<PAGE>
PROSPECTUS SUPPLEMENT
(To Prospectus Dated June 10, 1996)
- - - --------------------------------------------------------------------------------
$75,000,000
First Alliance Mortgage Loan Trust 1996-2
$29,614,000 7.225% Class A-1 Fixed Rate Group Certificates
$10,000,000 7.725% Class A-2 Fixed Rate Group Certificates
$10,386,000 8.225% Class A-3 Fixed Rate Group Certificates
$25,000,000 Class A-4 Variable Rate Group Certificates
Mortgage Loan Asset Backed Certificates
Series 1996-2
GRAPHIC OMITTED
Company and Servicer
- - - --------------------------------------------------------------------------------
The Mortgage Loan Asset Backed Certificates, Series 1996-2 (the
"Certificates") will consist of the Class A-1 Fixed Rate Group Certificates (the
"Class A-1 Certificates") the Class A-2 Fixed Rate Group Certificates (the
"Class A-2 Certificates"), the Class A-3 Fixed Rate Group Certificates (the
"Class A-3 Certificates" and collectively with the Class A-1 Certificates and
the Class A-2 Certificates, the ("Fixed Rate Certificates")), the Class A-4
Variable Rate Group Certificates (the "Class A-4 Certificates" or the "Variable
Rate Certificates," and collectively with the Fixed Rate Certificates, the
"Offered Certificates" or the "Class A Certificates") and the Class R
Certificates (the "Subordinate Certificates"). Only the Offered Certificates are
offered hereby.
As more fully described herein, interest distributions on the Offered
Certificates will be based on the Certificate Principal Balance thereof and the
then applicable Pass-Through Rate thereof. The Pass-Through Rate for the Class
A-1 Certificates will be fixed at 7.225% per annum, the Pass-Through Rate for
the Class A-2 Certificates will be fixed at 7.725% per annum and the
Pass-Through Rate for the Class A-3 Certificates will be fixed at 8.225% per
annum. The Pass-Through Rate for the Class A-4 Certificates adjusts monthly as
described herein and with respect to the first Payment Date will be 5.835% per
annum.
For a discussion of significant matters affecting investment in the
Certificates, see "Risk Factors" beginning on page S-15 herein and beginning on
page 12 in the Prospectus.
The Certificates will represent undivided ownership interests in a pool
of closed-end mortgage loans (the "Mortgage Loans") held by First Alliance
Mortgage Loan Trust 1996-2 (the "Trust"). The Trust will be created pursuant to
a Pooling and Servicing Agreement (the "Pooling and Servicing Agreement")
between First Alliance Mortgage Company (the "Company") and in its capacity as
servicer of the Mortgage Loans (the "Servicer"), and Bankers Trust Company of
California, N.A., in its capacity as trustee (the "Trustee").
(Cover continued on next page)
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THE OFFERED CERTIFICATES REPRESENT BENEFICIAL INTERESTS IN THE TRUST ONLY AND
DO NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF FIRST ALLIANCE MORTGAGE
COMPANY, THE TRUSTEE, ANY ORIGINATORS OR ANY OF THEIR AFFILIATES. NEITHER
THE OFFERED CERTIFICATES NOR THE MORTGAGE LOANS ARE INSURED
OR GUARANTEED BY ANY GOVERNMENTAL AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Offered Certificates will be purchased by the Underwriter from the
Company and will be offered by the Underwriter from time to time in negotiated
transactions or otherwise, at varying prices to be determined at the time of
sale. Proceeds to the Company, including accrued interest, are expected to be
approximately 99.79% of the aggregate principal balance of the Offered
Certificates before deducting expenses payable by the Company estimated to be
$250,000. See "Underwriting" herein.
The Offered Certificates are offered subject to prior sale, when, as,
and if accepted by the Underwriter and subject to the approval of certain legal
matters. It is expected that delivery of the Offered Certificates in book-entry
form will be made on or about June 14, 1996 only through the facilities of The
Depository Trust Company, CEDEL and Euroclear.
Prudential Securities Incorporated
June 10, 1996
<PAGE>
(Cover continued from previous page)
The obligations of the Company, the Trustee and the Servicer with
respect to the Certificates will be limited to their respective contractual
obligations under the Pooling and Servicing Agreement. The assets of the Trust
initially will include two pools (each, a "Mortgage Loan Group" or "Group") of
closed-end mortgage loans (the "Initial Mortgage Loans") secured by mortgages or
deeds of trust (the "Mortgages") on one-to-four family residential properties
(the "Mortgaged Properties") to be conveyed by the Company to the Trust on the
Closing Date. The Fixed Rate Certificates will represent undivided ownership
interests in a pool of fixed-rate Mortgage Loans (the "Fixed Rate Group")
secured by Mortgages which may be either in a first or junior lien position. The
Variable Rate Certificates will represent undivided ownership interests in a
pool of variable-rate Mortgage Loans (the "Variable Rate Group") secured by
Mortgages which are in a first lien position.
The Pooling and Servicing Agreement provides that additional fixed-rate
and adjustable-rate Mortgage Loans (the "Subsequent Mortgage Loans") may be
purchased by the Trust from the Company from time to time on or before June 28,
1996 from funds on deposit in the Pre-Funding Account. All Subsequent Mortgage
Loans so acquired by the Trust will be assigned to one (and only one) of either
the Fixed Rate Group or the Variable Rate Group. On the Closing Date an
aggregate cash amount of approximately $11,250,000 will be deposited with the
Trustee in the Pre-Funding Account to be used to acquire fixed-rate Subsequent
Mortgage Loans for the Fixed Rate Group and an aggregate cash amount of
approximately $3,900,000 will be deposited with the Trustee in the Pre-Funding
Account to be used to acquire variable-rate Subsequent Mortgage Loans for the
Variable Rate Group.
Distributions on the Subordinate Certificates are subordinate to
distributions on the Offered Certificates to the extent described herein. The
Pooling and Servicing Agreement will designate each Mortgage Loan Group as a
sub-trust to be held by the Trustee. Distributions of principal and interest
payable to each Class of the Offered Certificates will be made on the 20th day
of each month or if the 20th day is not a business day, the first business day
thereafter (each, a "Payment Date"), beginning in July 1996.
MBIA
On or before the issuance of the Certificates, the Company will obtain
from MBIA Insurance Corporation (the "Certificate Insurer") two certificate
guaranty insurance policies, one relating to the Fixed Rate Certificates and the
other relating to the Variable Rate Certificates (the "Certificate Insurance
Policies") in favor of the Trustee. Each Certificate Insurance Policy will
provide for 100% coverage of the principal amount of, and scheduled interest due
on, the related Class(es) of Class A Certificates.
The last scheduled Payment Date for the Class A-1 Certificates is
December 20, 2019; the last scheduled Payment Date for the Class A-2
Certificates is January 20, 2023; the last scheduled Payment Date for the Class
A-3 Certificates is September 20, 2027; and the last scheduled Payment Date for
the Class A-4 Certificates is August 20, 2027. It is expected that the actual
last Payment Date for each Class of Certificates will occur significantly
earlier than such last scheduled Payment Dates. The yield to maturity on the
Offered Certificates will depend on, among other things, the rate and timing of
principal payments (including prepayments, which rate may vary significantly
over time, repurchases, defaults and liquidations) on the Mortgage Loans. See
"Prepayment and Yield Considerations" in this Prospectus Supplement.
An election will be made to treat certain assets of the Trust as a real
estate mortgage investment conduit (a "REMIC") for federal income tax purposes.
As described more fully herein, each Class of Offered Certificates will
constitute "regular interests" in the REMIC. See "Certain Federal Income Tax
Consequences" herein and "Certain Federal Income Tax Consequences -- REMIC
Certificates" in the Prospectus.
Prior to their issuance there has been no market for the Offered
Certificates nor can there be any assurance that one will develop, or if it does
develop, that it will provide the Owners of the Offered Certificates with
liquidity or will continue for the life of the Offered Certificates. Prudential
Securities Incorporated (the "Underwriter") intends, but is not obligated, to
make a market in the Offered Certificates.
None of the Initial Mortgage Loans were 30 days or more delinquent in
their monthly payments as of the Cut-Off Date. However, investors in the Class A
Certificates should be aware that approximately 1.27% and 1.89% (by aggregate
principal balance as of the Cut-Off Date) of the Initial Mortgage Loans in the
Fixed Rate Group and Variable Rate Group, respectively, had a first monthly
payment due on or before April 1, 1996. Therefore, it was not possible for any
Initial Mortgage Loan other than such Initial Mortgage Loans to have had a
monthly payment that was delinquent 30 days or more. See "Risk Factors -- Risk
of Higher Delinquencies Associated With Underwriting Standards" herein for
important information regarding the delinquent mortgage loans. Prospective
investors should consider the factors set forth under "Risk Factors" in this
Prospectus Supplement.
-----------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE OFFERED
CERTIFICATES AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE OFFERED CERTIFICATES, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS TO WHICH IT RELATES. THIS 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.
-----------------------------
The Certificates offered by this Prospectus Supplement will be part of
a separate series of Certificates being offered by the Company pursuant to its
Prospectus dated June 10, 1996 of which this Prospectus Supplement is a part and
which accompanies this Prospectus Supplement. The Prospectus contains important
information regarding this offering which is not contained herein, and
prospective investors are urged to read the Prospectus and this Prospectus
Supplement in full.
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act of 1933, as
amended, with respect to the Certificates. This Prospectus Supplement and the
related Prospectus, which form a part of the Registration Statement, omit
certain information contained in such Registration Statement pursuant to the
Rules and Regulations of the Commission. The Registration Statement can be
inspected and copied at the Public Reference Room of the Commission at 450 Fifth
Street, N.W., Washington, D.C. and the Commission's regional offices at Seven
World Trade Center, 13th Floor, New York, New York, 10048 and Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such materials can be obtained at prescribed rates from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549.
REPORTS TO CERTIFICATEHOLDERS
The Trustee will mail monthly reports concerning the Class A
Certificates to all registered Owners pursuant to the Pooling and Servicing
Agreement.
<PAGE>
SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and the
accompanying Prospectus. Reference is made to the "Index to Location of
Principal Defined Terms" herein and "Index of Principal Definitions" in the
Prospectus for the definitions of certain capitalized terms.
Trust: First Alliance Mortgage Loan Trust
1996-2 (the "Trust").
Certificates Offered: Class A-1 Fixed Rate Group Certificates
(the "Class A-1 Certificates") Class A-2
Fixed Rate Group Certificates (the
"Class A-2 Certificates"), Class A-3
Fixed Rate Group Certificates (the
"Class A-3 Certificates," and
collectively with the Class A-1
Certificates and the Class A-2
Certificates, the "Fixed Rate
Certificates") and Class A-4 Variable
Rate Group Certificates (the "Class A-4
Certificates" or the "Variable Rate
Certificates" and together with the
Fixed Rate Certificates, the "Class A
Certificates" or the "Offered
Certificates").
Company and Servicer: First Alliance Mortgage Company, a
California corporation (the "Company"
and in its separate capacity as
servicer, the "Servicer"). The Company's
principal executive offices are located
at 17305 Von Karman Avenue, Irvine,
California 92714-6203, and its phone
number is (714) 224-8500.
Trustee: Bankers Trust Company of California,
N.A., a national banking association
(the "Trustee"). The Trustee's principal
executive offices are located at 3 Park
Plaza, 16th Floor, Irvine, California
92714.
Originators: The Company and any entity from which
the Company, on or prior to the Closing
Date with respect to Initial Mortgage
Loans and on or prior to any Subsequent
Transfer Date with respect to Subsequent
Mortgage Loans, acquires Mortgage Loans
is an "Originator" of the related
Mortgage Loans for purposes of this
Prospectus Supplement.
Cut-Off Date: June 1, 1996.
Closing Date: On or about June 14, 1996.
The Certificates: The Mortgage Loan Asset Backed
Certificates (the "Certificates") will
consist of the Class A Certificates and
the Class R Certificates (the
"Subordinate Certificates"). The
Certificates will be issued pursuant to
a pooling and servicing agreement (the
"Pooling and Servicing Agreement") to be
dated June 1, 1996, among the Servicer,
the Company, and the Trustee. Only the
Offered Certificates are offered hereby.
The assets of the Trust initially will
include two pools (each, a "Mortgage
Loan Group" or "Group") of closed-end
mortgage loans (the "Initial Mortgage
Loans") secured by mortgages or deeds of
trust (the "Mortgages") on one-to-four
family residential properties (the
"Mortgaged Properties") to be conveyed
to the Trust on the Closing Date. The
Fixed Rate Certificates will represent
undivided ownership interests in a pool
of fixed-rate Mortgage Loans (the "Fixed
Rate Group") secured by Mortgages which
may be either in a first or junior lien
position. The Variable Rate Certificates
will represent undivided ownership
interests in a pool of variable-rate
Mortgage Loans (the "Variable Rate
Group") secured by Mortgages which are
in a first lien position.
S-1
<PAGE>
The Pooling and Servicing Agreement will
designate each Mortgage Loan Group as a
sub-trust to be held by the Trustee.
Each Class of Class A Certificates
represents the right to receive payments
from funds available to be distributed
with respect to the related Mortgage
Loan Group, as hereinafter described.
On the Closing Date, an aggregate cash
amount of approximately $15,150,000 (the
"Original Pre-Funded Amount") will be
deposited in a trust account in the name
of the Trustee (the "Pre-Funding
Account"). It is intended that
additional Mortgage Loans satisfying the
criteria specified in the Pooling and
Servicing Agreement (the "Subsequent
Mortgage Loans") will be purchased by
the Trust from the Company from time to
time on or before June 28, 1996 from
funds on deposit in the Pre-Funding
Account. Each Subsequent Mortgage Loan
so acquired by the Trust will be
assigned to one (and only one) of either
the Fixed Rate Group or the Variable
Rate Group. As a result, the aggregate
principal balance of the Mortgage Loans
in the Fixed Rate Group and the Variable
Rate Group will increase by an amount
equal to the aggregate principal balance
of the Subsequent Mortgage Loans so
purchased and the amount in the
Pre-Funding Account will decrease
proportionately.
As described below, on the Closing Date,
cash will be deposited in the name of
the Trustee in the Capitalized Interest
Account (as defined herein). Funds in
the Capitalized Interest Account will be
applied by the Trustee to cover
shortfalls in interest during the
Funding Period (as described under
"Pre-Funding Account") on the Class A
Certificates attributable to the
provisions allowing for purchase of
Subsequent Mortgage Loans.
The Last Scheduled Payment Date for the
Class A-1 Certificates is December 20,
2019; the Last Scheduled Payment Date
for the Class A-2 Certificates is
January 20, 2023; the Last Scheduled
Payment Date for the Class A-3
Certificates is September 20, 2027; and
the Last Scheduled Payment Date for the
Class A-4 Certificates is August 20,
2027. It is expected that the actual
last Payment Date for each Class of
Certificates will occur significantly
earlier than such scheduled Payment
Dates. See "Prepayment and Yield
Considerations" herein.
The Certificate Insurer does not
directly or indirectly guarantee any
specified rate of prepayments. See "Risk
Factors" herein and in the Prospectus.
Denominations: The Offered Certificates are issuable in
book entry form in minimum denominations
of original principal amounts of $1,000
and integral multiples thereof.
The Mortgage Loans: Unless otherwise noted, all statistical
percentages in this Prospectus
Supplement are approximate and are
measured by the aggregate principal
balance of the Initial Mortgage Loans
(the "Original Aggregate Loan Balance")
or of the Initial Mortgage Loans in the
applicable Mortgage Loan Group, in each
case as of the Cut-Off Date. See
"Additional Information" herein. The
statistical characteristics of the
Mortgage Loans as a whole will vary upon
the transfer into either the Fixed Rate
Group or the Variable Rate Group of
Subsequent Mortgage Loans.
The Mortgage Loans to be conveyed by the
Company to the Trust on the Closing Date
(the "Initial Mortgage Loans") consist
of 723 fixed-rate and variable-rate
Mortgage Loans on single-family homes,
including investment
S-2
<PAGE>
properties (which may be condominiums,
two-to-four, one-to-four family
residences or homes in planned unit
developments), 50.88% of which, by
aggregate principal balance, are located
in the state of California and 49.12% of
which by aggregate principal balance,
collectively are located in the states
of Arizona, Colorado, Florida, Georgia,
Idaho, Illinois, Ohio, Oregon,
Pennsylvania, Utah and Washington. The
Initial Mortgage Loans are secured by
Mortgages of which 99.01% by aggregate
principal balance are first mortgages or
deeds of trust and 0.99% by aggregate
principal balance are secured by second
mortgages or deeds of trust. The Initial
Mortgage Loans in the Trust are all
closed-end mortgage loans in that the
mortgagee is not required to make future
advances thereunder. All of the Initial
Mortgage Loans are actuarial loans, as
discussed herein under "The Initial
Mortgage Loan Pool -- Interest Payments
on the Mortgage Loans."
As of the Cut-Off Date, the Initial
Mortgage Loans had an aggregate
principal balance of $60,108,200.57; the
Initial Mortgage Loans in the Fixed Rate
Group had an aggregate principal balance
of $39,015,274.07 and the Initial
Mortgage Loans in the Variable Rate
Group had an aggregate principal balance
of $21,092,926.50. The Fixed Rate
Certificates will be issued in respect
of the Fixed Rate Group, and the
Variable Rate Certificates will be
issued in respect of the Variable Rate
Group.
All of the Initial Mortgage Loans were
originated or acquired by the Company in
accordance with the Company's mortgage
loan program as described in the
Prospectus. As a general matter, the
Company's mortgage loan program consists
of the origination and packaging of
Mortgage Loans relating to
non-conforming credits. A non-conforming
credit means a mortgage loan which is
ineligible for purchase by the Federal
National Mortgage Association ("FNMA")
due to credit characteristics that do
not meet FNMA guidelines. Mortgage Loans
originated under the Company's mortgage
loan program are likely to experience
rates of delinquency, bankruptcy and
loss that are higher than mortgage loans
originated under FNMA guidelines. None
of the Initial Mortgage Loans by
aggregate principal balance were 30 days
or more delinquent in their monthly
payments as of the Cut-Off Date.
However, investors in the Class A
Certificates should be aware that
approximately 1.27% and 1.89% (by
aggregate principal balance as of the
Cut-Off Date) of the Initial Mortgage
Loans in the Fixed Rate Group and
Variable Rate Group, respectively, had a
first monthly payment due on or before
April 1, 1996. Therefore, it was not
possible for any Mortgage Loan other
than such Mortgage Loans to have had a
monthly payment that was delinquent 30
days or more. See "Risk Factors -- Risk
of Higher Delinquencies Associated with
Underwriting Standards" herein.
The Combined Loan-to-Value Ratio
("CLTV") of a Mortgage Loan is equal to
the ratio (expressed as a percentage) of
(x) the sum of the (i) original Loan
Balance of the Mortgage Loan and (ii)
the outstanding principal balances of
any senior mortgage loans (computed at
the date of origination of the Mortgage
Loan) and (y) the appraised value of the
Mortgaged Property at the time of
origination. The Loan-to-Value Ratio
("LTV") of a Mortgage Loan is equal to
the ratio (expressed as a percentage) of
the original Loan Balance of the
Mortgage Loan and the appraised value of
the Mortgaged Property at the time of
origination.
Fixed Rate Group. The weighted average
CLTV of the Initial Mortgage Loans in
the Fixed Rate Group as of the Cut-Off
Date was 58.75% and the weighted average
LTV was 58.32%. The weighted average
remaining term
S-3
<PAGE>
to stated maturity was 336 months, with
a range from 120 months to 360 months.
The average principal balance of the
Initial Mortgage Loans in the Fixed Rate
Group was $82,659.48, with a range from
$17,761.70 to $250,585.00; the Mortgage
Rates of the Initial Mortgage Loans in
the Fixed Rate Group ranged from 7.950%
to 15.450% per annum, with a weighted
average Mortgage Rate of 9.699% per
annum.
The "Junior Lien Ratio" of a Mortgage
Loan is equal to the ratio (expressed as
a percentage) of the original principal
balance of such Mortgage Loan to the sum
of (i) the original principal balance of
such Mortgage Loan and (ii) the
outstanding principal balances of any
senior mortgage loans (computed at the
date of origination of the Mortgage
Loan). As of the Cut-Off Date, the
weighted average Junior Lien Ratio of
the Initial Mortgage Loans in the Fixed
Rate Group was 99.28%. As a percentage
of the aggregate principal balance of
the Initial Mortgage Loans in the Fixed
Rate Group, 98.48% were secured by first
mortgages and 1.52% by second mortgages,
respectively. As a percentage of the
aggregate principal balance of the
Initial Mortgage Loans in the Fixed Rate
Group as of the Cut-Off Date, 95.80%
were secured by mortgages on one-family
detached dwellings, 2.68% by mortgages
on two-to-four family dwellings, 0.88%
by condominiums and 0.64% by mortgages
on planned unit developments. See "The
Mortgage Loan Pool -- Fixed Rate Group"
herein.
Variable Rate Group. All of the Initial
Mortgage Loans in the Variable Rate
Group bear interest rates that adjust
based on the London interbank offered
rate for six-month United States Dollar
deposits in the London Market based on
quotations of major banks as published
in The Wall Street Journal ("Six Month
LIBOR Loans"). All of the Initial
Mortgage Loans in the Variable Rate
Group also are subject to periodic
interest rate adjustment caps, lifetime
interest rate ceilings and lifetime
interest rate floors. See "The Mortgage
Loan Pool -- Variable Rate Group"
herein.
The weighted average LTV of the Initial
Mortgage Loans in the Variable Rate
Group as of the Cut-Off Date was 60.74%,
and the weighted average remaining term
to stated maturity was 345 months, with
a range from 120 months to 360 months.
The average principal balance of the
Initial Mortgage Loans in the Variable
Rate Group was $84,035.56, with a range
from $17,837.02 to $215,750.55. All of
the Initial Mortgage Loans in the
Variable Rate Group have initial and
maximum Mortgage Rates. The initial
Mortgage Rates are the minimum Mortgage
Rates for the Initial Mortgage Loans in
the Variable Rate Group. The weighted
average initial Mortgage Rate of Initial
Mortgage Loans in the Variable Rate
Group was 8.804% per annum, with initial
Mortgage Rates that ranged from 6.950%
to 13.490% per annum. The weighted
average maximum Mortgage Rate of the
Initial Mortgage Loans in the Variable
Rate Group was 15.80% per annum, with
maximum Mortgage Rates that ranged from
13.95% to 20.49% per annum. The gross
margin range for the Six Month LIBOR
Loans in the Variable Rate Group was
3.95% to 7.99%. As of the Cut-Off Date,
substantially all of the Initial
Mortgage Loans in the Variable Rate
Group had interest rates which were not
fully indexed (i.e., the entire gross
margin had not yet been added to the
rate given by the index).
All of the Initial Mortgage Loans in the
Variable Rate Group were secured by
first mortgages. As a percentage of the
aggregate principal balance of the
Initial Mortgage Loans in the Variable
Rate Group as of the Cut-Off Date,
95.36% were secured by mortgages on
one-family detached dwellings, 2.77% by
mortgages on two-to-four family
dwellings, 1.49% by mortgages
S-4
<PAGE>
on condominiums and 0.37% by mortgages
on planned unit developments. See "The
Mortgage Loan Pool -- Variable Rate
Group" herein.
General. The Mortgage Loans are not
insured by either primary or pool
mortgage insurance policies; however,
certain distributions due to the Owners
of the Offered Certificates are insured
by two Certificate Insurance Policies,
one relating to the Fixed Rate
Certificates and the other relating to
the Variable Rate Certificates. Each
Certificate Insurance Policy will
provide for 100% coverage of the
principal amount of, and scheduled
interest due on, the related Class A
Certificates. See "Credit Enhancement"
in this Summary and "The Certificate
Insurance Policies and the Certificate
Insurer" in this Prospectus Supplement.
The Mortgage Loans are not guaranteed by
the Company, any Originator or any of
their respective affiliates. The
Mortgage Loans are required to be
serviced by the Servicer in accordance
with the terms of the Pooling and
Servicing Agreement and with reasonable
care, using that degree of skill and
attention that the Servicer exercises
with respect to comparable mortgage
loans that it services for itself and
others. See "The Pooling and Servicing
Agreement" herein.
Class A-1 Original Certificate
Principal Balance: $29,614,000.
Class A-2 Original Certificate
Principal Balance: $10,000,000.
Class A-3 Original Certificate
Principal Balance: $10,386,000.
Class A-4 Original Certificate
Principal Balance: $25,000,000.
Class A-1 Pass-Through Rate: 7.225% per annum.
Class A-2 Pass-Through Rate: 7.725% per annum.
Class A-3 Pass-Through Rate: 8.225% per annum.
Class A-4 Pass-Through Rate: The initial Class A-4 Pass-Through Rate,
which will apply to the Accrual Period
beginning on the Closing Date and ending
on July 22, 1996, will be 5.835% per
annum. On each Payment Date thereafter,
the Class A-4 Pass-Through Rate will be
equal to the lesser of (i) with respect
to any Payment Date which occurs on or
prior to the date on which the
outstanding aggregate Loan Balance of
the Mortgage Loans in the Trust has
declined to 10% or less of the sum of
(x) the aggregate Loan Balance of the
Initial Mortgage Loans as of the Cut-Off
Date plus (y) the Original Pre-Funded
Amount (such amount, the "Maximum
Collateral Amount"), the London
interbank offered rate for one-month
United States dollar deposits ("LIBOR")
(calculated as described under
"Description of the Offered
Certificates-- Calculation of LIBOR"
herein) as of the second to last
business day prior to the immediately
preceding Payment Date plus, 0.35% per
annum and with respect to any Payment
Date thereafter, LIBOR plus 0.70% per
annum and (ii) the "Available Funds
Cap", which the Pooling and Servicing
Agreement defines to be the weighted
average of the Mortgage Rates on
Mortgage Loans in the Variable Rate
Group, less the sum of (a) the Variable
Rate Group Servicing Fee (as defined
herein), (b) beginning on the fourth
Payment Date following the Closing Date,
the premiums due to the Certificate
Insurer with respect to the Certificate
Insurance Policy relating to the Class
A-4 Certificates, (c) the fees due to
S-5
<PAGE>
the Trustee relating to the Class A-4
Certificates, and (d) beginning on the
seventh Payment Date following the
Closing Date, 0.50%, expressed as a
percentage of the Mortgage Loans in the
Variable Rate Group, calculated as of
the first day of the related Remittance
Period.
Distributions, Generally: Distributions on the Certificates will
be made on the twentieth day of each
calendar month, or if such day is not a
business day, the next succeeding
business day (each, a "Payment Date")
commencing in July 1996, to the Owners
of record (see "Description of the
Offered Certificates-- General" herein).
The Owners of record shall be such
Owners as of the last day of the
calendar month immediately preceding the
calendar month in which such Payment
Date occurs, whether or not such day is
a business day (each a "Record Date") in
an amount equal to the product of such
Owner's Percentage Interest and the
amount distributed in respect of such
Owner's Class of such Certificates on
such Payment Date.
The "Percentage Interest" represented by
any Certificate will be equal to the
percentage obtained by dividing the
Original Certificate Principal Balance
of such Certificate by the Original
Certificate Principal Balance of all
Certificates of the same Class.
The Class A Distribution Amount relating
to each Mortgage Loan Group for each
Payment Date (to the extent funds are
available therefor) shall be allocated
among the Class A Certificates in the
following amounts and in the following
order of priority:
(i) First, to the Owners of the Class A
Certificates of the related Mortgage
Loan Group, the related Class A Current
Interest on a pro rata basis without any
priority among such Class A
Certificates.
(ii) Second, to the Owners of the
related Class of Class A Certificates
(A) the Class A Principal Distribution
Amount (as defined below under the
heading "Distributions of Principal")
applicable to the Fixed Rate Group shall
be distributed sequentially as follows:
(I) first, to the Owners of the Class
A-1 Certificates until the Class A-1
Certificate Principal Balance is reduced
to zero; (II) second, to the Owners of
the Class A-2 Certificates until the
Class A-2 Certificate Principal Balance
is reduced to zero; and (III) third, to
the Owners of the Class A-3 Certificates
until the Class A-3 Certificates
Principal Balance is reduced to zero;
and (B) the Class A Principal
Distribution Amount applicable to the
Variable Rate Group shall be distributed
to the Owners of the Class A-4
Certificates until the Class A-4
Certificate Principal Balance is reduced
to zero.
Distributions of Interest: For each Payment Date, the interest due
with respect to the Fixed Rate
Certificates will be the interest which
has accrued thereon at the related
Pass-Through Rate during the calendar
month immediately preceding the calendar
month in which such Payment Date occurs;
the interest due with respect to the
Variable Rate Certificates will be the
interest which has accrued thereon at
the then applicable Class A-4
Pass-Through Rate from the preceding
Payment Date (or from the Closing Date
in the case of the first Payment Date)
to and including the day prior to the
current Payment Date. Each period
referred to in the prior sentence
relating to the accrual of interest is
the "Accrual Period" for the related
Class of Class A Certificates and the
amount of interest due on a Class of
Class A Certificates on a Payment Date
is the "Class A Current Interest" for
each Class of Class A Certificates on
such Payment Date.
S-6
<PAGE>
All calculations of interest on the
Fixed Rate Certificates will be made on
the basis of a 360-day year assumed to
consist of twelve 30-day months.
Calculations of interest on the Variable
Rate Certificates will be made on the
basis of the actual number of days
elapsed in the related Accrual Period
and a year of 360 days.
Distributions of Principal: The Owners of each Class of Class A
Certificates are entitled to receive
certain monthly distributions of
principal on each Payment Date which
generally reflect collections of
principal during the prior calendar
month. The Certificate Insurance
Policies only guarantee the amount by
which the sum of the related Class A
Current Interest and the related
Subordination Deficit, if any, exceeds
Total Available Funds for the related
Mortgage Loan Group (after taking into
account the portion of the related Class
A Principal Distribution Amount to be
actually distributed on such Payment
Date without regard to any related
Insured Payment to be made with respect
to such Payment Date) as more fully
described herein under "The Certificate
Insurance Policies and the Certificate
Insurer."
The credit enhancement provisions of the
Trust result in a limited acceleration
of the principal payments to the Owners
of each Class of Class A Certificates;
such credit enhancement provisions are
more fully described under "Description
of the Offered Certificates --
Overcollateralization Provisions" and
"-- Crosscollateralization Provisions"
herein. Such credit enhancement
provisions also have the effect of
accelerating and shortening the weighted
average lives of the Class A
Certificates by increasing the rate at
which principal is distributed to the
Owners. See "Prepayment and Yield
Considerations" herein. In addition, the
following discussion makes use of a
number of technical defined terms which
are defined under "Description of the
Offered Certificates --
Overcollateralization Provisions" and
"-- Crosscollateralization Provisions"
herein.
The Fixed Rate Certificates are divided
into three "sequential pay" classes such
that the Owners of the Class A-3
Certificates will receive no payments of
principal until the Class A-2
Certificate Principal Balance has been
reduced to zero and the Owners of the
Class A-2 Certificates will receive no
payments of principal until the Class
A-1 Certificate Principal Balance has
been reduced to zero.
On each Payment Date, distributions in
reduction of the Certificate Principal
Balance of the Offered Certificates will
be made in the amounts described herein.
The "Class A Principal Distribution
Amount" for each Mortgage Loan Group
with respect to each Payment Date shall
be the lesser of:
(a) the related Total Available Funds
for the related Mortgage Loan Group plus
any related Insured Payment minus the
related Class A Current Interest; and
(b) (i) the sum, without any duplication
of:
(a) the Carry-Forward Amount with
respect to the related Mortgage Loan
Group;
(b) the principal portion of all
scheduled monthly payments on the
Mortgage Loans in the related
Mortgage Loan Group due during the
related Due Period, to the extent
actually received by the Trustee on
or prior to the related Remittance
Date or to the extent actually
advanced by the Servicer on or prior
to the related Remittance Date and
the
S-7
<PAGE>
principal portion of all full and
partial principal prepayments made
by the respective Mortgagors during
the related Remittance Period;
(c) the scheduled Loan Balance of
each Mortgage Loan in the related
Mortgage Loan Group that either was
repurchased by the Company or an
Originator or purchased by the
Servicer on the related Remittance
Date, to the extent such scheduled
Loan Balance is actually received by
the Trustee on or prior to the
related Remittance Date;
(d) any Substitution Amounts
delivered by the Company or an
Originator on the related Remittance
Date in connection with a
substitution of a Mortgage Loan in
the related Mortgage Loan Group (to
the extent such Substitution Amounts
relate to principal), to the extent
such Substitution Amounts are
actually received by the Trustee on
or prior to the related Remittance
Date;
(e) all Net Liquidation Proceeds
actually collected by the Servicer
with respect to the Mortgage Loans
in the related Mortgage Loan Group
during the related Remittance Period
(to the extent such Net Liquidation
Proceeds relate to principal) to the
extent actually received by the
Trustee on or prior to the related
Remittance Date;
(f) the amount of any Subordination
Deficit with respect to such
Mortgage Loan Group for such Payment
Date;
(g) the proceeds received by the
Trustee of any termination of the
related Mortgage Loan Group (to the
extent such proceeds relate to
principal); and
(h) any moneys released from the
Pre-Funding Account as a prepayment
of the Fixed Rate Certificates (with
respect to the Fixed Rate Group) or
the Variable Rate Certificates (with
respect to the Variable Rate Group)
on the Payment Date which
immediately follows the end of the
Funding Period; and
(i) the amount of any Subordination
Increase Amount with respect to such
Mortgage Loan Group for such Payment
Date consisting of the amount of any
Net Monthly Excess Cash Flow to be
actually applied for the accelerated
payment of principal on the related
Class A Certificates;
minus
(ii) the amount of any Subordination
Reduction Amount with respect to
such Mortgage Loan Group for such
Payment Date consisting of the
amount of any Net Monthly Excess
Cash Flow to be actually paid to the
Owners of the Subordinate
Certificates.
In no event will the Class A Principal
Distribution Amount for any Mortgage
Loan Group and Payment Date (x) be less
than zero or (y) be greater than the
then-outstanding Certificate Principal
Balance of the related Class of Class A
Certificates.
The sum of the Class A Current Interest
and the Class A Principal Distribution
Amount with respect to any Class of
Class A Certificates and Payment Date is
the "Class A Distribution Amount" for
such Class of Class A Certificates and
Payment Date.
S-8
<PAGE>
The "Carry-Forward Amount" with respect
to a Class of Class A Certificates for
any Payment Date is the sum of (x) the
amount, if any, by which (i) the Class A
Distribution Amount for such Class as of
the immediately preceding Payment Date
exceeded (ii) the amount of the actual
distribution made to the Owners of the
related Class of Class A Certificates on
such immediately preceding Payment Date
plus (y) 30 days' interest on the
interest portion of such amount,
calculated at the related Pass-Through
Rate. See "Description of the Offered
Certificates -- Distributions" herein.
A "Liquidated Mortgage Loan" is, in
general, a defaulted Mortgage Loan as to
which the Servicer has determined that
all amounts that it expects to recover
on such Mortgage Loan have been
recovered (exclusive of any possibility
of a deficiency judgment).
Any loss on a Liquidated Mortgage Loan
(i.e., a Realized Loss) may or may not
be allocated to the Owners of the
related Class of Class A Certificates on
the Payment Date which immediately
follows the event of loss. However, the
Owners of the Class A Certificates are
entitled to receive ultimate recovery of
any Realized Losses which occur in the
related Mortgage Loan Group, which
receipt will be no later than the
Payment Date occurring after such
Realized Loss creates a Subordination
Deficit and will be in the form of an
Insured Payment if not covered through
Net Monthly Excess Cashflow in the
related Group or the other Group.
Insured Payments do not include Realized
Losses until such time as the aggregate
cumulative Realized Losses have created
a Subordination Deficit nor do Insured
Payments cover the Servicer's failure to
make Delinquency Advances until such
time as the aggregate cumulative amount
of such unpaid Delinquency Advances,
when added to Realized Losses have
created a Subordination Deficit.
A "Subordination Deficit" with respect
to a Mortgage Loan Group and Payment
Date is the amount, if any, by which (x)
the Certificate Principal Balance of the
related Class A Certificates, after
taking into account all distributions to
be made on such Payment Date, exceeds
(y) the sum of (i) the aggregate
principal balances of the Mortgage Loans
in the related Mortgage Loan Group as of
the close of business on the Due Date in
the calendar month in which such Payment
Date occurs and (ii) the amount, if any,
on deposit in the Pre-Funding Account as
of the close of business on the Due Date
in the calendar month in which such
Payment Date occurs.
Credit Enhancement: The Credit Enhancement provided for the
benefit of the Owners of the Offered
Certificates consists of (x) the
overcollateralization and
crosscollateralization mechanics which
utilize the internal cash flows of the
Trust and (y) the Certificate Insurance
Policies.
Overcollateralization. The credit
enhancement provisions of the Trust
result in a limited acceleration of each
Class of Offered Certificates relative
to the amortization of the related
Mortgage Loans in the early months of
the transaction. The accelerated
amortization is achieved by the
application of certain excess interest
to the payment of Class A Certificate
principal. This acceleration feature
creates, with respect to each Mortgage
Loan Group, overcollateralization which
results from the excess of the aggregate
scheduled Loan Balances of the Mortgage
Loans in the related Mortgage Loan Group
plus the amount, if any, in deposit in
the Pre-Funding Account over the
aggregate related Class A Certificate
Principal Balance. Once the required
level of overcollateralization is
reached, and subject to the
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<PAGE>
provisions described in the next
paragraph, the acceleration feature will
cease, unless necessary to maintain the
required level of overcollateralization.
The Pooling and Servicing Agreement
provides that, subject to certain
floors, caps and triggers, the required
level of overcollateralization with
respect to a Mortgage Loan Group may
increase or decrease over time. An
increase would result in a temporary
period of accelerated amortization of
the related Class A Certificates to
increase the actual level of
overcollateralization to its required
level; a decrease would result in a
temporary period of decelerated
amortization to reduce the actual level
of overcollateralization to its required
level.
As a result of the "sequential pay"
feature of the Fixed Rate Certificates,
any such accelerated principal will be
paid to that Class of Fixed Rate
Certificates then entitled to receive
distributions of principal.
Crosscollateralization. In addition to
the foregoing, the Pooling and Servicing
Agreement provides that such excess
interest, together with certain other
excess amounts, generated by one
Mortgage Loan Group may be used to fund
shortfalls in Available Funds in the
other Mortgage Loan Group or accelerate
the amortization of the Class of Class A
Certificates related to the other
Mortgage Loan Group, subject to certain
prior requirements of such Mortgage Loan
Group.
See "Description of the Offered
Certificates--Overcollateralization
Provisions" and "--
Crosscollateralization Provisions"
herein.
The Certificate Insurance Policies. The
Company will obtain the Certificate
Insurance Policies, which are
noncancelable, in favor of the Trustee
on behalf of the Owners of each Class of
the Offered Certificates. On each
Payment Date, the Certificate Insurer
will be required to make available to
the Trustee the amount by which the
related Class A Current Interest and any
Subordination Deficit for the related
Mortgage Loan Group exceeds the Total
Available Funds (after deducting the
amount necessary to pay the related
premium amount to the Certificate
Insurer) for such Mortgage Loan Group as
of such Payment Date. The Certificate
Insurance Policies do not guarantee to
Owners of the related Class A
Certificates any specified rate of
Prepayments. See "Credit Enhancement" in
this Summary and "The Certificate
Insurance Policies and the Certificate
Insurer" herein and "Description of
Credit Enhancement" in the Prospectus.
Pre-Funding Account: On the Closing Date, the Original
Pre-Funded Amount will be deposited in
the Pre-Funding Account which account
will be in the name of, and maintained
by, the Trustee on behalf of the Trust;
an amount of approximately $11,250,000
of such aggregate amount will be funded
from the sale of the Fixed Rate
Certificates and an amount of
approximately $3,900,000 of such
aggregate amount will be funded from the
sale of the Variable Rate Certificates
and may be used to acquire Subsequent
Mortgage Loans for addition to the Fixed
Rate Group and the Variable Rate Group,
respectively. With respect to either the
Fixed Rate Group or the Variable Rate
Group, during the period (the "Funding
Period") from and including the Closing
Date until the earliest of (i) the date
on which the amount on deposit in the
Pre-Funding Account is less than
$100,000, (ii) the date on which an
event of default under the Pooling and
Servicing Agreement occurs and (iii)
June 28, 1996, the Pre-Funded Amount
will be maintained in the Pre-Funding
Account. The Original Pre-Funded Amount
will be reduced
S-10
<PAGE>
during the Funding Period by the amount
thereof used to purchase Subsequent
Mortgage Loans in accordance with the
Pooling and Servicing Agreement. The
amount on deposit in the Pre-Funding
Account at any time is the "Pre-Funded
Amount". Subsequent Mortgage Loans
purchased by and added to the Fixed Rate
Group or the Variable Rate Group on any
date (each, a "Subsequent Transfer
Date") must satisfy the criteria for
such Group set forth in the Pooling and
Servicing Agreement. Any Pre-Funded
Amount, less any interest and other
investment earnings on amounts on
deposit in the Pre-Funding Account (the
"Pre-Funding Account Earnings"),
remaining at the end of the Funding
Period with respect to the Fixed Rate
Group will be distributed to the Owners
of the Fixed Rate Certificates then
entitled to receive distributions of
principal and any Pre-Funded Amount,
less any Pre-Funding Account Earnings,
remaining at the end of the Funding
Period with respect to the Variable Rate
Group will be distributed to the Owners
of the Class A-4 Certificates, in each
case on the Payment Date that
immediately follows the end of the
Funding Period in reduction of the
Certificate Principal Balance of such
Owners' Certificates, thus resulting in
a partial principal prepayment of such
Class of Class A Certificates as
specified herein under "Description of
the Offered Certificates --
Distributions." All earnings in the
Pre-Funding Account will be deposited in
the Capitalized Interest Account. The
Pre-Funding Account will be an asset of
the Trust but will not be an asset of
the REMIC (as defined herein).
Although no assurance can be given, it
is intended that the principal amount of
Subsequent Mortgage Loans sold to the
Trust and added to the Fixed Rate Group
or the Variable Rate Group will require
application of substantially all of the
Original Pre-Funded Amount and it is not
intended that there will be any material
amount of principal prepaid to the
Owners of the Fixed Rate or Class A-4
Certificates from the Pre-Funding
Account. In the event that the Company
is unable to sell Subsequent Mortgage
Loans to the Trust in an amount equal to
the Original Pre-Funded Amount, a
principal prepayment to Owners of the
Fixed Rate Certificates and/or Class A-4
Certificates will occur on the Payment
Date in July 1996 in an amount equal to
the Pre- Funded Amount, less any
Pre-Funding Account Earnings with
respect to the related Group, remaining
at the end of the Funding Period.
Capitalized Interest Account: On the Closing Date, cash will be
deposited in a trust account (the
"Capitalized Interest Account") in the
name of, and maintained by, the Trustee
on behalf of the Trust. The amount on
deposit in the Capitalized Interest
Account, including reinvestment income
thereon, will be used by the Trustee to
fund the excess, if any, of (i) the sum
of (a) the aggregate amount of interest
accruing during the related Accrual
Period at the weighted average
Pass-Through Rate on the Class A
Certificates on the amount by which the
aggregate Certificate Principal Balance
of the Class A Certificates exceeds the
aggregate Loan Balance of the Initial
Mortgage Loans plus (b) the Trustee fees
over (ii) the amount of any Pre-Funding
Account Earnings; such amounts on
deposit will be so applied by the
Trustee on each Payment Date in the
Funding Period to fund such excess, if
any. Any amounts remaining in the
Capitalized Interest Account not needed
for such purpose will be paid to the
Company at the end of the Funding
Period. The Capitalized Interest Account
will be an asset of the Trust but will
not be an asset of the REMIC (as defined
herein).
Mandatory Prepayment of
Certificates: In the event that at the end of the
Funding Period, not all of the
$11,250,000 and $3,900,000 funded from
the sale of the Fixed Rate Certificates
and Variable Rate Certificates,
respectively, has been used to
S-11
<PAGE>
acquire Subsequent Mortgage Loans with
respect to the related Group, then the
Class A Certificates of the related
Group then entitled to receive payments
of principal will receive a prepayment
on the Payment Date in July 1996. The
Pooling and Servicing Agreement does not
permit Pre- Funding Account moneys
funded from the sale of one Group of
Class A Certificates to be used to
acquire Subsequent Mortgage Loans
relating to the other Group of Class A
Certificates.
Certificate Insurer: MBIA Insurance Corporation (the
"Certificate Insurer").
Delinquency Advances
and Compensating Interest: The Servicer will
be obligated to make advances
("Delinquency Advances") with respect to
delinquent payments of interest (at the
related Mortgage Rate less the Servicing
Fee, as defined below) and scheduled
principal due on each Mortgage Loan to
the extent that such Delinquency
Advances, in good faith and in the
Servicer's reasonable judgment, are
reasonably recoverable from the related
Mortgage Loan. Delinquency Advances are
recoverable from (i) future collections
on the Mortgage Loan which gave rise to
the Delinquency Advance, (ii)
Liquidation Proceeds for such Mortgage
Loan and (iii) from certain excess
moneys which would otherwise be paid to
the Owners of the Subordinate
Certificates.
In addition, the Servicer will also be
required to deposit in the Principal and
Interest Account with respect to any
full Prepayment received on a Mortgage
Loan 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 such Mortgage
Loan's Mortgage Rate (less the Servicing
Fee) on the Loan 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) paid
by the Mortgagor with respect to such
Mortgage Loan during such Remittance
Period (any such amount paid by the
Servicer, "Compensating Interest"). The
Servicer will not be required to pay
Compensating Interest with respect to
any Remittance Period in an amount in
excess of the aggregate Servicing Fee
received by the Servicer for such
Remittance Period or to cover shortfalls
in collections of interest due to
curtailments.
Any failure by the Servicer to remit to
the Trustee a Delinquency Advance or
Compensating Interest to the extent
required under the Pooling and Servicing
Agreement will constitute an event of
default under the Pooling and Servicing
Agreement, in which case, upon the
removal of the Servicer, the Trustee or
the successor Servicer will be obligated
to make such advances in accordance with
the terms of the Pooling and Servicing
Agreement. See "Description of the
Securities -- Advances" in the
Prospectus.
Book-Entry Registration of the
Offered Certificates: The Offered Certificates will initially
be issued in book-entry form. Persons
acquiring beneficial ownership interests
in such Offered Certificates
("Beneficial Owners") may elect to hold
their interests through The Depository
Trust Company ("DTC"), in the United
States, or Centrale de Livraison de
Valeurs Mobilieres, S.A. ("CEDEL") or
the Euroclear System ("Euroclear"), in
Europe. Transfers within DTC, CEDEL or
Euroclear, as the case may be, will be
in accordance with the usual rules and
operating procedures of the relevant
system. So long as the Offered
Certificates are Book-Entry Certificates
(as defined herein), such Certificates
will be evidenced by one or more
Certificates registered in the name of
Cede & Co. ("Cede"), as the nominee of
DTC or one of the European Depositaries
(as
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<PAGE>
defined below). Cross-market transfers
between persons holding directly or
indirectly through DTC, on the one hand,
and counterparties holding directly or
indirectly through CEDEL or Euroclear,
on the other, will be effected in DTC
through Citibank N.A. ("Citibank") or
Chemical Bank ("Chemical", and together
with Citibank, the "European
Depositaries"), the relevant
depositaries of CEDEL and Euroclear,
respectively, and each a participating
member of DTC. The Offered Certificates
will initially be registered in the name
of Cede. The interests of the Owners of
such Certificates will be represented by
book-entries on the records of DTC and
participating members thereof. No
Beneficial Owner will be entitled to
receive a definitive certificate
representing such person's interest,
except in the event that Definitive
Certificates (as defined herein) are
issued under the limited circumstances
described herein. All references in this
Prospectus Supplement to any Offered
Certificates reflect the rights of
Beneficial Owners only as such rights
may be exercised through DTC and its
participating organizations for so long
as such Offered Certificates are held by
DTC. See "Description of the Offered
Certificates--Book-Entry Registration of
the Offered Certificates" herein and
Annex I hereto.
Monthly Servicing Fee: First Alliance Mortgage Company, as
Servicer, will retain a fee equal to
0.50% per annum (the "Fixed Rate Group
Servicing Fee"), payable monthly at
one-twelfth the annual rate, of the
then-outstanding principal amount of
each Mortgage Loan in the Fixed Rate
Group as of the first day of each
calendar month and a fee equal to 0.50%
per annum, (the "Variable Rate Group
Servicing Fee"), payable monthly at
one-twelfth the annual rate, of the
then-outstanding principal amount of
each Mortgage Loan in the Variable Rate
Group. The Fixed Rate Group Servicing
Fee and the Variable Rate Group
Servicing Fee are collectively referred
to as the "Servicing Fee."
Optional Termination: The Servicer, acting directly or through
a permitted designee, will have the
right to purchase from the Trust all the
Mortgage Loans then held by the Trust,
at a price at least equal to par plus
accrued interest, on any Remittance Date
on or after the Remittance Date on which
the then-outstanding aggregate principal
balance of the Mortgage Loans in the
Trust has declined to 10% or less of the
Maximum Collateral Amount. Under certain
circumstances the Certificate Insurer
may also exercise such purchase rights
if the Servicer does not do so. See "The
Pooling and Servicing Agreement--
Optional Termination" herein.
Ratings: It is a condition of the original
issuance of the Offered Certificates
that the Offered Certificates receive
ratings of AAA by Standard & Poor's
Ratings Service, a Division of The
McGraw-Hill Companies ("Standard &
Poor's"), and Aaa by Moody's Investors
Service, Inc. ("Moody's"). A security
rating is not a recommendation to buy,
sell or hold securities, and may be
subject to revision or withdrawal at any
time by the assigning entity. See
"Prepayment and Yield Considerations"
and "Ratings" herein and "Prepayment and
Yield Considerations" in the Prospectus.
Risk Factors: Credit Considerations. For information
with regard to the Mortgage Loans and
their related risks, see "The Mortgage
Loan Pool" herein.
Prepayment Considerations. For
information regarding the consequences
of prepayments of the Mortgage Loan and
of the failure of the Company to
purchase Subsequent Mortgage Loans
during the Funding Period in an amount
equal to the Original Pre-Funded Amount,
see "Prepayment and
S-13
<PAGE>
Yield Considerations" and "Risk Factors
-- the Subsequent Mortgage Loans and the
Pre-Funding Account" herein.
Other Considerations. For a discussion
of other risk factors that should be
considered by prospective investors in
the Offered Certificates, see "Risk
Factors" herein and in the Prospectus.
Federal Income Tax Aspects: For Federal income tax purposes an
election will be made to treat the Trust
(exclusive of the Pre-Funding Account
and the Capitalized Interest Account) as
a "real estate mortgage investment
conduit" (the "REMIC"). Each Class of
Offered Certificates will be designated
as "regular interests" in the REMIC and
will be treated as debt instruments of
the Trust for federal income tax
purposes. The REMIC will issue the Class
R Certificates, which will be designated
as the sole class of "residual
interests" in the REMIC. See "Certain
Federal Income Tax Consequences" herein
and in the Prospectus.
ERISA Considerations: Subject to the limitations described
under "ERISA Considerations" herein and
after the end of the the Funding Period,
the Class A Certificates may be
purchased by employee benefit plans that
are subject to the Employee Retirement
Income Security Act of 1974, as amended.
See "ERISA Considerations" herein and in
the Prospectus.
Legal Investment
Considerations: The Class A Certificates will not
constitute "mortgage related securities"
for purposes of the Secondary Mortgage
Market Enhancement Act of 1984
("SMMEA"). Accordingly, many
institutions with legal authority to
invest in comparably rated securities
based on first mortgage loans may not be
legally authorized to invest in the
Class A Certificates.
Certain Legal Matters: Certain legal matters relating to the
validity of the issuance of the
Certificates will be passed upon for the
Company and the Servicer by Arter &
Hadden, Washington, D.C., and by Steven
Gourley, Los Angeles, California,
counsel to the Company and the Servicer.
Certain legal matters relating to
insolvency issues and certain federal
income tax matters concerning the
Certificates will be passed upon for the
Company by Arter & Hadden, Washington,
D.C. Certain legal matters relating to
the validity of the issuance of the
Certificates will be passed upon for the
Underwriter by Dewey Ballantine, New
York, New York. Certain legal matters
relating to the Certificate Insurer and
the Certificate Insurance Policies will
be passed upon for the Certificate
Insurer by Kutak Rock, Omaha, Nebraska.
S-14
<PAGE>
RISK FACTORS
Prospective investors in the Class A Certificates should consider the
following factors (as well as the factors set forth under "Risk Factors" in the
Prospectus) in connection with the purchase of the Class A Certificates.
Risk of Mortgage Loan Yield Reducing Class A-4 Pass-Through Rate.
Subject to the Available Funds Cap, the Class A-4 Pass-Through Rate is based
upon the value of an index (LIBOR) which is different from the value of the
indices applicable to the Mortgage Loans in the Variable Rate Group, as
described under "The Mortgage Pool -- Variable Rate Group" herein (either as a
result of the use of a different index rate determination date, rate adjustment
date or rate cap or floor). The Variable Rate Group contains Mortgage Loans that
adjust semi-annually based upon a six-month LIBOR index whereas the Pass-Through
Rate on the Class A-4 Certificates adjusts monthly based upon a one-month LIBOR
index, subject to the Available Funds Cap. Consequently, the Class A-4 Pass-
Through Rate for any Payment Date may not equal the rate determined at LIBOR
plus the margin on the Class A-4 Certificates during the related Accrual Period.
In particular, the Class A-4 Pass-Through Rate adjusts monthly, while the
interest rates of the Mortgage Loans in the Variable Rate Group adjust less
frequently, with the result that the Available Funds Cap may be lower than the
otherwise applicable Class A-4 Pass-Through Rate for extended periods in a
rising interest rate environment. In addition, one-month LIBOR and the index
applicable to such Mortgage Loans may respond to different economic and market
factors, and there is not necessarily any correlation between them. Thus, it is
possible, for example, that one-month LIBOR may rise during periods in which the
Mortgage Loan's index is stable or is falling or that, even if both one-month
LIBOR and such index rise during the same period, one-month LIBOR may rise much
more rapidly than such index. See "Class A-4 Pass-Through Rate" in the Summary
herein.
The Subsequent Mortgage Loans and the Pre-Funding Account. If the
principal amount of eligible Mortgage Loans available during the Funding Period
is less than 100% of the Original Pre-Funded Amount, the Company will have
insufficient Mortgage Loans to sell to the Trust for addition to the Fixed Rate
Group and the Variable Rate Group on the Subsequent Transfer Dates, thereby
resulting in a prepayment of principal to Owners of the Fixed Rate Certificates
and/or the Variable Rate Certificates as described herein. See "Social, Economic
and Other Factors" below. In addition, any conveyance of Subsequent Mortgage
Loans is subject to the following conditions, among others: (i) each such
Subsequent Mortgage Loan must satisfy the representations and warranties
specified in the agreement pursuant to which such Subsequent Mortgage Loans are
transferred to the Trust (each a "Subsequent Transfer Agreement") and in the
Pooling and Servicing Agreement; (ii) the Subsequent Mortgage Loans must be
selected by the Company in a manner that it believes is not adverse to the
interest of the Owners of the Certificates or the Certificate Insurer; (iii)
certain opinions of counsel with respect to the validity of the conveyance of
such Subsequent Mortgage Loans must be delivered by the Company; and (iv) as of
each cut-off date (each, a "Subsequent Cut-Off Date") applicable thereto, the
Mortgage Loans, including the Subsequent Mortgage Loans to be conveyed by the
Company as of such Subsequent Cut-Off Date, must satisfy the criteria set forth
in the Pooling and Servicing Agreement, as described herein under "The Mortgage
Loan Pool--Conveyance of Subsequent Mortgage Loans--Fixed Rate Group" and
"--Conveyance of Subsequent Mortgage Loans--Variable Rate Group."
To the extent that amounts on deposit in the Pre-Funding Account have
not been fully applied to the purchase of Subsequent Mortgage Loans by the Trust
for inclusion in the Fixed Rate Group or the Variable Rate Group by the end of
the Funding Period, the Owners of the Fixed Rate Certificates then entitled to
payments of principal and/or the Class A-4 Certificates will receive a
prepayment of principal in an amount equal to the Pre- Funded Amount, less any
Pre-Funding Account Earnings, remaining in the Pre-Funding Account on the first
Payment Date following the end of the Funding Period (in no event later than the
July 1996 Payment Date). Although no assurances can be given, the Company
intends that the principal amount of Subsequent Mortgage Loans sold to the Trust
will require the application of substantially all amounts on deposit in the
Pre-Funding Account and that there will be no material principal prepayment to
the Owners of the Fixed Rate Certificates or the Class A-4 Certificates from the
Pre-Funded Amount.
Each Subsequent Mortgage Loan must satisfy the eligibility criteria
referred to above at the time of its addition. However, Subsequent Mortgage
Loans may be of a different credit quality. Therefore, following the transfer of
Subsequent Mortgage Loans to the Fixed Rate Group or the Variable Rate Group,
the aggregate characteristics of the Mortgage Loans then held in such Group may
vary from those of the Initial Mortgage Loans in such Group. See "The Mortgage
Loan Pool--Conveyance of Subsequent Mortgage Loans--Fixed Rate Group" and
"--Conveyance of Subsequent Mortgage Loans--Variable Rate Group."
S-15
<PAGE>
Social, Economic and Other Factors. The ability of the Trust to invest
in Subsequent Mortgage Loans is largely dependent upon the ability of the
Company to originate or purchase additional mortgage loans. The ability of the
Company to originate or purchase additional loans may be affected as a result of
a variety of social and economic factors. Economic factors include interest
rates, unemployment levels, the rate of inflation and consumer perception of
economic conditions generally. However, the Company is unable to determine and
has no basis to predict whether or to what extent economic or social factors
will affect its origination ability and the availability of Subsequent Mortgage
Loans.
Risk of Higher Delinquencies Associated with Underwriting Standards.
All of the Mortgage Loans were originated or acquired by the Company in
accordance with the Company's mortgage loan program described in the Prospectus.
As a general matter, the Company's mortgage loan program consists of the
origination and packaging of mortgage loans relating to non-conforming credits.
A non-conforming credit means a mortgage loan which is ineligible for purchase
by FNMA due to credit characteristics that do not meet FNMA guidelines. Mortgage
Loans originated under the Company's mortgage loan program may experience rates
of delinquency, foreclosure and bankruptcy that are higher than mortgage loans
originated under FNMA guidelines. None of the Initial Mortgage Loans were 30
days or more delinquent in their monthly payments as of the Cut-Off Date.
However, investors in the Class A Certificates should be aware that
approximately 1.27% and 1.89% (by aggregate principal balance as of the Cut-Off
Date) of the Initial Mortgage Loans in the Fixed Rate Group and Variable Rate
Group, respectively, had a first monthly payment due on or before April 1, 1996.
Therefore, it was not possible for any Mortgage Loan other than such Mortgage
Loans to have had a monthly payment that was delinquent 30 days or more.
Risk of Higher Default Rates Associated with California Real Property.
Since 50.88% of the Mortgaged Properties relating to the Initial Mortgage Loans
are located in California, an overall decline in the California residential real
estate market could adversely affect the values of the Mortgaged Properties
securing such Mortgage Loans, causing the Loan Balances of the related Initial
Mortgage Loans to equal or exceed the value of such Mortgaged Properties.
The standard hazard insurance policy required to be maintained under
the terms of each Mortgage Loan does not insure against physical damage arising
from earth movement (including earthquakes, landslides and mudflows). See
"Hazard Insurance; Claims Thereunder" in the Prospectus. Accordingly, should
such event cause losses in respect of the Mortgage Loans, if the protection
afforded by the overcollateralization and crosscollateralization of the
Certificates is insufficient and upon the occurrence of a Subordination Deficit
the Certificate Insurer is unable to meet its obligations under the related
Certificate Insurance Policy, then the Owners of the Offered Certificates could
experience a loss on their investment.
Risk of Higher Loss Rates Associated with Junior Liens. Since 1.52% of
the aggregate principal balance of the Mortgage Loans in the Fixed Rate Group as
of the Cut-Off Date are secured by junior deeds of trust or mortgages which are
subordinate to the rights of the beneficiaries under the related senior
mortgages, a decline in real property values could extinguish the interest of
the beneficiary of a junior deed of trust on the Mortgaged Property before
having any effect on the interest of the beneficiary of a senior mortgage
thereon. To the extent that such losses result in a shortfall of available funds
from payments relating to the Mortgage Loans and in the event that the
Certificate Insurer is unable to meet its obligation upon the occurrence of a
Subordination Deficit, then the owners of the Offered Certificates will bear all
risk of loss resulting from default by Mortgagors and will have to look
primarily to the value of the Mortgaged Property for recovery of the outstanding
principal and unpaid interest on the defaulted Mortgage Loans. See "Mortgage
Loan Program -- Underwriting Guidelines" herein and "Risk Factors -- Risks of
the Mortgage Loans" in the Prospectus.
Other Legal Considerations. Applicable state laws generally regulate
interest rates and other charges, require certain disclosures, and require
licensing of the Company. In addition, other state laws, public policy and
general principles of equity relating to the protection of consumers, unfair and
deceptive practices and debt collection practices may apply to the origination,
servicing and collection of the Mortgage Loans. The Company will be required to
repurchase any Mortgage Loans which, at the time of origination, did not comply
with applicable federal and state laws and regulations. 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 Trust 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 Company to damages and administrative
enforcement. See "Certain Legal Aspects of Mortgage Loans and Related Matters"
in the Prospectus.
S-16
<PAGE>
Approximately 82.66% of the Initial Mortgage Loans will be subject to
the Riegle Community Development and Regulatory Improvement Act of 1994 (the
"Riegle Act"), which incorporates the Home Ownership and Equity Protection Act
of 1994. The Riegle Act adds certain additional provisions to Regulation Z,
which is the implementing regulation of the Truth-In-Lending Act. These
provisions impose additional disclosure and other requirements on creditors with
respect to non-purchase money home equity loans with high interest rates or high
upfront fees and charges. In general, home equity loans within the purview of
the Riegle Act have annual percentage rates over 10% greater than the yield on
Treasury Securities of comparable maturity and/or fees and points which exceed
the greater of 8% of the total loan amount or $400. The provisions of the Riegle
Act apply on a mandatory basis to all home equity loans originated on or after
October 1, 1995. These provisions can impose specific statutory liabilities upon
creditors who fail to comply with their provisions and may affect the
enforceability of the related loans. In addition, any assignee of the creditor
would generally be subject to all claims and defenses that the consumer could
assert against the creditor, including, without limitation, the right to rescind
the home equity loan. The Company will represent and warrant in the Pooling and
Servicing Agreement that each Mortgage Loan was originated in compliance with
all applicable laws including the Truth-in-Lending Act, as amended.
Risk of Seller Insolvency. The Company believes that the transfer of
the Mortgage Loans to the Trust constitutes a sale by the Company to the Trust
and, accordingly, that such Mortgage Loans will not be part of the assets of the
Company in the event of the insolvency of the Company and will not be available
to the creditors of the Company. However, in the event of an insolvency of the
Company, it is possible that a bankruptcy trustee or a creditor of the Company
may argue that the transaction between the Company and the Trust was a pledge of
such Mortgage Loans in connection with a borrowing by the Company rather than a
true sale. Such an attempt, even if unsuccessful, could result in delays in
distributions on the Certificates.
On the Closing Date, the Trustee, the Company, the Rating Agencies and
the Certificate Insurer will have received an opinion of Arter & Hadden, counsel
to the Company, with respect to the true sale of the Mortgage Loans from the
Company to the Trustee, in form and substance satisfactory to the Certificate
Insurer and the Rating Agencies.
THE PORTFOLIO OF MORTGAGE LOANS
General
The Mortgage Loan Pool includes newly-originated fixed and variable
rate loans which were originated directly by the Company or one or more
unrelated third party Originators.
All of the Initial Mortgage Loans in the Variable Rate Group adjust
based on the London interbank offered rate for six-month United States Dollar
deposits in the London Market based on quotations of major banks published in
The Wall Street Journal and have a periodic semi-annual rate adjustment cap of
1% and a lifetime cap of 6% or 7% above the startup rate. Furthermore, all
mortgage loans originated under the retail adjustable rate program are in a
first lien position and generally do not allow for balloon payments. Such retail
adjustable rate mortgage loans are originated in accordance with the Company's
Guidelines. See "Mortgage Loan Program -- Underwriting Guidelines" herein in the
Prospectus.
Acquisitions
Fixed Rate Group. All of the Mortgage Loans in the Fixed Rate Group
were originated by the Company pursuant to the Company's Guidelines or acquired
by the Company from an Originator. Initial Mortgage Loans representing an
aggregate principal balance of $861,184.21 or 2.20% of the Fixed Rate Group by
aggregate principal balance were acquired from an Originator other than the
Company.
Variable Rate Group. All of the Mortgage Loans in the Variable Rate
Group were originated by the Company and were underwritten pursuant to the
Company's Guidelines or acquired by the Company from an Originator. Initial
Mortgage Loans representing an aggregate principal balance of $7,219,475.71 or
34.23% of the Variable Rate Group by aggregate principal balance were acquired
from an Originator other than the Company.
S-17
<PAGE>
Delinquencies
The following tables set forth information relating to the delinquency,
foreclosure and loan loss experience of the Servicer for its servicing portfolio
of fixed and variable rate mortgage loans as of and for the period ended March
31, 1996 and for each of the three prior calendar years. The Servicer is not an
approved seller/servicer by FNMA or the Federal Home Loan Mortgage Corporation.
Delinquency and Foreclosure Experience of the
Servicer's Servicing Portfolio
<TABLE>
<CAPTION>
As of As of December 31,
March 31, ---------------------------------
1996 1995 1994 1993
----- ---- ---- ----
Dollar Dollar Dollar Dollar
Amount Amount Amount Amount
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
Total Servicing Portfolio......... $611,718 $613,791 $555,685 $385,570
Delinquent Loans(1)
30-59 days............... 11,800 8,339 6,084 4,547
60-89 days............... 5,166 6,538 4,471 3,070
90 days or more.......... 21,800 21,002 13,589 7,749
------ ------ ------ -----
Total................... $38,766 $35,879 $24,144 $15,366
------- ------- ======= =======
Total Delinquency Percentage 6.34% 5.85% 4.34% 3.96%
REO Properties (2)................ $8,657 $8,016 $3,704 $2,445
- - - ---------------------------
<FN>
(1) The period of delinquency is based on the number of days payments are
contractually past due and includes all loans in foreclosure.
(2) Includes REO Properties owned by the Company as well as REO Properties
owned by REMIC Trusts and serviced by the Company; however, excludes
private investor REO Properties not serviced by the Company.
</FN>
</TABLE>
Loan Loss Experience of the
Servicer's Servicing Portfolio
<TABLE>
<CAPTION>
Three Months Ended Year Ended December 31,
March 31, -----------------------------------
1996 1995 1994 1993
---- ---- ----- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Average Servicing Portfolio Balance Outstanding (1) $612,755 $584,738 $470,627 $312,438
Net Losses (2)..................................... $465 $169 $44 $63
As a percentage of Average Portfolio
Balance................................... 0.08% 0.03% 0.01% 0.02%
- - - --------------------------
<FN>
(1) Average Servicing Portfolio Balance Outstanding equals the average of the
servicing portfolio balance at the beginning and ending periods.
(2) "Net Losses" means actual net losses realized with respect to the
disposition of the REO properties.
</FN>
</TABLE>
USE OF PROCEEDS
The Company will sell the Mortgage Loans to the Trust concurrently with
the delivery of the Certificates. Net proceeds from the sale of the Class A
Certificates will be applied by the Trust to the purchase of the Initial
Mortgage Loans from the Company. Such net proceeds less the Pre-Funded Amount
and the amount deposited in the Capitalized Interest Account will (together with
the Subordinate Certificates retained by the Company or its affiliates)
represent the purchase price to be paid by the Trust to the Company for the
Initial Mortgage Loans.
S-18
<PAGE>
THE MORTGAGE LOAN POOL
General
Unless otherwise noted, all references to statistical percentages in
this Prospectus Supplement appearing "as of the Cut-Off Date," together with all
dollar amount references herein to aggregate principal balances appearing "as of
the Cut-Off Date" have been calculated using the aggregate scheduled principal
balances of the Initial Mortgage Loans as of the close of business on the
Cut-Off Date. Subsequent Mortgage Loans are intended to be purchased by the
Trust for inclusion in the Fixed Rate Group and the Variable Rate Group from the
Company from time to time on or before June 28, 1996 from funds on deposit in
the Pre-Funding Account. The Initial Mortgage Loans and the Subsequent Mortgage
Loans are referred to herein collectively as the "Mortgage Loans." The
Subsequent Mortgage Loans, if available, will be sold by the Company to the
Trust.
This subsection describes generally certain characteristics of the
Initial Mortgage Loans. Unless otherwise specified herein, references herein to
percentages of Initial Mortgage Loans refer in each case to the approximate
percentage of the aggregate principal balance of the Initial Mortgage Loans as
of the Cut-Off Date, based on the outstanding principal balances of the Initial
Mortgage Loans in the Fixed Rate Group or the Initial Mortgage Loans in the
Variable Rate Group, in each case as of the Cut-Off Date, and giving effect to
all payments due on or prior to the Cut-Off Date. The Mortgage Loan Pool will
initially consist of 723 loans evidenced by promissory notes (the "Notes")
secured by deeds of trust, security deeds or mortgages on the Mortgaged
Properties, 50.88% of which by aggregate principal balance are located in the
State of California and 49.12% of which by aggregate principal balance are
collectively located in the States of Arizona, Colorado, Florida, Georgia,
Idaho, Illinois, Ohio, Oregon, Pennsylvania, Utah and Washington. The Mortgaged
Properties securing the Mortgage Loans consist of 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 Mortgaged Properties may be
owner-occupied (which includes second and vacation homes) or non-owner occupied
investment properties. The Initial Mortgage Loans consist of 99.01% of loans
secured by first lien mortgages on the related properties and 0.99% of loans
secured by second liens on the related Mortgaged Properties.
The Initial Mortgage Loans were required to satisfy the following
criteria as of the Cut-Off Date: had remaining terms to stated maturity of no
greater than 360 months; no more than 1.5% were 30 or more days delinquent; had
a Mortgage Rate as of the Cut-Off Date of at least 7.95% with respect to the
Fixed Rate Group and at least 6.95% with respect to the Variable Rate Group; and
had a CLTV not in excess of 80% with respect to the Fixed Rate Group and had a
LTV not in excess of 81% with respect to the Variable Rate Group.
Each Mortgage Loan in the Trust will be assigned to one of the two
Mortgage Loan Groups comprised of Mortgage Loans which bear fixed interest rates
only, in the case of the Fixed Rate Group, and Mortgage Loans which bear
adjustable interest rates only, in the case of the Variable Rate Group. Each of
the Mortgage Loans contained in the Fixed Rate Group will be secured by a
Mortgage having either a first or junior lien position with respect to the
related Property. Each of the Mortgage Loans contained in the Variable Rate
Group will be secured by Mortgages which are in a first lien position. 99.5% of
the Initial Mortgage Loans originated in both the Fixed Rate Group and the
Variable Rate Group were originated less than six months prior to the Cut-Off
Date. The Fixed Rate Certificates represent undivided ownership interests in all
Mortgage Loans contained in the Fixed Rate Group, and the Variable Rate
Certificates represent undivided ownership interests in all Mortgage Loans
contained in the Variable Rate Group.
Fixed Rate Group - Initial Mortgage Loans
All of the Initial Mortgage Loans in the Fixed Rate Group are Actuarial
Loans. All of the Initial Mortgage Loans in the Fixed Rate Group as of the
Cut-Off Date require monthly payments of principal that will fully amortize the
Initial Mortgage Loans by their respective stated maturity dates. No Initial
Mortgage Loan in the Fixed Rate Group had a stated maturity date later than
August 1, 2026. As of the Cut-Off Date, the aggregate principal balance of all
Initial Mortgage Loans in the Fixed Rate Group was 99.93% of the aggregate
principal balance of such Initial Mortgage Loans at the times of their
origination.
S-19
<PAGE>
The Initial Mortgage Loans in the Fixed Rate Group had the following
aggregate characteristics as of the Cut-Off Date:
<TABLE>
<CAPTION>
<S> <C>
Aggregate Number of Initial Mortgage Loans........................................ 472
Arizona.................................................................. 20
California............................................................... 254
Colorado................................................................. 15
Florida.................................................................. 43
Georgia.................................................................. 10
Illinois................................................................. 33
Oregon................................................................... 24
Pennsylvania............................................................. 4
Utah..................................................................... 12
Washington............................................................... 57
Principal Balance
Aggregate................................................................ $39,015,274.07
Minimum.................................................................. 17,761.70
Maximum.................................................................. 250,585.00
Average.................................................................. 82,659.48
Mortgage Rates
Weighted Average......................................................... 9.699%
Range.................................................................... 7.950%-
15.450%
Original Term to Stated Maturity (range in months)................................ 120 - 360
Remaining Term to Stated Maturity (range in months)............................... 120 - 360
Weighted Average CLTV............................................................. 58.75%
Weighted Average LTV.............................................................. 58.32%
Weighted Average Junior Lien Ratio................................................ 99.28%
Percentage of First Mortgages..................................................... 98.48%
Percentage of Second Mortgages.................................................... 1.52%
</TABLE>
Some of the aggregate percentages in the following tables may not total
100% due to rounding.
<TABLE>
<CAPTION>
DISTRIBUTION OF CLTV'S
Fixed Rate Group
Aggregate % of Aggregate
Number of Initial Unpaid Unpaid
Range of CLTV's Mortgage Loans Principal Balance Principal Balance
<S> <C> <C> <C> <C>
75.001 - 80.000%.................................... 25 $ 2,475,486.13 6.34%
70.001 - 75.000..................................... 69 7,664,623.74 19.65
65.001 - 70.000..................................... 64 6,999,444.01 17.94
60.001 - 65.000..................................... 57 4,853,757.32 12.44
55.001 - 60.000..................................... 43 3,827,349.86 9.81
50.001 - 55.000..................................... 32 2,401,735.51 6.16
45.001 - 50.000..................................... 39 3,315,164.80 8.50
40.001 - 45.000..................................... 38 2,412,955.80 6.18
35.001 - 40.000..................................... 31 1,732,536.76 4.44
30.001 - 35.000..................................... 27 1,591,351.08 4.08
25.001 - 30.000..................................... 16 627,105.12 1.61
20.001 - 25.000..................................... 14 680,200.51 1.74
15.001 - 20.000..................................... 13 339,238.43 0.87
10.001 - 15.000..................................... 4 94,325.00 0.24
--- ------------ -----
Total........................................ 472 $39,015,274.07 100.00%
=== ============== =======
</TABLE>
S-20
<PAGE>
DISTRIBUTION OF LTV'S
Fixed Rate Group
<TABLE>
<CAPTION>
Aggregate % of Aggregate
Number of Initial Unpaid Unpaid
Range of LTV's Mortgage Loans Principal Balance Principal Balance
<S> <C> <C> <C> <C>
75.001 - 80.000%.................................... 25 $ 2,475,486.13 6.34%
70.001 - 75.000..................................... 66 7,459,935.43 19.12
65.001 - 70.000..................................... 63 7,046,183.63 18.06
60.001 - 65.000..................................... 54 4,759,787.19 12.20
55.001 - 60.000..................................... 42 3,761,694.86 9.64
50.001 - 55.000..................................... 32 2,401,735.51 6.16
45.001 - 50.000..................................... 39 3,315,164.80 8.50
40.001 - 45.000..................................... 36 2,348,973.38 6.02
35.001 - 40.000..................................... 31 1,732,536.76 4.44
30.001 - 35.000..................................... 27 1,591,351.08 4.08
25.001 - 30.000..................................... 16 623,574.25 1.60
20.001 - 25.000..................................... 17 812,619.11 2.08
15.001 - 20.000..................................... 17 498,571.94 1.28
10.001 - 15.000..................................... 6 167,690.06 0.43
< 10.000..................................... 1 19,969.94 0.05
--- ------------ ----
Total............................................ 472 $39,015,274.07 100.00%
=== ============== =======
</TABLE>
The CLTV's and LTV's shown above were calculated based upon the
appraised values of the Mortgaged Properties at the time of origination (the
"Appraised Values"). No assurance can be given that such appraised values of the
Mortgaged Properties have remained or will remain at their levels on the dates
of origination of the related Initial Mortgage Loans. If property values decline
such that the outstanding balances of the Mortgage Loans, together with the
outstanding balances of any senior Mortgage Loans, 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 heretofore experienced by the
Servicer, as set forth above under "The Portfolio of Mortgage Loans," and by the
mortgage lending industry in general.
DISTRIBUTION OF JUNIOR LIEN RATIOS
Fixed Rate Group
<TABLE>
<CAPTION>
Aggregate % of Aggregate
Range of Number of Initial Unpaid Unpaid
Junior Lien Ratios Mortgage Loans Principal Balance Principal Balance
<S> <C> <C> <C>
< 20.00%............................... 1 $ 19,969.94 0.05%
-
20.01 - 30.00................................ 5 199,797.75 0.51
30.01 - 40.00................................ 3 129,322.13 0.33
40.01 - 60.00................................ 1 32,466.42 0.08
60.01 - 70.00................................ 1 35,682.00 0.09
70.01 - 100.00................................ 461 38,598,035.83 98.93
--- ------------- -----
Total................................... 472 $39,015,274.07 100.00%
===== ============== =======
</TABLE>
S-21
<PAGE>
DISTRIBUTION OF MORTGAGE RATES
Fixed Rate Group
<TABLE>
<CAPTION>
Aggregate % of Aggregate
Range of Number of Initial Unpaid Unpaid
Mortgage Rates Mortgage Loans Principal Balance Principal Balance
<S> <C> <C> <C> <C>
7.501 - 8.000%.............................. 2 $ 144,185.36 0.37%
8.001 - 8.500............................... 33 3,102,411.09 7.95
8.501 - 9.000............................... 81 7,695,317.22 19.72
9.001 - 9.500............................... 144 11,986,809.51 30.72
9.501 - 10.000............................... 94 8,931,758.11 22.89
10.001 - 10.500............................... 23 1,806,200.82 4.63
10.501 - 11.000............................... 38 2,584,495.30 6.62
11.001 - 11.500............................... 8 592,504.86 1.52
11.501 - 12.000............................... 19 979,422.41 2.51
12.001 - 12.500............................... 2 131,308.33 0.34
12.501 - 13.000............................... 8 331,489.52 0.85
13.001 - 13.500............................... 4 151,063.87 0.39
13.501 - 14.000............................... 12 418,973.54 1.07
14.001 - 14.500............................... 1 32,151.13 0.08
14.501 - 15.000............................... 2 85,333.94 0.22
15.001 - 15.500............................... 1 41,849.06 0.11
--- -------------- ----
Total...................................... 472 $39,015,274.07 100.00
=== ============== ======
</TABLE>
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES
Fixed Rate Group
<TABLE>
<CAPTION>
Aggregate % of Aggregate
Number of Initial Unpaid Unpaid
State Mortgage Loans Principal Balance Principal Balance
<S> <C> <C> <C>
Arizona...................................... 20 $ 1,283,514.55 3.29%
California................................... 254 23,817,952.19 61.05
Colorado..................................... 15 1,005,299.05 2.58
Florida...................................... 43 2,664,104.56 6.83
Georgia...................................... 10 583,431.63 1.50
Illinois..................................... 33 2,415,428.71 6.19
Oregon....................................... 24 1,751,831.75 4.49
Pennsylvania................................. 4 234,705.00 0.60
Utah......................................... 12 979,445.51 2.51
Washington................................... 57 4,279,561.12 10.97
-- ------------ -----
Total................................... 472 $39,015,274.07 100.00%
=== ============== =======
</TABLE>
DISTRIBUTION OF REMAINING TERMS TO STATED MATURITY
Fixed Rate Group
<TABLE>
<CAPTION>
Aggregate % of Aggregate
Number of Initial Unpaid Unpaid
Range of Months Mortgage Loans Principal Balance Principal Balance
<S> <C> <C> <C>
< 120 .................................... 4 $ 166,367.00 0.43%
-
121 - 180 .................................... 56 3,433,115.04 8.80
181 - 240 .................................... 24 2,223,623.26 5.70
241 - 360 .................................... 388 33,192,168.77 85.07
--- ------------- -----
Total.................................................. 472 $39,015,274.07 100.00%
=== ============== =======
</TABLE>
S-22
<PAGE>
DISTRIBUTION OF PRINCIPAL BALANCES
Fixed Rate Group
<TABLE>
<CAPTION>
Aggregate % of Aggregate
Range of Number of Initial Unpaid Unpaid
Principal Balances Mortgage Loans Principal Balance Principal Balance
<S> <C> <C> <C> <C>
$ 15,000.01 - 20,000.00 ....................... 6 $ 116,585.03 0.30%
20,000.01 - 25,000.00 ....................... 15 340,899.11 0.87
25,000.01 - 30,000.00 ....................... 9 249,604.07 0.64
30,000.01 - 35,000.00 ....................... 20 655,597.69 1.68
35,000.01 - 40,000.00 ....................... 15 552,044.27 1.41
40,000.01 - 45,000.00 ....................... 10 416,826.92 1.07
45,000.01 - 50,000.00 ....................... 25 1,201,833.69 3.08
50,000.01 - 55,000.00 ....................... 28 1,447,436.18 3.71
55,000.01 - 60,000.00 ....................... 20 1,143,520.32 2.93
60,000.01 - 65,000.00 ....................... 26 1,630,314.08 4.18
65,000.01 - 70,000.00 ....................... 20 1,341,748.57 3.44
70,000.01 - 75,000.00 ....................... 27 1,963,155.28 5.03
75,000.01 - 80,000.00 ....................... 26 2,032,511.57 5.21
80,000.01 - 85,000.00 ....................... 29 2,401,827.41 6.16
85,000.01 - 90,000.00 ....................... 27 2,361,952.70 6.05
90,000.01 - 95,000.00 ....................... 26 2,397,050.71 6.14
95,000.01 - 100,000.00 ....................... 21 2,031,994.68 5.21
100,000.01 - 125,000.00 ....................... 55 6,150,064.91 15.76
125,000.01 - 150,000.00 ....................... 30 4,104,925.71 10.52
150,000.01 - 200,000.00 ....................... 33 5,587,898.82 14.32
200,000.01 - 250,000.00 ....................... 3 636,897.35 1.63
250,000.01 - 300,000.00 ............. 1 250,585.00 0.64
- ---------- ----
Total................................................ 472 $39,015,274.07 100.00%
=== ============== =======
</TABLE>
DISTRIBUTION OF PROPERTY TYPES
Fixed Rate Group
<TABLE>
<CAPTION>
Aggregate % of Aggregate
Number of Initial Unpaid Unpaid
Property Type Mortgage Loans Principal Balance Principal Balance
<S> <C> <C> <C>
Condominium.............................................. 8 $ 341,488.83 0.88%
Two-to-Four Family....................................... 13 1,046,654.27 2.68
Planned Unit Development................................. 4 249,206.49 0.64
Single Family............................................ 447 37,377,924.48 95.80
--- ------------- -----
Total............................................... 472 $39,015,274.07 100.00%
======= ============== =======
</TABLE>
DISTRIBUTION OF OCCUPANCY STATUS
Fixed Rate Group
<TABLE>
<CAPTION>
Aggregate % of Aggregate
Number of Unpaid Unpaid
Occupancy Status Mortgage Loans Principal Balance Principal Balance
<S> <C> <C> <C>
Investor Property........................................ 17 $ 1,289,674.76 3.31%
Primary Residence........................................ 455 37,725,599.31 96.69
--- ------------- -----
Total............................................... 472 $39,015,274.07 100.00%
=== ============== =======
</TABLE>
Conveyance of Subsequent Mortgage Loans - Fixed Rate Group
The Pooling and Servicing Agreement permits the Trust to acquire
approximately $11,250,000 in aggregate principal balance of Subsequent Mortgage
Loans for addition to the Fixed Rate Group. Accordingly, the statistical
characteristics of the Mortgage Loan Pool and the Fixed Rate Group will vary as
of any Subsequent Cut-Off Date upon the acquisition of Subsequent Mortgage
Loans. Pursuant to the Pooling and Servicing Agreement, however,
S-23
<PAGE>
the Company has covenanted to deliver Subsequent Mortgage Loans for inclusion in
the Fixed Rate Group that will not materially change the statistical
characteristics of the Mortgage Loan Pool and the Fixed Rate Group.
The obligation of the Trust to purchase Subsequent Mortgage Loans for
addition to the Fixed Rate Group on a Subsequent Transfer Date is subject to the
requirements as defined in the Pooling and Servicing Agreement by the
Certificate Insurer.
Variable Rate Group
All of the Initial Mortgage Loans in the Variable Rate Group are
Actuarial Loans and are secured by first mortgages. All of the Initial Mortgage
Loans in the Variable Rate Group require monthly payments of principal that will
fully amortize such Initial Mortgage Loans by their respective stated maturity
dates. No Mortgage Loan in the Variable Rate Group had a stated maturity date
later than July 1, 2026. As of the Cut-Off Date, the aggregate principal balance
of the Initial Mortgage Loans in the Variable Rate Group was 99.94% of the
aggregate principal balance of such Initial Mortgage Loans at the times of their
origination. The Mortgage Loans in the Variable Rate Group are Six Month LIBOR
Loans and have semi-annual interest rate and semi-annual payment adjustment
frequencies. The gross margin range for the Six Month LIBOR Loans is 3.95% to
7.99%. As of the Cut-Off Date, substantially all of the Initial Mortgage Loans
in the Variable Rate Group had interest rates which were not fully indexed
(i.e., the entire gross margin has not yet been added to the rate given by the
index).
The Initial Mortgage Loans in the Variable Rate Group had the following
aggregate characteristics as of the Cut-Off Date:
<TABLE>
<CAPTION>
<S> <C>
Aggregate Number of Initial Mortgage Loans............................ 251
Arizona...................................................... 7
California................................................... 72
Colorado..................................................... 15
Florida...................................................... 15
Georgia...................................................... 2
Idaho........................................................ 4
Illinois..................................................... 52
Ohio......................................................... 5
Oregon....................................................... 20
Pennsylvania................................................. 5
Utah......................................................... 14
Washington................................................... 40
Principal Balance
Aggregate.................................................... $21,092,926.50
Minimum...................................................... $17,837.02
Maximum...................................................... $215,750.55
Average...................................................... $84,035.56
Weighted Average Initial Mortgage Rate................................ 8.804%
Initial Mortgage Rate Range........................................... 6.950% - 13.490%
Original Term to Stated Maturity (range in months).................... 120 - 360
Remaining Term to Stated Maturity (range in months)................... 120 - 360
Weighted Average Original Term to Stated Maturity (months)............ 345
Weighted Average Remaining Term to Stated Maturity (months)........... 345
Weighted Average LTV.................................................. 60.74%
Weighted Average Gross Margin......................................... 5.774%
Gross Margin Range.................................................... 3.950% - 7.990%
Semi-Annual Rate Adjustment Cap....................................... 1.00%
Lifetime Cap
Percentage of Initial Mortgage Loans with a 6% Lifetime
Cap above the startup rate............................................ 0.40%
Percentage of Initial Mortgage Loans with a 7% Lifetime
Cap above the startup rate............................................ 99.60%
Weighted Average Maximum Mortgage Rate................................ 15.800%
Maximum Mortgage Rate Range........................................... 13.950% - 20.490%
</TABLE>
S-24
<PAGE>
DISTRIBUTION OF LTV's
Variable Rate Group
<TABLE>
<CAPTION>
Aggregate % of Aggregate
Number of Initial Unpaid Unpaid
Range of LTV's Mortgage Loans Principal Balance Principal Balance
<C> <C> <C> <C> <C>
80.001 - 85.000% ........................................ 1 $ 127,340.95 0.60%
75.001 - 80.000.......................................... 27 2,740,327.89 12.99
70.001 - 75.000.......................................... 28 2,849,929.09 13.51
65.001 - 70.000.......................................... 36 3,681,754.45 17.45
60.001 - 65.000.......................................... 21 1,921,956.54 9.11
55.001 - 60.000.......................................... 35 2,819,833.08 13.37
50.001 - 55.000.......................................... 36 2,882,940.20 13.67
45.001 - 50.000.......................................... 14 902,653.38 4.28
40.001 - 45.000.......................................... 12 879,451.46 4.17
35.001 - 40.000.......................................... 18 1,262,931.24 5.99
30.001 - 35.000.......................................... 5 252,342.60 1.20
25.001 - 30.000.......................................... 8 377,077.36 1.79
20.001 - 25.000.......................................... 8 344,841.24 1.63
15.001 - 20.000.......................................... 1 31,710.00 0.15
10.001 - 15.000.......................................... 1 17,837.02 0.08
- ------------ ----
Total............................................... 251 $21,092,926.50 100.00%
=== ============== =======
</TABLE>
The LTV's shown above were calculated based upon the Appraised Values
of the Mortgaged Properties. No assurance can be given that appraised values of
the Mortgaged Properties have remained or will remain at their levels on the
dates of origination of the related Initial Mortgage Loans. If property values
decline such that the outstanding balances of the Initial Mortgage Loans 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 heretofore
experienced by the Servicer, as set forth above under "The Portfolio of Mortgage
Loans," and by the mortgage lending industry in general.
DISTRIBUTION OF REMAINING TERMS TO STATED MATURITY
Variable Rate Group
<TABLE>
<CAPTION>
Aggregate % of Aggregate
Range of Number of Initial Unpaid Unpaid
Months Mortgage Loans Principal Balance Principal Balance
<S> <C> <C> <C>
< 120................................................ 1 $ 47,450.00 0.22%
-
121 - 180................................................ 22 1,614,235.33 7.65
181 - 240................................................ 1 67,664.11 0.32
241 - 360................................................ 227 19,363,577.06 91.80
--- ------------- -----
Total............................................... 251 $21,092,926.50 100.00%
=== ============== =======
</TABLE>
S-25
<PAGE>
DISTRIBUTION OF PRINCIPAL BALANCES
Variable Rate Group
<TABLE>
<CAPTION>
Aggregate % of Aggregate
Range of Number of Initial Unpaid Unpaid
Principal Balances Mortgage Loans Principal Balance Principal Balance
<S> <C> <C> <C> <C>
$15,000.01 - 20,000.00 ........................ 1 $ 17,837.02 0.08%
20,000.01 - 25,000.00 ........................ 1 22,049.00 0.10
25,000.01 - 30,000.00 ........................ 2 57,468.00 0.27
30,000.01 - 35,000.00 ........................ 4 130,583.09 0.62
35,000.01 - 40,000.00 ........................ 5 196,642.04 0.93
40,000.01 - 45,000.00 ........................ 5 209,380.12 0.99
45,000.01 - 50,000.00 ........................ 12 575,216.45 2.73
50,000.01 - 55,000.00 ........................ 13 683,121.39 3.24
55,000.01 - 60,000.00 ........................ 17 971,298.04 4.60
60,000.01 - 65,000.00 ........................ 18 1,131,663.44 5.37
65,000.01 - 70,000.00 ........................ 19 1,275,141.09 6.05
70,000.01 - 75,000.00 ........................ 13 953,797.15 4.52
75,000.01 - 80,000.00 ........................ 25 1,944,449.10 9.22
80,000.01 - 85,000.00 ........................ 19 1,559,308.70 7.39
85,000.01 - 90,000.00 ........................ 14 1,225,047.65 5.81
90,000.01 - 95,000.00 ........................ 10 930,564.38 4.41
95,000.01 - 100,000.00 ........................ 16 1,568,586.95 7.44
100,000.01 - 125,000.00 ....................... 27 3,049,683.50 14.46
125,000.01 - 150,000.00 ....................... 17 2,304,415.63 10.93
150,000.01 - 200,000.00 ........................ 11 1,863,141.95 8.83
200,000.01 - 250,000.00 ........................ 2 423,531.81 2.01
- ---------- ----
Total..................................................... 251 $21,092,926.50 100.00%
=== ============== =======
</TABLE>
DISTRIBUTION OF PROPERTY TYPES
Variable Rate Group
<TABLE>
<CAPTION>
Aggregate % of Aggregate
Number of Initial Unpaid Unpaid
Property Type Mortgage Loans Principal Balance Principal Balance
<S> <C> <C> <C>
Condominium.............................................. 4 $ 315,223.00 1.49%
Two-to-Four Family....................................... 7 584,754.41 2.77
Planned Unit Development................................. 1 78,272.95 0.37
Single Family............................................ 239 20,114,676.14 95.36
------ ------------- -----
Total............................................... 251 $21,092,926.50 100.00%
=== ============== =======
</TABLE>
DISTRIBUTION OF OCCUPANCY STATUS
Variable Rate Group
<TABLE>
<CAPTION>
Aggregate % of Aggregate
Number of Initial Unpaid Unpaid
Occupancy Status Mortgage Loans Principal Balance Principal Balance
<S> <C> <C> <C>
Investor Property........................................ 6 $ 454,640.66 2.16%
Primary Residence........................................ 245 20,638,285.84 97.84
--- ------------- -----
Total............................................... 251 $21,092,926.50 100.00%
=== ============== =======
</TABLE>
S-26
<PAGE>
DISTRIBUTION OF INITIAL MORTGAGE RATES
Variable Rate Group
<TABLE>
<CAPTION>
Aggregate % of Aggregate
Range of Initial Number of Initial Unpaid Unpaid
Mortgage Rates Mortgage Loans Principal Balance Principal Balance
<S> <C> <C> <C> <C>
6.501 - 7.000%...................................... 1 $ 74,836.11 0.35%
7.001 - 7.500....................................... 24 2,037,989.09 9.66
7.501 - 8.000....................................... 75 6,673,077.95 31.64
8.001 - 8.500....................................... 45 3,886,403.17 18.43
8.501 - 9.000....................................... 35 3,287,236.74 15.58
9.001 - 9.500....................................... 8 735,274.17 3.49
9.501 - 10.000....................................... 23 1,723,758.16 8.17
10.001 - 10.500....................................... 4 286,868.77 1.36
10.501 - 11.000....................................... 3 220,287.92 1.04
11.001 - 11.500....................................... 12 792,081.08 3.76
11.501 - 12.000....................................... 17 1,144,314.39 5.43
12.001 - 12.500....................................... 2 100,620.00 0.48
12.501 - 13.000....................................... 1 84,891.95 0.40
13.001 - 13.500....................................... 1 45,287.00 0.21
- --------- ----
Total........................................... 251 $21,092,926.50 100.00%
=== ============== =======
</TABLE>
DISTRIBUTION OF MAXIMUM MORTGAGE RATES
Variable Rate Group
<TABLE>
<CAPTION>
Range of Aggregate % of Aggregate
Maximum Number of Initial Unpaid Unpaid
Mortgage Rates Mortgage Loans Principal Balance Principal Balance
<C> <C> <C> <C> <C>
13.501 - 14.000%..................................... 1 $ 74,836.11 0.35%
14.001 - 14.500...................................... 24 2,037,989.09 9.66
14.501 - 15.000...................................... 75 6,673,077.95 31.64
15.001 - 15.500...................................... 45 3,886,403.17 18.43
15.501 - 16.000...................................... 35 3,287,236.74 15.58
16.001 - 16.500...................................... 8 735,274.17 3.49
16.501 - 17.000...................................... 23 1,723,758.16 8.17
17.001 - 17.500...................................... 4 286,868.77 1.36
17.501 - 18.000...................................... 3 220,287.92 1.04
18.001 - 18.500...................................... 13 876,973.03 4.16
18.501 - 19.000...................................... 17 1,144,314.39 5.43
19.001 - 19.500...................................... 2 100,620.00 0.48
20.001 - 20.500...................................... 1 45,287.00 0.21
--- ------------- ------
Total....................................... 251 $21,092,926.50 100.00%
=== ============== =======
</TABLE>
S-27
<PAGE>
DISTRIBUTION OF MARGINS
Variable Rate Group
<TABLE>
<CAPTION>
Aggregate % of Aggregate
Range of Number of Initial Unpaid Unpaid
Margins Mortgage Loans Principal Balance Principal Balance
<S> <C> <C> <C>
3.001 - 4.000%...................................... 1 $ 62,149.58 0.29%
4.001 - 5.000....................................... 69 5,958,084.62 28.25
5.001 - 6.000....................................... 93 8,510,220.12 40.35
6.001 - 7.000....................................... 83 6,287,560.07 29.81
7.001 - 8.000....................................... 5 274,912.11 1.30
--- ------------- ----
Total.......................................... 251 $ 21,092,926.50 100.00%
=== =============== =======
</TABLE>
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES
Variable Rate Group
<TABLE>
<CAPTION>
Aggregate % of Aggregate
Number of Unpaid Unpaid
State Mortgage Loans Principal Balance Principal Balance
<S> <C> <C> <C>
Arizona.................................................. 7 $ 500,095.54 2.37%
California............................................... 72 6,768,018.82 32.09
Colorado................................................. 15 1,219,822.07 5.78
Florida.................................................. 15 1,157,264.73 5.49
Georgia.................................................. 2 132,240.81 0.63
Idaho.................................................... 4 238,089.11 1.13
Illinois................................................. 52 4,299,811.50 20.39
Ohio..................................................... 5 333,560.25 1.58
Oregon................................................... 20 1,533,318.12 7.27
Pennsylvania............................................. 5 436,260.00 2.07
Utah..................................................... 14 1,163,231.54 5.51
Washington............................................... 40 3,311,214.01 15.70
-- ------------ -----
Total.............................................. 251 $21,092,926.50 100.00%
=== ============== =======
</TABLE>
Conveyance of Subsequent Mortgage Loans - Variable Rate Group
The Pooling and Servicing Agreement permits the Trust to acquire
approximately $3,900,000 in aggregate principal balance of Subsequent Mortgage
Loans for addition to the Variable Rate Group. Accordingly, the statistical
characteristics of the Mortgage Loan Pool and the Variable Rate Group will vary
as of any Subsequent Cut-Off Date upon the acquisition of Subsequent Mortgage
Loans. Pursuant to the Pooling and Servicing Agreement, however, the Company has
covenanted to deliver Subsequent Mortgage Loans for inclusion in the Variable
Rate Group that will not materially change the statistical characteristics of
the Mortgage Loan Pool and the Variable Rate Group.
The obligation of the Trust to purchase Subsequent Mortgage Loans for
addition to the Variable Rate Group on a Subsequent Transfer Date is subject to
the requirements as defined in the Pooling and Servicing Agreement by the
Certificate Insurer.
Interest Payments on the Mortgage Loans
Each Mortgage Loan provides for monthly payments by the obligor on the
related Note (the "Mortgagor") according to the actuarial method ("Actuarial
Loans"). Actuarial loans provide that interest is charged to the Mortgagors
thereunder, and payments are due from such Mortgagors, as of a scheduled day of
each month which is fixed at the time of origination. Scheduled monthly payments
made by the Mortgagors on the actuarial loans either earlier or later than the
scheduled due dates thereof will not affect the amortization schedule or the
relative application of such payments to principal and interest.
S-28
<PAGE>
PREPAYMENT AND YIELD CONSIDERATIONS
The weighted average life of, and, if purchased at other than par
(disregarding, for purposes of this discussion, the effects on a Fixed Rate
Certificate Owner's yield resulting from the timing of the settlement date and
those considerations discussed below under "Payment Delay Feature of Fixed Rate
Certificates"), the yield to maturity on an Offered Certificate will be directly
related to the rate of payment of principal of the Mortgage Loans in the related
Mortgage Loan Group, including for this purpose voluntary payment in full of
Mortgage Loans in the related Mortgage Loan Group prior to stated maturity (a
"Prepayment"), liquidations due to defaults, casualties and condemnations, and
repurchases of Mortgage Loans in the related Mortgage Loan Group by the Company
or by the Certificate Insurer. The actual rate of principal prepayments on pools
of mortgage loans is influenced by a variety of economic, tax, geographic,
demographic, social, legal and other factors and has fluctuated considerably in
recent years. In addition, the rate of principal prepayments may differ among
pools of mortgage loans at any time because of specific factors relating to the
mortgage loans in the particular pool, including, among other things, the age of
the mortgage loans, the geographic locations of the properties securing the
loans, the extent of the mortgagors' equity in such properties, and changes in
the mortgagors' housing needs, job transfers and unemployment.
The timing of changes in the rate of prepayments may significantly
affect the actual yield to investors, even if the average rate of principal
prepayments is consistent with the expectations of investors. In general, the
earlier the payment of principal of the Mortgage Loans the greater the effect on
an investor's yield to maturity. As a result, the effect on an investor's yield
of principal prepayments occurring at a rate higher (or lower) than the rate
anticipated by the investor during the period immediately following the issuance
of the Class A Certificates will not be offset by a subsequent like reduction
(or increase) in the rate of principal prepayments. Investors must make their
own decisions as to the appropriate prepayment assumptions to be used in
deciding whether to purchase any of the Class A Certificates. Neither the
Company nor the Depositor makes any representations or warranties as to the rate
of prepayment or the factors to be considered in connection with such
determination.
Mandatory Prepayment
In the event that at the end of the Funding Period, not all of the
Original Pre-Funded Amount has been used to acquire Subsequent Mortgage Loans
for inclusion in the Fixed Rate Group or the Variable Rate Group, then the
Owners of the Fixed Rate Certificates and/or Variable Rate Certificates then
entitled to receive payments of principal will receive a partial prepayment on
the Payment Date in July 1996.
Although no assurances can be given, the Company expects that the
principal amount of Subsequent Mortgage Loans sold to the Trust for inclusion in
the Fixed Rate Group and the Variable Rate Group will require the application of
substantially all the amount on deposit in the Pre-Funding Account and that
there should be no material principal prepaid to the Owners of the Fixed Rate
Certificates or Variable Rate Certificates.
Projected Prepayments and Yields for Offered Certificates
If purchased at other than par, the yield to maturity on an Offered
Certificate will be affected by the rate of the payment of principal of the
Mortgage Loans in the related Mortgage Loan Group. If the actual rate of
payments on the Mortgage Loans in a Mortgage Loan Group is slower than the rate
anticipated by an investor who purchases an Offered Certificate of the related
Class at a discount, the actual yield to such investor will be lower than such
investor's anticipated yield. If the actual rate of payments on the Mortgage
Loans in a Mortgage Loan Group is faster than the rate anticipated by an
investor who purchases an Offered Certificate of the related Class at a premium,
the actual yield to such investor will be lower than such investor's anticipated
yield.
All of the Mortgage Loans in the Fixed Rate Group are fixed rate
Mortgage Loans. The rate of prepayments with respect to conventional fixed rate
mortgage loans has fluctuated significantly in recent years. In general, if
prevailing interest rates fall significantly below the interest rates on fixed
rate mortgage loans, such mortgage loans are likely to be subject to higher
prepayment rates than if prevailing rates remain at or above the interest rates
on such mortgage loans. However, the monthly payment on a home equity or home
improvement loan is often smaller than the monthly payment on a purchase money
first mortgage loan. Because of the smaller loan balance on a refinancing, a
decrease in the interest rate payable results in a smaller reduction in the
amount of the Mortgagor's monthly payment. Conversely, if prevailing interest
rates rise appreciably above the interest rates on fixed rate mortgage loans,
such mortgage loans are likely to experience a lower prepayment rate than if
prevailing rates remain at or below the interest rates on such mortgage loans.
S-29
<PAGE>
All of the Mortgage Loans in the Variable Rate Group are adjustable
rate mortgage loans. As is the case with conventional fixed rate mortgage loans,
adjustable rate mortgage loans may be subject to a greater rate of principal
prepayments in a declining interest rate environment. For example, if prevailing
interest rates fall significantly, adjustable rate mortgage loans could be
subject to higher prepayment rates than if prevailing interest rates remain
constant because the availability of fixed rate mortgage loans at competitive
interest rates may encourage mortgagors to refinance their adjustable rate
mortgage loans to a lower fixed interest rate. However, no assurance can be
given as to the level of prepayments that the Mortgage Loans will experience.
The Company does not believe that data compiled by FNMA or FHLMC is
representative of the types of borrowers included in the Company's lending
program and cannot assure that such prepayment experience is relevant to the
Mortgage Loans contained in the Variable Rate Group.
The "Last Scheduled Payment Date" for each Class of the Class A
Certificates is as follows: Class A-1 Certificates, December 20, 2019; Class A-2
Certificates, January 20, 2023; Class A-3 Certificates, September 20, 2027 and
Class A-4 Certificates, August 20, 2027. These dates for the Class A-1
Certificates and the Class A-2 Certificates are the dates on which the "Original
Certificate Principal Balance" set forth in the Summary hereof for the such
Class as of the Closing Date less all amounts previously distributed to the
Owners on account of principal would be reduced to zero, assuming the use of the
Modeling Assumptions and further assuming that no prepayments are received on
the Mortgage Loans, that scheduled monthly payments of principal of and interest
on each of the Mortgage Loans are received on a timely basis and that no Net
Monthly Excess Spread will be used to make accelerated payments of principal
(i.e., Subordination Increase Amounts) to Owners of the Class A Certificates.
The Last Scheduled Payment Date for the Class A-3 and Class A-4 Certificates is
the Payment Date in the month following the calendar month of maturity of the
latest possible maturing Initial Mortgage Loan in the respective Mortgage Loan
Group, plus one year. The weighted average life of each Class of Class A
Certificates is likely to be shorter, and the actual final Payment Date with
respect to each Class of Class A Certificates could occur significantly earlier
than the Last Scheduled Payment Date because (i) Prepayments are likely to occur
which shall be applied to the payment of the Class A Principal Balances, (ii)
Net Monthly Excess Spread to the extent available will be applied as an
accelerated payment of principal on the Class A Certificates up to the Specified
Subordinated Amount for each Class and (iii) the Servicer or, in limited
circumstances, the Certificate Insurer, may cause a termination of the Trust
when the aggregate outstanding principal balance of the Mortgage Loans in the
Trust has declined to 10% or less of the Maximum Collateral Amount.
Prepayments on mortgage loans are commonly measured relative to a
prepayment model or standard. The model used in this Prospectus Supplement
("Home Equity Prepayment" or "HEP") is a prepayment assumption (the "Prepayment
Assumption") which represents an assumed rate of prepayment each month relative
to the then outstanding principal balance of a pool of mortgage loans for the
life of such mortgage loans. 21% HEP assumes prepayment rates of 2.1% per annum
of the then outstanding principal balance of the Mortgage Loans in the first
month of the life of the Mortgage Loans and an additional 2.1% per annum in each
month thereafter up to and including the tenth month. Beginning in the eleventh
month and in each month thereafter during the life of the Mortgage Loans, 21%
HEP assumes a constant prepayment rate of 21% per annum. As used in the table
below, 0% Prepayment Assumption assumes prepayment rates equal to 0% of the
Prepayment Assumption, i.e., no prepayments on the mortgage loans having the
characteristics described below. The Prepayment Assumption does not purport to
be a historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of mortgage loans, including the
related Mortgage Loans.
The tables entitled "Weighted Average Lives" have been prepared on the
basis of the following assumptions (collectively, the "Modeling Assumptions"):
(i) the Mortgage Loans of the related Mortgage Loan Groups prepay at the
indicated percentage of the related Prepayment Assumption; (ii) distributions on
the Offered Certificates are received, in cash, on the 20th day of each month,
commencing in July 1996; (iii) no defaults or delinquencies in, or
modifications, waivers or amendments respecting, the payment by the Mortgagors
of principal and interest on the Mortgage Loans occur; (iv) scheduled payments
are assumed to be received on the first day of each month commencing in July
1996 (or as set forth in the following table) and prepayments represent payment
in full of individual Mortgage Loans and are assumed to be received on the last
day of each month, commencing in June 1996 (or as set forth in the following
table) and include 30 days' interest thereon; (v) the level of Six-Month LIBOR
remains constant at 5.6797% (vi) the Class A-4 Pass-Through Rate remains
constant at 5.83047% per annum; (vii) the Offered Certificates are purchased on
June 14, 1996; (viii) the Mortgage Rate for each Mortgage Loan in the Variable
Rate Group is adjusted on its next Mortgage Rate change date (and on subsequent
Mortgage Rate change dates, if necessary) to equal the sum of (a) the assumed
level of the Six-Month LIBOR index and (b) the respective gross margin (such sum
being subject to the applicable periodic adjustment cap of 1%); and (ix) each
Mortgage Loan Group consists of Mortgage Loans having the following
characteristics:
S-30
<PAGE>
FIXED RATE GROUP
Initial Mortgage Loans
<TABLE>
<CAPTION>
Remaining
Mortgage Term to
Principal Mortgage Rate Net of Stated Maturity Seasoning
Balance Rate Servicing Fee (months) (months)
------- ---- ------------- -------- --------
<S> <C> <C> <C> <C>
$ 3,599,482.04 9.860% 9.360% 176 0
35,415,792.03 9.683 9.183 352 0
</TABLE>
Subsequent Mortgage Loans
<TABLE>
<CAPTION>
Remaining
Mortgage Term to
Principal Mortgage Rate Net of Stated Maturity Seasoning
Balance Rate Servicing Fee (months) (months)
------- ---- ------------- -------- --------
<S> <C> <C> <C> <C>
$ 11,257,480.09(1) 9.699% 9.199%(2) 336 0
</TABLE>
VARIABLE RATE GROUP
Initial Mortgage Loans
<TABLE>
<CAPTION>
Remaining Number of
Initial Term to Mos.
Initial Mortgage Stated to next Mtg.
Principal Mortgage Rate Net of Maturity Seasoning Gross Rate Change
Balance Rate Servicing Fee (months) (months) Margin (months)
------- ---- ------------- -------- -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
$ 4,797,352.85 8.687% 8.187% 344 2 5.344% 4
6,010,510.66 8.873 8.373 338 0 5.890 5
8,010,664.00 8.706 8.206 351 0 5.854 6
2,274,398.99 9.219 8.719 345 0 6.091 7
</TABLE>
Subsequent Mortgage Loans
<TABLE>
<CAPTION>
Remaining Number of
Initial Term to Mos.
Initial Mortgage Stated to next Mtg.
Principal Mortgage Rate Net of Maturity Seasoning Gross Rate Change
Balance Rate Servicing Fee (months) (months) Margin (months)
------- ---- ------------- -------- -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
$3,907,073.50(1) 8.804% 8.304%(3) 345 0 5.774% 6
<FN>
(1) Assumes transfer to the Trust in July 1996 with the characteristics stated
above. Scheduled payments are assumed to be received on the first day of
each month commencing in August 1996. Prepayments are assumed to be
received on the last day of each month commencing in July 1996 and include
30 days' interest thereon.
(2) During the first Accrual Period interest is assumed to be available at a
rate of 9.199% per annum.
(3) During the first Accrual Period interest is assumed to be available at a
rate of 8.304% per annum.
</FN>
</TABLE>
"Weighted average life" refers to the average amount of time that will
elapse from the date of issuance of a Certificate until each dollar of principal
of such Certificate will be repaid to the investor. The weighted average life of
the Class A Certificates will be influenced by the rate at which principal
payments on the Mortgage Loans in the related Mortgage Loan Group are paid,
which may be in the form of scheduled amortization or prepayments (for this
purpose, the term "prepayment" includes prepayments, liquidations due to default
or early termination of the Trust). The weighted average lives of the Class A
Certificates also will be influenced by the overcollateralization of the Class A
Certificates because collections otherwise payable to the Subordinate
Certificates are applied as principal prepayments to the Class A Certificates
until the outstanding aggregate principal balance of the Class A
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<PAGE>
Certificates is less than the aggregate outstanding principal balance of the
Mortgage Loans in each Mortgage Loan Group by the Specified Subordinated Amount
for such Group. These prepayments have the effect of accelerating the
amortization of the Class A Certificates, thereby shortening their respective
weighted average lives.
Based on the foregoing Modeling Assumptions, the tables below indicate
the weighted average life of each Class of the Offered Certificates, assuming
that the Mortgage Loans in the related Mortgage Loan Group prepay according to
the indicated percentages of the related Prepayment Assumption:
PREPAYMENT ASSUMPTIONS
<TABLE>
<CAPTION>
Assumption I Assumption II Assumption III Assumption IV Assumption V
------------ ------------- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Fixed Rate Group (HEP): 0% 13% 18% 21% 28%
Variable Rate Group (HEP): 0% 15% 20% 23% 30%
</TABLE>
WEIGHTED AVERAGE LIVES
Class A-1
Weighted
Prepayment Average Life Earliest Retirement
Assumption (years)(1) Date(2)
- - - ---------- ---------- -------
I .............................. 14.20 August 20, 2019
II .............................. 2.77 June 20, 2002
III .............................. 2.12 December 20, 2000
IV .............................. 1.87 May 20, 2000
V .............................. 1.49 May 20, 1999
Class A-2
Weighted
Prepayment Average Life Earliest Retirement
Assumption (years)(1) Date(2)
- - - ---------- ---------- -------
I .............................. 24.91 December 20, 2022
II .............................. 7.96 September 20, 2006
III .............................. 5.90 February 20, 2004
IV .............................. 5.10 January 20, 2003
V .............................. 3.84 May 20, 2001
Class A-3
Weighted
Prepayment Average Life Earliest Retirement
Assumption (years)(1) Date(2)
- - - ---------- ---------- -------
I .............................. 27.88 May 20, 2024
II .............................. 15.40 November 20, 2010
III .............................. 11.75 May 20, 2007
IV .............................. 10.17 November 20, 2005
V .............................. 7.63 July 20, 2003
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<PAGE>
Class A-4
Weighted
Prepayment Average Life Earliest Retirement
Assumption (years)(2) Date(2)
- - - ---------- ---------- -------
I .............................. 20.49 May 20, 2024
II .............................. 5.54 November 20, 2010
III .............................. 4.22 May 20, 2007
IV .............................. 3.69 November 20, 2005
V .............................. 2.84 July 20, 2003
(1) Assumes no early termination of the Trust.
(2) Assuming early termination of the Trust at the date when the aggregate
principal balances of the Mortgage Loans decline to a level equal to
10% of the Maximum Collateral Amount.
There is no assurance that prepayments will occur, or, if they do
occur, that they will occur at any constant percentage or in accordance with any
of the aforementioned Prepayment Assumptions.
Payment Delay Feature of Fixed Rate Certificates
The effective yield to the Owners of the Fixed Rate Certificates will
be lower than the yield otherwise produced by the related Fixed Rate Certificate
Pass-Through Rate and the purchase price of such Certificates because principal
and interest distributions will not be payable to such holders until at least
the twentieth day of the month following the month of accrual (without any
additional distributions of interest or earnings thereon in respect of such
delay).
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the mortgage pool and
the Mortgaged Properties is based upon the pool of Initial Mortgage Loans as
constituted at the close of business on the Cut-Off Date, as adjusted for the
scheduled principal payments due on or before such date. Prior to the issuance
of the Offered Certificates, Initial Mortgage Loans may be removed from the
mortgage pool as a result of incomplete documentation or non-compliance with
representations and warranties set forth in the Pooling and Servicing Agreement,
if the Company deems such removal necessary or appropriate. A limited number of
other mortgage loans may be included in the mortgage pool prior to the issuance
of the Offered Certificates.
A current report on Form 8-K will be available to purchasers of the
Offered Certificates and will be filed and incorporated by reference to the
Registration Statement, together with the Pooling and Servicing Agreement with
the Commission within fifteen days after the initial issuance of the Offered
Certificates. In the event Initial Mortgage Loans are removed from or added to
the mortgage pool as set forth in the preceding paragraph, such removal or
addition will be noted in the current report on Form 8-K. Also, the Company
intends to file certain additional yield tables and other computational
materials with respect to the Fixed Rate Certificates and/or the Variable Rate
Certificates with the Commission in a report on Form 8-K. Such tables and
materials were prepared at the request of certain prospective investors, based
on assumptions provided by, and satisfying the special requirements of, such
prospective investors. Such tables and assumptions may be based on assumptions
that differ from the Modeling Assumptions. Accordingly, such tables and other
materials may not be relevant to or appropriate for investors other than those
specifically requesting them.
DESCRIPTION OF THE OFFERED CERTIFICATES
General
The Certificates will consist of the Class A-1 Certificates, the Class
A-2 Certificates, the Class A-3 Certificates, the Class A-4 Certificates and the
Class R Certificates. The Certificates will be issued by First Alliance Mortgage
Loan Trust 1996-2, a trust to be organized under the laws of the State of New
York. Only the Offered Certificates are offered hereby. The Subordinate
Certificates will be retained by the Company, and are not being
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<PAGE>
offered hereby. The Offered Certificates together with the Subordinate
Certificates are herein referred to as the "Certificates."
Persons in whose name a Certificate is registered in the Register
maintained by the Trustee are the "Owners" of the Certificates. For so long as
the Offered Certificates are in book-entry form with DTC, the only "Owner" of
the Offered Certificates as the term "Owner" is used in the Pooling and
Servicing Agreement will be Cede. No Owners will be entitled to receive a
definitive certificate representing such person's interest in the Trust, except
in the event that physical Certificates are issued under limited circumstances
set forth in the Pooling and Servicing Agreement. All references herein to the
Owners of Offered Certificates shall mean and include the rights of Owners as
such rights may be exercised through DTC and its participating organizations,
except as otherwise specified in the Pooling and Servicing Agreement.
As described in "The Mortgage Loan Pool" herein, the Mortgage Loan Pool
is divided into the Fixed Rate Group, which contains first and junior lien
Mortgage Loans having fixed rates of interest and the Variable Rate Group, which
contains first lien Mortgage Loans having variable rates of interest. For each
Mortgage Loan Group, the related Class of Class A Certificates will evidence the
right to receive on each Payment Date the Class A Distribution Amount for such
Class of Class A Certificates, in each case until the related Certificate
Principal Balance has been reduced to zero. The Owners of the Subordinate
Certificates will be entitled to receive distributions of residual Net Monthly
Excess Cashflow.
One-hundred percent of the Class A Distribution Amount due to the
Owners of each Class of the Class A Certificates on each Payment Date is insured
by the Certificate Insurer pursuant to the Certificate Insurance Policies.
See "The Certificate Insurance Policies and the Certificate Insurer" herein.
Payment Dates
The Pooling and Servicing Agreement will require that the Trustee
create and maintain a Certificate Account, to be established as a trust account
held by the trust department of the Trustee (the "Certificate Account"). All
funds in the Certificate Account shall be invested and reinvested by the Trustee
for the benefit of the related Owners and Certificate Insurer, as directed by
the Servicer, in Eligible Investments.
One business day prior to the related Payment Date (or, if such day is
not a business day, the immediately preceding business day) (the "Remittance
Date") the Servicer is required to withdraw from the Principal and Interest
Account and remit to the Trustee, for deposit in the Certificate Account, the
Monthly Remittance Amount for the related Mortgage Loan Group. The Monthly
Remittance Amount for a Mortgage Loan Group is equal to (a) the sum of (i) the
balance on deposit in the Principal and Interest Account as of the close of
business on the related Determination Date, (ii) all Delinquency Advances and
Compensating Interest (collectively, the "Advances") and (iii) certain amounts
required to be deposited by the Servicer in the Certificate Account, including
Loan Purchase Prices and Substitution Amounts, reduced by (b) the sum of (i)
scheduled payments on the Mortgage Loans collected but due after the related Due
Date, (ii) reinvestment income on amounts in the Principal and Interest Account,
(iii) all amounts reimbursable to the Servicer and (iv) any unscheduled
payments, including Mortgagor prepayments on the Mortgage Loans, Insurance
Proceeds and Net Liquidation Proceeds occurring in the month of such Payment
Date. With respect to any Payment Date, (i) the Due Date is the first day of the
month in which such Payment Date occurs, and (ii) the Determination Date is the
12th day of the month in which such Payment Date occurs or, if such day is not a
business day, the immediately preceding business day. "Remittance Period" means,
the period beginning on the first day of the calendar month immediately
preceding the month in which the related Remittance Date occurs and ending on
the last day of such month. See "The Pooling and Servicing Agreement Servicing
and Other Compensation and Payment of Expenses; Originator's Retained Yield" in
the Prospectus.
The Compensating Interest for any Payment Date is equal to the
aggregate shortfall, if any, in collections of interest (adjusted to the related
net Mortgage Rates) resulting from principal prepayments in full on the Mortgage
Loans received in the corresponding Remittance Period. Such shortfalls will
result because interest on prepayments in full is distributed only to the date
of prepayment. The Servicer will be obligated to apply amounts otherwise payable
to it as servicing compensation in any month to cover any shortfalls in
collections of one full month's interest at the applicable net Mortgage Rate
resulting from principal prepayments in full. The Servicer is not obligated to
cover any shortfalls in collections of interest for prepayments in part. Such
prepayments in part are applied to reduce the outstanding principal balance of
the related Mortgage Loan as of the Due Date in the month of prepayment.
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<PAGE>
Distributions
Distributions on the Certificates will be made on each Payment Date to
Owners of record of the Certificates as of the immediately preceding Record Date
in an amount equal to the product of such Owner's Percentage Interest and the
amount distributed in respect of such Certificateholder's Class of such
Certificates on such Payment Date. The "Percentage Interest" represented by any
Offered Certificate will be equal to the percentage obtained by dividing the
Original Certificate Principal Balance of such Offered Certificate by the
Original Certificate Principal Balance of all Certificates of the same Class.
Overcollateralization Provisions
Overcollateralization Resulting from Cash Flow Structure. The Pooling
and Servicing Agreement requires that, on each Payment Date, Net Monthly Excess
Spread with respect to a Mortgage Loan Group be applied on such Payment Date as
an accelerated payment of principal on the related Class(es) of Class A
Certificates, but only to the limited extent hereafter described. The Net
Monthly Excess Spread equals (i) the excess (such excess being the "Total
Monthly Excess Spread" with respect to the related Mortgage Loan Group), if any
of (x) the interest which is collected on the Mortgage Loans in such Mortgage
Loan Group during a Remittance Period and with respect to Due Dates occurring in
the month in which such Payment Date occurs (net of the Servicing Fee and of
certain miscellaneous administrative amounts) plus the interest portion of any
Delinquency Advances and Compensating Interest over (y) the sum of (I) the Class
A Current Interest on the related Class(es) of Class A Certificates and (II) the
premiums due to the Certificate Insurer with respect to the related Certificate
Insurance Policy and the fees due to the Trustee minus (ii) any portion of the
Total Monthly Excess Spread which is used to cover any shortfalls in Available
Funds on such Payment Date in the related Mortgage Loan Group, or in the other
Mortgage Loan Group, or used to reimburse the Certificate Insurer on account of
prior Insured Payments.
Pursuant to the Pooling and Servicing Agreement, each Mortgage Loan
Group's Net Monthly Excess Spread is required to be applied as a payment of
principal on the related Class(es) of Class A Certificates until the related
Subordinated Amount has increased to the level required with respect to the
related Mortgage Loan Group. "Subordinated Amount" means, with respect to any
Mortgage Loan Group and Payment Date, the difference, if any, between (x) the
sum of (i) the aggregate principal balances of the Mortgage Loans in such
Mortgage Loan Group as of the close of business on the last day of the preceding
Remittance Period after taking into account payments of scheduled principal on
the Mortgage Loans due on the Due Date which immediately follows the last day of
such Remittance Period and (ii) any amount on deposit in the Pre-Funding Account
less any Pre-Funding Account Earnings at such time and (y) the Class A Principal
Balance of the related Class(es) of Class A Certificates as of such Payment Date
(and assuming all distributions are made on such Payment Date). With respect to
either Mortgage Loan Group, any amount of Net Monthly Excess Spread actually
applied as a payment of principal is a "Subordination Increase Amount". The
required level of the Subordinated Amount with respect to a Mortgage Loan Group
and Payment Date is the "Specified Subordinated Amount" with respect to such
Mortgage Loan Group and Payment Date. The Pooling and Servicing Agreement
generally provides that the related Specified Subordinated Amount may, over
time, decrease, or increase, subject to certain floors, caps and triggers.
To the extent that any Mortgage Loan Group's Net Monthly Excess Spread
is not required to be applied to the payment of a Subordination Increase Amount
on the related Class(es) of Class A Certificates because the Subordinated Amount
related to such Class is equal to or greater than the then Specified
Subordinated Amount related to such Class(es), such Net Monthly Excess Spread
(together with the amount of any Subordination Reduction Amount, as described in
the second succeeding paragraph) is permitted to be applied to the payment of
Subordination Increase Amounts on the other Class(es) of Class A Certificates to
the extent necessary to increase the related Subordinated Amount to the level of
its Specified Subordinated Amount.
The application of Net Monthly Excess Spread to principal has the
effect of accelerating the amortization of the related Class(es) of Class A
Certificates relative to the amortization of the Mortgage Loans in the related
Mortgage Loan Group. To the extent that any Net Monthly Excess Spread is not so
used, the Pooling and Servicing Agreement provides that it will be used to
reimburse the Servicer or Trustee with respect to any amounts owing to each, or
paid to the Owners of the Subordinated Certificates.
In the event that the required level of the Specified Subordinated
Amount with respect to a Mortgage Loan Group is permitted to decrease or "step
down" on a Payment Date in the future, the Pooling and Servicing Agreement
provides that a portion of the principal which would otherwise be distributed to
the Owners of the related Class(es) of Class A Certificates on such Payment Date
shall be distributed to the Owners of the Subordinated
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<PAGE>
Certificates on such Payment Date. This has the effect of decelerating the
amortization of the related Class(es) of Class A Certificates relative to the
amortization of the Mortgage Loans in the related Mortgage Loan Group, and of
reducing the related Subordinated Amount. "Excess Subordinated Amount" means,
with respect to any Mortgage Loan Group and Payment Date, the difference, if
any, between (x) the Subordinated Amount that would apply to the related
Mortgage Loan Group on such Payment Date after taking into account all
distributions to be made on such Payment Date (except for any distributions of
related Subordination Reduction Amounts as described in this paragraph) and (y)
the related Specified Subordinated Amount for such Payment Date. If, on any
Payment Date, the Excess Subordinated Amount is, or, after taking into account
all other distributions to be made on such Payment Date would be, greater than
zero (i.e., the Subordinated Amount is or would be greater than the related
Specified Subordinated Amount), then any amounts relating to principal which
would otherwise be distributed to the Owners of the related Class(es) of Class A
Certificates on such Payment Date shall instead be distributed to the Owners of
the Subordinated Certificates (subject to certain other prior applications as
described below under "Crosscollateralization Provisions") in an amount equal to
the lesser of (x) the Excess Subordinated Amount and (y) the amount available
for distribution on account of principal with respect to the related Class(es)
of Class A Certificates on such Payment Date; such amount being the
"Subordination Reduction Amount" with respect to the related Mortgage Loan Group
for such Payment Date. As a technical matter regarding the cash flow structure
of the Trust, Subordination Reduction Amounts may result even prior to the
occurrence of any decrease or "step down" in the related Specified Subordinated
Amount. This is because the Owners of the related Class(es) of Class A
Certificates will generally be entitled to receive 100% of collected principal,
even though the related Class A Principal Balances will, following the
accelerated amortization resulting from the application of the Net Monthly
Excess Spread, represent less than 100% of the related Mortgage Loan Group's
aggregate scheduled principal balance. In the absence of the provisions relating
to Subordination Reduction Amounts, the foregoing may otherwise increase the
Subordinated Amounts above their Specified Subordinated Amount requirements even
without the further application of any Net Monthly Excess Spread.
The Pooling and Servicing Agreement provides that, on any Payment Date
all amounts (subject to the discussion in the preceding paragraph) collected on
account of principal (including the principal portion of any Delinquency
Advances and other than any such amount applied to the payment of a
Subordination Reduction Amount) with respect to a Mortgage Loan Group during the
prior Remittance Period together with principal due on the Due Date which
immediately follows the last day of such Remittance Period will be distributed
to the Owners of the related Class(es) of Class A Certificates on such Payment
Date. If any Mortgage Loan became a Liquidated Mortgage Loan during such prior
Remittance Period, the Net Liquidation Proceeds related thereto and allocated to
principal may be less than the principal balance of the related Mortgage Loan;
the amount of any such insufficiency is a "Realized Loss." In addition, the
Pooling and Servicing Agreement provides that, the principal balance of any
Mortgage Loan which becomes a Liquidated Mortgage Loan shall thenceforth equal
zero. The Pooling and Servicing Agreement does not contain any rule which
requires that the amount of any Realized Loss be distributed to the Owners of
the related Class(es) of Class A Certificates on the Payment Date which
immediately follows the event of loss; i.e., the Pooling and Servicing Agreement
does not require the current recovery of losses. However, the occurrence of a
Realized Loss will reduce the Subordinated Amount with respect to the related
Mortgage Loan Group, which, to the extent that such reduction causes the
Subordinated Amount to be less than the related Specified Subordinated Amount
applicable to the related Payment Date, will require the payment of a
Subordination Increase Amount on such Payment Date (or, if insufficient funds
are available on such Payment Date, on subsequent Payment Dates, until the
Subordinated Amount equals the related Specified Subordinated Amount). The
effect of the foregoing is to allocate losses to the Owners of the Subordinated
Certificates by reducing, or eliminating entirely, payments of Monthly Excess
Cash Flow and of Subordination Reduction Amounts which such Owners would
otherwise receive.
Overcollateralization and the Certificate Insurance Policies. The
Pooling and Servicing Agreement defines a "Subordination Deficit" with respect
to a Mortgage Loan Group and Payment Date to be the amount, if any, by which (x)
the Class A Principal Balance of the related Class(es) of Class A Certificates,
after taking into account all distributions to be made on such Payment Date,
exceeds (y) the sum of (i) the aggregate principal balances of the Mortgage
Loans in the related Mortgage Loan Group as of the close of business on the Due
Date which immediately follows the last day of the prior Remittance Period and
(ii) the amount, if any, on deposit in the Pre- Funding Account less any
Pre-Funding Account Earnings on the last day of the related Remittance Period.
The Pooling and Servicing Agreement requires the Trustee to make a claim for an
Insured Payment under the related Certificate Insurance Policy not later than
the third Business Day prior to any Payment Date as to which the Trustee has
determined that a Subordination Deficit will occur for the purpose of applying
the proceeds of such Insured Payment as a payment of principal to the Owners of
the related Class(es) of Class A Certificates on such Payment Date. The
Certificate Insurance Policies are thus similar to the subordination provisions
described above insofar as
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<PAGE>
the Certificate Insurance Policies guarantee ultimate, rather than current,
payment of the amounts of any Realized Losses to the Owners of the related
Class(es) of Class A Certificates. Investors in the Class A Certificates should
realize that, under extreme loss or delinquency scenarios applicable to the
related Mortgage Loan Pool, they may temporarily receive no distributions of
principal.
Crosscollateralization Provisions
On each Payment Date, an amount equal to the sum of (x) the Total
Monthly Excess Spread with respect to each Mortgage Loan Group and Payment Date
plus (y) any Subordination Reduction Amount with respect to each such Mortgage
Loan Group and Payment Date (such amount being the "Total Monthly Excess
Cashflow" with respect to such Mortgage Loan Group and Payment Date) will be
required to be applied in the following order of priority:
(i) such amount shall be used to fund any shortfall on
such Payment Date with respect to the related Mortgage Loan Group and
equal to the difference, if any, between (x) the related Class A
Distribution Amount (calculated only with respect to clause (y) of the
definition thereof and without any Subordination Increase Amount) with
respect to such Mortgage Loan Group for such Payment Date and (y) the
Available Funds with respect to such Mortgage Loan Group for such
Payment Date (the amount of such difference being equal to an
"Available Funds Shortfall" with respect to the related Mortgage Loan
Group);
(ii) any portion of the Total Monthly Excess Cashflow
with respect to such Mortgage Loan Group remaining after the
application described in clause (i) above shall be used to fund any
Available Funds Shortfall with respect to the other Mortgage Loan
Group;
(iii) any portion of the Total Monthly Excess Cashflow
with respect to such Mortgage Loan Group remaining after the
applications described in clauses (i) and (ii) above shall be paid to
the Certificate Insurer in respect of amounts owed on account of any
Insured Payments theretofore made and interest thereon with respect to
the related Mortgage Loan Group (any such amount so owed to the
Certificate Insurer and not theretofore paid, together with accrued
interest thereon, the "Insurer Reimbursable Amount" with respect to the
related Mortgage Loan Group); and
(iv) any portion of the Total Monthly Excess Cashflow
with respect to such Mortgage Loan Group remaining after the
applications described in clauses (i), (ii) and (iii) above shall be
paid to the Certificate Insurer in respect of any Insurer Reimbursable
Amount with respect to the other Mortgage Loan Group.
The amount, if any, of the Total Monthly Excess Cashflow with respect to a
Mortgage Loan Group on a Payment Date remaining after such applications is the
"Net Monthly Excess Cashflow" with respect to such Mortgage Loan Group for such
Payment Date; such amount is required to be applied in the following order of
priority on such Payment Date:
(i) such amount shall be used to fund the payment of
any required Subordination Increase Amount with respect to the related
Mortgage Loan Group as a portion of the distribution of the Class A
Principal Distribution Amount on such Payment Date;
(ii) any portion of the Net Monthly Excess Cashflow
remaining after the application described in clause (i) above shall be
used to make any required Subordination Increase Amount with respect to
the other Mortgage Loan Group; and
(iii) any remaining Net Monthly Excess Cashflow may then
be used to reimburse the Servicer and the Trustee for certain amounts
owing to each, or may be paid to the Owners of the Subordinated
Certificates.
Credit Enhancement Does Not Apply to Prepayment Risk
In general, the protection afforded by the subordination provisions and
by the Certificate Insurance Policies is protection for credit risk and not for
prepayment risk. The subordination provisions may not be adjusted, nor may
S-37
<PAGE>
a claim be made under the Certificate Insurance Policies to guarantee or insure
that any particular rate of prepayment is experienced by the Trust.
Class A Distributions and Insured Payments to the Owners of the Offered
Certificates
No later than three Business Days prior to each Payment Date the
Trustee will be required to determine the amounts to be on deposit in the
Certificate Account on such Payment Date with respect to each of the two
Mortgage Loan Groups and equal to the sum of (x) such amounts excluding the
amount of any Total Monthly Excess Cashflow amounts included in such amounts,
plus (y) any amounts of Total Monthly Excess Cashflow (as described above under
"Crosscollateralization Provisions") to be applied on account of such Mortgage
Loan Group on such Payment Date plus, (z) any deposit to the Certificate Account
from the Pre-Funding Account and Capitalized Interest Account expected to be
made in accordance with the Pooling and Servicing Agreement. The amounts
described in clause (x) of the preceding sentence with respect to each Mortgage
Loan Group and Payment Date are the "Fixed Rate Group Available Funds" and the
"Variable Rate Group Available Funds", respectively or, generally, "Available
Funds;" the sum of the amounts described in clauses (x), (y) and (z) of the
preceding sentence with respect to each Mortgage Loan Group and Payment Date are
the "Fixed Rate Group Total Available Funds" and the "Variable Rate Group Total
Available Funds," respectively, or, generally, "Total Available Funds." If the
sum of the Class A Distribution Amounts with respect to the Fixed Rate
Certificates, for any Payment Date exceeds the Fixed Rate Group Total Available
Funds for such Payment Date, the Trustee will be required to draw the amount of
such insufficiency from the Certificate Insurer under the Certificate Insurance
Policy applicable to the Fixed Rate Certificates. Similarly, if on any Payment
Date the Class A Distribution Amount with respect to the Variable Rate
Certificates exceeds the Variable Rate Group Total Available Funds for such
Payment Date, the Trustee will be required to draw the amount of such
insufficiency from the Certificate Insurer under the Certificate Insurance
Policy applicable to the Variable Rate Certificates. The Trustee will be
required to deposit to the Certificate Account the amount of any Insured Payment
made by the Certificate Insurer. The Pooling and Servicing Agreement provides
that amounts which cannot be distributed to the Owners of the Offered
Certificates as a result of proceedings under the United States Bankruptcy Code
or similar insolvency laws will not be considered in determining the amount of
Total Available Funds with respect to any Payment Date.
On each Payment Date, and following the making by the Trustee of all
allocations, transfers and deposits heretofore described under this caption,
from amounts (including any related Insured Payment) then on deposit in the
Certificate Account with respect to the related Mortgage Loan Group, the Trustee
will be required to distribute (x) to the Owners of the Fixed Rate Certificates,
the related Class A Distribution Amount for such Payment Date and (y) to the
Owners of the Variable Rate Certificates, the related Class A Distribution
Amount for such Payment Date.
Pre-Funding Account
On the Closing Date, the Original Pre-Funded Amount will be deposited
in the Pre-Funding Account, which account shall be in the name of and maintained
by the Trustee and shall be part of the Trust. During the Funding Period, the
Pre-Funded Amount will be maintained in the Pre-Funding Account. The Original
Pre-Funded Amount will be reduced during the Funding Period by the amount
thereof used to purchase Subsequent Mortgage Loans for addition to the Fixed
Rate Group or the Variable Rate Group in accordance with the Pooling and
Servicing Agreement. Any Pre-Funded Amount remaining at the end of the Funding
Period will be distributed to the Owners of the Class or Classes of the Offered
Certificates then entitled to receive principal in accordance with the terms of
the Pooling and Servicing Agreement on the Payment Date that immediately follows
the end of the Funding Period in reduction of the Certificate Principal Balance
of such Owner's Certificates, thus resulting in a principal prepayment of such
Class of Certificates.
Amounts on deposit in the Pre-Funding Account will be invested in
Eligible Investments. All interest and any other investment earnings on amounts
on deposit in the Pre-Funding Account will be deposited in the Capitalized
Interest Account prior to each Payment Date during the Funding Period. The
Pre-Funding Account will not be an asset of the REMIC.
Capitalized Interest Account
On the Closing Date, cash will be deposited in the Capitalized Interest
Account, which account shall be in the name of and maintained by the Trustee and
shall be part of the Trust. The amount on deposit in the Capitalized Interest
Account, including reinvestment income thereon and amounts deposited thereto
from the Pre-
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Funding Account, will be used by the Trustee to fund the excess, if any, of (i)
the sum of (a) the aggregate amount of interest accruing at the weighted average
Pass-Through Rate on the Offered Certificates on the amount by which the
aggregate Certificate Principal Balance of the Offered Certificates exceeds the
aggregate Loan Balance of the Initial Mortgage Loans plus (b) the Trustee fees
over (ii) the amount of any Pre-Funding Account Earnings; such amounts on
deposit will be so applied by the Trustee on each Payment Date in the Funding
Period to fund such excess, if any. Any amounts remaining in the Capitalized
Interest Account at the end of the Funding Period and not needed for such
purpose will be paid to the Company and will not thereafter be available for
distribution to the Owners of the Certificates.
Amounts on deposit in the Capitalized Interest Account will be invested
in Eligible Investments. The Capitalized Interest Account will not be an asset
of the REMIC.
Calculation of LIBOR
The Class A-4 Certificates will initially bear a pass-through rate of
5.835% per annum which applies to the Accrual Period beginning on the Closing
Date and ending on July 21, 1996. Thereafter on the second business day
preceding each Payment Date (each such date, an "Interest Determination Date"),
the Trustee will determine the London interbank offered rate for one-month U.S.
dollar deposits ("LIBOR") for the next Accrual Period for the Class A-4
Certificates on the basis of the offered rates of the Reference Banks for
one-month U.S. dollar deposits, as such rates appear on the Reuter Screen LIBO
Page, as of 11:00 a.m. (London time) on such Interest Determination Date. As
used in this section, "business day" means a day on which banks are open for
dealing in foreign currency and exchange in London and New York City; "Reuter
Screen LIBO Page" means the display designated as page "LIBO" on the Reuter
Monitor Money Rates Service (or such other page as may replace the LIBO page on
that service for the purpose of displaying London interbank offered rates of
major banks); and "Reference Banks" means leading banks selected by the Trustee
and engaged in transactions in Eurodollar deposits in the international
Eurocurrency market (i) with an established place of business in London, (ii)
whose quotations appear on the Reuter Screen LIBO Page on the Interest
Determination Date in question, (iii) which have been designated as such by the
Trustee and (iv) not controlling, controlled by, or under common control with,
the Company or any Originator.
On each Interest Determination Date, LIBOR for the related Accrual
Period for the Class A-4 Certificates will be established by the Trustee as
follows:
(a) If on such Interest Determination Date two or more
Reference Banks provide such offered quotations, LIBOR for the related
Accrual Period for the Class A-4 Certificates shall be the arithmetic
mean of such offered quotations (rounded upwards if necessary to the
nearest whole multiple of 0.0625%).
(b) If on such Interest Determination Date fewer than two
Reference Banks provide such offered quotations, LIBOR for the related
Accrual Period for the Class A-4 Certificates shall be the higher of
(x) LIBOR as determined on the previous Interest Determination Date and
(y) the Reserve Interest Rate. The "Reserve Interest Rate" shall be the
rate per annum that the Trustee determines to be either (i) the
arithmetic mean (rounded upwards if necessary to the nearest whole
multiple of 0.0625%) of the one-month U.S. dollar lending rates which
New York City banks selected by the Trustee are quoting on the relevant
Interest Determination Date to the principal London offices of leading
banks in the London interbank market or, in the event that the Trustee
can determine no such arithmetic mean, (ii) the lowest one-month U.S.
dollar lending rate which New York City banks selected by the Trustee
are quoting on such Interest Determination Date to leading European
banks.
The establishment of LIBOR on each Interest Determination Date by the
Trustee and the Trustee's calculation of the rate of interest applicable to the
Class A-4 Certificates for the related Accrual Period shall (in the absence of
manifest error) be final and binding.
Book Entry Registration of the Offered Certificates
The Offered Certificates will be book-entry Certificates (the
"Book-Entry Certificates"). Beneficial Owners may elect to hold their Book-Entry
Certificates directly through DTC in the United States, or CEDEL or Euroclear
(in Europe) if they are participants of such systems ("Participants") , or
indirectly through organizations which are Participants. The Book-Entry
Certificates will be issued in one or more certificates per class of Offered
Certificates which in the aggregate equal the principal balance of such Offered
Certificates and will initially be registered in the
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name of Cede & Co., the nominee of DTC. CEDEL and Euroclear will hold omnibus
positions on behalf of their Participants through customers' securities accounts
in CEDEL's and Euroclear's names on the books of their respective depositaries
which in turn will hold such positions in customers' securities accounts in the
depositaries' names on the books of DTC. Citibank will act as depositary for
CEDEL and Chemical will act as depositary for Euroclear (in such capacities,
individually the "Relevant Depositary" and collectively the "European
Depositaries"). Investors may hold such beneficial interests in the Book-Entry
Certificates in minimum denominations representing principal amounts of $1,000
and in integral multiples in excess thereof. Except as described below, no
Beneficial Owner will be entitled to receive a physical certificate representing
such Certificate (a "Definitive Certificate"). Unless and until definitive
Certificates are issued, it is anticipated that the only "Owner" of such
Book-Entry Certificates will be Cede & Co., as nominee of DTC. Beneficial Owners
will not be Owners as that term is used in the Pooling and Servicing Agreement.
Beneficial Owners are only permitted to exercise their rights indirectly through
Participants and DTC.
The Beneficial Owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
Beneficial Owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the Beneficial Owner's Financial Intermediary is not a DTC Participant and on
the records of CEDEL or Euroclear, as appropriate).
Beneficial Owners will receive all distributions of principal of, and
interest on, the Book-Entry Certificates from the Trustee through DTC and DTC
Participants. While such Certificates are outstanding (except under the
circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required to
make book-entry transfers among Participants on whose behalf it acts with
respect to such Certificates and is required to receive and transmit
distributions of principal of, and interest on, such Certificates. Participants
and indirect participants with whom Beneficial Owners have accounts with respect
to Book-Entry Certificates are similarly required to make book-entry transfers
and receive and transmit such distributions on behalf of their respective
Beneficial Owners. Accordingly, although Beneficial Owners will not possess
certificates, the Rules provide a mechanism by which Beneficial Owners will
receive distributions and will be able to transfer their interests.
Beneficial Owners will not receive or be entitled to receive
certificates representing their respective interests in the Offered
Certificates, except under the limited circumstances described below. Unless and
until Definitive Certificates are issued, Beneficial Owners who are not
Participants may transfer ownership of Offered Certificates only through
Participants and indirect participants by instructing such Participants and
indirect participants to transfer such Offered Certificates, by book-entry
transfer, through DTC for the account of the purchasers of such Offered
Certificates, which account is maintained with their respective Participants.
Under the Rules and in accordance with DTC's normal procedures, transfers of
ownership of such Offered Certificates will be executed through DTC and the
accounts of the respective Participants at DTC will be debited and credited.
Similarly, the Participants and indirect participants will make debits or
credits, as the case may be, on their records on behalf of the selling and
purchasing Beneficial Owners.
Because of time zone differences, credits of securities received in
CEDEL or Euroclear as a result of a transaction with a Participant will be made
during subsequent securities settlement processing and dated the business day
following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or CEDEL Participants on such business day. Cash received in CEDEL or
Euroclear as a result of sales of securities by or through a CEDEL Participant
(as defined below) or Euroclear Participant (as defined below) to a DTC
Participant will be received with value on the DTC settlement date but will be
available in the relevant CEDEL or Euroclear cash account only as of the
business day following settlements in DTC. For information with respect to tax
documentation procedures relating to the Certificates, see "Certain Federal
Income Tax Consequences -- Backup Withholding" in the Prospectus and "Global
Clearance, Settlement and Tax Documentation Procedures--Certain U.S. Federal
Income Tax Documentation Requirements" in Annex I hereto.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC
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in accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. CEDEL Participants and Euroclear Participants may not deliver instructions
directly to the European Depositaries.
DTC, which is a New York-chartered limited purpose trust company,
performs services for its Participants ("DTC Participants"), some of which
(and/or their representatives) own DTC. In accordance with its normal
procedures, DTC is expected to record the positions held by each DTC Participant
in the Book-Entry Certificates, whether held for its own account or as a nominee
for another person. In general, beneficial ownership of Book- Entry Certificates
will be subject to the rules, regulations and procedures governing DTC and DTC
Participants as in effect from time to time.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participant organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes in
accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to CEDEL is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a CEDEL Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 32 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by Chemical Bank (the "Euroclear
Operator"), under contract with Euroclear Clearance Systems S.C., a Belgian
cooperative corporation (the "Cooperative"). All operations are conducted by the
Euroclear Operator, and all Euroclear Securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear Operator, not the
Cooperative. The Cooperative establishes policy for Euroclear on behalf of
Euroclear Participants. Euroclear Participants include banks (including central
banks), securities brokers and dealers and other professional financial
intermediaries. Indirect access to Euroclear is also available to other firms
that clear through or maintain a custodial relationship with a Euroclear
Participant, either directly or indirectly.
The Euroclear Operator is a branch of a New York banking corporation
which is a member bank of the Federal Reserve System. As such, it is regulated
and examined by the Board of Governors of the Federal Reserve System and the New
York State Banking Department, as well as the Belgian Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions on the Book-Entry Certificates will be made on each
Payment Date by the Trustee to DTC. DTC will be responsible for crediting the
amount of such payments to the accounts of the applicable DTC
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Participants in accordance with DTC's normal procedures. Each DTC Participant
will be responsible for disbursing such payment to the Beneficial Owners of the
Book-Entry Certificates that it represents and to each Financial Intermediary
for which it acts as agent. Each such Financial Intermediary will be responsible
for disbursing funds to the Beneficial Owners of the Book-Entry Certificates
that it represents.
Under a book-entry format, Beneficial Owners of the Book-Entry
Certificates may experience some delay in their receipt of payments, since such
payments will be forwarded by the Trustee to Cede. Distributions with respect to
Certificates held through CEDEL or Euroclear will be credited to the cash
accounts of CEDEL Participants or Euroclear Participants in accordance with the
relevant system's rules and procedures, to the extent received by the Relevant
Depositary. Such distributions will be subject to tax reporting in accordance
with relevant United States tax laws and regulations. Because DTC can only act
on behalf of Financial Intermediaries, the ability of a Beneficial Owner to
pledge Book-Entry Certificates to persons or entities that do not participate in
the Depository system, or otherwise take actions in respect of such Book-Entry
Certificates, may be limited due to the lack of physical certificates for such
Book-Entry Certificates. In addition, issuance of the Book-Entry Certificates in
book-entry form may reduce the liquidity of such Certificates in the secondary
market since certain potential investors may be unwilling to purchase
Certificates for which they cannot obtain physical certificates.
Monthly and annual reports on the Trust provided by the Servicer to
Cede, as nominee of DTC, may be made available to Beneficial Owners upon
request, in accordance with the rules, regulations and procedures creating and
affecting the Depository, and to the Financial Intermediaries to whose DTC
accounts the Book-Entry Certificates of such Beneficial Owners are credited.
DTC has advised the Trustee that, unless and until Definitive
Certificates are issued, DTC will take any action permitted to be taken by the
holders of the Book-Entry Certificates under the Pooling and Servicing Agreement
only at the direction of one or more Financial Intermediaries to whose DTC
accounts the Book-Entry Certificates are credited, to the extent that such
actions are taken on behalf of Financial Intermediaries whose holdings include
such Book-Entry Certificates. CEDEL or the Euroclear Operator, as the case may
be, will take any action permitted to be taken by an Owner under the Pooling and
Servicing Agreement on behalf of a CEDEL Participant or Euroclear Participant
only in accordance with its relevant rules and procedures and subject to the
ability of the Relevant Depositary to effect such actions on its behalf through
DTC. DTC may take actions, at the direction of the related Participants, with
respect to some Offered Certificates which conflict with actions taken with
respect to other Offered Certificates.
None of the Company, the Servicer or the Trustee will have any
responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the Book-Entry Certificates held by
Cede, as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
Definitive Certificates will be issued to Beneficial Owners of the
Book-Entry Certificates, or their nominees, rather than to DTC, only if (a) DTC
or the Company advises the Trustee and the Certificate Insurer in writing that
DTC is no longer willing, qualified or able to discharge properly its
responsibilities as a nominee and depository with respect to the Book-Entry
Certificates and the Company or the Trustee is unable to locate a qualified
successor, (b) the Company, at its sole option, elects to terminate a book-entry
system through DTC or (c) DTC, at the direction of the Beneficial Owners
representing a majority of the outstanding Percentage Interests of the Offered
Certificates, advises the Trustee in writing that the continuation of a
book-entry system through DTC (or a successor thereto) is no longer in the best
interests of Beneficial Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all Beneficial
Owners and the Certificate Insurer of the occurrence of such event and the
availability through DTC of Definitive Certificates. Upon surrender by DTC of
the global certificate or certificates representing the Book-Entry Certificates
and instructions for re-registration, the Trustee will issue Definitive
Certificates, and thereafter the Trustee will recognize the holders of such
Definitive Certificates as Owners under the Pooling and Servicing Agreement.
Although DTC, CEDEL and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Certificates among Participants
of DTC, CEDEL and Euroclear, they are under no obligation to perform or continue
to perform such procedures and such procedures may be discontinued at any time.
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Certain Activities
The Trust has not and will not: (i) issue securities (except for the
Certificates); (ii) borrow money; (iii) make loans; (iv) invest in securities
for the purpose of exercising control; (v) underwrite securities; (vi) except as
provided in the Pooling and Servicing Agreement, engage in the purchase and sale
(or turnover) of investments; (vii) offer securities in exchange for property
(except Certificates for the Mortgage Loans); or (viii) repurchase or otherwise
reacquire its securities. See "Description of the Securities -- Reports To
Securityholders" in the Prospectus for information regarding reports to the
Owners.
THE COMPANY
The Company, First Alliance Mortgage Company, was incorporated in the
State of California on May 13, 1975. The Company has been actively involved in
the mortgage lending business since its founding. The Company is currently a
privately held company 100% owned by Brian Chisick and his wife, Sarah Chisick,
however, on May 13, 1996, the Company filed a registration statement with the
Securities and Exchange Commission for the offering of Class A Common Stock to
the public, such public offering is expected to close in July, 1996. The current
business and all of its predecessors have been located in Orange County,
California. Approximately 233 of the Company's 323 employees are located at the
corporate headquarters. The remainder of the Company's employees work in
eighteen branch offices distributed throughout the United States. The branch
offices are located in the following cities in California: Long Beach, Encino,
Irvine, West Covina, Oakland, and San Jose. The Company has branch offices
outside California located in the following cities: Bellevue, Washington;
Denver, Colorado; Oakbrook Terrace and Arlington Heights, Illinois; Miami and
Fort Lauderdale, Florida; Portland, Oregon; Atlanta, Georgia; Phoenix, Arizona;
Salt Lake City, Utah; Wayne, Pennsylvania and Beachwood, Ohio.
The Company maintains its corporate headquarters at 17305 Von Karman
Avenue, Irvine, California 92714- 6203. Its telephone number is (714) 224-8500.
THE CERTIFICATE INSURANCE POLICIES AND THE CERTIFICATE INSURER
The following information has been supplied by the Certificate Insurer
for inclusion in this Prospectus Supplement.
The Certificate Insurer, in consideration of the payment of the premium
and subject to the terms of the Certificate Insurance Policies thereby
unconditionally and irrevocably guarantees to any Owner (as defined below) that
an amount equal to each full and complete Insured Payment will be received by
the Trustee, or its successor, as trustee for the Owners, on behalf of the
Owners from the Certificate Insurer, for distribution by the Trustee to each
Owner of each Owner's proportionate share of the Insured Payment. The
Certificate Insurer's obligation under the Certificate Insurance Policies with
respect to a particular Insured Payment shall be discharged to the extent funds
equal to the applicable Insured Payment are received by the Trustee, whether or
not such funds are properly applied by the Trustee. Insured Payments shall be
made only at the time set forth in the Certificate Insurance Policies and no
accelerated Insured Payments shall be made regardless of any acceleration of the
Class A Certificates, unless such acceleration is at the sole option of the
Certificate Insurer.
Notwithstanding the foregoing paragraph, the Certificate Insurance
Policies do not cover shortfalls, if any, attributable to the liability of the
Trust, the REMIC or the Trustee for withholding taxes, if any (including
interest and penalties in respect of any such liability).
The Certificate Insurer will pay any Insured Payment that is a
Preference Amount on the Business Day following receipt on a Business Day by the
Fiscal Agent (as described below) of (i) a certified copy of the order requiring
the return of a preference payment, (ii) an opinion of counsel satisfactory to
the Certificate Insurer that such order is final and not subject to appeal,
(iii) an assignment in such form as is reasonably required by the Certificate
Insurer, irrevocably assigning to the Certificate Insurer all rights and claims
of the Owner relating to or arising under the Class A Certificates against the
debtor which made such preference payment or otherwise with respect to such
preference payment and (iv) appropriate instruments to effect the appointment of
the Certificate Insurer as agent for such Owner in any legal proceeding related
to such preference payment, such instruments being in a form satisfactory to the
Certificate Insurer, provided that if such documents are received after 12:00
noon New York City time on such Business Day, they will be deemed to be received
on the following Business Day. Such payments shall be disbursed to the receiver
or trustee in bankruptcy named in the final order of the court exercising
jurisdiction on behalf of the Owner and not to such Owner directly unless such
Owner has returned principal or
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interest paid on the Class A Certificates to any receiver or trustee in
bankruptcy, in which case such payment shall be disbursed to such Owner.
The Certificate Insurer will pay any other amount payable under the
Certificate Insurance Policies no later than 12:00 noon New York City time on
the later of the Payment Date on which the related Class A Distribution Amount
is due or the Business Day following receipt in New York, New York on a Business
Day by State Street Bank and Trust Company, N.A., as Fiscal Agent for the
Certificate Insurer or any successor fiscal agent appointed by the Certificate
Insurer (the "Fiscal Agent") of a Notice (as described below); provided that if
such Notice is received after 12:00 noon New York City time on such Business
Day, it will be deemed to be received on the following Business Day. If any such
Notice received by the Fiscal Agent is not in proper form or is otherwise
insufficient for the purpose of making claim under the related Certificate
Insurance Policy it shall be deemed not to have been received by the Fiscal
Agent for purposes of this paragraph, and the Certificate Insurer or the Fiscal
Agent, as the case may be, shall promptly so advise the Trustee and the Trustee
may submit an amended Notice.
Insured Payments due under the Certificate Insurance Policies unless
otherwise stated in the Certificate Insurance Policies will be disbursed by the
Fiscal Agent to the Trustee on behalf of Owners by wire transfer of immediately
available funds in the amount of the Insured Payment less, in respect of Insured
Payments related to Preference Amounts, any amount held by the Trustee for the
payment of such Insured Payment and legally available therefor.
The Fiscal Agent is the agent of the Certificate Insurer only and the
Fiscal Agent shall in no event be liable to Owners for any acts of the Fiscal
Agent or any failure of the Certificate Insurer to deposit, or cause to be
deposited, sufficient funds to make payments due under the Certificate Insurance
Policies.
As used in the Certificate Insurance Policies, the following terms
shall have the following meanings:
"Agreement" means the Pooling and Servicing Agreement dated as
of June 1, 1996 among First Alliance Mortgage Company, as Company,
First Alliance Mortgage Company, as Servicer and Bankers Trust Company
of California, N.A., as Trustee, without regard to any amendment or
supplement thereto unless the Certificate Insurer shall have consented
in writing thereto.
"Business Day" means any day other than a Saturday, a Sunday
or a day on which banking institutions in New York City or in the city
in which the corporate trust office of the Trustee under the Agreement
is located are authorized or obligated by law or executive order to
close.
"Class A Distribution Amount" shall have the same meaning
ascribed to such term in the Agreement as of the date of execution of
the Certificate Insurance Policies, without giving effect to any
subsequent amendment or modification to the Agreement.
"Insured Payment," with respect to either Mortgage Loan Group
and as to any Payment Date, will equal the sum of (i) the excess, if
any, of (a) the sum of the related Class A Current Interest and the
related Subordination Deficit, if any, over (b) the related Total
Available Funds (after applying the cross collateralization provisions
of the Agreement, after any deduction for the related Premium Amount
and fee payable to the Trustee and after taking into account the
portion of the related Class A Principal Distribution Amount to be
actually distributed on such Payment Date without regard to any related
Insured Payment to be made with respect to such Payment Date), plus
(ii) the related Preference Amount.
"Notice" means the telephonic or telegraphic notice, promptly
confirmed in writing by telecopy substantially in the form of the
exhibit attached to the related Certificate Insurance Policy, the
original of which is subsequently delivered by registered or certified
mail, from the Trustee specifying the Insured Payment which shall be
due and owing on the applicable Payment Date.
"Owner" means each Owner of a Class A Certificate (as defined
in the Agreement) who, on the applicable Payment Date, is entitled
under the terms of the applicable Class A Certificate to payment
thereunder.
"Preference Amount" means any amount previously distributed to
an Owner on the Class A Certificates that is recoverable and sought to
be recovered as a voidable preference by a trustee in
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bankruptcy pursuant to the United States Bankruptcy Code (11 U.S.C.),
as amended from time to time, in accordance with a final nonappealable
order of a court having competent jurisdiction.
Capitalized terms used in the Certificate Insurance Policies and not
otherwise defined therein shall have the respective meanings set forth in the
Agreement as of the date of execution of the Certificate Insurance Policies,
without giving effect to any subsequent amendment or modification to the
Agreement unless such amendment or modification has been approved in writing by
the Certificate Insurer.
Any notice under the Certificate Insurance Policies or service of
process on the Fiscal Agent may be made at the address listed below for the
Fiscal Agent of the Certificate Insurer or such other address as the Certificate
Insurer shall specify in writing to the Trustee.
The notice address of the Fiscal Agent is 61 Broadway, 15th Floor, New
York, New York 10006, Attention: Municipal Registrar and Paying Agency or such
other address as the Fiscal Agent shall specify to the Trustee in writing.
The Certificate Insurance Policies are being issued under and pursuant
to, and shall be construed under, the laws of the State of New York, without
giving effect to the conflict of laws principles thereof.
THE INSURANCE PROVIDED BY THE CERTIFICATE INSURANCE POLICIES IS NOT
COVERED BY THE PROPERTY/CASUALTY INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76
OF THE NEW YORK INSURANCE LAW.
The Certificate Insurance Policies are not cancelable for any reason.
The premiums on the Certificate Insurance Policies are not refundable for any
reason including payment, or provision being made for payment, prior to the
maturity of the Class A Certificates.
The Certificate Insurer, formerly known as Municipal Bond Investors
Assurance Corporation, is the principal operating subsidiary of MBIA Inc., a New
York Stock Exchange listed company. MBIA Inc. is not obligated to pay the debts
of or claims against the Certificate Insurer. The Certificate Insurer is
domiciled in the State of New York and licensed to do business in all 50 states,
the District of Columbia and the Commonwealth of Puerto Rico, the Commonwealth
of the Northern Mariana Islands, the Virgin Islands of the United States and the
Territory of Guam. The Certificate Insurer has one European branch in the
Republic of France.
All information regarding the Certificate Insurer, a wholly-owned
subsidiary of MBIA Inc., including the financial statements of the Certificate
Insurer for the year ended December 31, 1995, prepared in accordance with
generally accepted accounting principles, included in the Annual Report on Form
10-K of MBIA Inc. for the year ended December 31, 1995, is hereby incorporated
by reference into this Prospectus Supplement and shall be deemed to be a part
hereof. Any statement contained in a document incorporated by reference herein
shall be modified or superseded for purposes of this Prospectus Supplement to
the extent that a statement contained herein or in any other subsequently filed
document which also is incorporated by reference herein modifies or supersedes
such statement. Any statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus
Supplement.
The tables below present selected financial information of the
Certificate Insurer determined in accordance with statutory accounting practices
prescribed or permitted by insurance regulatory authorities ("SAP") and
generally accepted accounting principles ("GAAP"):
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SAP
----------------------------------------
December 31, March 31,
1995 1996
(Audited) (Unaudited)
(In millions)
Admitted Assets...................... $3,814 $3,989
Liabilities.......................... 2,540 2,672
Capital and Surplus.................. 1,274 1,317
GAAP
---------------------------------------
December 31, March 31,
1995 1996
(Audited) (Unaudited)
(In millions)
Assets............................... $4,463 $4,548
Liabilities.......................... 1,937 2,006
Shareholder's Equity................. 2,526 2,542
Audited financial statements of the Certificate Insurer as of December
31, 1995 and 1994 and for each of the three years ended December 31, 1995, are
included herein as Appendix B. Unaudited financial statements of the Certificate
Insurer for the three-month period ended March 31, 1996 are included herein as
Appendix C. Such financial statements have been prepared on the basis of
generally accepted accounting principles. Copies of the Certificate Insurer's
1995 year-end audited financial statements prepared in accordance with statutory
accounting practices are available from the Certificate Insurer. The address of
the Certificate Insurer is 113 King Street, Armonk, New York 10504.
A copy of the Annual Report on Form 10-K of MBIA Inc. is available from
the Certificate Insurer or the Securities and Exchange Commission. The address
of the Certificate Insurer is 113 King Street, Armonk, New York 10504.
The Certificate Insurer does not accept any responsibility for the
accuracy or completeness of this Prospectus Supplement or any information or
disclosure contained herein, or omitted heretofrom, other than with respect to
the accuracy of the information regarding the Certificate Insurance Policies and
Certificate Insurer set forth under the heading "The Certificate Insurance
Policies and the Certificate Insurer" and in Appendices B and C.
Moody's rates the claims paying ability of the Certificate Insurer
"Aaa."
Standard & Poor's rates the claims paying ability of the Certificate
Insurer "AAA."
Fitch Investors Service, L.P. rates the claims paying ability of the
Certificate Insurer "AAA."
Each rating of the Certificate Insurer should be evaluated
independently. The ratings reflect the respective rating agency's current
assessment of the creditworthiness of the Certificate Insurer and its ability to
pay claims on its policies of insurance. Any further explanation as to the
significance of the above ratings may be obtained only from the applicable
rating agency.
The above ratings are not recommendations to buy, sell or hold the
Class A Certificates, and such ratings may be subject to revision or withdrawal
at any time by the rating agencies. Any downward revision or withdrawal of any
of the above ratings may have an adverse effect on the market price of the Class
A Certificates. The Certificate Insurer does not guaranty the market price of
the Class A Certificates, nor does it guaranty that the ratings on the Class A
Certificates will not be reversed or withdrawn.
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THE POOLING AND SERVICING AGREEMENT
In addition to the provisions of the Pooling and Servicing Agreement
summarized elsewhere in this Prospectus Supplement, there is set forth below a
summary of certain other provisions of the Pooling and Servicing Agreement.
Formation of the Trust
On the Closing Date, the Trust will be created and established pursuant
to the Pooling and Servicing Agreement. On such date, the Company will sell
without recourse the Initial Mortgage Loans to the Trust and the Trust will
issue the Offered Certificates to the Owners thereof pursuant to the Pooling and
Servicing Agreement.
The property of the Trust shall include all money, instruments and
other property to the extent such money, instruments and other property are
subject or intended to be held in trust for the benefit of the Owners and the
Certificate Insurer, as their interests may appear, and all proceeds thereof,
including, without limitation, (i) the Mortgage Loans, (ii) such amounts,
including Eligible Investments, as from time to time may be held by the Trustee
in the Certificate Account, the Pre-Funding Account and the Capitalized Interest
Account and by the Servicer in the Principal and Interest Account (except as
otherwise provided in the Pooling and Servicing Agreement), each to be created
pursuant to the Pooling and Servicing Agreement, (iii) any Mortgaged Property,
the ownership of which has been effected on behalf of the Trust as a result of
foreclosure or acceptance by the Servicer of a deed in lieu of foreclosure and
that has not been withdrawn from the Trust, (iv) any insurance policies relating
to the Mortgage Loans and any rights of the Company under any insurance
policies, (v) Net Liquidation Proceeds with respect to any Liquidated Loan, (vi)
the Certificate Insurance Policies and (vii) the rights of the Company against
any Originator pursuant to the related Master Loan Transfer Agreement
(collectively, the "Trust Estate").
The Offered Certificates will not represent an interest in or an
obligation of, nor will the Mortgage Loans be guaranteed by, any Originator, the
Company, the Servicer or the Trustee.
Sale of Mortgage Loans
Pursuant to the Pooling and Servicing Agreement, on the Closing Date
the Company will sell without recourse to the Trust all right, title and
interest of the Company in each Mortgage Loan listed on the related schedules of
the Mortgage Loans delivered to the Trustee prior to the Closing Date with
respect to the Initial Mortgage Loans and prior to each Subsequent Transfer Date
with respect to the Subsequent Mortgage Loans (the "Schedules of Mortgage
Loans") and all of its right, title and interest in all scheduled payments due
on each Initial Mortgage Loan after the Cut-Off Date (or on each Subsequent
Mortgage Loan after the related Subsequent Cut-Off Date) and all principal and
all interest collected on each such Initial Mortgage Loan after the Cut-Off Date
(or on each Subsequent Mortgage Loan after the related Subsequent Cut-Off Date).
In connection with the sale of the Initial Mortgage Loans on the
Closing Date and the Subsequent Mortgage Loans on each Subsequent Transfer Date,
the Company will be required to deliver to the Trustee at least five Business
Days prior to the Closing Date 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, or a certified copy of the Mortgage as recorded, or (b) if the original
Mortgage has not yet been returned from the recording office, a certified copy
of the Mortgage, (v) evidence of title insurance with respect to the mortgaged
property in the form of a binder or commitment and (vi) at the Company's
expense, an opinion of counsel with respect to the sale and perfection of all
Subsequent Mortgage Loans delivered to the Trustee in form and substance
satisfactory to the Trustee and the Certificate Insurer. The Trustee will agree,
for the benefit of the Owners and the Certificate Insurer, as their interests
may appear, to review each such file on or before the Closing Date and again
within 90 days after the Closing Date or to ascertain that all required
documents (or certified copies of documents) have been executed and received.
Pursuant to the terms of the Pooling and Servicing Agreement, the
Company shall assign to the Trustee for the benefit of the holders of the
Certificates and the Certificate Insurer, as their interests may appear, all of
the Company's right, title and interest in each Master Loan Transfer Agreement
insofar as it relates to the
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representations and warranties made therein by the Originators and the Company
in respect of the origination of the Mortgage Loans and the remedies provided
for breach of such representations and warranties. Upon discovery by the Trustee
of a breach of any representation, warranty or covenant which materially and
adversely affects the interests of the Owners of the Certificates in a Mortgage
Loan or of the Certificate Insurer, the Trustee will promptly notify the
Originator, the Company and the Certificate Insurer. The Originators and the
Company will have 60 days from its discovery or its receipt of such notice to
cure such breach or repurchase the Mortgage Loan.
The Company is additionally required to cause to be prepared and
recorded, within 75 business days of the Closing Date with respect to the
Initial Mortgage Loans, or Subsequent Transfer Date with respect to the
Subsequent Mortgage Loans (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 (other than the Company) to
the Company and then to the Trustee, in the appropriate jurisdictions in which
such recordation is necessary to perfect the lien of the Trust thereof as
against creditors of or purchasers from the Originators; provided, however, that
if the Company furnishes to the Trustee executed recordable assignments of the
Mortgages and to the Trustee and 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 relevant jurisdictions,
then such recording will not be required with respect to such jurisdictions.
Removal and Resignation of the Servicer
The Pooling and Servicing Agreement provides that the 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 (or an
affiliate thereof) or a successor Servicer has assumed the Servicer's
obligations and duties under the Pooling and Servicing Agreement. The
Certificate Insurer, the Trustee or the Owners with the consent of the
Certificate Insurer, will have the right, pursuant to the Pooling and Servicing
Agreement, to remove the Servicer upon the occurrence of any of (a) the
continuing failure of the Servicer to deliver to the Trustee any proceeds or
required payment for a period of five business days after written notice; (b)
certain events of insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceedings regarding the Servicer and certain actions by
the Servicer indicating its insolvency or inability to pay its obligations; (c)
the continuing failure of the Servicer to perform any one or more of its
material obligations under the Pooling and Servicing Agreement for a period of
sixty (60) days after notice by the Trustee or the Certificate Insurer of said
failure; or (d) the failure of the 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 Owners or the
Certificate Insurer for a period of sixty (60) days after the Servicer's
discovery or receipt of notice thereof.
The Pooling and Servicing Agreement additionally provides that the
Certificate Insurer may remove the Servicer upon the occurrence of any of the
following events:
(i) with respect to any Payment Date, if the sum of the Fixed
Rate Group and Variable Rate Group Total Available Funds will be less
than the sum of the Class A Distribution Amounts with respect to all of
the Class A Certificates, in respect of such Payment Date; provided,
however, that the Certificate Insurer will have no right to remove the
Servicer pursuant to the provision described in this clause (i) if the
Servicer can demonstrate to the reasonable satisfaction of the
Certificate Insurer that such event was due to circumstances beyond the
control of the Servicer;
(ii) the failure by the Servicer to make any required
Servicing Advance;
(iii) the failure of the Servicer to perform one or more of
its obligations under the Pooling and Servicing Agreement and the
continuance thereof for a period of thirty (30) days or such longer
period as agreed to in writing by the Certificate Insurer;
(iv) the failure by the Servicer to make any required
Delinquency Advance or to pay any Compensating Interest by the
Remittance Date; or
(v) if the delinquency or loss levels applicable to the
Mortgage Loans exceed certain "trigger" levels set forth in the Pooling
and Servicing Agreement.
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The Trustee
In accordance with the Pooling and Servicing Agreement, following the
termination of the Servicer and pending the appointment of any other person as
successor servicer, the Trustee (for this purpose, the term Trustee includes an
affiliate thereof) shall be the successor Servicer and is empowered to perform
the duties of the Servicer; it being expressly understood, however, that the
Trustee, the Company, the Servicer and the Owners, agree, prior to any
termination of the Servicer, that the Servicer shall perform such duties.
Specifically, and not in limitation of the foregoing, the Trustee shall, upon
termination of the Servicer, during its performance as successor Servicer and
pending the appointment of any other person as successor servicer, have the
power and duty:
(i) to collect Mortgagor payments;
(ii) to foreclose on defaulted Mortgage Loans;
(iii) to enforce due-on-sale clauses and to enter into
assumption and substitution agreements as permitted by the Pooling and
Servicing Agreement;
(iv) to deliver instruments of satisfaction;
(v) to make Delinquency Advances and Servicing Advances and to
pay Compensating Interest; and
(vi) to enforce the Mortgage Loans.
During any period in which the Trustee is successor Servicer, the
Trustee shall be entitled to all compensation due to the Servicer.
Governing Law
The Pooling and Servicing Agreement and each Certificate will be
construed in accordance with and governed by the laws of the State of New York
applicable to agreements made and to be performed therein.
Termination of the Trust
The Pooling and Servicing Agreement will provide that the Trust will
terminate upon the earlier of (i) the payment to the Owners of all Certificates
from amounts other than those available under the Certificate Insurance Policies
of all amounts required to be paid such Owners 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 or (b) the disposition of all property
acquired in respect of any Mortgage Loan remaining in the Trust Estate or (ii)
any time when a Qualified Liquidation (as defined in the Pooling and Servicing
Agreement) of the Trust Estate is effected.
Optional Termination
By the Servicer. At its option, the Servicer acting directly or through
one or more affiliates may determine to purchase from the Trust all of the
Mortgage Loans and other property then held by the Trust, and thereby effect
early retirement of the Certificates, on any Remittance Date when the aggregate
outstanding principal balances of the Mortgage Loans has declined to 10% or less
of the Maximum Collateral Amount. Under certain circumstances the Certificate
Insurer may also exercise such purchase rights if the Servicer does not do so.
Upon Loss of REMIC Status. Following a final determination by the
Internal Revenue Service, or by a court of competent jurisdiction, in each case
from which no appeal is taken within the permitted time for such appeal, or if
any appeal is taken, following a final determination of such appeal from which
no further appeal can be taken to the effect that the REMIC held by the Trust
does not and will no longer qualify as a "REMIC" pursuant to Section 860D of the
Code (the "Final Determination"), at any time on or after the date which is 30
calendar days following such Final Determination, (i) the Certificate Insurer or
the Owners of a majority in Percentage Interest represented by the Class of
Offered Certificates then outstanding with the consent of the Certificate
Insurer (which consent may not be unreasonably withheld) may direct the Trustee
on behalf of the Trust to adopt a plan of complete liquidation as contemplated
by Section 860F(a)(4) of the Code and (ii) the Certificate Insurer may notify
the Trustee of the Certificate Insurer's determination to purchase from the
Trust all Mortgage Loans and other property acquired
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by foreclosure, deed in lieu of foreclosure, or otherwise in respect of any
Mortgage Loan then remaining in the Trust, and thereby effect the early
retirement of the Certificates. The purchase price for any purchase of the
property of the Trust Estate shall be the Termination Price (as defined in the
Pooling and Servicing Agreement).
Upon receipt of such notice or direction from the Certificate Insurer,
the Trustee will be required to notify the Owners of the Subordinated
Certificates of such election to liquidate or such determination to purchase, as
the case may be (the "Termination Notice"). The Owners of a majority of the
Percentage Interest of the Subordinated Certificates then outstanding may,
within sixty (60) days from the date of receipt of the Termination Notice (the
"Purchase Option Period"), at their option, purchase from the Trust all (but not
fewer than all) Mortgage Loans and all property theretofore acquired by
foreclosure, deed in lieu of foreclosure, or otherwise in respect of any
Mortgage Loan then remaining in the Trust Estate at a purchase price equal to
the Termination Price. If, during the Purchase Option Period, the Owners of the
Subordinated Certificates have not exercised the option described in the
immediately preceding sentence, then upon the expiration of the Purchase Option
Period (i) in the event that the Certificate Insurer or the Owners of the Class
A Certificates with the consent of the Certificate Insurer have given the
Trustee the direction described in clause (a)(i) above, the Trustee will be
required to sell the Mortgage Loans and distribute the proceeds of the
liquidation of the Trust Estate, each in accordance with the plan of complete
liquidation, such that, if so directed, the liquidation of the Trust Estate, the
distribution of the proceeds of the liquidation and the termination of the
Pooling and Servicing Agreement occur no later than the close of the sixtieth
(60th) day, or such later day as the Certificate Insurer or the Owners of the
Class A Certificates with the consent of the Certificate Insurer permit or
direct in writing, after the expiration of the Purchase Option Period and (ii)
in the event that the Certificate Insurer has given the Trustee notice of the
Certificate Insurer's determination to purchase the Trust Estate described in
clause (a)(ii) preceding the Certificate Insurer will be required to, within
sixty (60) days, purchase all (but not fewer than all) Mortgage Loans and all
property theretofore acquired by foreclosure, deed in lieu of foreclosure or
otherwise in respect of any Mortgage Loan then remaining in the Trust Estate. In
connection with such purchase, the Servicer will be required to remit to the
Trustee all amounts then on deposit in the Principal and Interest Account for
deposit to the Certificate Account, which deposit will be deemed to have
occurred immediately preceding such purchase.
Following a Final Determination, the Owners of a majority of the
Percentage Interest of the Subordinated Certificates then outstanding may, at
their option and upon delivery to the Certificate Insurer of an opinion of
counsel experienced in Federal income tax matters acceptable to the Certificate
Insurer selected by the Owners of the Subordinated Certificates which opinion
shall be reasonably satisfactory in form and substance to the Certificate
Insurer, to the effect that the effect of the Final Determination is to increase
substantially the probability that the gross income of the Trust will be subject
to federal taxation, purchase from the Trust all (but not fewer than all)
Mortgage Loans and all property theretofore acquired by foreclosure, deed in
lieu of foreclosure, or otherwise in respect of any Mortgage Loan then remaining
in the Trust Estate at a purchase price equal to the Termination Price. In
connection with such purchase, the Servicer will be required to remit to the
Trustee all amounts then on deposit in the Principal and Interest Account for
deposit to the Certificate Account, which deposit shall be deemed to have
occurred immediately preceding such purchase. The foregoing opinion shall be
deemed satisfactory unless the Certificate Insurer gives the Owners of a
majority of the Percentage Interest of the Subordinated Certificates notice that
such opinion is not satisfactory within thirty days after receipt of such
opinion.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion of certain of the material anticipated federal
income tax consequences of the purchase, ownership and disposition of the
Offered Certificates is to be considered only in connection with "Certain
Federal Income Tax Consequences" in the Prospectus. The discussion herein and in
the Prospectus is based upon laws, regulations, rulings and decisions now in
effect, all of which are subject to change. The discussion below and in the
Prospectus 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 Offered Certificates.
REMIC Elections
The Trustee will cause an election to be made to treat the Trust as a
REMIC (other than the Pre-Funding Account and the Capitalized Interest Account)
for federal income tax purposes. Arter & Hadden, special tax counsel, will
advise that, in its opinion, for federal income tax purposes, assuming (i) the
REMIC election is made and (ii) compliance with the Pooling and Servicing
Agreement, the Trust will be treated as a REMIC, each Class
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of Offered Certificates will be treated as "regular interests" in the REMIC and
the Class R Certificates will be treated as the sole class of "residual
interests" in the REMIC. For federal income tax purposes, regular interests in a
REMIC are treated as debt instruments issued by the REMIC on the date on which
those interests are created, and not as ownership interests in the REMIC or its
assets. Owners of Offered Certificates that otherwise report income under a cash
method of accounting will be required to report income with respect to such
Offered Certificates under an accrual method. The Offered Certificates may be
issued with "original issue discount" for federal income tax purposes. The
prepayment assumption to be used in determining whether any Class of Offered
Certificates is issued with original issue discount and the rate of accrual of
original issue discount is 21% HEP. No representation is made that any of the
Mortgage Loans will prepay at this rate or any other rate. See "Certain Federal
Income Tax Consequences -- Discount and Premium -- Original Issue Discount" in
the Prospectus.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), imposes certain requirements on those employee benefit plans and
individual retirement arrangements (and entities whose underlying assets include
plan assets by reason of such a plan's or arrangement's investment in such
entities) to which it applies ("Plan") and on those persons who are fiduciaries
with respect to such Plans. Any Plan fiduciary which proposes to cause a Plan to
acquire any of the Offered Certificates should consult with counsel with respect
to the consequences under ERISA and the Code of the Plan's acquisition and
ownership of such Certificates. See "ERISA Considerations -- Plan Asset
Regulations," "-- Prohibited Transaction Class Exemption," "-- Tax Exempt
Investors" and "--Consultation with Counsel" in the Prospectus.
Section 406 of ERISA prohibits Plans from engaging in certain
transactions involving the assets of such Plans with Parties in Interest with
respect to such Plans, unless a statutory or administrative exemption is
applicable to the transaction. Excise taxes under Section 4975 of the Code,
penalties under Section 502 of ERISA and other penalties may be imposed on Plan
fiduciaries and Parties in Interest (or "disqualified persons "under the Code)
that engage in "prohibited transactions" involving assets of a Plan. Individual
retirement arrangements and other plans that are not subject to ERISA, but are
subject to Section 4975 of the Code, and disqualified persons with respect to
such arrangements and plans, also may be subject to excise taxes and other
penalties if they engage in prohibited transactions. Furthermore, based on the
reasoning of the United States Supreme Court in John Hancock Life Ins. Co. v.
Harris Trust and Sav. Bank, 114 S. Ct. 517 (1993) an insurance company may be
subject to excise taxes and other penalties if such insurance company's general
account is deemed to include assets of the Plans investing in the general
account (e.g., through the purchase of an annuity contract).
The Department of Labor (the "DOL") has issued a regulation (the "Plan
Asset Regulation") describing what constitutes the assets of a Plan when the
Plan acquires an equity interest in another entity. The Plan Asset Regulation
states that, unless an exemption described in the regulation is applicable, the
underlying assets of an entity considered, for purposes of ERISA, to be the
assets of the investing Plan. Pursuant to the Plan Asset Regulation, if the
assets of the Trust were deemed to be plan assets by reason of a Plan's
investment in any Offered Certificates, such plan assets would include an
undivided interest in any exemption, the purchase, sale or holding of any
Certificate by a Plan 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.
The DOL has issued to Prudential Securities Incorporated an individual
prohibited transaction exemption, Prohibited Transaction Exemption 90-32 (the
"Exemption"), which generally exempts from the application of the prohibited
transaction provision of Section 406(a), Section 406(b)(1) and Section 406(b)(2)
of ERISA and the excise taxes imposed pursuant to Sections 4975(a) and (b) of
the Code, with respect to the initial purchase, the holding and the subsequent
resale by Plans of certificates in pass-through trusts that consist of certain
receivables, loans and other obligations that meet the conditions and
requirements of the Exemption. The loans covered by the Exemption include
mortgage loans such as the Mortgage Loans.
Among the conditions that must be satisfied for the Exemption to apply
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;
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(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 either Standard & Poor's, Moody's, Duff
& Phelps Credit Rating Co. ("D&P") or Fitch Investors Service, Inc.
("Fitch");
(4) the Trustee must not be 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
Underwriter 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
Seller 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; and
(6) the Plan investing in the certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission under the Securities Act of 1933.
The Trust Estate must also meet the following requirements:
(i) the corpus of the Trust Estate must consist solely of
assets of the type that have been included in other investment pools;
(ii) certificates in such other investment pools must have
been rated in one of the three highest rating categories of Standard &
Poor's, Moody's, Fitch or D&P for at least one year prior to the Plan's
acquisition of certificates; and
(iii) certificates evidencing interests in such other
investment pools must have been purchased by investors other than Plans
for at least one year prior to the Plan's acquisition of certificates.
Moreover, the Exemption provides 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
Exemption does not apply to Plans sponsored by the Company, the Certificate
Insurer, the Underwriter, the Trustee, 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").
Notwithstanding the foregoing, prior to the earlier of (i) the date on
which the Funding Period expires and (ii) the date on which the DOL amends the
Exemption to permit the use of pre-funding accounts thereunder, Plans will not
be permitted to purchase the Offered Certificates. On or after the earlier to
occur of such dates, the Exemption may be available for the purchase of Offered
Certificates by Plans.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the applicability of the Exemption,
and the potential consequences in their specific circumstances, prior to making
an investment in the Offered Certificates. Moreover, each Plan fiduciary should
determine whether under the general fiduciary standards of investment procedure
and diversification an investment in the Offered Certificates is appropriate for
the Plan, taking into account the overall investment policy of the Plan and the
composition of the Plan's investment portfolio.
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RATINGS
It is a condition of the original issuance of the Class A Certificates
that they receive ratings of AAA by Standard & Poor's and Aaa by Moody's. The
ratings assigned to the Class A Certificates will be based on the claims-paying
ability of the Certificate Insurer.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. The security rating assigned to the Offered
Certificates should be evaluated independently of similar security ratings
assigned to other kinds of securities.
Explanations of the significance of such ratings may be obtained from
Moody's Investors Service, Inc., 99 Church Street, New York, New York, 10007 and
Standard & Poor's, a Division of The McGraw-Hill Companies, 25 Broadway, New
York, New York 10004. Such ratings will be the views only of such rating
agencies. There is no assurance that any such ratings will continue for any
period of time or that such ratings will not be revised or withdrawn. Any such
revision or withdrawal of such ratings may have an adverse effect on the market
price of the Offered Certificates.
LEGAL INVESTMENT CONSIDERATIONS
The Class A Certificates will not constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA"). Accordingly, many institutions with legal authority to invest in
comparably rated securities may not be legally authorized to invest in the Class
A Certificates.
UNDERWRITING
Under the terms and subject to the conditions set forth in the
Underwriting Agreement for the sale of the Offered Certificates, dated June 10,
1996, the Company has agreed to cause the Trust to sell and Prudential
Securities Incorporated (the "Underwriter") has agreed to purchase the Offered
Certificates.
In the Underwriting Agreement, the Underwriter has agreed, subject to
the terms and conditions set forth therein, to purchase the entire principal
amount of each Class of Offered Certificates.
The Underwriter has advised the Company that it proposes to offer the
Offered Certificates purchased by the Underwriter for sale from time to time in
one or more negotiated transactions or otherwise, at market prices prevailing at
the time of sale, at prices related to such market prices or at negotiated
prices. The Underwriter may effect such transactions by selling such
Certificates to or through dealers, and such dealers may receive compensation in
the form of underwriting discounts, concessions or commissions from the
Underwriter or purchasers of the Offered Certificates for whom they may act as
agent. Any dealers that participate with the Underwriter in the distribution of
the Offered Certificates purchased by the Underwriter may be deemed to be
underwriters, and any discounts or commissions received by them or the
Underwriter and any profit on the resale of Offered Certificates by them or the
Underwriter may be deemed to be underwriting discounts or commissions under the
Securities Act.
Proceeds to the Company, including accrued interest, are expected to be
approximately 99.79% of the aggregate principal balance of the Offered
Certificates, before deducting expenses payable by the Company in connection
with the Offered Certificates, estimated to be $250,000. In connection with the
purchase and sale of the Offered Certificates, the Underwriter may be deemed to
have received compensation from the Company in the form of underwriting
discounts.
The Company has agreed to indemnify the Underwriter against certain
liabilities including liabilities under the Securities Act of 1933, as amended.
The Company has been advised by the Underwriter that the Underwriter
presently intends to make a market in each Class of Offered Certificates, as
permitted by applicable laws and regulations. The Underwriter is not obligated,
however, to make a market in either Class of Offered Certificates and such
market-making may be discontinued at any time at the sole discretion of the
Underwriter. Accordingly, no assurance can be given as to the liquidity of, or
trading markets for, the Offered Certificates.
S-53
<PAGE>
REPORT OF EXPERTS
The consolidated financial statements of the Certificate Insurer, MBIA
Insurance Corporation (formerly known as Municipal Bond Investors Assurance
Corporation), as of December 31, 1995 and 1994 and for each of the three years
in the period ended December 31, 1995, appearing in Appendix B of this
Prospectus Supplement have been audited by Coopers & Lybrand L.L.P., independent
accountants, as set forth in their report thereon appearing elsewhere herein,
and are included in reliance upon the authority of such firm as experts in
accounting and auditing.
CERTAIN LEGAL MATTERS
Certain legal matters relating to the validity of the issuance of the
Certificates will be passed upon for the Company and the Servicer by Arter &
Hadden, Washington, D.C. and by Steven Gourley, Los Angeles, California, counsel
to the Company and the Servicer. Certain legal matters relating to insolvency
issues and certain federal income tax matters concerning the Certificates will
be passed upon for the Company by Arter & Hadden, Washington, D.C. Certain legal
matters relating to the validity of the Certificates will be passed upon for the
Underwriter by Dewey Ballantine, New York, New York. Certain legal matters
relating to the Certificate Insurer and the Certificate Insurance Policies will
be passed upon for the Certificate Insurer by Kutak Rock, Omaha, Nebraska.
S-54
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered First
Alliance Mortgage Loan Trust 1996-2 Mortgage Pass-Through Certificates, Class A
(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 Depositary 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
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.
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 Depositary, as the case
I-1
<PAGE>
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 Depositary to the DTC Participant's account
against delivery of the Global Securities. After settlement has been completed,
the Global Securities will be credited to the respective clearing system and by
the clearing system, in accordance with its usual procedures, to the CEDEL
Participant's or Euroclear Participant's account. The securities credit will
appear the next day (European time) and the cash 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 Depositary for the benefit of CEDEL
Participants or Euroclear Participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC Participants a
cross-market transaction will settle no differently than a trade between two DTC
Participants.
Trading between CEDEL or Euroclear Seller and DTC Purchaser. Due to
time zone differences in their favor, CEDEL Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the respective Depositary, to a DTC Participant. The seller will send
instructions to CEDEL or Euroclear through a CEDEL Participant or Euroclear
Participant at least one business day prior to settlement. In these cases CEDEL
or Euroclear will instruct the respective Depositary, as appropriate, to 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). Should the CEDEL Participant or Euroclear Participant have a line of
credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the back-valuation
will extinguish any overdraft incurred over that one-day period. If settlement
is not completed on the intended value date (i.e., the trade fails), receipt of
the cash proceeds in the CEDEL Participant's or Euroclear Participant's account
would instead be valued as of the actual settlement date.
Finally, day traders that use CEDEL or Euroclear and that purchase
Global Securities from DTC Participants for delivery to CEDEL Participants or
Euroclear Participants should note that these trades would automatically fail 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;
I-2
<PAGE>
(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
security (the clearing agency, in the case of persons holding directly on the
books of the clearing agency). Form W-8 and Form 1001 are effective for three
calendar years and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation, partnership or other entity organized in or under
the laws of the United States or any political subdivision thereof or (iii) an
estate or trust that is subject to U.S. federal income tax regardless of the
source of its income. The term "Non-U.S. Person" means any person who is not a
U.S. Person. This summary does not deal with all aspects of U.S. Federal income
tax withholding that may be relevant to foreign holders of the Global
Securities. Investors are advised to consult their own tax advisors for specific
tax advice concerning their holding and disposing of the Global Securities.
I-3
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK.]
<PAGE>
APPENDIX A
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS
Accrual Period..........................................................S-6
Advances...............................................................S-34
Appraised Values.......................................................S-21
Available Funds........................................................S-38
Available Funds Cap.....................................................S-5
Available Funds Shortfall..............................................S-37
Beneficial Owners......................................................S-12
Book-Entry Certificates................................................S-39
Capitalized Interest Account...........................................S-11
Carry-Forward Amount....................................................S-9
Cede...................................................................S-12
CEDEL..................................................................S-12
CEDEL Participants.....................................................S-41
Certificate Account....................................................S-34
Certificate Insurer....................................................S-12
Certificates...........................................................S-34
Chemical...............................................................S-13
Citibank...............................................................S-13
Class A Certificates....................................................S-1
Class A Current Interest................................................S-6
Class A Distribution Amount.............................................S-8
Class A Principal Distribution Amount...................................S-7
Class A-1 Certificates..................................................S-1
Class A-1 Original Certificate Principal Balance........................S-5
Class A-1 Pass-Through Rate.............................................S-5
Class A-1 Pass-Through Rate.............................................S-*
Class A-2 Certificates..................................................S-1
Class A-2 Certificates..................................................S-*
Class A-2 Original Certificate
Principal Balance.......................................................S-5
Class A-2 Original Certificate
Principal Balance.......................................................S-*
Class A-2 Pass-Through Rate.............................................S-5
Class A-2 Pass-Through Rate.............................................S-*
Class A-2 Pass-Through Rate.............................................S-*
Class A-3 Certificates..................................................S-1
Class A-3 Pass-Through Rate.............................................S-5
Class A-4 Original Certificate Principal Balance........................S-5
Class A-3 Original Certificate Principal Balance:.......................S-5
Closing Date............................................................S-1
CLTV....................................................................S-3
Company.................................................................S-1
Compensating Interest..................................................S-12
Cooperative............................................................S-41
Cut-Off Date............................................................S-1
D&P....................................................................S-52
Definitive Certificate.................................................S-40
Delinquency Advances...................................................S-12
DOL....................................................................S-51
DTC....................................................................S-12
DTC Participants.......................................................S-41
ERISA..................................................................S-51
Euroclear..............................................................S-12
Euroclear Operator.....................................................S-41
Euroclear Participants.................................................S-41
European Depositaries..................................................S-13
Excess Subordinated Amount.............................................S-36
Exemption..............................................................S-51
Financial Intermediary.................................................S-40
Fiscal Agent...........................................................S-44
Fitch..................................................................S-52
Fixed Rate Certificates.................................................S-1
Fixed Rate Group........................................................S-1
Fixed Rate Group Available Funds.......................................S-38
Fixed Rate Group Servicing Fee.........................................S-13
Fixed Rate Group Total Available Funds.................................S-38
FNMA....................................................................S-3
Funding Period.........................................................S-10
GAAP...................................................................S-45
Initial Mortgage Loans..................................................S-2
Insurer Reimbursable Amount............................................S-37
Interest Determination Date............................................S-39
Junior Lien Ratio.......................................................S-4
Last Scheduled Payment Date............................................S-30
LIBOR...................................................................S-5
Liquidated Mortgage Loan................................................S-9
LTV.....................................................................S-3
Maximum Collateral Amount...............................................S-5
Modeling Assumptions...................................................S-30
Moody's................................................................S-13
Mortgage Loan Group.....................................................S-1
Mortgage Loans..........................................................S-1
Mortgaged Properties....................................................S-1
Mortgages...............................................................S-1
Mortgagor..............................................................S-28
Net Monthly Excess Cashflow............................................S-37
Notes..................................................................S-19
Offered Certificates....................................................S-1
Original Aggregate Loan Balance.........................................S-2
Original Pre-Funded Amount..............................................S-2
Originator..............................................................S-1
Owner..................................................................S-34
Participants...........................................................S-39
Payment Date............................................................S-6
Percentage Interest.....................................................S-6
Plan...................................................................S-51
Plan Asset Regulation..................................................S-51
Pooling and Servicing Agreement.........................................S-1
Pre-Funded Amount......................................................S-11
Pre-Funding Account.....................................................S-2
Pre-Funding Account Earnings...........................................S-11
Prepayment.............................................................S-29
Prepayment Assumption..................................................S-30
Realized Loss..........................................................S-36
Record Date.............................................................S-6
Reference Banks........................................................S-39
Relevant Depositary....................................................S-40
REMIC..................................................................S-14
Remittance Date........................................................S-34
Remittance Period......................................................S-34
Restricted Group.......................................................S-52
Reuter Screen LIBO Page................................................S-39
Riegle Act.............................................................S-17
Rules..................................................................S-40
SAP....................................................................S-45
Securities..............................................................S-1
Servicer................................................................S-1
Servicing Fee..........................................................S-13
Six Month LIBOR Loans...................................................S-4
SMMEA..................................................................S-14
Specified Subordinated Amount..........................................S-35
Standard & Poor's......................................................S-13
Subordinate Certificates................................................S-1
Subordination Deficit...................................................S-9
Subordination Increase Amount..........................................S-35
Subordination Reduction Amount.........................................S-36
Subsequent Cut-Off Date................................................S-15
Subsequent Mortgage Loans...............................................S-2
Subsequent Transfer Agreement..........................................S-15
Subsequent Transfer Date...............................................S-11
Terms and Conditions...................................................S-41
Total Available Funds..................................................S-38
Total Monthly Excess Cashflow..........................................S-37
Total Monthly Excess Spread............................................S-35
Trust...................................................................S-1
Trustee.................................................................S-1
Underwriter............................................................S-53
Variable Rate Certificates..............................................S-1
Variable Rate Group.....................................................S-1
Variable Rate Group Available Funds....................................S-38
Variable Rate Group Servicing Fee......................................S-13
Variable Rate Group Total Available Funds..............................S-38
A-1
<PAGE>
APPENDIX B
AUDITED FINANCIAL STATEMENTS FOR THE CERTIFICATE INSURER
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1995 and 1994
and for the years ended
December 31, 1995, 1994 and 1993
B-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
TO THE BOARD OF DIRECTORS AND SHAREHOLDER OF
MBIA INSURANCE CORPORATION:
We have audited the accompanying consolidated balance sheets of MBIA Insurance
Corporation and Subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of income, changes in shareholder's equity and cash
flows for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of MBIA Insurance
Corporation and Subsidiaries as of December 31, 1995 and 1994, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles.
As discussed in Note 7 to the consolidated financial statements, effective
January 1, 1993 the Company adopted Statement of Financial Accounting Standards
No. 109 "Accounting for Income Taxes." As discussed in Note 2 to the
consolidated financial statements, effective January 1, 1994 the Company adopted
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities."
\s\ COOPERS & LYBRAND
New York, New York
January 22, 1996
B-2
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
------------------- ----------------
ASSETS
Investments:
<S> <C> <C>
Fixed maturity securities held as available-for-sale
at fair value (amortized cost $3,428,986 and
$3,123,838 $3,652,621 3,051,906
Short-term investments, at amortized cost
(which approximates fair value) 198,035 121,384
Other investments 14,064 11,970
------------ ------------
Total investments 3,864,720 3,185,260
Cash and cash equivalents 2,135 1,332
Accrued investment income 60,247 55,347
Deferred acquisition costs 140,348 133,048
Prepaid reinsurance premiums 200,887 186,492
Goodwill (less accumulated amortization of
$37,366 and $32,437) 105,614 110,543
Property and equipment, at cost (less accumulated
depreciation of $12,137 and $9,501) 41,169 39,648
Receivable for investments sold 5,729 945
Other assets 42,145 46,552
------------ ------------
TOTAL ASSETS $4,462,994 $3,759,167
============ ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Deferred premium revenue $ 1,616,315 $ 1,512,211
Loss and loss adjustment expense reserves 42,505 40,148
Deferred income taxes 212,925 97,828
Payable for investments purchased 10,695 6,552
Other liabilities 54,682 46,925
------------ ------------
TOTAL LIABILITIES 1,937,122 1,703,664
------------ ------------
Shareholder's Equity:
Common stock, par value $150 per share; authorized,
issued and outstanding - 100,000 shares 15,000 15,000
Additional paid-in capital 1,021,584 953,655
Retained earnings 1,341,855 1,134,061
Cumulative translation adjustment 2,704 427
Unrealized appreciation (depreciation) of investments,
net of deferred income tax provision (benefit)
of $78,372 and $(25,334) 144,729 (47,640)
------------ ------------
TOTAL SHAREHOLDER'S EQUITY 2,525,872 2,055,503
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $4,462,994 $3,759,167
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
B-3
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands)
<TABLE>
<CAPTION>
Years ended December 31
----------------------------------------
1995 1994 1993
--------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Gross premiums written $349,812 $361,523 $479,390
Ceded premiums (45,050) (49,281) (47,552)
---------- ---------- ----------
Net premiums written 304,762 312,242 431,838
Increase in deferred premium revenue (88,365) (93,226) (200,519)
---------- ---------- ----------
Premiums earned (net of ceded
premiums of $30,655
$33,340 and $41,409) 216,397 219,016 231,319
Net investment income 219,834 193,966 175,329
Net realized gains 7,777 10,335 8,941
Other income 2,168 1,539 3,996
---------- ---------- ----------
Total revenues 446,176 424,856 419,585
---------- ---------- ----------
Expenses:
Losses and loss adjustment expenses 10,639 8,093 7,821
Policy acquisition costs, net 21,283 21,845 25,480
Underwriting and operating expenses 41,812 41,044 38,006
---------- ---------- ----------
Total expenses 73,734 70,982 71,307
---------- ---------- ----------
Income before income taxes and cumulative
effect of accounting changes 372,442 353,874 348,278
Provision for income taxes 81,748 77,125 86,684
---------- ---------- ----------
Income before cumulative effect of
accounting changes 290,694 276,749 261,594
Cumulative effect of accounting changes --- --- 12,923
---------- ---------- ----------
Net income $290,694 $276,749 $274,517
========== ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
B-4
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
For the years ended December 31, 1995, 1994 and 1993
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Unrealized
Additional Cumulative Appreciation
Common Stock Paid-in Retained Translation (Depreciation)
Shares Amount Capital Earnings Adjustment of Investments
------- -------- ---------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1993 100,000 $ 15,000 $ 931,943 $ 670,795 $ (474) $ 2,379
Net income --- --- --- 274,517 --- ---
Change in foreign currency translation --- --- --- --- (729) ---
Change in unrealized appreciation
of investments net of change in
deferred income taxes of $(1,381) --- --- --- --- --- 2,461
Dividends declared (per
common share $500.00) --- --- --- (50,000) --- ---
Tax reduction related to tax sharing
agreement with MBIA Inc. --- --- 11,851 --- --- ---
------- -------- ---------- ---------- ---------- ------------
Balance, December 31, 1993 100,000 15,000 943,794 895,312 (1,203) 4,840
------- -------- ---------- ---------- ---------- ------------
Net income --- --- --- 276,749 --- ---
Change in foreign currency translation --- --- --- --- 1,630 ---
Change in unrealized depreciation
of investments net of change in
deferred income taxes of $27,940 --- --- --- --- --- (52,480)
Dividends declared (per
common share $380.00) --- --- --- (38,000) --- ---
Tax reduction related to tax sharing
agreement with MBIA Inc. --- --- 9,861 --- --- ---
------- -------- ---------- ---------- ---------- ------------
Balance, December 31, 1994 100,000 15,000 953,655 1,134,061 427 (47,640)
------- -------- ---------- ---------- ---------- ------------
Exercise of stock options --- --- 5,403 --- --- ---
Net income --- --- --- 290,694 --- ---
Change in foreign currency translation --- --- --- --- 2,277 ---
Change in unrealized appreciation
of investments net of change in
deferred income taxes of $(103,707) --- --- --- --- --- 192,369
Dividends declared (per
common share $829.00) --- --- --- (82,900) --- ---
Capital contribution from MBIA Inc. --- --- 52,800 --- --- ---
Tax reduction related to tax sharing
agreement with MBIA Inc. --- --- 9,726 --- --- ---
------- -------- ---------- ---------- --------- ------------
Balance, December 31, 1995 100,000 $ 15,000 $1,021,584 $1,341,855 $ 2,704 $144,729
======= ======== ========== ========== ========== ============
The accompanying notes are an integral part of the consolidated
financial statements.
</TABLE>
B-5
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Years ended December 31
-----------------------------------------
1995 1994 1993
----------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $290,694 $276,749 $274,517
Adjustments to reconcile net income to net
cash provided by operating activities:
Increase in accrued investment income (4,900) (3,833) (5,009)
Increase in deferred acquisition costs (7,300) (12,564) (10,033)
Increase in prepaid reinsurance premiums (14,395) (15,941) (6,143)
Increase in deferred premium revenue 104,104 109,167 206,662
Increase in loss and loss adjustment expense reserves 2,357 6,413 8,225
Depreciation 2,676 1,607 1,259
Amortization of goodwill 4,929 4,961 5,001
Amortization of bond (discount) premium, net (2,426) 621 (743)
Net realized gains on sale of investments (7,778) (10,335) (8,941)
Deferred income taxes 11,391 19,082 7,503
Other, net 29,080 (8,469) 15,234
----------- ------------ ------------
Total adjustments to net income 117,738 90,709 213,015
----------- ------------ ------------
Net cash provided by operating activities 408,432 367,458 487,532
----------- ------------ ------------
Cash flows from investing activities:
Purchase of fixed maturity securities, net
of payable for investments purchased (897,128) (1,060,033) (786,510)
Sale of fixed maturity securities, net of
receivable for investments sold 473,352 515,548 205,342
Redemption of fixed maturity securities,
net of receivable for investments redeemed 83,448 128,274 225,608
(Purchase) sale of short-term investments, net (32,281) 3,547 (40,461)
(Purchase) sale of other investments, net (692) 87,456 (37,777)
Capital expenditures, net of disposals (4,228) (3,665) (3,601)
----------- ------------ ------------
Net cash used in investing activities (377,529) (328,873) (437,399)
----------- ------------ ------------
Cash flows from financing activities:
Capital contribution from MBIA Inc. 52,800 --- ---
Dividends paid (82,900) (38,000) (50,000)
----------- ------------ ------------
Net cash used by financing activities (30,100) (38,000) (50,000)
----------- ------------ ------------
Net increase in cash and cash equivalents 803 585 133
Cash and cash equivalents - beginning of year 1,332 747 614
----------- ------------ ------------
Cash and cash equivalents - end of year $2,135 $1,332 $747
=========== ============ ============
Supplemental cash flow disclosures:
Income taxes paid $ 50,790 $ 53,569 $ 52,967
The accompanying notes are an integral part of the consolidated financial
statements.
B-6
<PAGE>
</TABLE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
MBIA Insurance Corporation ("MBIA Corp."), formerly known as Municipal Bond
Investors Assurance Corporation, is a wholly owned subsidiary of MBIA Inc. MBIA
Inc. was incorporated in Connecticut on November 12, 1986 as a licensed insurer
and, through the following series of transactions during December 1986, became
the successor to the business of the Municipal Bond Insurance Association (the
"Association"), a voluntary unincorporated association of insurers writing
municipal bond and note insurance as agent for the member insurance companies:
o MBIA Inc. acquired for $17 million all of the outstanding common stock of
New York domiciled insurance company and changed the name of the insurance
company to Municipal Bond Investors Assurance Corporation. In April 1995, the
name was again changed to MBIA Insurance Corp. Prior to the acquisition, all of
the obligations of this company were reinsured and/or indemnified by the former
owner.
o Four of the five member companies of the Association, together with their
affiliates, purchased all of the outstanding common stock of MBIA Inc. and
entered into reinsurance agreements whereby they ceded to MBIA Inc.
substantially all of the net unearned premiums on existing and future
Association business and the interest in, or obligation for, contingent
commissions resulting from their participation in the Association. MBIA Inc.'s
reinsurance obligations were then assumed by MBIA Corp. The participation of
these four members aggregated approximately 89% of the net insurance in force of
the Association. The net assets transferred from the predecessor included the
cash transferred in connection with the reinsurance agreements, the related
deferred acquisition costs and contingent commissions receivable, net of the
related unearned premiums and contingent commissions payable. The deferred
income taxes inherent in these assets and liabilities were recorded by MBIA
Corp. Contingent commissions receivable (payable) with respect to premiums
earned prior to the effective date of the reinsurance agreements by the
Association in accordance with statutory accounting practices, remained as
assets (liabilities) of the member companies.
Effective December 31, 1989, MBIA Inc. acquired for $288 million all of
the outstanding stock of Bond Investors Group, Inc. ("BIG"), the parent company
of Bond Investors Guaranty Insurance Company ("BIG Ins."), which was
subsequently renamed MBIA Insurance Corp. of Illinois ("MBIA Illinois").
B-7
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In January 1990, MBIA Illinois ceded its portfolio of net insured
obligations to MBIA Corp. in exchange for cash and investments equal to its
unearned premium reserve of $153 million. Subsequent to this cession, MBIA Inc.
contributed the common stock of BIG to MBIA Corp. resulting in additional
paid-in capital of $200 million. The insured portfolio acquired from BIG Ins.
consists of municipal obligations with risk characteristics similar to those
insured by MBIA Corp. On December 31, 1990, BIG was merged into MBIA Illinois.
Also in 1990, MBIA Inc. formed MBIA Assurance S.A. ("MBIA Assurance"),
a wholly owned French subsidiary, to write financial guarantee insurance in the
international community. MBIA Assurance provides insurance for public
infrastructure financings, structured finance transactions and certain
obligations of financial institutions. The stock of MBIA Assurance was
contributed to MBIA Corp. in 1991 resulting in additional paid-in capital of $6
million. Pursuant to a reinsurance agreement with MBIA Corp., a substantial
amount of the risks insured by MBIA Assurance is reinsured by MBIA Corp.
In 1993, MBIA Inc. formed a wholly owned subsidiary, MBIA Investment
Management Corp. ("IMC"). IMC, which commenced operations in August 1993,
principally provides guaranteed investment agreements to states, municipalities
and municipal authorities which are guaranteed as to principal and interest.
MBIA Corp. insures IMC's outstanding investment agreement liabilities.
In 1993, MBIA Corp. assumed the remaining business from the fifth member of
the Association.
In 1994, MBIA Inc. formed a wholly owned subsidiary, MBIA Securities
Corp. ("SECO"), to provide fixed-income investment management services for MBIA
Inc.'s municipal cash management service businesses. In 1995, portfolio
management for a portion of MBIA Corp.'s insurance related investment portfolio
was transferred to SECO; the management of the balance of this portfolio was
transferred in January 1996.
2. SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared on the basis of
generally accepted accounting principles ("GAAP"). The preparation of financial
statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
B-8
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant
accounting policies are as follows:
CONSOLIDATION
The consolidated financial statements include the accounts of MBIA Corp., MBIA
Illinois, MBIA Assurance and BIG Services, Inc. All significant intercompany
balances have been eliminated. Certain amounts have been reclassified in prior
years' financial statements to conform to the current presentation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and demand deposits with banks.
INVESTMENTS
Effective January 1, 1994, MBIA Corp. adopted Statement of Financial Accounting
Standards ("SFAS") 115 "Accounting for Certain Investments in Debt and Equity
Securities." In accordance with SFAS 115, MBIA Corp. reclassified its entire
investment portfolio ("Fixed-maturity securities") as "available-for-sale."
Pursuant to SFAS 115, securities classified as available-for-sale are required
to be reported in the financial statements at fair value, with unrealized gains
and losses reflected as a separate component of shareholder's equity. The
cumulative effect of MBIA Corp.'s adoption of SFAS 115 was a decrease in
shareholder's equity at December 31, 1994 of $46.8 million, net of taxes. The
adoption of SFAS 115 had no effect on MBIA Corp.'s earnings.
Bond discounts and premiums are amortized on the effective-yield method
over the remaining term of the securities. For pre-refunded bonds the remaining
term is determined based on the contractual refunding date. Short-term
investments are carried at amortized cost, which approximates fair value and
include all fixed-maturity securities with a remaining term to maturity of less
than one year. Investment income is recorded as earned. Realized gains or losses
on the sale of investments are determined by specific identification and are
included as a separate component of revenues.
Other investments consist of MBIA Corp.'s interest in limited
partnerships and a mutual fund which invests principally in marketable equity
securities. MBIA Corp. records dividends from its investment in marketable
equity securities and its share of limited partnerships and mutual funds as a
B-9
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
component of investment income. In addition, MBIA Corp. records its share of the
unrealized gains and losses on these investments, net of applicable deferred
income taxes, as a separate component of shareholder's equity.
PREMIUM REVENUE RECOGNITION
Premiums are earned pro rata over the period of risk. Premiums are allocated to
each bond maturity based on par amount and are earned on a straight-line basis
over the term of each maturity. When an insured issue is retired early, is
called by the issuer, or is in substance paid in advance through a refunding or
defeasance accomplished by placing U.S. Government securities in escrow, the
remaining deferred premium revenue, net of the portion which is credited to a
new policy in those cases where MBIA Corp. insures the refunding issue, is
earned at that time, since there is no longer risk to MBIA Corp. Accordingly,
deferred premium revenue represents the portion of premiums written that is
applicable to the unexpired risk of insured bonds and notes.
POLICY ACQUISITION COSTS
Policy acquisition costs include only those expenses that relate primarily to,
and vary with, premium production. For business produced directly by MBIA Corp.,
such costs include compensation of employees involved in marketing, underwriting
and policy issuance functions, certain rating agency fees, state premium taxes
and certain other underwriting expenses, reduced by ceding commission income on
premiums ceded to reinsurers. For business assumed from the Association, such
costs were comprised of management fees, certain rating agency fees and
marketing and legal costs, reduced by ceding commissions received by the
Association on premiums ceded to reinsurers. Policy acquisition costs are
deferred and amortized over the period in which the related premiums are earned.
LOSSES AND LOSS ADJUSTMENT EXPENSES
Reserves for losses and loss adjustment expenses ("LAE") are established in an
amount equal to MBIA Corp.'s estimate of the identified and unidentified losses,
including costs of settlement on the obligations it has insured.
To the extent that specific insured issues are identified as currently
or likely to be in default, the present value of expected payments, including
loss and LAE associated with these issues, net of expected recoveries, is
allocated within the total loss reserve as case basis reserves. Management of
MBIA Corp. periodically evaluates its estimates for losses and LAE and any
resulting adjustments are reflected in current earnings. Management believes
B-10
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
that the reserves are adequate to cover the ultimate net cost of claims, but the
reserves are necessarily based on estimates, and there can be no assurance that
the ultimate liability will not exceed such estimates.
CONTINGENT COMMISSIONS
Contingent commissions may be receivable from MBIA Corp.'s and the Association's
reinsurers under various reinsurance treaties and are accrued as the related
premiums are earned.
INCOME TAXES
MBIA Corp. is included in the consolidated tax return of MBIA
Inc. The tax provision for MBIA Corp. for financial reporting purposes is
determined on a stand alone basis. Any benefit derived by MBIA Corp. as a result
of the tax sharing agreement with MBIA Inc. and its subsidiaries is reflected
directly in shareholder's equity for financial reporting purposes.
Deferred income taxes are provided in respect of temporary differences
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse.
The Internal Revenue Code permits financial guarantee insurance
companies to deduct from taxable income additions to the statutory contingency
reserve, subject to certain limitations. The tax benefits obtained from such
deductions must be invested in non-interest bearing U. S. Government tax and
loss bonds. MBIA Corp. records purchases of tax and loss bonds as payments of
Federal income taxes. The amounts deducted must be restored to taxable income
when the contingency reserve is released, at which time MBIA Corp. may present
the tax and loss bonds for redemption to satisfy the additional tax liability.
PROPERTY AND EQUIPMENT
Property and equipment consists of MBIA Corp.'s headquarters and equipment and
MBIA Assurance's furniture, fixtures and equipment, which are recorded at cost
and, exclusive of land, are depreciated on the straight-line method over their
estimated service lives ranging from 4 to 31 years. Maintenance and repairs are
charged to expenses as incurred.
GOODWILL
Goodwill represents the excess of the cost of the acquired and contributed
subsidiaries over the tangible net assets at the time of acquisition or
contribution. Goodwill attributed to the acquisition of the licensed insurance
B-11
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
company includes recognition of the value of the state licenses held by that
company, and is amortized by the straight-line method over 25 years. Goodwill
related to the wholly owned subsidiary of MBIA Inc. contributed in 1988 is
amortized by the straight-line method over 25 years. Goodwill attributed to the
acquisition of MBIA Illinois is amortized according to the recognition of future
profits from its deferred premium revenue and installment premiums, except for a
minor portion attributed to state licenses, which is amortized by the
straight-line method over 25 years.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities denominated in foreign currencies are translated at
year-end exchange rates. Operating results are translated at average rates of
exchange prevailing during the year. Unrealized gains or losses resulting from
translation are included as a separate component of shareholder's equity.
3. STATUTORY ACCOUNTING PRACTICES
The financial statements have been prepared on the basis of GAAP, which differs
in certain respects from the statutory accounting practices prescribed or
permitted by the insurance regulatory authorities. Statutory accounting
practices differ from GAAP in the following respects:
o premiums are earned only when the related risk has expired
rather than over the period of the risk;
o acquisition costs are charged to operations as incurred rather
than as the related premiums are earned;
o a contingency reserve is computed on the basis of statutory requirements and
reserves for losses and LAE are established, at present value, for specific
insured issues which are identified as currently or likely to be in default.
Under GAAP reserves are established based on MBIA Corp.'s reasonable estimate
of the identified and unidentified losses and LAE on the insured obligations
it has written;
o Federal income taxes are only provided on taxable income for which income
taxes are currently payable, while under GAAP, deferred income taxes are
provided with respect to temporary differences;
o fixed-maturity securities are reported at amortized cost rather than fair
value;
B-12
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
o tax and loss bonds purchased are reflected as admitted assets as well as
payments of income taxes; and
o certain assets designated as "non-admitted assets" are charged directly
against surplus but are reflected as assets under GAAP.
The following is a reconciliation of consolidated shareholder's equity
presented on a GAAP basis to statutory capital and surplus for MBIA Corp. and
its subsidiaries, MBIA Illinois and MBIA Assurance:
As of December 31
-----------------
(In thousands) 1995 1994 1993
-------------- ---- ---- ----
GAAP shareholder's equity ... $ 2,525,872 $ 2,055,503 $ 1,857,743
Premium revenue recognition . (328,450) (296,524) (242,577)
Deferral of acquisition costs (140,348) (133,048) (120,484)
Unrealized (gains) losses ... (223,635) 71,932 --
Contingent commissions ...... (1,645) (1,706) (1,880)
Contingency reserve ......... (743,510) (620,988) (539,103)
Loss and loss adjustment
expense reserves ........... 28,024 18,181 26,262
Deferred income taxes ....... 205,425 90,328 99,186
Tax and loss bonds .......... 70,771 50,471 25,771
Goodwill .................... (105,614) (110,543 (115,503)
Other ....................... (12,752) (13,568 (11,679)
------------ ----------- -----------
Statutory capital
and surplus ......... $ 1,274,138 1,110,038 $ 977,736
=========== ========= ===========
Consolidated net income of MBIA Corp. determined in accordance with
statutory accounting practices for the years ended December 31, 1995, 1994 and
1993 was $278.3 million, $224.9 million and $258.4 million, respectively.
4. PREMIUMS EARNED FROM REFUNDED AND CALLED BONDS
Premiums earned include $34.0 million, $53.0 million and $85.6 million for 1995,
1994 and 1993, respectively, related to refunded and called bonds.
5. INVESTMENTS
MBIA Corp.'s investment objective is to optimize long-term, after-tax returns
while emphasizing the preservation of capital and claims-paying capability
through maintenance of high-quality investments with adequate liquidity. MBIA
Corp.'s investment policies limit the amount of credit exposure to any one
B-13
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
issuer. The fixed-maturity portfolio is comprised of high-quality (average
rating Double-A) taxable and tax-exempt investments of diversified maturities.
The following tables set forth the amortized cost and fair value of the
fixed-maturities and short-term investments included in the consolidated
investment portfolio of MBIA Corp. as of December 31, 1995 and 1994.
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---- ----- ------ ----------
(In thousands
December 31, 1995
Taxable bonds
United States Treasury
and Government Agency .. $ 6,742 $ 354 -- $ 7,096
Corporate and other
obligations ............ 592,604 30,536 (212) 622,928
Mortgage-backed .......... 389,943 21,403 (932) 410,414
Tax-exempt bonds municipal
Obligations .............. 2,637,732 175,081 (2,595) 2,810,218
--------- ------- ------ ---------
Total fixed-
maturities $3,627,021 $ 227,374 (3,739) $3,850,656
========== ========== ====== ==========
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---- ----- ------ ----------
(In thousands)
Taxable bonds
United States Treasury
and Government Agency $ 15,133 -- (149) $ 14,984
Corporate and other ...
obligations ......... 461,601 2,353 (23,385) 440,569
Mortgage-backed ......... 317,560 3,046 (12,430) 308,176
Tax-exempt bonds
State and municipal
obligations ........... 2,450,928 36,631 (77,998) 2,409,561
--------- ------ ------- ---------
Total fixed-
maturities ......... $3,245,222 $ 42,030 $ (113,962) $3,173,290
========== ========== ========== ==========
Fixed-maturity investments carried at fair value of $8.1 million and
$7.4 million as of December 31, 1995 and 1994, respectively, were on deposit
with various regulatory authorities to comply with insurance laws.
B-14
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The table below sets forth the distribution by expected maturity of the
fixed-maturities and short-term investments at amortized cost and fair value at
December 31, 1995. Expected maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations.
Amortized Fair
(In thousands) Cost Value
Maturity
Within 1 year ....................... $ 178,328 $ 178,256
Beyond 1 year but within 5 years .... 448,817 477,039
Beyond 5 years but within 10 years .. 1,133,527 1,211,645
Beyond 10 years but within 15 years . 742,790 804,421
Beyond 15 years but within 20 years . 686,871 730,030
Beyond 20 years ..................... 46.745 38,851
-------- --------
3,237,078 3,440,242
Mortgage-backed ..................... 389,943 410,414
------- -------
Total fixed-maturities and short-term
investments ....................... $3,627,021 $3,850,656
========== ==========
6. Investment Income and Gains and Losses
Investment income consists of:
Years ended December 31
-----------------------
(In thousands) ................ 1995 1994 1993
---- ---- ----
Fixed-maturities .............. $ 216,653 $ 193,729 $ 173,070
Short-term investments ...... 6,008 3,003 2,844
Other investments ............. 17 12 2,078
-- -- -----
Gross investment income ..... 222,678 196,744 177,992
Investment expenses ........... 2,844 2,778 2,663
----- ----- -----
Net investment income ....... 219,834 193,966 175,329
Net realized gains (losses):
Fixed-maturities:
Gains..................... 9,941 9,635 9,070
Losses................ .. (2,537) (8,851) (744)
------ ------ ----
Net..................... 7,404 784 8,326
Other investments:
Gains................... 382 9,551 615
Losses................... (9) -- --
---- ------ ----
Net....................... 373 9,551 615
--- ----- ---
Net realized gains .......... 7,777 10,335 8,941
----- ------ -----
Total investment income ....... $ 227,611 $ 204,301 $ 184,270
=========== =========== ===========
B-15
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unrealized gains (losses) consist of:
As of December 31
-----------------
(In thousands) .................. 1995 1994
---- ----
Fixed-maturities:
Gains ......................... $ 227,374 $ 42,030
Losses ........................ (3,739) (113,962)
Net .......................... 223,635 (71,932)
Other investments:
Gains ......................... 287 --
Losses ........................ (821) (1,042)
------- ------
Net ........................... (534) (1,042)
------ ------
Total ........................... 223,101 (72,974)
Deferred income tax (benefit) ... 78,372 (25,334)
------ -------
Unrealized gains (losses) - net $ 144,729 $ (47,640)
========= =========
The deferred taxes in 1995 and 1994 relate primarily to unrealized
gains and losses on MBIA Corp.'s fixed-maturity investments, which are reflected
in shareholders' equity in 1995 and 1994 in accordance with MBIA Corp.'s
adoption of SFAS 115.
The change in net unrealized gains (losses) consists of:
Years ended December 31
-----------------------
In thousands 1995 1994 1993
- - - ------------ ---- ---- ----
Fixed-maturities ............... $ 295,567 $(289,327) $ 101,418
Other investments .............. 508 (8,488) 3,842
--- ------ -----
Total ........................ 296,075 (297,815) 105,260
Deferred income taxes (benefit) 103,706 (27,940) 1,381
------- ------- -----
Unrealized gains (losses), net $ 192,369 $(269,875) $ 103,879
========= ========= =========
7. INCOME TAXES
Effective January 1, 1993, MBIA Corp. changed its method of accounting for
income taxes from the income statement-based deferred method to the balance
sheet-based liability method required by SFAS 109 "Accounting for Income Taxes."
MBIA Corp. adopted the new pronouncement on the cumulative catch-up basis and
recorded a cumulative adjustment, which increased net income and reduced the
deferred tax liability by $13.0 million. The cumulative effect represents the
impact of adjusting the deferred tax liability to reflect the January 1, 1993
tax rate of 34% as opposed to the higher tax rates in effect when certain of the
deferred taxes originated.
B-16
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SFAS 109 requires recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred tax
liabilities and assets are determined based on the difference between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
The effect on tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities at December 31, 1995 and 1994 are as presented below:
(In thousands) ................................ 1995 1994
- - - ----------------------------------------------- ---- ----
Deferred tax assets
Tax and loss bonds .......................... $ 71,183 $ 50,332
Unrealized losses ........................... -- 25,334
Alternative minimum tax credit carry forwards 39,072 22,391
Loss and loss adjustment expense reserves ... 9,809 6,363
Other ....................................... 954 3,981
--- -----
Total gross deferred tax assets ............. 121,018 108,401
======= =======
Deferred tax liabilities
Contingency reserve ......................... 131,174 91,439
Deferred premium revenue .................... 64,709 54,523
Deferred acquisition costs .................. 49,122 48,900
Unrealized gains ............................ 78,372 --
Contingent commissions ...................... 7,158 4,746
Other ....................................... 3,408 6,621
----- -----
Total gross deferred tax liabilities ........ 333,943 206,229
------- -------
Net deferred tax liability .................. $212,925 $ 97,828
======== ========
Under SFAS 109, a change in the Federal tax rate requires a restatement
of deferred tax assets and liabilities. Accordingly, the restatement for the
change in the 1993 Federal tax rate resulted in a $5.4 million increase in the
tax provision, of which $3.2 million resulted from the recalculation of deferred
taxes at the new Federal rate.
The provision for income taxes is composed of:
Years ended December 31
-----------------------
(In thousands) .................. 1995 1994 1993
- - - --------------------------------- ---- ---- ----
Current ......................... $70,357 $58,043 $66,086
Deferred ........................ 11,391 19,082 20,598
------ ------ ------
Total ......................... $81,748 $77,125 $86,684
======= ======= =======
B-17
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The provision for income taxes gives effect to permanent differences
between financial and taxable income. Accordingly, MBIA Corp.'s effective income
tax rate differs from the statutory rate on ordinary income. The reasons for
MBIA Corp.'s lower effective tax rates are as follows:
Years ended December 31
-----------------------
1995 1994 1993
---- ---- ----
Income taxes computed on pre-tax
financial income at statutory rates .......... 35.0% 35.0% 35.0%
Increase (reduction) in taxes resulting from:
Tax-exempt interest ........................ (12.5) (12.0) (10.6)
Amortization of goodwill ................... 0.5 0.5 0.5
Other ...................................... (1.1) (1.7) --
---- ---- ----
Provision for income taxes ......... 21.9% 21.8% 24.9%
==== ==== ====
8. DIVIDENDS AND CAPITAL REQUIREMENTS
Under New York state insurance law, MBIA Corp. may pay a dividend only from
earned surplus subject to the maintenance of a minimum capital requirement. The
dividends in any 12-month period may not exceed the lesser of 10% of its
policyholders' surplus as shown on its last filed statutory-basis financial
statements, or of adjusted net investment income, as defined, for such 12-month
period, without prior approval of the superintendent of the New York State
Insurance Department.
In accordance with such restrictions on the amount of dividends which
can be paid in any 12-month period, MBIA Corp. had approximately $44 million
available for the payment of dividends as of December 31, 1995. In 1995, 1994
and 1993, MBIA Corp. declared and paid dividends of $83 million, $38 million and
$50 million, respectively, to MBIA Inc.
Under Illinois Insurance Law, MBIA Illinois may pay a dividend from
unassigned surplus, and the dividends in any 12-month period may not exceed the
greater of 10% of policyholders' surplus (total capital and surplus) at the end
of the preceding calendar year, or the net income of the preceding calendar year
without prior approval of the Illinois State Insurance Department.
In accordance with such restrictions on the amount of dividends which
can be paid in any 12-month period, MBIA Illinois may pay a dividend only with
prior approval as of December 31, 1995.
B-18
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The insurance departments of New York state and certain other statutory
insurance regulatory authorities and the agencies which rate the bonds insured
by MBIA Corp. have various requirements relating to the maintenance of certain
minimum ratios of statutory capital and reserves to net insurance in force. MBIA
Corp. and MBIA Assurance were in compliance with these requirements as of
December 31, 1995.
9. LINES OF CREDIT
MBIA Corp. has a standby line of credit commitment in the amount of $650 million
with a group of major banks to provide loans to MBIA Corp. after it has incurred
cumulative losses (net of any recoveries) from September 30, 1995 in excess of
the greater of $500 million and 6.25% of average annual debt service. The
obligation to repay loans made under this agreement is a limited recourse
obligation payable solely from, and collateralized by, a pledge of recoveries
realized on defaulted insured obligations including certain installment premiums
and other collateral. This commitment has a seven-year term and expires on
September 30, 2002 and contains an annual renewal provision subject to the
approval by the bank group.
MBIA Corp. and MBIA Inc. maintain bank liquidity facilities aggregating
$275 million. At December 31, 1995, MBIA Inc. had $18 million outstanding under
these facilities.
10. NET INSURANCE IN FORCE
MBIA Corp. guarantees the timely payment of principal and interest on municipal,
asset-/mortgage-backed and other non-municipal securities. MBIA Corp.'s ultimate
exposure to credit loss in the event of nonperformance by the insured is
represented by the insurance in force as set forth below.
The insurance policies issued by MBIA Corp. are unconditional
commitments to guarantee timely payment on the bonds and notes to bondholders.
The creditworthiness of each insured issue is evaluated prior to the issuance of
insurance and each insured issue must comply with MBIA Corp.'s underwriting
guidelines. Further, the payments to be made by the issuer on the bonds or notes
may be backed by a pledge of revenues, reserve funds, letters of credit,
investment contracts or collateral in the form of mortgages or other assets. The
right to such money or collateral would typically become MBIA Corp.'s upon the
payment of a claim by MBIA Corp.
B-19
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31, 1995, insurance in force, net of cessions to reinsurers,
has a range of maturity of 1-43 years. The distribution of net insurance in
force by geographic location and type of bond, including $2.7 billion and $1.5
billion relating to IMC's municipal investment agreements guaranteed by MBIA
Corp. in 1995 and 1994, respectively, is set forth in the following tables:
<TABLE>
<CAPTION>
As of December 31
-----------------
($ in billions) 1995 1994
- - - --------------- ---- ----
Net Number % of Net Net Number % of Net
Geographic Insurance of Issues Insurance Insurance of Issues Insurance
Location In Force Outstanding In Force In Force Outstanding In Force
- - - -------- -------- ----------- -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
California .. $ 51.2 3,122 14.8 $ 43.9 2,832 14.3%
New York .... 30.1 4,846 8.7 25.0 4,447 8.2
Florida ..... 26.9 1,684 7.7 25.4 1,805 8.3
Texas ....... 20.4 2,031 5.9 18.6 2,102 6.1
Pennsylvania 19.7 2,143 5.7 19.5 2,108 6.4
New Jersey .. 16.4 1,730 4.7 15.0 1,590 4.9
Illinois .... 15.0 1,090 4.3 14.7 1,139 4.8
Massachusetts 9.3 1,070 2.7 8.6 1,064 2.8
Ohio ........ 9.1 1,017 2.6 8.3 996 2.7
Michigan .... 7.9 1,012 2.3 5.7 972 1.9
--- ----- --- --- --- ---
Subtotal .... 206.0 19,745 59.4 184.7 19,055 60.4
Other ....... 135.6 11,147 39.1 118.8 10,711 38.8
----- ------ ---- ----- ------ ----
Total U.S. 341.6 30,892 98.5 303.5 29,766 99.2
International 5.1 53 1.5 2.5 18 0.8
--- -- --- --- -- ---
$ 346.7 30,945 100.0% $ 306.0 29,784 100.0%
======== ====== ===== ======== ====== =====
</TABLE>
B-20
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
As of December 31
-----------------
1995 1994
---- ----
($ in billions) Net Number % of Net Net Number % of Net
Insurance of Issues Insurance Insurance of Issues Insurance
Type of Bond In Force Outstanding In Force In Force Outstanding In Force
- - - ------------ -------- ----------- -------- -------- ----------- --------
MUNICIPAL
<S> <C> <C> <C> <C> <C> <C>
General Obligation $ 91.6 11,445 26.4% $ 84.2 11,029 27.5%
Utilities ........ 60.3 4,931 17.4 56.0 5,087 18.3
Health Care ...... 51.9 2,458 15.0 50.6 2,670 16.5
Transportation ... 25.5 1,562 7.4 21.3 1,486 7.0
Special Revenue .. 24.4 1,445 7.0 22.7 1,291 7.4
Industrial
development and
pollution control
revenue 17.2 924 5.0 15.1 1,016 4.9
Housing .......... 15.8 2,671 4.5 13.6 2,663 4.5
Higher Education . 15.2 1,261 4.4 14.0 1,208 4.6
======= ======= ====== ======= ======= =====
Other ............ 7.3 134 2.1 3.8 124 1.2
309.2 26,831 89.2 281.3 26,574 91.9
======= ======= ======= ======= ======= =====
Non-municipal
Asset/mortgage-
backed 20.2 256 5.8 12.8 151 4.2
Investor-owned
utilities 6.4 3,559 1.8 5.7 2,918 1.9
International .... 5.1 53 1.5 2.5 18 0.8
Other ............ 5.8 246 1.7 3.7 123 1.2
--- --- --- --- --- ---
37.5 4,114 10.8 24.7 3,210 8.1
---- ----- ---- ---- ----- ---
$346.7 30,945 100.0% $306.0 29,784 100.0%
======= ======= ======= ====== ======= =====
</TABLE>
11. REINSURANCE
MBIA Corp. reinsures portions of its risks with other insurance companies
through various quota and surplus share reinsurance treaties and facultative
agreements. In the event that any or all of the reinsurers were unable to meet
their obligations, MBIA Corp. would be liable for such defaulted amounts.
Amounts deducted from gross insurance in force for reinsurance ceded by
MBIA Corp., MBIA Assurance and MBIA Illinois were $50.1 billion and $42.6
B-21
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
billion, at December 31, 1995 and 1994, respectively. The distribution of ceded
insurance in force by geographic location and type of bond is set forth in the
tables below:
As of December 31
-----------------
(In billions) 1995 1994
- - - ------------- ---- ----
% of % of
Ceded Ceded Ceded Ceded
Insurance Insurance Insurance Insurance
Geographic Location In Force In Force In Force In Force
- - - ------------------- -------- -------- -------- --------
California ......... $ 8.8 17.5% $ 7.5 17.6%
New York ........... 5.7 11.4 4.9 11.5
New Jersey ......... 3.1 6.1 2.0 4.7
Texas .............. 2.8 5.6 2.5 5.9
Pennsylvania ....... 2.7 5.4 2.6 6.1
Florida ............ 2.3 4.6 2.1 4.9
Illinois ........... 2.2 4.5 2.3 5.4
District of Columbia 1.5 3.0 1.6 3.8
Washington ......... 1.4 2.7 1.2 2.8
Puerto Rico ........ 1.3 2.6 1.1 2.6
Massachusetts ...... 1.1 2.1 0.9 2.1
Ohio ............... 1.0 2.1 0.9 2.1
--- --- --- ---
Subtotal ........... 33.9 67.6 29.6 69.5
Other .............. 14.4 28.8 12.3 28.9
---- ---- ---- ----
Total U. S ..... 48.3 96.4 41.9 98.4
International ...... 1.8 3.6 0.7 1.6
--- --- --- ---
$ 50.1 100.0% $42.6 100.0%
======= ===== ===== =====
B-22
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31
-----------------
(In billions) 1995 1994
- - - ------------- ---- ----
% of % of
Ceded Ceded Ceded Ceded
Insurance Insurance Insurance Insurance
Type of Bond In Force In Force In Force In Force
- - - ------------ -------- -------- -------- --------
Municipal
General obligation ... $ 11.7 23.3% $ 9.7 22.8%
Utilities ............ 9.0 18.0 8.5 20.0
Health care .......... 6.6 13.1 6.5 15.3
Transportation ....... 5.5 11.0 4.5 10.6
Special revenue ...... 3.2 6.4 2.7 6.3
Industrial development
and pollution
control revenue 3.0 6.0 2.9 6.8
Housing .............. 1.4 2.8 1.0 2.3
Higher Education ..... 1.2 2.4 1.2 2.8
Other ................ 2.4 4.8 1.5 3.5
--- --- --- ---
44.0 87.8 38.5 90.4
==== ==== ==== ====
Non-municipal
Asset-/mortgage-backed 3.6 7.2 2.7 6.3
International ........ 1.8 3.6 0.7 1.6
Other ................ 0.7 1.4 0.7 1.7
--- --- --- ---
6.1 12.2 4.1 9.6
--- ---- --- ---
$ 50.1 100.0% $ 42.6 100.0%
======== ===== ======== =====
Included in gross premiums written are assumed premiums from other
insurance companies of $11.7 million, $6.3 million and $20.4 million for the
years ended December 31, 1995, 1994 and 1993, respectively. The percentages of
the amounts assumed to net premiums written were 3.8%, 2.0% and 4.7% in 1995,
1994 and 1993, respectively.
Gross premiums written include $0.2 million in 1994 and $5.4 million in
1993 related to the reassumption by MBIA Corp. of reinsurance previously ceded
by the Association. Also included in gross premiums in 1993 is $10.8 million of
premiums assumed from a member of the Association. Ceded premiums written are
net of $0.2 million in 1995, $1.6 million in 1994 and $2.5 million in 1993
related to the reassumption of reinsurance previously ceded by MBIA Corp. or
MBIA Illinois.
B-23
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. EMPLOYEE BENEFITS
MBIA Corp. participates in MBIA Inc.'s pension plan covering all eligible
employees. The pension plan is a defined contribution plan and MBIA Corp.
contributes 10% of each eligible employee's annual total compensation. Pension
expense for the years ended December 31, 1995, 1994 and 1993 was $3.2 million,
$3.0 million and $3.1 million, respectively. MBIA Corp. also has a profit
sharing/401(k) plan which allows eligible employees to contribute up to 10% of
eligible compensation. MBIA Corp. matches employee contributions up to the first
5% of total compensation. MBIA Corp. contributions to the profit sharing plan
aggregated $1.4 million, $1.4 million and $1.3 million for the years ended
December 31, 1995, 1994 and 1993, respectively. The 401(k) plan amounts are
invested in common stock of MBIA Inc. Amounts relating to the above plans that
exceed limitations established by Federal regulations are contributed to a
non-qualified deferred compensation plan. Of the above amounts for the pension
and profit sharing plans, $2.7 million, $2.6 million and $2.6 million for the
years ended December 31, 1995, 1994 and 1993, respectively, are included in
policy acquisition costs.
MBIA Corp. also participates in MBIA Inc.'s common stock incentive plan
which enables employees of MBIA Corp. to acquire shares of MBIA Inc. or to
benefit from appreciation in the price of the common stock of MBIA Inc.
MBIA Corp. also participates in MBIA Inc.'s restricted stock program,
adopted in December 1995, whereby key executive officers of MBIA Corp. are
granted restricted shares of MBIA Inc. common stock.
Effective January 1, 1993, MBIA Corp. adopted SFAS 106 "Employers'
Accounting for Postretirement Benefits Other than Pensions." Under SFAS 106,
companies are required to accrue the cost of employee post-retirement benefits
other than pensions during the years that employees render service. Prior to
January 1, 1993, MBIA Corp. had accounted for these post-retirement benefits on
a cash basis. In 1993, MBIA Corp. adopted the new pronouncement on the
cumulative catch-up basis and recorded a cumulative effect adjustment which
decreased net income and increased other liabilities by $0.1 million. As of
January 1, 1994, MBIA Corp. eliminated these post-retirement benefits.
B-24
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. RELATED PARTY TRANSACTIONS
The business assumed from the Association, relating to insurance on unit
investment trusts sponsored by two members of the Association, includes deferred
premium revenue of $1.6 million and $1.9 million at December 31, 1995 and 1994,
respectively.
In 1993, MBIA Corp. assumed the balance of $10.8 million of deferred
premium revenue from a member of the Association which had not previously ceded
its insurance portfolio to MBIA Corp. Also in 1993, MBIA Corp. assumed $0.4
million of deferred premium revenue relating to one of the trusts which was
previously ceded to an affiliate of an Association member.
Since 1989, MBIA Corp. has executed five surety bonds to guarantee the
payment obligations of the members of the Association, one of which is a
principal shareholder of MBIA Inc., which had their Standard & Poor's
claims-paying rating downgraded from Triple-A on their previously issued
Association policies. In the event that they do not meet their Association
policy payment obligations, MBIA Corp. will pay the required amounts directly to
the paying agent instead of to the former Association member as was previously
required. The aggregate amount payable by MBIA Corp. on these surety bonds is
limited to $340 million. These surety bonds remain outstanding as of December
31, 1995.
MBIA Corp. has investment management and advisory agreements with an
affiliate of a principal shareholder of MBIA Inc., which provides for payment of
fees on assets under management. Total related expenses for the years ended
December 31, 1995, 1994 and 1993 amounted to $2.5 million, $2.6 million and $2.4
million, respectively. These agreements were terminated on January 1, 1996 at
which time SECO commenced management of MBIA Corp.'s consolidated investment
portfolios. In addition, investment management expenses of $0.1 million were
paid to SECO for the portion of the investment portfolio transferred in 1995.
MBIA Corp. has various insurance coverages provided by a principal
shareholder of MBIA Inc., the cost of which was $1.9 million, $1.9 million and
$2.0 million for the years ended December 31, 1995, 1994 and 1993, respectively.
B-25
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Included in other assets at December 31, 1995 and 1994 is $1.1 million
and $14.5 million of net receivables from MBIA Inc. and other subsidiaries.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value amounts of financial instruments shown in the following
table have been determined by MBIA Corp. using available market information and
appropriate valuation methodologies. However, in certain cases considerable
judgment is necessarily required to interpret market data to develop estimates
of fair value. Accordingly, the estimates presented herein are not necessarily
indicative of the amount MBIA Corp. could realize in a current market exchange.
The use of different market assumptions and/or estimation methodologies may have
a material effect on the estimated fair value amounts.
FIXED-MATURITY SECURITIES - The fair value of fixed-maturity securities equals
quoted market price, if available. If a quoted market price is not available,
fair value is estimated using quoted market prices for similar securities.
SHORT-TERM INVESTMENTS - Short-term investments are carried at amortized cost
which, because of their short duration, is a reasonable estimate of fair value.
OTHER INVESTMENTS - Other investments consist of MBIA Corp.'s interest in
limited partnerships and a mutual fund which invests principally in marketable
equity securities. The fair value of other investments is based on quoted market
prices.
CASH AND CASH EQUIVALENTS, RECEIVABLE FOR INVESTMENTS SOLD AND PAYABLE FOR
INVESTMENTS PURCHASED - The carrying amounts of these items are a reasonable
estimate of their fair value.
PREPAID REINSURANCE PREMIUMS - The fair value of MBIA Corp.'s prepaid
reinsurance premiums is based on the estimated cost of entering into an
assumption of the entire portfolio with third party reinsurers under current
market conditions.
B-26
<PAGE>
DEFERRED PREMIUM REVENUE - The fair value of MBIA Corp.'s deferred premium
revenue is based on the estimated cost of entering into a cession of the entire
portfolio with third party reinsurers under current market conditions.
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES - The carrying amount is composed of
the present value of the expected cash flows for specifically identified claims
combined with an estimate for unidentified claims. Therefore, the carrying
amount is a reasonable estimate of the fair value of the reserve.
INSTALLMENT PREMIUMS - The fair value is derived by calculating the present
value of the estimated future cash flow stream at 9% and 13.25% at December 31,
1995 and December 31, 1994, respectively.
As of December 31,
------------------
1995 1994
---- ----
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
ASSETS:
Fixed-maturity securuities $3,652,621 $3,652,621 $3,051,906 $3,051,906
Short-term investments.. 198,035 198,035 121,384 121,384
Other investments ...... 14,064 14,064 11,970 11,970
Cash and cash equivalents 23,258 23,258 1,332 1,332
Prepaid reinsurance
premiums .............. 200,887 174,444 186,492 159,736
Receivable for
investments sold ...... 5,729 5,729 945 945
LIABILITIES:
Deferred premium
revenue ............. 1,616,315 1,395,159 1,512,211 1,295,305
Loss and loss adjustment
expense reserves ..... 42,505 42,505 40,148 40,148
Payable for investments
purchased ........... 10,695 10,695 6,552 6,552
OFF-BALANCE-SHEET
INSTRUMENTS:
Installment premiums ---- 235,371 --- 176,944
B-27
<PAGE>
APPENDIX C
UNAUDITED FINANCIAL STATEMENTS FOR THE CERTIFICATE INSURER
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1996 AND DECEMBER 31, 1995
AND FOR THE PERIODS ENDED MARCH 31, 1996 AND 1995
C-1
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
I N D E X
PAGE
Consolidated Balance Sheets -
March 31, 1996 (Unaudited) and December 31, 1995 (Audited) ............. 3
Consolidated Statements of Income -
Three months ended March 31, 1996 and 1995 (Unaudited) ................. 4
Consolidated Statement of Changes in Shareholder's Equity -
Three months ended March 31, 1996 (Unaudited) .......................... 5
Consolidated Statements of Cash Flows -
Three months ended March 31, 1996 and 1995 (Unaudited) ................. 6
Notes to Consolidated Financial Statements (Unaudited) ..................... 7
C-2
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share amounts)
March 31, 1996 December 31, 1995
--------------- ------------------
(Unaudited) (Audited)
ASSETS
Investments:
Fixed-maturity securities
held as available-for-sale
at fair value
(amortized cost $3,664,571
and $3,428,986) .................. $3,784,836 $3,652,621
Short-term investments, at
amortized cost
(which approximates fair value) .. 135,428 198,035
Other investments .................. 13,374 14,064
---------- ----------
TOTAL INVESTMENTS .............. 3,933,638 3,864,720
Cash and cash equivalents .............. 2,499 2,135
Accrued investment income .............. 60,462 60,247
Deferred acquisition costs ............. 140,919 140,348
Prepaid reinsurance premiums ........... 206,383 200,887
Goodwill (less accumulated amortization
of $38,590 and $37,366) ............ 104,390 105,614
Property and equipment, at cost
(less accumulated
depreciation of $12,822 and $12,137) 41,771 41,169
Receivable for investments sold ........ 6,501 5,729
Other assets ........................... 51,534 42,145
---------- ----------
TOTAL ASSETS ................... $4,548,097 $4,462,994
========== ==========
Liabilities and Shareholder's Equity
Liabilities:
Deferred premium revenue ........... $1,666,945 $1,616,315
Loss and loss adjustment
expense reserves .................. 46,376 42,505
Deferred income taxes .............. 180,843 212,925
Payable for investments purchased .. 15,715 10,695
Other liabilities .................. 96,600 54,682
---------- ----------
TOTAL LIABILITIES .............. 2,006,479 1,937,122
---------- ----------
Shareholder's Equity:
Common stock, par value $150
per share; authorized,
issued and outstanding -
100,000 shares .................... 15,000 15,000
Additional paid-in capital ......... 1,025,591 1,021,584
Retained earnings .................. 1,423,157 1,341,855
Cumulative translation
adjustment ........................ 330 2,704
Unrealized appreciation
of investments,
net of deferred income tax
provision of $42,114 and $78,372 .. 77,540 144,729
---------- ----------
TOTAL SHAREHOLDER'S EQUITY ..... 2,541,618 2,525,872
---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDER'S EQUITY ......... $4,548,097 $4,462,994
========== ==========
The accompanying notes are an integral part of the
consolidated financial statements.
C-3
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in thousands)
Three Months Ended
March 31
------------------------
1996 1995
--------- ---------
Revenues:
Gross premiums written ...................... $ 121,011 $ 71,112
Ceded premiums .............................. (14,715) (7,080)
--------- ---------
Net premiums written .................... 106,296 64,032
Increase in deferred premium revenue ........ (45,532) (12,680)
--------- ---------
Premiums earned (net of ceded
premiums of $9,220 and $7,839) ...... 60,764 51,352
Net investment income ....................... 59,003 53,065
Net realized gains .......................... 2,692 1,724
Other income ................................ 969 908
--------- ---------
Total revenues .......................... 123,428 107,049
--------- ---------
Expenses:
Losses and loss adjustment expenses ......... 3,178 2,033
Policy acquisition costs, net ............... 5,900 5,140
Underwriting and operating expenses ......... 10,549 9,752
--------- ---------
Total expenses .......................... 19,627 16,925
--------- ---------
Income before income taxes ....................... 103,801 90,124
Provision for income taxes ....................... 22,499 19,476
--------- ---------
Net income ....................................... $ 81,302 $ 70,648
========= =========
The accompanying notes are an integral part of the consolidated
financial statements.
C-4
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY (Unaudited)
For the three months ended March 31, 1996
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Common Stock Additional Cumulative Unrealized
------------------------- Paid-In Retained Translation Appreciation
Shares Amount Capital Earnings Adjustment of Investments
---------- ---------- ---------- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 ............... 100,000 $ 15,000 $1,021,584 $1,341,855 $ 2,704 $ 144,729
Exercise of stock options .............. -- -- 1,179 -- -- --
Net income ............................. -- -- -- 81,302 -- --
Change in foreign
currency transactions ................ -- -- -- -- (2,374) --
Change in unrealized
appreciation of
investment net of change
in deferred income taxes
of $36,258 ........................... -- -- -- -- -- (67,189)
Tax reduction related to
tax sharing agreement
with MBIA Inc. ....................... -- -- 2,828 -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balance, March 31, 1996 ................ 100,000 $ 15,000 $1,025,591 $1,423,157 $ 330 $ 77,540
========== ========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
C-5
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
Three Months Ended
March 31
-----------------------
1996 1995
--------- ---------
Cash flows from operating activities:
Net income ....................................... $ 81,302 $ 70,648
Adjustments to reconcile net
income to net cash provided
by operating activities:
(Increase) decrease in accrued
investment income ............................ (215) 960
Increase in deferred acquisition costs ......... (571) (1,634)
(Increase) decrease in prepaid
reinsurance premiums .......................... (5,496) 758
Increase in deferred premium revenue ........... 51,028 11,922
Increase in loss and loss adjustment
expense reserves .............................. 3,871 1,885
Depreciation ................................... 719 630
Amortization of goodwill ....................... 1,224 1,232
Amortization of bond discount, net ............. (1,014) (358)
Net realized gains on sale of investments ...... (2,692) (1,724)
Deferred income taxes .......................... 4,176 3,782
Other, net ..................................... 34,288 19,601
--------- ---------
Total adjustments to net income ................ 85,318 37,054
--------- ---------
Net cash provided by operating activities ...... 166,620 107,702
--------- ---------
Cash flows from investing activities:
Purchase of fixed-maturity securities, net
of payable for investments purchased ........... (329,252) (182,603)
Sale of fixed-maturity securities, net of
receivable for investments sold ................ 146,729 92,890
Redemption of fixed-maturity securities,
net of receivable for investments redeemed ..... 32,644 16,717
Purchase of short-term investments, net .......... (15,259) (9,908)
Sale (purchase) of other investments, net ........ 215 (863)
Capital expenditures, net of disposals ........... (1,333) (817)
--------- ---------
Net cash used in investing activities .......... (166,256) (84,584)
--------- ---------
Cash flows from financing activities:
Dividends paid ................................... -- (22,500)
--------- ---------
Net cash used by financing activities .......... -- (22,500)
--------- ---------
Net increase in cash and cash equivalents .......... 364 618
Cash and cash equivalents - beginning of period .... 2,135 1,332
--------- ---------
Cash and cash equivalents - end of period .......... $ 2,499 $ 1,950
========= =========
Supplemental cash flow disclosures:
Income taxes paid ................................ $ 1,161 $ 1
The accompanying notes are an integral part of the consolidated
financial statements.
C-6
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
- - - ------------------------
The accompanying consolidated financial statements are unaudited and
include the accounts of MBIA Insurance Corporation and its Subsidiaries (the
"Company"). The statements do not include all of the information and disclosures
required by generally accepted accounting principles. These statements should be
read in conjunction with the Company's consolidated financial statements and
notes thereto for the year ended December 31, 1995. The accompanying
consolidated financial statements have not been audited by independent
accountants in accordance with generally accepted auditing standards but in the
opinion of management such financial statements include all adjustments,
consisting only of normal recurring adjustments, necessary to summarize fairly
the Company's financial position and results of operations. The results of
operations for the three months ended March 31, 1996 may not be indicative of
the results that may be expected for the year ending December 31, 1996. The
December 31, 1995 condensed balance sheet data was derived from audited
financial statements, but does not include all disclosures required by generally
accepted accounting principles.
2. Dividends Declared
- - - ---------------------
No dividends were declared by the Company during the three months ended
March 31, 1996.
C-7
<PAGE>
PROSPECTUS
- - - -------------------------------------------------------------------------------
Mortgage Loan Asset Backed Securities, Issuable in Series
First Alliance Mortgage Company
Sponsor
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 or certificates of interest or participation therein
(the "Mortgage Loans"), to be acquired by such Trust from First Alliance
Mortgage Company (the "Sponsor" or "Company"). The Company will originate and/or
acquire the Mortgage Loans from one or more affiliated or unaffiliated
institutions (together with the Company, the "Originators"). 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") 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.
Each Mortgage Pool will consist of one or more of the various types of Mortgage
Loans described under "The Mortgage Pools."
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 Company'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 Company or by such Originators, except as described in the related
Prospectus Supplement. The Prospectus Supplement for each series of Securities
will name the Company as Servicer (the "Servicer") which will act, directly or
through one or more sub-servicers (the "Sub-Servicer(s)"). The principal
obligations of the Servicer will be pursuant to its contractual servicing
obligations (which include its 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."
See "Risk Factors" beginning on page 12 herein and in the related
Prospectus Supplement for a discussion of significant matters affecting
investments in the Securities.
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 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) projected prepayment and yields based upon
certain specified assumptions for a series of Securities and (iii) priority of
payment and maturity dates of the Securities. See "Yield Considerations." A
Trust may be subject to early termination under the circumstances described
herein and in the related Prospectus Supplement.
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.
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 COMPANY, THE SERVICER, ANY ORIGINATOR OR ANY OF THEIR AFFILIATES, EXCEPT
AS SET FORTH HEREIN AND IN THE RELATED PROSPECTUS SUPPLEMENT. NEITHER THE
SECURITIES NOR THE UNDERLYING MORTGAGE LOANS WILL BE GUARANTEED OR INSURED BY
ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY THE COMPANY, THE SERVICER, THE
MASTER SERVICER, ANY ORIGINATOR OR ANY OF THEIR AFFILIATES, EXCEPT AS SET FORTH
IN THE RELATED PROSPECTUS SUPPLEMENT. SEE ALSO "RISK FACTORS."
- - - --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- - - --------------------------------------------------------------------------------
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 June 10, 1996.
<PAGE>
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") 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 and which classes of Securities or other interests will be
designated as the residual interest in a REMIC. 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.
TABLE OF CONTENTS
Caption Page
Incorporation of Certain Documents by Reference............................... 2
Summary of Prospectus......................................................... 3
Risk Factors..................................................................12
The Trusts....................................................................17
The Mortgage Pools............................................................20
General.....................................................................20
The Mortgage Pools..........................................................21
Mortgage Loan Program.........................................................22
Underwriting Guidelines.....................................................23
Qualifications of Originators...............................................25
Sub-Servicers...............................................................27
Representations by Originators..............................................27
Sub-Servicing by Originators................................................29
Description of the Securities.................................................30
General.....................................................................30
General Payment Terms of Securities.........................................31
Form of Securities..........................................................32
Assignment of Mortgage Loans................................................33
Forward Commitments; Pre-Funding............................................34
Payments on Mortgage Loans; Deposits to
Distribution Account......................................................35
Withdrawals from the Principal and Interest Account.........................37
Distributions...............................................................38
Principal and Interest on the Securities....................................38
Advances....................................................................39
Reports to Securityholders..................................................40
Collection and Other Servicing Procedures...................................41
Realization upon Defaulted Mortgage Loans...................................42
Subordination.................................................................43
Description of Credit Enhancement.............................................44
Hazard Insurance; Claims Thereunder...........................................49
Hazard Insurance Policies...................................................49
The Company...................................................................49
The Servicer..................................................................50
The Master Servicer...........................................................50
The Pooling and Servicing Agreement...........................................50
Servicing and Other Compensation and Payment
of Expenses; Originator's Retained Yield...................................50
Evidence as to Compliance...................................................50
Removal and Resignation of the Servicer.....................................51
Resignation of the Master Servicer..........................................52
Rights Upon Event of Default................................................52
Caption Page
- - - -------- ----
Amendment...................................................................52
Termination; Retirement of Securities.......................................53
The Trustee.................................................................53
Yield Considerations..........................................................54
Maturity and Prepayment Considerations........................................56
Certain Legal Aspects of Mortgage Loans and
Related Matters...............................................................57
General.....................................................................57
Foreclosure.................................................................58
Rights of Redemption........................................................58
Anti-Deficiency Legislation and Other Limitations
on Lenders.............................................................58
Environmental Legislation...................................................59
Enforceability of Certain Provisions........................................60
Certain Provisions of California Deeds of Trust.............................61
Applicability of Usury Laws.................................................61
Alternative Mortgage Instruments............................................61
Soldiers' and Sailors' Civil Relief Act of 1940.............................62
Certain Federal Income Tax Consequences.......................................62
General.....................................................................62
Grantor Trust Estates.......................................................62
REMICS......................................................................64
Sales of REMIC Securities...................................................67
Debt Securities.............................................................69
Discount and Premium........................................................70
Backup Withholding..........................................................73
Foreign Investors...........................................................73
ERISA Considerations..........................................................73
Plan Asset Regulations......................................................74
Prohibited Transaction Class Exemption......................................74
Tax Exempt Investors........................................................76
Consultation with Counsel...................................................76
Legal Investment Matters......................................................76
Use of Proceeds...............................................................77
Methods of Distribution.......................................................77
Legal Matters.................................................................78
Financial Information.........................................................78
Additional Information........................................................78
Index of Principal Definitions................................................79
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by each respective trust pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the termination of the offering of the securities of
such trust offered hereby shall be deemed to be incorporated by reference into
this Prospectus when delivered with respect to such trust.
Any statement contained in a document incorporated or deemed to be incorporated
by reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
Any person receiving a copy of this Prospectus may obtain, without
charge, upon written or oral request, a copy of any of the documents
incorporated by reference herein, except for the exhibits to such documents
(other than the documents expressly incorporated therein by reference). Requests
should be directed to First Alliance Mortgage Company, 17305 Von Karman, Irvine,
California 92714 (telephone number 714-224-8600).
2
<PAGE>
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.
Company..................... First Alliance Mortgage Company. See "The
Company."
Originators.................
The Company will originate and/or acquire the
Mortgage Loans from one or more institutions
affiliated with the Company ("Affiliated
Originators") or institutions unaffiliated with
the Company ("Unaffiliated Originators") (the
Affiliated Originators, the Unaffiliated
Originators and the Company are collectively
referred to as the "Originators"). Unaffiliated
Originators that enter into agreements to sell
Mortgage Loans to the Company and that meet
certain qualifications described herein are
referred to as "Participating Originators" or
"Designated Originators"; such designation is
dependent upon types of duties retained by an
Originator (i.e., sub-servicing) and
satisfaction of the Company's requirements for
such qualification.
Servicer.................... First Alliance Mortgage Company. See "The
Servicer" and "The Pooling and Servicing
Agreement--Certain Matters Regarding the
Servicer and the Company."
MasterServicer.............. A Master Servicer may be specified in the
related Prospectus Supplement for the related
series of Securities. See "Mortgage Loan
Program--Master Servicer" and "The Pooling and
Servicing Agreement--Certain Matters Regarding
the Servicer and the Company."
Sub-Servicers............... Affiliated Originators may act as Sub-Servicers
for Mortgage Loans acquired by the Company from
such Affiliated Originators unless servicing is
released to the Servicer or has been
transferred to a servicer approved by the
Servicer. Unaffiliated Originators (including
Designated Originators, Participating
Originators or Originators of Bulk
Acquisitions) may or may not act as
Sub-Servicers for Mortgage Loans acquired by
the Company from such Unaffiliated Originators.
In addition, third-party unaffiliated contract
servicers may act as Sub-Servicers. 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 Company 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 (the "Mortgage
Loans") or certificates of interest or
participation therein, acquired by such Trust
from the Company. The Company will originate
and/or acquire the Mortgage Loans from one
3
<PAGE>
or more of the Originators. The Securities
issued by any Trust may represent beneficial
ownership interests in the related Mortgage
Loans held by the related Trust, or may
represent debt secured by such Mortgage Loans,
as described herein and in the related
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 Company 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
serviced by the Servicer pursuant to a
servicing agreement (each, a "Servicing
Agreement") by and between the 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 Company, the Master
Servicer, the Servicer, any Originator or any
Person other than the related Trust. In the
case of Securities that represent beneficial
ownership interest in the related Trust Estate,
such Securities will represent the ownership of
such Trust Estate; with respect to Securities
that represent debt issued by the related
Trust, such
4
<PAGE>
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.
Aseries may include one or more classes of
Fixed-Income Securities ("Strip Securities")
entitled (i) to principal distributions, with
disproportionate, nominal or no interest
distributions, or (ii) to interest
distributions, with disproportionate, nominal
or no principal distributions. In addition, a
series may include two or more classes of
Fixed-Income Securities that differ as to
timing, sequential order, priority of payment,
Interest Rate or amount of distributions of
principal or interest or both, or as to which
distributions of principal or interest or both
on any class may be made upon the occurrence of
specified events, in accordance with a schedule
or formula, or on the basis of collections from
designated portions of the related Mortgage
Pool, which series may include one or more
classes of Fixed-Income Securities ("Accrual
Securities"), as to which certain accrued
interest will not be distributed but rather
will be added to the principal balance (or
nominal principal balance, in the case of
Accrual Securities which are also strip
Securities) thereof on each Payment Date, as
hereinafter defined and in the manner described
in the related Prospectus Supplement.
If so provided in the related Prospectus
Supplement, a series of Securities may include
one or more other classes of Fixed-Income
Securities (collectively, the "Senior
Securities") that are senior to one or more
other classes of Fixed-Income Securities
(collectively, the "Subordinate Securities") in
respect of certain distributions of principal
and interest and allocations of losses on
Mortgage Loans. In addition, certain classes of
Senior (or Subordinate) Securities may be
senior to other classes of Senior (or
Subordinate) Securities in respect of such
distributions or losses.
Equity Securities will represent the right to
receive the proceeds of the related Trust
Estate after all required payments have been
made to the Securityholders of the related
Fixed-Income Securities (both Senior Securities
and Subordinate Securities), and following any
required
5
<PAGE>
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 Company. In addition, the
Company 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 semiannually,
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 each
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 that
precedes the calendar month in which such
Payment Date occurs.
Each Pooling and Servicing Agreement will
describe different periods (a "Remittance
Period" or "Due 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 Servicer to the related Trustee
prior to the related Payment Date, and will be
used to fund payments to Securityholders on
such Payment Date. As may be described in the
related Prospectus Supplement, the related
Pooling and Servicing Agreement may provide
that all or a portion of the principal
collected on or with respect to the related
Mortgage Loans may be applied by 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
6
<PAGE>
commonly referred to as a revolving period,
which will be followed by an amortization
period. Any such interest-only or revolving
period may, upon the occurrence of certain
events to be described in the related
Prospectus Supplement, terminate prior to the
end of the specified period and result in the
earlier than expected amortization of the
related Securities.
In addition, and as may be described in the
related Prospectus Supplement, the related
Pooling and Servicing Agreement may provide
that all or a portion of such collected
principal may be retained by the Trustee (and
held in certain temporary investments,
including Mortgage Loans) for a specified
period prior to being used to fund payments of
principal to Securityholders.
The result of such retention and temporary
investment by the Trustee of such principal
would be to slow the amortization rate of the
related Securities relative to the amortization
rate of the related Mortgage Loans, or to
attempt to match the amortization rate of the
related Securities to an amortization schedule
established at the time such Securities are
issued. Any such feature applicable to any
Securities may terminate upon the occurrence of
events to be described in the related
Prospectus Supplement, resulting in the current
distribution of principal payments to the
specified Securityholders and an acceleration
of the amortization of such Securities.
Neither the Securities nor the underlying
Mortgage Loans will be guaranteed or insured by
any governmental agency or instrumentality or
the Company, the Servicer, the Master Servicer,
any Sub-Servicer, any Originator or any of
their affiliates; however, certain
distributions to the Securityholders may be
insured by a Financial Guaranty Insurer
pursuant to a Financial Guaranty Insurance
Policy.
No Investment
Companies................. Neither the Company 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 moneys 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, no collections on any Mortgage Loans
held by any Trust may be applied to the payment
of Securities issued by any other Trust (except
to the limited extent that certain collections
in excess of amounts needed to pay the related
Securities may be deposited in a common, master
reserve account that provides credit
enhancement for more than one series of
Securities).
The Mortgage Pools........... Each Trust Estate will consist primarily of
Mortgage Loans secured by liens on one- to
four-family residential properties
("Mortgages"), located in any one of the fifty
states, the District of Columbia, Puerto Rico
or any other Territories of the United States
(the "Mortgaged Properties"). All Mortgage
Loans will have been acquired by the
7
<PAGE>
related Trust from the Company. All Mortgage
Loans will have been originated either by (i)
the Company; (ii) one or more Affiliated
Originators generally pursuant to standard
underwriting guidelines described herein, as
modified from time to time ("Company's
Guidelines"); (iii) one or more Unaffiliated
Originators, generally pursuant to the
Company's Guidelines; (iv) certain Unaffiliated
Originators, including Participating
Originators or Designated Originators,
generally pursuant to such Unaffiliated
Originators' underwriting guidelines approved
by the Company ("Approved Guidelines"); and (v)
the Originators of a portfolio of Mortgage
Loans, subsequently purchased in whole or in
part by the Company as bulk acquisitions ("Bulk
Acquisitions"), generally pursuant to such
Originators' underwriting guidelines. See
"Mortgage Loan Program." For a description of
the types of Mortgage Loans that may be
included in the Mortgage Pools, see "The
Mortgage Pools--The Mortgage Loans."
If specified in the related Prospectus
Supplement, Mortgage Loans that are converted
from an adjustable rate to a fixed rate or
certain Mortgage Loans for which the Mortgage
Rate has been reset will be repurchased by the
Company or purchased by the applicable
Sub-Servicer, Servicer or another party, or a
designated remarketing agent will use its best
efforts to arrange the sale thereof as further
described herein.
A Current Repor 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 Company
whereby the Company will agree to transfer
Subsequent Mortgage Loans (each, a "Subsequent
Mortgage Loan") to such Trust following the
date on which such Trust is established and the
related Securities are issued. All Subsequent
Mortgage Loans transferred to the Trust
pursuant to a Forward Purchase Agreement will
be originated by the Company or an Originator.
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. If a Forward
Purchase Agreement is to be utilized the
related Trustee will be required to deposit in
a segregated account (each, a "Pre-Funding
Account") all or a portion of the proceeds
received by the Trustee in connection with the
sale of one or more classes of Securities of
the related series; subsequently, the
Subsequent Mortgage Loans will be transferred
to the related Trust in exchange for money
released to the Company from the related
Pre-Funding Account in one or more transfers.
The maximum amount of money deposited in the
Pre- Funding Account to acquire Subsequent
Mortgage Loans for transfer to the Trust will
not exceed 35% of the aggregate principal
amount of the Securities offered pursuant to
the related Prospectus Supplement. Each Forward
Purchase Agreement will set a specified period
(the "Funding Period") during which any such
transfers must occur, which such period shall
not exceed 90 days from the date such Trust is
established. The Forward Purchase Agreement or
the related
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Pooling and Servicing Agreement will require
that, if all moneys originally deposited to
such Pre-Funding Account are not so used by the
end of such specified period, then any
remaining moneys will be applied as a mandatory
prepayment of the related class or classes of
Securities as specified in the related
Prospectus Supplement. See "Risk Factors"
herein and in the related Prospectus
Supplement. All moneys on deposit in the
Pre-Funding Account will be invested in
Permitted Investments with all earnings thereon
available to make interest payments on the
Securities.
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. A
mortgage pool insurance policy may 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.................... The Servicer, directly or through Sub-Servicers,
may be obligated to make certain cash advances
with respect to delinquent scheduled payments
on the Mortgage Loans, but only to the extent
that the Servicer believes that such amounts
will be recoverable by it. Any such advance
made by the 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 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.
The Servicer may be required to advance
Compensating Interest as defined hereafter
under "Description of the
Securities--Advances."
In addition, the 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
Servicer reasonably believes that such amounts
will increase Net Liquidation Proceeds on the
related Mortgage Loan. See "Description of the
Securities--Advances."
Optional Termination........ The Servicer, the Company, or, if specified in
the related Prospectus Supplement, the holders
of the related class of Equity Securities or
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the redit 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 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........ Afiduciary of an employee benefit plan and
certain other retirement plans and
arrangements, including individual retirement
accounts and annuities, Keogh plans, and
collective investment funds and separate
accounts in which such plans, accounts,
annuities or arrangements are invested, that is
subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), or
Section 4975 of the Code (each such entity, a
"Plan") should carefully review with its legal
advisors whether the purchase or holding of
Securities could give rise to a transaction
that is prohibited or is not otherwise
permissible either under ERISA or Section 4975
of the Code. Investors are advised to consult
their counsel and to review "ERISA
Considerations" herein.
Certain Federal Income Tax
Consequences.............. Securities of each series offered hereby will,
for federal income tax purposes, constitute
either (i) interests ("Grantor Trust
Securities") in a Trust treated as a grantor
trust under applicable provisions of the Code,
(ii) "regular interests" ("REMIC Regular
Securities") or "residual interests" ("REMIC
Residual Securities") in a Trust treated as a
REMIC (or, in certain instances, containing one
or more REMIC's) under Sections 860A through
860G of the Code, (iii) debt issued by a Trust
("Debt Securities") or (iv) interests in a
Trust which is treated as a partnership
("Partnership Interests").
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Investors are advised to consult their tax
advisors and to review "Certain Federal Income
Tax Consequences" herein and in the related
Prospectus Supplement.
Registration of Securities.. Securities may be represented by global
securities registered in the name of Cede & Co.
("Cede"), as nominee of The Depository Trust
Company ("DTC"), or another nominee. In such
case, Securityholders will not be entitled to
receive definitive securities representing such
holders' interests, except in certain
circumstances described in the related
Prospectus Supplement. See "Description of the
Securities--Form of Securities" herein.
Ratings..................... Each class of Fixed-Income Securities offered
pursuant to the related Prospectus Supplement
will be rated in one of the four highest rating
categories by one or more "national statistical
rating organizations," as defined in the
Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and commonly referred to
as "Rating Agencies." Such ratings will
address, in the opinion of such Rating
Agencies, the likelihood that the related Trust
will be able to make timely payment of all
amounts due on the related Fixed-Income
Securities in accordance with the terms
thereof. Such ratings will neither address any
prepayment or yield considerations applicable
to any Securities nor constitute a
recommendation to buy, sell or hold any
Securities.
Equity Securities will not be rated.
The ratings expected to be received with respect
to any Securities will be set forth in the
related Prospectus Supplement.
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RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Securities.
Limited Liquidity. There can be no assurance that a secondary market
for the Securities of any series or class will develop or, if it does develop,
that it will provide Securityholders with liquidity of investment or that it
will continue for the life of the Securities of any series. The Prospectus
Supplement for any series of Securities may indicate that an underwriter
specified therein intends to establish a secondary market in such Securities;
however, no underwriter will be obligated to do so. 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 Company,
the Master Servicer, the Servicer, any Originator (as defined herein) or any
person other than the related Trust. 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. The only obligations of the foregoing entities with respect to the
Securities or the Mortgage Loans will be the obligations (if any) of the
Company, the related Originators and the Servicer pursuant to certain limited
representations and warranties made with respect to the Mortgage Loans, the
Servicer's servicing obligations and the Master Servicer's secondary servicing
obligations under the related Pooling and Servicing Agreement (including their
respective limited obligation 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 Company, 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.
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 Company, the Master Servicer,
the Servicer, any Sub-Servicer or any of their affiliates. Proceeds of the
assets included in the related Trust Estate for each series of Securities
(including the Mortgage Loans and any form of credit enhancement) will be the
sole source of payments on the Securities, and there will be no recourse to the
Company or any other entity in the event that such proceeds are insufficient or
otherwise unavailable to make all payments provided for under the Securities.
Limitations, Reduction and Substitution of Credit Enhancement. With
respect to each series of Securities, credit enhancement will be provided in
limited amounts to cover certain types of losses on the underlying Mortgage
Loans. Credit enhancement will be provided in one or more of the forms referred
to herein, including, but not limited to: a letter of credit; a 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 Servicer will
generally be permitted to reduce, terminate or substitute all or a portion of
the credit enhancement for any series of Securities, if the applicable Rating
Agency indicates that the then-current rating thereof will not be adversely
affected. To the extent not set forth herein, the amount and types of coverage,
the identification of any entity providing the coverage, the terms of any
subordination and related information will be set forth in the Prospectus
Supplement relating to a series of Securities. See "Description of Credit
Enhancement" and "Subordination."
Risks of the Mortgage Loans
Risk of the Losses Associated with Junior Liens. Certain of the
Mortgage Loans will be secured by junior liens subordinate to the rights of the
mortgagee or beneficiary under each related senior mortgage or deed of trust. As
a result, the proceeds from any liquidation, insurance or condemnation
proceedings will be available to satisfy
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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 been the practice of the
Servicer to satisfy each such senior mortgage at or prior to the foreclosure
sale only to the extent that it determines any amounts so paid will be
recoverable from future payments and collections on such junior lien loans or
otherwise. The Trusts will not have any source of funds to satisfy any such
senior mortgage or make payments due to any senior mortgagee. See "Certain Legal
Aspects of Mortgage Loans and Related Matters--Foreclosure."
Risk of Losses Associated with Declining Real Estate Values. An
investment in securities such as the Securities that generally represent
beneficial ownership interests in the Mortgage Loans or debt secured by such
Mortgage Loans may be affected by, among other things, a decline in real estate
values and changes in the borrowers' financial condition. No assurance can be
given that values of the Mortgaged Properties have remained or will remain at
their levels on the dates of origination of the related Mortgage Loans. If the
residential real estate market should experience an overall decline in property
values such that the outstanding balances of any senior liens, the Mortgage
Loans and any secondary financing on the Mortgaged Properties in a particular
Mortgage Pool become equal to or greater than the value of the Mortgaged
Properties, the actual rates of delinquencies, foreclosures and losses could be
higher than those now generally experienced in the nonconforming credit mortgage
lending industry. Such a decline could extinguish the interest of the related
Trust in the Mortgaged Properties before having any effect on the interest of
the related senior mortgagee. In addition, in the case of Mortgage Loans that
are subject to negative amortization, due to the addition to principal balance
of deferred interest ("Deferred Interest"), the principal balances of such
Mortgage Loans could be increased to an amount equal to or in excess of the
value of the underlying Mortgaged Properties, thereby increasing the likelihood
of default. To the extent that such losses are not covered by the applicable
credit enhancement, holders of Securities of the series evidencing interests in
the related Mortgage Pool will bear all risk of loss resulting from default by
Mortgagors and will have to look primarily to the value of the Mortgaged
Properties for recovery of the outstanding principal and unpaid interest on the
defaulted Mortgage Loans.
Risk of Losses Associated with Certain Non-Conforming and
Non-Traditional Loans. The Company'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
Company's Mortgage Loan program generally provides for the origination of
Mortgage Loans relating to non-conforming credits. 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. For a more detailed discussion, see "Mortgage Loan Program."
Risk of Losses Associated with Balloon Loans. Certain of the Mortgage
Loans may constitute "Balloon Loans." Balloon Loans are originated with a stated
maturity of less than the period of time of the corresponding amortization
schedule. Consequently, upon the maturity of a Balloon Loan, the Mortgagor will
be required to make a "balloon" payment that will be significantly larger than
such Mortgagor's previous monthly payments. The ability of such a Mortgagor to
repay a Balloon Loan at maturity frequently will depend on such borrower's
ability to refinance the Mortgage Loan. The ability of a Mortgagor to refinance
such a Mortgage Loan will be affected by a number of factors, including the
level of available mortgage rates at the time, the value of the related
Mortgaged Property, the Mortgagor's equity in the related Mortgaged Property,
the financial condition of the Mortgagor, the tax laws and general economic
conditions at the time.
Although a low interest rate environment may facilitate the refinancing
of a balloon payment, the receipt and reinvestment by Securityholders of the
proceeds in such an environment may produce a lower return than that previously
received in respect of the related Mortgage Loan. Conversely, a high interest
rate environment may make it more difficult for the Mortgagor to accomplish a
refinancing and may result in delinquencies or defaults. None of the Company,
the Originators, the Master Servicer, the Servicer, any Sub-Servicer or the
Trustee will be obligated to provide funds to refinance any Mortgage Loan,
including Balloon Loans.
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Risk of Losses Associated with Bankruptcy of Mortgagors. General
economic conditions have an impact on the ability of borrowers to repay Mortgage
Loans. Loss of earnings, illness and other similar factors also may lead to an
increase in delinquencies and bankruptcy filings by borrowers. In the event of
personal bankruptcy of a Mortgagor, it is possible that a Trust could experience
a loss with respect to such Mortgagor's Mortgage Loan. In conjunction with a
Mortgagor's bankruptcy, a bankruptcy court may suspend or reduce the payments of
principal and interest to be paid with respect to such Mortgage Loan or
permanently reduce the principal balance of such Mortgage Loan thereby either
delaying or permanently limiting the amount received by the Trust with respect
to such Mortgage Loan. Moreover, in the event a bankruptcy court prevents the
transfer of the related Mortgaged Property to a Trust, any remaining balance on
such Mortgage Loan may not be recoverable.
Risk of Losses Associated with Foreclosure of Mortgaged Properties.
Even assuming that the Mortgaged Properties provide adequate security for the
Mortgage Loans, substantial delays could be encountered in connection with the
liquidation of defaulted Mortgage Loans and corresponding delays in the receipt
of related proceeds by the Securityholders could occur. An action to foreclose
on a Mortgaged Property securing a Mortgage Loan is regulated by state statutes,
rules and judicial decisions and is subject to many of the delays and expenses
of other lawsuits if defenses or counterclaims are interposed, sometimes
requiring several years to complete. Furthermore, in some states an action to
obtain a deficiency judgment is not permitted following a nonjudicial sale of a
Mortgaged Property. In the event of a default by a Mortgagor, these
restrictions, among other things, may impede the ability of the 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 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, 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 who takes a deed in lieu of foreclosure, or
acquires at a foreclosure sale a mortgaged property and who, 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
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 owner occupied. It is possible that the rate of delinquencies, foreclosures
and losses on Mortgage Loans secured by non-owner occupied properties could be
higher than for loans secured by the primary residence of the borrower.
Litigation. Any material litigation relating to the Company 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.
The Subsequent Mortgage Loans and the Pre-Funding Account. If the
principal amount of eligible Mortgage Loans available during the Funding Period
and sold by the Company to the Trust is less than 100% of the aggregate
principal amount, the Company will have insufficient Mortgage Loans to sell to
the Trust, thereby
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resulting in a prepayment of principal to Owners of the Securities as described
herein. See "Social, Economic and Other Factors" below. In addition, any
conveyance of Subsequent Mortgage Loans is subject to the following conditions,
among others (i) each such Subsequent Mortgage Loan must satisfy the
representations and warranties specified in the agreement pursuant to which such
Subsequent Mortgage Loans are transferred to the Trust (each a "Subsequent
Transfer Agreement") and in the Pooling and Servicing Agreement; (ii) the
Company will not select such Subsequent Mortgage Loans in a manner that it
believes is adverse to the interest of the Owners of the Securities; (iii) the
Depositor will deliver certain opinions of counsel with respect to the validity
of the conveyance of such Subsequent Mortgage Loans; and (iv) as of each cut-off
date (each, a "Subsequent Cut-Off Date") applicable thereto, the Subsequent
Mortgage Loans to be conveyed by the Company as of such Subsequent Cut-Off Date,
will satisfy the criteria set forth in the Pooling and Servicing Agreement.
To the extent that amounts on deposit in the Pre-Funding Account have
not been fully applied to the purchase of Subsequent Mortgage Loans by the Trust
by the end of the Funding Period, the Owners of the Securities then entitled to
receive payments of principal will receive a prepayment of principal in an
amount equal to the amount remaining in the Pre-Funding Account on the first
Payment Date following the end of the Funding Period. Although no assurances can
be given, the Company intends that the principal amount of Subsequent Mortgage
Loans sold to the Trust will require the application of substantially all amount
on deposit in the Pre-Funding Account and that there will be no material
principal prepayment to the Owners of the Securities.
Each Subsequent Mortgage Loan must satisfy the eligibility criteria
referred to above at the time of its addition. However, Subsequent Mortgage
Loans may be originated or purchased by the Company using credit criteria
different from those which were applied to the initial Mortgage Loans and may be
of a different credit quality. Therefore, following the transfer of Subsequent
Mortgage Loans, the aggregate characteristics of the pool of Mortgage Loans may
vary from those of the initial Mortgage Loans.
Social, Economic and Other Factors. The ability of the Trust to invest
in Subsequent Mortgage Loans is largely dependent upon the ability of the
Company to originate or purchase additional mortgage loans. The ability of the
Company to originate or purchase additional mortgage loans may be affected as a
result of a variety of social and economic factors. Economic factors include
interest rates, unemployment levels, the rate of inflation and consumer
perception of economic conditions generally. However, the Company is unable to
determine and has no basis to predict whether or to what extent economic or
social factors will affect the Company's origination ability and the
availability of Subsequent Mortgage Loans.
Legal Considerations. Applicable state laws generally regulate interest
rates and other charges, require certain disclosures, and require licensing of
the Originators, the 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. In
California, for example, a mortgage lender is subject to the California Fair
Debt Collection Practices Act which regulates practices used to effect
collection on consumer loans. See "Certain Legal Aspects of Mortgage Loans and
Related Matters."
The Mortgage Loans may also be subject to federal laws, including: (i)
the Federal Truth-in-Lending Act and Regulation Z promulgated thereunder and the
Real Estate Settlement Procedures Act and Regulation X promulgated thereunder,
which require certain disclosures to the borrowers regarding the terms of the
Mortgage Loans; (ii) the Equal Credit Opportunity Act and Regulation B
promulgated thereunder, which prohibit discrimination on the basis of age, race,
color, sex, religion, marital status, national origin, receipt of public
assistance or the exercise of any right under the Consumer Credit Protection
Act, in the extension of credit; and (iii) the Fair Credit Reporting Act, which
regulates the use and reporting of information related to the borrower's credit
experience. Depending on the provisions of the applicable law and the specific
facts and circumstances involved, violations of these laws, policies and general
principles of equity may limit the ability of the 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 Servicer to damages and administrative sanctions. If
the 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 Securityholders. Furthermore, depending upon
whether damages and sanctions are assessed against the Servicer or an
Originator, such violations may materially impact the financial ability of the
Company to continue to act as Servicer or the ability of an Originator to
repurchase or replace Mortgage Loans if such violations breach a representation
or warranty contained in a Pooling and Servicing Agreement.
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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 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 to or
discounts from 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.
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.
Such penalties may not become the 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
moneys 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. The Mortgage Loans may contain "due-on-sale" provisions,
and the Servicer will be required to enforce such provisions unless (i) such
enforcement would materially increase the risk of default or delinquency on, or
materially decrease the security for, such Mortgage Loan or (ii) such
enforcement is not permitted by applicable law, in which case the Servicer is
authorized to permit the purchaser of the related Mortgaged Property to assume
the Mortgage Loan. See "The Pooling and Servicing Agreement" in the related
Prospectus Supplement.
Collections on the Mortgage Loans may vary due to the level of
incidence of delinquent payments and of prepayments. Collections on the Mortgage
Loans may also vary due to seasonal purchasing and payment habits of borrowers.
Book-entry Registration. Issuance of the Securities in book-entry form
may reduce the liquidity of such Securities in the secondary trading market
since investors may be unwilling to purchase Securities for which they cannot
obtain definitive physical securities representing such Securityholders'
interests, except in certain circumstances described in the related Prospectus
Supplement.
Since transactions in Securities will, in most cases, be able to be
effected only through DTC, direct or indirect participants in DTC's book-entry
system ("Direct or Indirect Participants") and certain banks, the ability of a
Securityholder to pledge a Security to persons or entities that do not
participate in the DTC system, or otherwise to take actions in respect of such
Securities, may be limited due to lack of a physical security representing the
Securities.
Securityholders may experience some delay in their receipt of
distributions of interest on and principal of the Securities since distributions
may be required to be forwarded by the Trustee to DTC and, in such a case, DTC
will be required to credit such distributions to the accounts of its
Participants which thereafter will be required to credit them to the accounts of
the applicable class of Securityholders either directly or indirectly through
Indirect Participants. See "Description of the Securities--Form of Securities."
The Status of the Mortgage Loans in the Event of Bankruptcy of the
Company or an Originator. In the event of the bankruptcy of the Company or an
Originator at a time when it or any affiliate thereof holds an Equity Security,
a trustee in bankruptcy of the Company, an Originator or its creditors could
attempt to recharacterize the sale of the Mortgage Loans to the related Trust as
a borrowing by the Company, the Originator or such affiliate with the result, if
such recharacterization is upheld, that the Securityholders would be deemed
creditors of the Company, 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.
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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
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 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
related Securities would likely result in a reduction in the rating of the
Securities. See "Rating" 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 or (ii) other loans (each hereinafter defined) 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.
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 Company, the Originators or any of their affiliates. If specified in the
related Prospectus Supplement, certain Securities will evidence the entire
fractional undivided ownership interest in the related Mortgage Loans held by
the related Trust or may represent debt secured by the related Mortgage Loans.
The following is a brief description of the Mortgage Assets expected to
be included in the related Trusts. If specific information respecting the
primary Mortgage Assets is not known at the time the related series of
Securities initially is offered, information of the nature described below will
be provided in the Prospectus Supplement, and specific information will be set
forth in a report on Form 8-K to be filed with the Commission within fifteen
days after the initial issuance of such Securities (the "Detailed Description").
A copy of the Pooling and Servicing Agreement with respect to each Series of
Securities will be attached to the Form 8-K and will be available for inspection
at the corporate trust office of the Trustee specified in the related Prospectus
Supplement. A schedule of the Mortgage Assets relating to such Series (the
"Mortgage Asset Schedule") will be attached to the Pooling and Servicing
Agreement delivered to the Trustee upon delivery of the Securities.
The Mortgage Loans--General
The real properties which secure repayment of the Mortgage Loans (the
"Mortgaged Properties") may be located in any one of the fifty states, the
District of Columbia, Puerto Rico, any other Territories of the United States or
in the United Kingdom. The Mortgage Loans will generally 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. The Mortgage Loans will be
generally 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. The Mortgage Loans will not be guaranteed or insured by
any government agency or other insurer; however, certain distributions to
Securityholders may be guaranteed by a Financial Guaranty Insurer.
All of the Mortgage Loans in a Mortgage Pool will provide for payments
to be made monthly ("monthly pay") or bi-weekly. The payment terms of the
Mortgage Loans to be included in a Trust will be described in the related
Prospectus Supplement and may include any of the following features or
combination thereof or other features described in the related Prospectus
Supplement:
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(a) Interest may be payable at a Fixed Rate, or an Adjustable
Rate (i.e., a rate that is adjustable from time to time in relation to
an index, a rate that is fixed for 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
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 over a specified period
of time ("graduated payments") or may change from period to period.
Mortgage Loans may include limits on periodic increases or decreases in
the amount of monthly payments and may include maximum or minimum
amounts of monthly payments. Mortgage Loans having graduated payment
provisions may provide for deferred payment of a portion of the
interest due monthly during a specified period, and recoup the deferred
interest through negative amortization during such period whereby the
difference between the interest paid during such period and the
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 Guidelines of the Company.
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 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 Combined Loan-to-Value Ratio and
the range of Combined Loan-to-Value Ratios of the Mortgage
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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
indexes, if any; (x) the aggregate outstanding principal balance, if any, of
Buy-Down Loans and Mortgage Loans having graduated payment provisions; (xi) the
amount of any mortgage pool insurance policy, special hazard insurance policy or
bankruptcy bond to be maintained with respect to such Mortgage Pool; (xii) the
amount of any standard hazard insurance required to be maintained with respect
to each Mortgage Loan; (xiii) the amount, if any, and terms 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 "Combined Loan-to-Value Ratio" 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 plus the then current
principal balance of all mortgage loans secured by liens on the related
Mortgaged Property having priorities senior to that of the lien which secures
such Mortgage Loan, if any, by (y) the value of the related Mortgaged Property,
based upon the appraisal or valuation made at the time of origination of the
Mortgage Loan or, in the case where there is no senior lien to the Mortgage Loan
and such Mortgage represents a purchase money instrument, the lesser of (a) the
appraisal or valuation, or (b) the purchase price. If the Mortgagor will use the
proceeds of the Mortgage Loan to refinance an existing Mortgage Loan which is
being serviced directly or indirectly by the Servicer, the requirement of an
appraisal or other valuation at the time the new Mortgage Loan is made may be
waived.
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 Mortgage 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 nonconforming 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 nonconforming credit mortgage lending industry.
Certain Mortgage Loans may be secured by junior liens ("Junior Lien
Loans") subordinate to the rights of the mortgagee under each 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 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 Servicer's practice to satisfy each senior mortgage at or prior to a
foreclosure sale only to the extent that it determines any amounts so paid will
be recoverable from future payments and collections on the Mortgage Loans or
otherwise. The Trusts will not have any source of funds to satisfy any such
senior mortgage or make payments due to any senior mortgagee. See "Certain Legal
Aspects of Mortgage Loans and Related Matters--Foreclosure."
Other factors affecting mortgagors' ability to repay Mortgage Loans
include excessive building resulting in an oversupply of housing stock or a
decrease in employment reducing the demand for units in an area; federal, state
or local regulations and controls affecting rents; prices of goods and energy;
environmental restrictions; increasing labor and material costs; and the
relative attractiveness of the Mortgaged Properties. To the extent that losses
on the Mortgage Loans are not covered by credit enhancements, such losses will
be borne, at least in part, by the Securityholders of the related series.
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The Company 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 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. A Master Servicers, if required by a Prospectus Supplement, will have
the primary function of reviewing the Servicer's monthly servicing reports for
any material inconsistencies, and secondarily, the Master Servicer will assume
the Servicer's obligations in the event of a default by the Servicer. The
Servicer or the Trust will be liable for fees and expenses of the Master
Servicer. See "Mortgage Loan Program" and "The Pooling and Servicing Agreement."
With respect to Mortgage Loans serviced through a Sub-Servicer, the Servicer
will remain liable for its servicing obligations under the related Pooling and
Servicing Agreement as if the Servicer alone were servicing such Mortgage Loans.
The only obligations of the Company and the Originators with respect to
a series of Securities will be related to servicing and/or providing (or, where
the Company or an Originator acquired a Mortgage Loan from another originator,
obtaining from such originator) certain representations and warranties
concerning the Mortgage Loans and to assign to the Trustee for such series of
Securities the Company's or Originator's rights with respect to such
representations and warranties. See "The Pooling and Servicing Agreement." The
obligations of the 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 to make certain cash advances in the event of
delinquencies in payments on or with respect to the Mortgage Loans in the
amounts described herein under "Description of the Securities--Advances." The
obligations of a Servicer to make advances may be subject to limitations, to the
extent provided herein and in the related Prospectus Supplement. The Master
Servicer's contractual obligations for servicing the Mortgage Loans and making
advances will consist primarily of acting as a back-up Servicer in the event of
the removal of the Servicer in accordance with the terms of the Pooling and
Servicing Agreement.
Single Family Loans
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 Mortgage Properties may include owner-occupied (which
includes vacation and second homes) and non-owner occupied 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.
THE MORTGAGE POOLS
General
Each Mortgage Pool will consist primarily of (i) conventional Mortgage
Loans, minus any stripped portion of the interest payments due under the related
Mortgage Note that may have been retained by any Originator ("Originator's
Retained Yield"), or any other interest retained by the Company or any affiliate
of the Company, 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 properties, or
(ii) certificates of interest or participations in such Mortgage Notes. The
Mortgaged Properties will consist primarily of owner-occupied 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, and the fee, leasehold or other
interests in the underlying real property. The Mortgaged Properties may include
vacation, second and non-owner occupied homes.
Each Mortgage Loan will be selected by the Company for inclusion in a
Mortgage Pool from among mortgage loans originated by the Company, one or more
institutions affiliated with the Company, (such affiliated institutions, the
"Affiliated Originators") or from banks, savings and loan associations, mortgage
bankers, mortgage brokers, investment banking firms, the RTC and the FDIC (as
defined herein) and other mortgage loan originators
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or sellers not affiliated with the Company (such unaffiliated institutions, the
"Unaffiliated Originators" and, collectively with the Affiliated Originators and
the Company, 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 Company for inclusion in such
Mortgage Pool.
Each series of Securities will evidence interests in one or more
Mortgage Pool(s) containing Mortgage Loans having an aggregate principal balance
of not less than approximately $5,000,000 as of, unless otherwise specified in
the applicable Prospectus Supplement, the related Cut-Off Date. 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 master reserve account or otherwise applied in
a manner that provides credit enhancement for more than one series of
Securities).
The Mortgage Pools
Unless otherwise specified below, 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, any other Territories of the United States or in the
United Kingdom and (iii) consist of one or more of the following types of
mortgage loans:
(1) Fixed-rate, fully-amortizing mortgage loans (which may
include mortgage loans converted from adjustable-rate mortgage loans or
otherwise modified) providing for level monthly payments of principal
and interest and terms at origination or modification of generally not
more than 30 years;
(2) ARM Loans having original or modified terms to maturity of
generally not more than 30 years with a related Mortgage Rate that
adjusts periodically, at the intervals described in the related
Prospectus Supplement (which may have adjustments in the amount of
monthly payments at periodic intervals) over the term of the mortgage
loan to equal the sum of a fixed percentage set forth in the related
Mortgage Note (the "Note Margin") and an index (the "Index") to be
specified in the related Prospectus Supplement, such as, by way of
example: (i) U.S. Treasury securities of a specified constant maturity,
(ii) 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) Balloon mortgage loans ("Balloon Loans"), which are
fixed-rate mortgage loans having original or modified terms to maturity
of generally 5 to 15 years as described in the related Prospectus
Supplement and that 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");
(5) 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
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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; or
(6) Another type of mortgage loan described in the related
Prospectus Supplement.
If provided for in the related Prospectus Supplement, a Mortgage Pool
may contain 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 (each such Mortgage Loan, a "Convertible Mortgage Loan"). If
specified in the related Prospectus Supplement, upon any conversion, the Company
will repurchase or the Servicer, the applicable Sub-Servicer, Originator, or a
third party will purchase the converted Mortgage Loan as and to the extent set
forth in the related Prospectus Supplement. Alternatively, if specified in the
related Prospectus Supplement, the Company or the Servicer (or another party
specified therein) may agree to act as remarketing agent with respect to such
converted Mortgage Loans and, in such capacity, to use its best efforts to
arrange for the sale of converted Mortgage Loans under specific conditions. Upon
the failure of any party so obligated to purchase any such converted Mortgage
Loan, the inability of any remarketing agent to so arrange for the sale of the
converted Mortgage Loan and the unwillingness of the remarketing agent to
exercise any election to purchase the converted Mortgage Loan for its own
account, the related Mortgage Pool will thereafter include both fixed rate and
adjustable rate Mortgage Loans.
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 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 Company and/or certain Originators may make certain representations
and warranties regarding the Mortgage Loans, but the Company's assignment of the
Mortgage Loans to the Trustee will be without recourse. See "Description of the
Securities--Assignment of Mortgage Loans." The 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 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 Servicer to make delinquency
advances will be limited to amounts which the Servicer believes ultimately will
be reimbursable out of the proceeds of liquidation of the Mortgage Loans. The
Master Servicer's obligations consist primarily of acting as a back-up Servicer
in the event of the removal of the Servicer in accordance with the terms and
conditions of the Pooling and Servicing Agreement. See "Mortgage Loan
Program--Master Servicer." In the event that the Master Servicer assumes the
role of Servicer, the Master Servicer will assume all of the obligations of the
Servicer except for obligations to repurchase or substitute for Mortgage Loans
which breach representations and warranties under the Pooling and Servicing
Agreement. See "Description of the Securities--Advances."
MORTGAGE LOAN PROGRAM
As a general matter, the Company'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 the Federal National Mortgage Association ("FNMA") due to credit
characteristics that do not meet FNMA guidelines. However, certain of the
Mortgage Loans will relate to FNMA conforming credits.
The Mortgagors generally will have taken out the related Mortgage Loans
for one of four reasons: (i) to purchase the related Mortgaged Property, (ii) to
refinance an existing mortgage loan on more favorable terms, (iii) to
consolidate debt, or (iv) to obtain cash proceeds by borrowing against the
Mortgagor's equity in the related Mortgaged Property. The Mortgage Loans
described in (i) are commonly referred to as purchase money loans and the
Mortgage Loans described in (iii) and (iv) on the whole are commonly referred to
as home equity loans.
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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 Company's
Mortgage Loan Program. Under the Company's Mortgage Loan Program, the Company
purchases and originates Mortgage Loans pursuant to four types of underwriting
guidelines: (1) standard underwriting guidelines according to the Company's
Originator Guide, as modified from time to time, used by Affiliated Originators
and Unaffiliated Originators ("Company's Guidelines"), (2) underwriting
guidelines utilized by Participating Originators or Designated Originators and
approved by the Company ("Approved Guidelines"), and (3) underwriting guidelines
("Bulk Guidelines") used by Unaffiliated Originators of a portfolio of Mortgage
Loans subsequently purchased in whole or part by the Company as a bulk
acquisition ("Bulk Acquisition"). The respective underwriting guidelines are
described below.
Company's Guidelines. The Company's Guidelines are set forth in the
Company's Guides. The Company's Guides 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.
Substantially all loans originated or purchased by the Company are
subjected to the Company's Guidelines. The underwriting process is intended to
assess both the prospective borrower's ability to repay and equally, if not more
important, the adequacy of the real property security. The fixed-rate and
adjustable-rate loans are generally fully amortized over a ten, fifteen or
thirty year schedule. To a limited extent, the Company will originate balloon
loans which generally are based on a 30-year amortization schedule with a single
payment of the remaining balance of the balloon loan generally 15 years after
origination. Loan amounts range from a minimum of $12,000 to a maximum of
$350,000, unless a higher amount is approved by the Company's loan committee.
The properties securing the loans are primarily single family detached, owner
occupied residences. Occasionally, loans are originated or acquired on one- to
four-family residential properties, condominiums or townhouses. No mobile home,
co-operative or land loans are currently originated or acquired.
The decision of the loan committee to approve a loan is based upon a
number of factors, including the appraised value of the property, the
applicant's creditworthiness and the Company's perception of the applicant's
ability to repay the loan. With respect to the value of the collateral,
generally, loans secured by first mortgages are limited to a maximum of 75%
loan-to-value ratio; however, the Company will originate loans with a
loan-to-value ratio of up to 85% for loans expected to be sold. Loans secured by
second mortgages are limited to a maximum of 70% loan-to-value ratio. With
respect to creditworthiness, the Company has established classifications with
respect to the credit profiles of loans and subject properties based on certain
of the applicant's characteristics. Each loan application is placed into one of
the Company's four ratings ("A" through "D," with subratings within those
categories), depending upon the following three primary factors: (i) an
applicant's credit score under the Company's proprietary credit scoring system,
which uses information obtained from national credit bureau reports, (ii)
loan-to-value ratios and (iii) debt-to-income ratios. Terms of loans made by the
Company vary depending upon the classification of the application. Applications
with lower classifications generally are subject to higher interest rates. A
loan application must obtain the following thresholds with respect to each of
the three primary factors to be included in the particular ratings shown below:
"A" "B" "C" "D"
--- --- --- ---
Borrower Credit Score 100-87 86-64 63-36 35-0
Maximum of Loan-to-Value 75% 73% 72% 65%
Maximum of Debt-to-Income Ratio 40% 49% 59% 65%
While the Company primarily analyzes the three factors noted above, the
Company also reviews other factors to determine whether an application will be
subject to a higher interest rate than the interest rate applicable to the
rating under which such application has initially been placed. These include
factors such as an unsubstantiated employment history, a recent foreclosure
proceeding, a number of recent delinquent payments on an existing mortgage, a
recent bankruptcy filing, the presence of a senior mortgage or zoning
restrictions on the subject property or a loan-to-value ratio in excess of 71%.
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Each loan applicant is required to provide personal financial
information on a loan application and a statement of obligations. A TRW credit
report is obtained for each borrower at the time of application which confirms
and reconciles amounts disclosed in the statement of obligations and which
discloses the applicant's payment and credit history. Generally, the borrower is
required to have an acceptable credit history given the amount of equity
available, the strength of the employment history and income stability. Income,
employment, and deed of trust status is verified for each applicant by telephone
and/or written inquiry, examination of tax returns, pay check stubs, court
supported documents or bank statements. Self-employed applicants provide
personal and business financial statements. The Company's applicant scoring
system rates a borrower's TRW credit score and debt ratio and determines the
interest rate to be charged. Borrower debt ratios (calculated as the percentage
of total monthly fixed costs and debt payments to gross monthly income) will
generally range from 25% to 45%.
In general, with respect to Company originated Mortgage Loans, the
value of each property proposed as security for a mortgage loan is required to
be determined by a full appraisal conducted by a Company employee. After
evaluation of three neighborhood comparables, a Company appraiser will complete
his appraisal with an inspection of the subject property and a meeting with the
prospective borrower. The Company hires certified appriaser in those states
which require such designation. Appraisers at the Company's headquarters, not
third party fee appraisers, perform a review of the property appraisal on the
following loan applications: (i) all properties with a market value above
$150,000, (ii) all loans with a loan-to-value ratio of equal to or greater than
62%, (iii) all loan applications prepared by a new branch office for the first
90 days of its existence, (iv) all income properties, and (v) all non-California
loans with a loan-to-value ratio equal to or greater than 55% or with value less
than $100,000 not otherwise reviewed.
In connection with the securitization of the Company's loans,
independent appraisers have conducted appraisals of a sample of the subject
properties that are the collateral for the securitized loans. The appraisals
performed by the Company's appraisers have been within 1.5% of the aggregate
appraisal values on Securitization pools to date as calculated by the
independent appraisers.
Certain laws protect loan applicants by offering them a timeframe 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. The Company discourages waiving the rescission period but does
permit such waivers with proper documentation.
The Company's Guidelines generally require title insurance coverage
issued by an approved American Land Title Association or California Land Title
Association title insurance company (as defined below) on each loan the Company
originates or purchases. The Company, the related Originator and their assignees
are generally named as the insured. Title insurance policies indicate the lien
position of the mortgage loan and protect the insured against loss if the title
or lien position is not as indicated.
The applicant is required to secure property insurance in an amount
sufficient to cover the new loan and any prior mortgage. If the sum of the
outstanding first mortgage, if any, and the related loan exceeds replacement
value, insurance equal to replacement value may be accepted. The Company 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 Company 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 of cancellation, an endorsement
adding such provision is required.
Approved Guidelines. The Company may cause a Trust to acquire Mortgage
Loans underwritten pursuant to underwriting guidelines that may differ from the
Company's Guidelines. 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 Company from Originators who will represent that the Mortgage Loans
have been originated in accordance with underwriting guidelines agreed to by the
Company; the Company will generally review or cause to be reviewed only a
limited portion of the Mortgage Loans in any delivery of Mortgage Loans from the
related Originator for conformity with the Approved Guidelines. Certain other
Mortgage Loans will be acquired from Originators who will represent that the
Mortgage Loans were originated pursuant to underwriting guidelines determined by
a mortgage insurance company acceptable to the Company. The Company 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 Company.
The Company will only perform random quality assurance reviews on Mortgage Loans
delivered with such certifications.
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The underwriting standards utilized in negotiated transactions and
Master Commitments and the underwriting standards of insurance companies may
vary substantially from the Company's Guidelines. The Approved Guidelines are
designed to 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 Approved 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 Approved Guidelines applicable to the Mortgage Loans nor describe
any review for compliance with applicable Approved Guidelines performed by the
Company. Moreover, there can be no assurance that every Mortgage Loan was
originated in conformity with the applicable 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. Notwithstanding the foregoing, in the case of a Designated
Originator transaction or a Participating Originator transaction, the applicable
underwriting guidelines may not be those pre-approved by the Company, as in the
case of Approved Guidelines, but may be those of the related Designated
Originator or Participating Originator, and will be described in the related
Prospectus Supplement.
Bulk Guidelines. Bulk portfolios of Mortgage Loans may be originated by
a variety of Originators under several different underwriting guidelines.
Because bulk portfolios are generally seasoned for a period of time, the
Company'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. As a result,
Mortgage Loans that conform to the related Bulk Guidelines may not conform to
the requirements of the Company's Guidelines or any Approved Guidelines. For
example, the Company may purchase Mortgage Loans in bulk acquisitions with
Loan-to-Value Ratios in excess of 80%, 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 Company. The Company generally will cause the Mortgage
Loans acquired in a Bulk Acquisition to be reviewed for the purpose of
determining whether such Mortgage Loans were originated in accordance with the
applicable Bulk Guidelines. Such underwriting may consist of a review of all
such Mortgage Loans or may be performed on a sample basis. In addition, such
reunderwriting may be performed by the Company or by a third party acting at the
direction of the Company.
Quality Control. The Company maintains a quality control program. All
files are reviewed for accuracy of certain data fields, and random files are
selected for underwriting review. Training programs, additional audits and
performance evaluations for underwriting personnel, appraisers and management
are influenced by the results of the quality control review.
The Company generally will cause Mortgage Loans acquired from
Unaffiliated Originators to be reunderwritten for the purpose of determining
whether such Mortgage Loans were originated in accordance with the loan
submission underwriting guidelines. Such reunderwriting 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 Company or a third party acting at the
direction of the Company.
Qualifications of Originators
Each Originator from which a Mortgage Loan is acquired will have been
accepted by the Company for participation in the Company's mortgage loan
program. Unaffiliated Originators that enter into agreements to sell mortgage
loans to the Company ("Master Commitments") and which meet the following
qualifications are hereinafter referred to as "Participating Originators." As of
the date of approval, each Participating Originator is generally required to
have a specified minimum level of experience in originating conventional
mortgage loans and will be required to meet certain requirements relating to
origination volume of conventional mortgage loans within the twelve months
preceding its application to participate in the Company's mortgage loan program,
will meet minimum GAAP tangible net worth and liquidity requirements, and with
respect to depositories will be required to meet any applicable risk-based
capital requirements. Furthermore, an Originator that will retain the servicing
of the related Mortgage Loans will be required to have a conventional Mortgage
Loan servicing portfolio of a required amount and to have a specified minimal
level of experience servicing comparable mortgage loans. An Unaffiliated
Originator that would qualify as a "Participating Originator" is a "Designated
Originator" if it meets certain additional requirements. Notwithstanding these
requirements, however, there can be no assurance that any Originator presently
meets such qualifications or will continue to meet such qualifications at the
time of inclusion of mortgage loans sold by it in the Trust Estate for a series
of Securities, or thereafter.
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The Company may waive or modify in an appropriate case any of the
foregoing requirements for Participating Originators and Designated Originators.
Among Unaffiliated Originators, only Participating Originators and Designated
Originators may enter into Master Commitments with the Company and may serve as
Sub-Servicers for any loans acquired by a Trust and originated by such
Unaffiliated Originators; loans acquired from other Unaffiliated Originators
will only be acquired on a "spot" basis, and will be acquired servicing-released
to the Servicer. Unless otherwise described in the related Prospectus
Supplement, the Company will make directly, or will guarantee compliance with,
any representations and warranties made by any Unaffiliated Originator, other
than a Designated Originator, with respect to the Mortgage Loans originated by
it and acquired by a Trust; provided, however, that the Company will not
directly make or guarantee compliance with such representations and warranties
made by a Designated Originator. In the event of a breach of any such
representation or warranty made by a Designated Originator the only remedies
will lie against such Designated Originator.
All Unaffiliated Originators must have received a satisfactory review
by the Company of its operating procedures and have delinquency and foreclosure
rates with respect to its conventional loan portfolio acceptable to the Company.
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 Company's Guidelines may be modified or waived with
respect to certain Mortgage Loans originated by such Originators.
The Resolution Trust Corporation (the "RTC") or the Federal Deposit
Insurance Corporation (the "FDIC") (either in their respective corporate
capacities or as receiver or conservator for a depository institution) may also
be an Originator of the Mortgage Loans. The RTC and the FDIC are together
referred to as the "Federal Corporations." The RTC was established pursuant to
the Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA"), which was enacted in response to the financial crisis of the thrift
industry and the Federal Savings and Loan Insurance Corporation. The purpose of
FIRREA is to restore the public's confidence in the savings and loan industry in
order to ensure a viable system of affordable housing finance as well as to
improve the supervision of savings associations and promote the independence of
the FDIC. The FDIC is an independent executive agency originally established by
the Banking Act of 1933 to insure the deposits of all banks entitled to federal
deposit insurance under the Federal Reserve Act and Federal Deposit Insurance
Act. The FDIC administers the system of nationwide deposit insurance (mutual
guaranty of deposits) for United States Banks and together with the United
States Comptroller of the Currency regulates in areas related to the maintenance
of reserves for certain types of deposits, the maintenance of certain financial
ratios, transactions with affiliates and a broad range of other banking
practices.
The Company 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 Company
nor any other entity has assumed the representations and warranties or made
representations and warranties, neither the Company 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.
To the extent the Originator in a Designated Originator transaction
fails to or is unable to repurchase any Mortgage Loan due to a breach of
representation and warranty, neither the Company nor any other entity has
assumed the representations and warranties and any related losses will be borne
by the Securityholders or by the credit enhancement, if any.
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Sub-Servicers
Each Originator of a Mortgage Loan will act as Sub-Servicer for such
Mortgage Loan pursuant to an agreement between the Servicer and the Sub-Servicer
(a "Sub-Servicing Agreement") unless the servicing obligations are released to
the Servicer or transferred to a servicer approved by the 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. The Company may employ Sub-Servicers that neither originate
mortgage loans nor originated the Mortgage Loans, such Sub-Servicers shall be
referred to as "Contract Sub-Servicers."
Unaffiliated Originators (except for Designated Originators and
Participating Originators) will be required to release such servicing
obligations to the Servicer. Designated Originators and Participating
Originators may act as Sub-Servicers for such Mortgage Loans pursuant to a
Sub-Servicing Agreement or may release such servicing obligations to the
Servicer. An Unaffiliated Originator acting as a Sub-Servicer for the Mortgage
Loans will be required to meet certain standards specified in the Prospectus
Supplement with respect to its conventional Mortgage Loan servicing portfolio,
GAAP tangible net worth, cash/warehouse line availability, mortgage servicing
licensing status and other specified qualifications. Contract Sub-Servicers
shall be required to satisfy standards similar to those for Unaffiliated
Originators; however, the Servicer will be directly responsible to the Trusts
for Servicing Mortgage Loans in compliance with the standards set forth in the
Pooling and Servicing Agreement. The Servicer will be responsible for the
compensation of any Contract Sub-Servicer and such compensation shall be
inclusive in the Servicer's fees.
Representations by Originators
Each Originator will generally make 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 Company 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, which may include condominiums and townhouses; (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 Company; 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. Accordingly, the Originator's
purchase obligation (or, if specified in the related Prospectus Supplement,
limited replacement option) will not arise if, during the period commencing on
the date of sale of a Mortgage Loan by the Originator to the Company, an event
occurs that would give rise to such an obligation if the event had occurred
prior to sale of the affected Mortgage Loan.
The Company will assign to the Trustee for the benefit of the holders
of the related series of Securities all of its right, title and interest in each
agreement by which it acquires a Mortgage Loan from an Originator insofar as
such agreement relates to the representations and warranties made by an
Originator in respect of such Mortgage Loan and any remedies provided for breach
of such representations and warranties. If an Originator cannot cure a breach of
any representation or warranty made by it in respect of a Mortgage Loan that
materially and adversely affects the interests of the Securityholders in such
Mortgage Loan within a time period specified in the related Pooling and
Servicing Agreement, such Originator and/or the Company 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 sub-servicing compensation, as applicable, and the
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Originator's Retained Yield, if any, and certain miscellaneous administrative
amounts, together with, without duplication, the aggregate amount of all
delinquent interest, if any.
As to any such Mortgage Loan required to be purchased by an Originator
and/or the Company, as provided above, rather than repurchase the Mortgage Loan,
the Servicer may, at its sole option, remove such Mortgage Loan (a "Deleted
Mortgage Loan") from the related Trust and cause the Company 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);
however, such substitution must be effected within 90 days of the date of the
initial issuance of the Securities with respect to a Trust for which no REMIC
election is to be made. 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. Except as
otherwise provided in the related Prospectus Supplement, any Qualified
Replacement Mortgage generally will, on the date of substitution, (i) have an
outstanding principal balance, after deduction of all scheduled payments due in
the month of substitution, not in excess of the outstanding principal balance of
the Deleted Mortgage Loan (the amount of any shortfall to be paid to the related
Trust in the month of substitution for distribution to the Securityholders),
(ii) have a Mortgage Rate neither one percentage point less than nor one
percentage point more than the Mortgage Rate of the Deleted Mortgage Loan as of
the date of substitution, (iii) have a remaining term to maturity neither one
year less than nor one year more than that of the Deleted Mortgage Loan, and
(iv) comply with all of the representations and warranties set forth in the
related Pooling and Servicing Agreement as of the date of substitution. The
related Pooling and Servicing Agreement may include additional requirements
relating to ARM Loans or other specific types of Mortgage Loans or additional
provisions relating to meeting the foregoing requirements on an aggregate basis
where a number of substitutions occur contemporaneously. Unless otherwise
specified in the related Prospectus Supplement or Pooling and Servicing
Agreement, an Originator will also have the option to substitute a replacement
Mortgage Loan for a Mortgage Loan that it is obligated to repurchase in
connection with a breach of a representation and warranty.
The 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 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 Company's representations has occurred, the
Originator's purchase or substitution obligation will in no event become an
obligation of the Company. In the case of a Designated Originator transaction
where the Originator fails to repurchase or substitute a Mortgage Loan and
neither the Company, nor any other entity has assumed the representations and
warranties, such repurchase or substitute obligation of the Originator will in
no event become an obligation of the Company. 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 Company.
Unless otherwise described in the related Prospectus Supplement, the
Company 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;
provided, however, that the Company will not directly make or guarantee
compliance with such representations and warranties made by a Designated
Originator. In the event of a breach of any such representation or warranty made
by a Designated Originator the only remedies will lie against such Designated
Originator.
Notwithstanding the foregoing with respect to any Originator that
requests the Servicer's consent to the transfer of sub-servicing rights relating
to any Mortgage Loans to a successor servicer, the 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 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.
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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 Servicer or has been transferred to a servicer approved by the
Servicer. The Servicer may, in turn, assign such subservicing to designated
Sub-Servicers that will be qualified Originators and may include affiliates of
the Company. While such a Sub-Servicing Agreement will be a contract solely
between the Servicer and the Sub-Servicer, the Pooling and Servicing Agreement
pursuant to which a series of Securities is issued will provide that, the
Trustee, the Servicer or any Master Servicer must recognize the Sub-Servicer's
rights and obligations under such Sub-Servicing Agreement.
With the approval of the Servicer, a Sub-Servicer generally 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 Servicer; maintenance of hazard insurance and filing and
settlement of claims thereunder, subject in certain cases to the right of the
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 of 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 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 pay to the Servicer any Compensating Interest with
respect to the related Mortgage Loans. 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. A Sub-Servicer may transfer its servicing
obligations to another entity that has been approved for participation in the
Company's loan purchase programs, but only with the approval of the Servicer.
As compensation for its servicing duties, the Sub-Servicer may be
entitled to a monthly servicing fee in a minimum amount set forth in the related
Prospectus Supplement. 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 reimbursed by the Servicer for certain expenditures that it makes,
generally to the same extent that the Servicer would be reimbursed under the
applicable Pooling and Servicing Agreement from the loan proceeds. Unless
specified in the related Prospectus Supplement and Pooling and Servicing
Agreement, compensation for the services of the Sub-Servicer shall be paid by
the Servicer as a general corporate obligation of the Servicer. 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 Servicer
for any liability or obligation sustained by the Servicer in connection with any
act or failure to act by the Sub-Servicer in its servicing capacity. Each
Sub-Servicer will be 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 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
Servicer or the Sub-Servicer or unless servicing is released to the Servicer.
The 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 upon thirty days' 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 Servicer may agree with a Sub-Servicer to amend a Sub-Servicing
Agreement. Upon termination of a Sub-Servicing Agreement, the Servicer may act
as servicer of the related Mortgage Loans or enter into one or more new
Sub-Servicing Agreements. If the Servicer acts as servicer, it will not assume
liability for the representations and warranties of the Sub-Servicer that it
replaces. If the 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 Servicer. The Servicer may make reasonable efforts to have the new
Sub-Servicer assume liability for the representations and warranties of the
terminated
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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 Servicer, the
liability for such representations and warranties will not be assumed by such
new Sub-Servicer. In the event of such an assumption, the 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.
Master Servicer
A Master Servicer may be specified in the related Prospectus Supplement
for the related series of Securities. Customary servicing functions with respect
to Mortgage Loans constituting the Mortgage Pool in the Trust Estate will be
provided by the Servicer directly or through one or more Sub-Servicers subject
to supervision by the Master Servicer. If the Master Servicer is not directly
servicing the Mortgage Loans, then the Master Servicer will (i) administer and
supervise the performance by the Servicer of its servicing responsibilities
under the Pooling and Servicing Agreement with the Master Servicer, (ii)
maintain a current data base with the payment histories of each Mortgagor, (iii)
review monthly servicing reports and data relating to the Mortgage Pool for
discrepancies and errors, and (iv) act as back-up Servicer during the term of
the transaction unless the Servicer is terminated or resigns in such case the
Master Servicer shall assume the obligations of the Servicer.
The Master Servicer will be a party to the Pooling and Servicing
Agreement for any Series for which Mortgage Loans comprise the Trust Estate. The
Master Servicer generally will be required to be a FNMA- or FHLMC-approved
seller/servicer and, in the case of FHA Loans, approved by HUD as an FHA
mortgagee. The Master Servicer will be compensated for the performance of its
services and duties under each Pooling and Servicing Agreement as specified in
the related Prospectus Supplement.
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 to
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
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are also Strip Securities) thereof on each Payment Date, as hereinafter defined
and in the manner described in the related Prospectus Supplement.
If so provided in the related Prospectus Supplement, a series of
Securities may include one or more classes of Fixed-Income Securities
(collectively, the "Senior Securities") that are senior to one or more classes
of Fixed-Income Securities (collectively, the "Subordinate Securities") in
respect of certain distributions of principal and interest and allocations of
losses on Mortgage Loans. In addition, certain classes of Senior (or
Subordinate) Securities may be senior to other classes of Senior (or
Subordinate) Securities in respect of such distributions or losses.
Equity Securities will represent the right to receive the proceeds of
the related Trust Estate after all required payments have been made to the
Securityholders of the related Fixed-Income Securities (both Senior Securities
and Subordinate Securities), and following any required deposits to any reserve
account that may be established for the benefit of the Fixed-Income Securities.
Equity Securities may constitute what are commonly referred to as the "residual
interest," "seller's interest" or the "general partnership interest," depending
upon the treatment of the related Trust for federal income tax purposes. As
distinguished from the Fixed-Income Securities, the Equity Securities will not
be styled as having principal and interest components. Any losses suffered by
the related Trust first will be absorbed by the related class of Equity
Securities, as described herein and in the related Prospectus Supplement.
No Class of Equity Securities will be offered pursuant to this
Prospectus or any Prospectus Supplement related hereto. Equity Securities may be
offered on a private placement basis or pursuant to a separate Registration
Statement to be filed by the Company. In addition, the Company 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.
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 Pooling and Servicing Agreement
will describe the periods (each, a "Remittance Period" or "Due 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
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.
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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.
Neither the Securities nor the underlying Mortgage Loans will be
guaranteed or insured by any governmental agency or instrumentality or the
Company, the Servicer, any Sub-Servicer, any Master Servicer, any Originator or
any of their affiliates; provided, however, that certain distributions to
Securityholders may be guaranteed by a Financial Guaranty Insurer.
Unless otherwise specified in the Prospectus Supplement with respect to
a series, Securities of each series covered by a particular Pooling and
Servicing Agreement will evidence specified beneficial ownership interest in a
separate Trust Estate created pursuant to such Pooling and Servicing Agreement.
A Trust Estate will consist of, to the extent provided in the Pooling and
Servicing Agreement: (i) a pool of Mortgage Loans (and the related mortgage
documents) or certificates of interest or participations therein underlying a
particular series of Securities as from time to time are subject to the Pooling
and Servicing Agreement, exclusive of, if specified in the related Prospectus
Supplement, any Originator's Retained Yield or other interest retained by the
related Originator, the Company or any of its affiliates with respect to each
such Mortgage Loan; (ii) certain other assets including, without limitation, all
payments due on the Mortgage Loans 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
If so 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
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Securityholders. Unless and until Physical Securities are issued, it is
anticipated that the only Securityholder will be Cede, as nominee of DTC, and
that the beneficial holders of Securities will not be recognized by the Trustee
as Securityholders under the Pooling and Servicing Agreement. The beneficial
holders of such Securities will only be permitted to exercise the rights of
Securityholders under the Pooling and Servicing Agreement indirectly through DTC
and its Participants who in turn will exercise their rights through DTC.
Under the rules, regulations and procedures creating and affecting DTC
and its operations, DTC is required to make book-entry transfers among
Participants on whose behalf it acts with respect to the Securities and is
required to receive and transmit payments of principal of and interest on the
Securities. Participants and Indirect Participants with which Securityholders
have accounts with respect to their Securities similarly are required to make
book-entry transfers and receive and transmit such payments on behalf of their
respective Securityholders. Accordingly, although Securityholders will not
possess Securities, the rules provide a mechanism by which Securityholders will
receive distributions and will be able to transfer their interests.
Unless and until Physical Certificates are issued, Securityholders who
are not Participants may transfer ownership of Securities only through
Participants by instructing such Participants to transfer Securities, by
book-entry transfer, through DTC for the account of the purchasers of such
Securities, which account is maintained with their respective Participants.
Under the Rules and in accordance with DTC's normal procedures, transfers of
ownership of Securities will be executed through DTC and the accounts of the
respective Participants at DTC will be debited and credited. Similarly, the
respective Participants will make debits or credits, as the case may be, on
their records on behalf of the selling and purchasing Securityholders.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a
Securityholder to pledge Securities to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of such
Securities may be limited due to the lack of a Physical Certificate for such
Securities.
DTC in general advises that it will take any action permitted to be
taken by a Securityholder under a Pooling and Servicing Agreement only at the
direction of one or more Participants to whose account with DTC the related
Securities are credited. Additionally, DTC in general advises that it will take
such actions with respect to specified percentages of the Securityholders only
at the direction of and on behalf of Participants whose holdings include current
principal amounts of outstanding Securities that satisfy such specified
percentages. DTC may take conflicting 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 Securities"), 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.
Assignment of Mortgage Loans
At the time of issuance of a series of Securities, the Company will
cause the Mortgage Loans being included in the related Trust Estate to be
assigned to the Trustee together with all principal and interest due on or after
the Cut-Off Date with respect to such Mortgage Loan, other than principal and
interest due before the Cut-Off Date. If specified in the related Prospectus
Supplement, the Company 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
Company 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
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Cut-Off Date, as well as information regarding the Mortgage Rate, the currently
scheduled monthly payment of principal and interest and the maturity of the
Mortgage Note.
In connection with the transfer of the Mortgage Loans to the Trustee,
the Originators will be required to deliver to the Company, who in turn will
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.
The Trustee will agree, for the benefit of the Securityholders, to review each
such file within 90 days after the execution and delivery of the applicable
Pooling and Servicing Agreement to ascertain that all required documents (or
certified copies of documents) have been executed and received.
The Originators are additionally required to cause to be prepared and
recorded, within 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 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 one or more jurisdictions, then such recording will not be
required with respect to such jurisdictions.
If the Sub-Servicer or Originator does not cure an omission or defect
in a required document within 60 days after notice is given to the Servicer, 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 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." Neither the Servicer, the Master
Servicer nor the Company 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. Such purchase obligation constitutes the sole remedy available to
the Securityholders or the Trustee for omission of, or a material defect in, a
constituent document.
The Trustee will be authorized at any time to appoint a custodian
pursuant to a custodial agreement to maintain possession of and, if applicable,
to review the documents relating to the Mortgage Loans as the agent of the
Trustee. The identity of any such custodian to be appointed on the date of
initial issuance of the Securities will be set forth in the related Prospectus
Supplement.
Pursuant to each Pooling and Servicing Agreement, the 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 a Forward Purchase Agreement with the Company
whereby the Company will agree to transfer Subsequent Mortgage Loans to such
Trust following the date on which such Trust is established and the related
Securities are issued. All Subsequent Mortgage Loans transferred to the Trust
pursuant to a Forward Purchase Agreement will be originated by the Company or an
Originator. The Trust may enter into Forward Purchase Agreements to permit the
acquisition of Subsequent Mortgage Loans that could not be delivered by the
Company 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
Subsequent Mortgage Loans so transferred to a Trust conform to the requirements
specified in such Forward Purchase Agreement. If a Forward Purchase Agreement is
to be utilized the related Trustee will be required to deposit in the
Pre-Funding Account all or a portion of the proceeds received by the Trustee in
connection with the sale of one or more classes of Securities of the related
series; the Subsequent Mortgage Loans will be transferred to the related Trust
in exchange for money released to the Company from the related Pre-Funding
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Account in one or more transfers. The maximum amount of money deposited in the
Pre-Funding Account to acquire Subsequent Mortgage Loans for transfer to the
Trust will not exceed 35% of the aggregate principal amount of the Securities
offered pursuant to the related Prospectus Supplement. Each Forward Purchase
Agreement will set a specified period during which any such transfers must
occur, which such period shall not exceed 90 days from the date such Trust was
established. The Forward Purchase Agreement or the related Pooling and Servicing
Agreement will require that, if all moneys originally deposited to such
Pre-Funding Account are not so used by the end of such specified period, then
any remaining moneys will be applied as a mandatory prepayment of the related
class or classes of Securities as specified in the related Prospectus
Supplement. See "Risk Factors" herein and in the related Prospectus Supplement.
All moneys on deposit in the Pre-Funding Account will be invested in one or more
Permitted Investments with all earnings thereon available to make interest
payments on the Securities.
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 Company's Guidelines
from time to time, and is otherwise acceptable to the Servicer. A Sub-Servicing
Account will generally be a lock box account established with a Federal Home
Loan Bank or with a depository institution (including the Sub-Servicer itself)
whose accounts are insured by the National Credit Union Share Insurance Fund or
the FDIC, provided that any such depository institution must meet certain
minimum rating criteria set forth in the Company's Guidelines. 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
within one day of receipt 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 fee or other compensation. On a daily basis
or 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 Servicer or the Trustee
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
Servicing Advances, and Delinquency Advances and to pay Compensating Interest as
set forth in the related Sub-Servicing Agreement.
The Servicer will deposit or will cause to be deposited into the
Principal and Interest Account on a daily basis certain payments and collections
received by it subsequent to the Cut-Off Date (other than payments due on or
before the Cut-Off Date), as specifically set forth in the related Pooling and
Servicing Agreement, which generally will include 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 Servicer and the Sub-Servicer, if any, as their
servicing fee or other compensation;
(iii) all amounts (net of unreimbursed liquidation expenses
and insured expenses incurred, and unreimbursed advances made, by the
Servicer or the related Sub-Servicer) 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 Servicer's
normal servicing procedures (such amounts, net of related unreimbursed
expenses and advances of the Servicer, "Net Liquidation Proceeds");
(iv) any Buydown Funds (and, if applicable, investment
earnings thereon) required to be paid to Securityholders, as described
below;
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(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 Servicer, the Company, the
Master Servicer, 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; and
(vi) any amounts required to be transferred from the
Distribution Account to the Principal and Interest Account.
In addition to the Principal and Interest Account, the Servicer 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"). Both the Principal and Interest Account and the Distribution Account
must be (x) maintained with a depository institution whose debt obligations at
the time of any deposit therein meet certain rating criteria, and (y) (i) an
account or accounts the deposits in which are fully insured to the limits
established by the FDIC, (ii) an account maintained at a federal savings and
loan or state banking institution, (iii) an account maintained at a principal
subsidiary of a bank holding company, (iv) an account maintained at a national
banking association, or (v) such other account or accounts acceptable to the
Rating Agency or Agencies that rated one or more classes of Securities of such
series (an "Eligible Account"). The collateral that is eligible to secure
amounts in an Eligible Account is limited to certain permitted investments
("Permitted Investments"). Permitted Investments include direct general
obligations of the United States or the obligations of any agency or
instrumentality of the United States that are fully guaranteed, Federal Funds,
certificates of deposit, time and demand deposits of any bank meeting certain
short term rating requirements described in a Pooling and Servicing Agreement,
certain investment agreements approved by the Financial Guaranty Insurer, and
commercial paper and no load mutual funds meeting certain rating requirements
described in a Pooling and Servicing Agreement. A Distribution Account may be
maintained as an interest-bearing or a non-interest-bearing account, or funds
therein may be invested in Permitted Investments as described below. 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 the Servicer that have been deposited into the
Principal and Interest Account. The 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 Accounts.
Unless otherwise specified in the related Prospectus Supplement and
Pooling and Servicing Agreement, not later than the seventh day preceding each
Payment Date (the "Remittance Date"), the Servicer will withdraw from the
Principal and Interest Account and remit to the Trustee for deposit into the
applicable Distribution Account, in immediately available funds, the amount to
be distributed therefrom to Securityholders on such Payment Date. The Servicer
will remit to the Trustee for deposit into the Distribution Account the amount
of any advances made by the Servicer as described herein under "Advances," any
amounts required to be paid by the Servicer out of its own funds due to the
operation of a deductible clause in any blanket policy maintained by the
Servicer to cover hazard losses on the Mortgage Loans as described under "Hazard
Insurance; Claims Thereunder" below and any other amounts as specifically set
forth in the related Pooling and Servicing Agreement. The Trustee will cause all
payments under any credit enhancement such as a financial guaranty insurance
policy or a letter of credit to be deposited in the Distribution Account prior
to the close of business on the business day next preceding each Payment Date.
The portion of any payment received by the Servicer in respect of a
Mortgage Loan that is allocable to the Originator's Retained Yield generally
will be deposited into the Principal and Interest Account but will not be
deposited in the Distribution Account for the related series of Securities.
Funds on deposit in the Principal and Interest Account attributable to
Mortgage Loans underlying a series of Securities may be invested in Permitted
Investments maturing in general not later than the business day preceding the
next Payment Date. All income and gain realized from any such investment will
generally be for the account of the Servicer. Funds on deposit in the related
Distribution Account may be invested in Permitted Investments maturing, in
general, no later than the 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. 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
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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 Company's Guidelines from time to time,
will support the scheduled level of payments due under the Buydown Mortgage
Loan. Neither the Servicer nor the Company 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 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 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
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 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
Servicer or, if instructed by the 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 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 Delinquency
Advances or Servicing Advances as to any Mortgaged Property, out of
late payments or collections on the related Mortgage Loan with respect
to which such Delinquency Advances or Servicing Advances were made;
(iii) to withdraw investment earnings on amounts on deposit in
the Principal and Interest Account;
(iv) to pay the Company 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);
(v) to withdraw amounts that have been deposited in the
Principal and Interest Account in error; and
(vi) 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."
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Distributions
Beginning on the Payment Date in the month following the month (or, in
the case of quarterly-pay Securities, the third month following such month and
each third month thereafter or, in the case of semi-annually-pay Securities, the
sixth month following such month and each sixth month thereafter) in which the
Cut-Off Date occurs (or such other date as may be set forth in the related
Prospectus Supplement) for a series of Securities, distributions of principal
and interest (or, where applicable, of principal only or interest only) on each
class of Securities entitled thereto will be made either by the Trustee or a
paying agent appointed by the Trustee (the "Paying Agent"), to the persons who
are registered as the Securityholders of such Securities at the close of
business as of the last day of the preceding month (the "Record Date") in
proportion to their respective Percentage Interests. Interest that accrues and
is not payable on a class of Securities will generally 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.
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 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, 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.
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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 15th day (or if such day is not a business day,
the next succeeding business day or such other date specified in the Pooling and
Servicing Agreement) of the month of distribution (the "Determination Date"),
the Servicer will provide the Trustee, (and the Master Servicer and Credit
Enhancer, if any) with a monthly servicing report. Except as otherwise provided
in the related Pooling and Servicing Agreement, on or prior to one business day
after the related Remittance Date (or such earlier or later day as shall be
agreed by a Financial Guaranty Insurer, if applicable, and Trustee) of the month
of distribution, the Trustee will use the monthly servicing report to 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
Principal and Interest Account is insufficient to cover the amount to be passed
through to Securityholders, no later than 12:00 noon New York City time on the
second business day preceding a Payment Date, the Trustee will notify a
Financial Guaranty Insurer or any other person required to be notified pursuant
to the related Pooling and Servicing Agreement.
Advances
The Servicer is required, not later than each Remittance Date, to
deposit into the Principal and Interest Account an amount equal to the sum of
the scheduled interest and principal payments (net of the Servicing Fees and
certain administrative amounts) due, but not collected, with respect to
delinquent Mortgage Loans during the prior Remittance Period, but only if, in
its good faith business judgment, the Servicer believes that such amount will
ultimately be recovered from the related Mortgage Loan. Such amounts are
"Delinquency Advances." The Servicer will be permitted to fund its payment of
Delinquency Advances on any Remittance Date from collections on any Mortgage
Loan deposited to the Principal and Interest Account subsequent to the related
Remittance Period and will be required to deposit into the Principal and
Interest Account with respect thereto (i) collections from the Mortgagor whose
delinquency gave rise to the shortfall which resulted in such Delinquency
Advance and (ii) Net Liquidation Proceeds recovered on account of the related
Mortgage Loan to the extent of the amount of aggregate Delinquency Advances
related thereto.
A 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.
Generally, on or prior to each Remittance Date, the Servicer will be
required to deposit in the Principal and Interest Account with respect to any
full prepayment received on a Mortgage Loan 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 Servicing Fee and certain miscellaneous administrative
amounts) on the loan 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 certain miscellaneous administrative
amounts) paid by the Mortgagor with respect to the Mortgage Loan during such
Remittance Period (any such amount paid by the Servicer, "Compensating
Interest"). The Servicer shall in no event be required to pay Compensating
Interest with respect to any Remittance Period in an amount in excess of the
aggregate Servicing Fee received by the Servicer with respect to all Mortgage
Loans for such Remittance Period.
The 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 Servicer reasonably believes that such amounts will increase
Net Liquidation Proceeds on the related Mortgage Loan. Each such amount so paid
will constitute a "Servicing Advance." The Servicer may recover Servicing
Advances to the extent permitted by the Mortgage Loans or, if not theretofore
recovered from the Mortgagor on whose behalf such Servicing Advance was made,
from liquidation proceeds realized upon the liquidation of the related Mortgage
Loan. In no case may the Servicer recover Servicing Advances from the principal
and interest payments on any Mortgage Loan or from any amounts relating to any
other Mortgage Loan.
Notwithstanding the foregoing, if the 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
Servicer will be deemed to have been reimbursed for all related advances
previously made by it and not
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theretofore reimbursed to it. The Servicer's obligation to make advances may be
supported by credit enhancement as described in the related Pooling and
Servicing Agreement. In the event that the provider of such support is
downgraded by a Rating Agency rating the related Securities or if the collateral
supporting such obligation is not performing or is removed pursuant to the terms
of any agreement described in the related Prospectus Supplement, the Securities
may also be downgraded.
Reports to Securityholders
With each distribution to Securityholders of a particular class the
Trustee will forward or cause to be forwarded to each holder of record of such
class of Securities a statement or statements with respect to the related Trust
setting forth the information specifically described in the related Pooling and
Servicing Agreement, which generally will include the following as applicable
except as otherwise provided therein:
(i) the amount of the distribution with respect to each class
of Securities;
(ii) the amount of such distribution allocable to principal,
separately identifying the aggregate amount of any prepayments or other
recoveries of principal included therein;
(iii) the amount of such distribution allocable to interest;
(iv) the aggregate unpaid Principal Balance of the Mortgage
Loans after giving effect to the distribution of principal on such
Payment Date;
(v) with respect to a series consisting of two or more
classes, the outstanding principal balance or notional amount of each
class after giving effect to the distribution of principal on such
Payment Date;
(vi) the amount of coverage under any letter of credit,
mortgage pool insurance policy or other form of credit enhancement
covering default risk as of the close of business on the applicable
Determination Date and a description of any credit enhancement
substituted therefor;
(vii) information furnished by the Company 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 certificates in such class (after giving
effect to any distribution of principal to be made on such Payment
Date) by the original principal balance of certificates 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 following any
year during which Securities are outstanding, the Trustee shall furnish a report
to each Securityholder of record 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 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, 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 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));
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(iv) the number, percentage 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.
Each Pooling and Servicing Agreement shall provide that the
Securityholders will have the right to request a Securityholder list. Any
Securityholder in a Trust may apply in writing to the related Trustee, and such
application shall state that the Securityholder desires to communicate with
other Securityholders with respect to their rights under the related Pooling and
Servicing Agreement. Such written request shall be accompanied by a copy of the
communication which such Securityholder proposes to transmit to other
Securityholders. The Trustee shall furnish such Securityholder list to such
requesting Securityholder within ten business days after receipt of the
application.
Collection and Other Servicing Procedures
Acting directly or through one or more Sub-Servicers as provided in the
related Pooling and Servicing Agreement, the 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 Servicer exercises with respect to comparable mortgage loans that it
services for itself or others.
The duties of the 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. The Servicer is required to follow
its customary standards, policies and procedures in performing its duties as
Servicer.
The 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 (other than as permitted by the related Pooling and Servicing
Agreement) or the timing of receipt of any payments required thereunder; 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 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 Servicer is required always at least to follow
collection procedures that are consistent with or better than standard industry
practices. The 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 Servicer shall not 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 Servicer's general policies for comparable
mortgage loans subject to the Relief Act.
The Servicer will be required to foreclose upon or otherwise comparably
effect the ownership on behalf of the Trust of Mortgaged Properties relating to
defaulted Mortgage Loans as to which no satisfactory arrangements can be made
for collection of delinquent payments. The related Pooling and Servicing
Agreement will require the Servicer to 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 Response Conservation and Recovery Act of 1976, or other federal, state
or local environmental legislation, in determining whether to foreclose upon a
Mortgaged Property, or otherwise comparably effect the ownership of such
Mortgaged Property on behalf of the Trust.
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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 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 Servicer will not be required to
exercise any such right if (i) the "due-on-sale" clause, in the reasonable
belief of the Servicer, is not enforceable under applicable law or (ii) the
Servicer reasonably believes that to permit an assumption of the Mortgage Loan
would not materially and adversely affect the interests of Securityholders or
the Financial Guaranty Insurer, if any, or jeopardize coverage under any primary
insurance policy or applicable credit enhancement arrangements. In such event,
the 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 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 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 Servicer or Sub-Servicer for entering into an assumption or
substitution of liability agreement will be retained by the Servicer or
Sub-Servicer as additional servicing compensation unless otherwise set forth in
the related Prospectus Supplement. See "Certain Legal Aspects of Mortgage Loans
and Related Matters--Enforceability of Certain Provisions" herein.
The 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 Servicer unless: (i) the provisions of the related Mortgage Note and
Mortgage have been complied with; (ii) the loan-to-value ratio and
debt-to-income ratio after any release are consistent with the Company's
Guidelines then applicable to such Mortgage Loan; and (iii) the lien priority of
the related Mortgage is not affected.
Realization upon Defaulted Mortgage Loans
The Servicer shall foreclose upon or otherwise comparably effect the
ownership on behalf of the Trust 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 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
Servicer shall exercise such of the rights and powers vested in it under the
related Pooling and Servicing Agreement, 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, advancing funds for the payment of taxes, amounts due with
respect to Senior Liens and insurance premiums. Any amounts so advanced shall
constitute "Servicing Advances." Unless otherwise provided in the related
Prospectus Supplement, the Servicer shall sell any REO Property within 23 months
of its acquisition by the Trust, unless the Servicer obtains for the Trustee an
opinion of counsel experienced in federal income tax matters, addressed to the
Trustee, a Financial Guaranty Insurer, if applicable, and the Servicer, to the
effect that the holding by the Trust of such REO Property for any greater period
will not result in the imposition of taxes on "Prohibited Transactions" of the
Trust as defined in Section 860F of the Code or, if a REMIC election has been
made, cause the Trust to fail to qualify as a REMIC under the REMIC Provisions
at any time that any Securities are outstanding, in which case the Servicer
shall sell any REO Property by the end of any extended period specified in any
such opinion.
Notwithstanding the generality of the foregoing provisions, the
Servicer shall manage, conserve, protect and operate each REO Property for the
Securityholders solely for the purpose of its prompt disposition and sale in a
manner which does not cause such REO Property to fail to qualify as "foreclosure
property" within the meaning of Section 860G(a)(8) of the Code or result in 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 Servicer shall either itself or
through an agent selected by the Servicer protect and conserve such REO Property
in the same
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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
Servicer deems to be in the best interest of the Securityholders for the period
prior to the sale of such REO Property. The 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 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.
If a defaulted Mortgage Loan or REO Property is not so removed from the
Trust Estate, then, upon the final liquidation thereof, if a loss is realized
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 Servicer will be entitled to retain such
gain as additional servicing compensation unless the related Prospectus
Supplement provides otherwise. For a description of the 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."
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. 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 distribution 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, 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
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
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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 Principal
Balance thereof as of the Payment Date following the calendar month in which
such Realized Loss was incurred.
In lieu of the foregoing provisions, subordination may be effected in
the following manner, or in any other manner described in the related Prospectus
Supplement. The rights of the holders of Subordinate Securities to receive any
or a specified portion of distributions with respect to the Mortgage Loans may
be subordinated to the extent of the amount set forth in the related Prospectus
Supplement (the "Subordinate Amount"). As specified in the related Prospectus
Supplement, the Subordinate Amount may be subject to reduction based upon the
amount of losses borne by the holders of the Subordinate Securities as a result
of such subordination, a specified schedule or such other method of reduction as
such Prospectus Supplement may specify. If so specified in the related
Prospectus Supplement, additional credit support for this form of subordination
may be provided by the establishment of a reserve fund for the benefit of the
holders of the Senior Securities (which may, if such Prospectus Supplement so
provides, initially be funded by a cash deposit by the Company or the related
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
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 specified herein. 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. 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 other 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.
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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 "Reduction or Substitution of Credit
Enhancement." If specified in the applicable Prospectus Supplement, credit
enhancement for a series of Securities may cover one or more other series of
Securities.
The descriptions of any insurance policies or bonds described in this
Prospectus or any Prospectus Supplement and the coverage thereunder do not
purport to be complete and are qualified in their entirety by reference to the
actual forms of such policies, copies of which are available upon request.
Letter of Credit
If any component of credit enhancement as to any series of Securities
is to be provided by a letter of credit (the "Letter of Credit"), a bank (the
"Letter of Credit Bank") will deliver to the Trustee an irrevocable Letter of
Credit. The Letter of Credit may provide direct coverage with respect to the
related Securities or, if specified in the related Prospectus Supplement,
support the Company'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
and in the related Form 8-K. 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 Company (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 Company 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
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 Company for a Trust 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 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
Servicer or the Sub-Servicer, the insurer will pay the lesser of (i) the cost
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of repair or replacement of such property or (ii) upon 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 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.
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. 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 Company 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 Company 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
Permitted 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 Servicer for outstanding advances or may be used for other
purposes, in the manner and to the extent specified in the related Prospectus
Supplement. Unless otherwise provided in the related Prospectus Supplement, any
such Reserve Fund will not be deemed to be part of the related Trust Estate.
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 Financial Guaranty Insurance Policy will unconditionally and
irrevocably guarantee to Securityholders that an amount equal to each full and
complete insured payment will ultimately 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 of one or more
classes are entitled under the related Pooling and Servicing Agreement plus any
other amounts specified therein or in the related Prospectus Supplement (the
"Insured Payment").
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 generally will not
guarantee any specified rate of prepayments or 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 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 with
respect to one class of security be made with excess amounts available from
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, overcollateralization 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 Company or the Servicer 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 Company's or the Servicer's obligation to maintain a
particular form of credit enhancement, the Company or the Servicer may obtain a
substitute or alternate form of credit enhancement. If the 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 Company or
the Servicer, as the case may be, will obtain written confirmation from the
Rating
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Agency or Agencies that rated the related series of Securities that the
substitution or alternate form of credit enhancement for the existing credit
enhancement will not adversely affect the then current ratings assigned to such
Securities by such Rating Agency or Agencies.
The 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
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 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 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 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 Servicer has been unable to make the above
determinations, has made such determinations incorrectly or recovery is not
available for any other reason, the 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
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 alterative form of credit enhancement) may be
reduced under certain specified circumstances. In addition, if provided 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, neither the Company nor the Servicer thereafter will
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 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 Company, one or more Originators, the Servicer 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 Servicer upon request.
Hazard Insurance Policies
The terms of the Mortgage Loans require each Mortgagor to maintain a
hazard insurance policy for the Mortgage Loan. Additionally, the Pooling and
Servicing Agreement will require the Servicer to cause to be maintained with
respect to each Mortgage Loan a hazard insurance policy with a generally
acceptable carrier that provides for fire and extended coverage relating to such
Mortgage Loan in an amount not less than the least of (i) the outstanding
principal balance of the Mortgage Loan, (ii) the minimum amount required to
compensate for damage or loss on a replacement cost basis or (iii) the full
insurable value of the premises.
If a Mortgage Loan at the time of origination relates to a Mortgaged
Property in an area identified in the Federal Register by the Federal Emergency
Management Agency as having special flood hazards, the Servicer will 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 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 Servicer will be required to indemnify the Trust out of the Servicer's own
funds for any loss to the Trust resulting from the Servicer's failure to
maintain such flood insurance.
In the event that the 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 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 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 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 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.
While the Servicer does not actively monitor the maintenance of hazard
or flood insurance by borrowers, it responds to the notices of cancellation or
expiration as joint-loss payee by requiring verification of replacement
coverage.
THE COMPANY
The Company, First Alliance Mortgage Company, was incorporated in the
State of California on May 13, 1975. The Company or its affiliates have been
actively involved in the mortgage lending business since its founding. The
Company is currently a privately held company 100% owned by Brian Chisick and
his wife, Sarah Chisick, however, on May 13, 1996, the Company filed a
registration statement with the Securities and Exchange Commission for the
offering of Class A Common Stock to the public, such public offering is expected
to close in July 1996. The current corporation and all of its predecessors have
been located in Orange County, California. Approximately half of the Company's
employees are located at the corporate headquarters. The balance of the
employees work in branch offices distributed throughout the United States.
The Company maintains its principal office at 17305 Von Karman, Irvine,
California 92714. Its telephone number is (714) 224-8500.
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THE SERVICER
First Alliance Mortgage Company will act as the Servicer for a series
of Securities. See "The Company."
THE MASTER SERVICER
A Master Servicer may be appointed pursuant to a Pooling and Servicing
Agreement and named in the related Prospectus Supplement or Current Report on
Form 8-K.
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
The principal servicing compensation to be paid to the Servicer in
respect of its servicing activities for each series of Securities will be equal
to the percentage per annum specified in the related Prospectus Supplement or
Current Report on Form 8-K of the outstanding principal balance of the Mortgage
Loans, and such compensation will be retained by it from collections of interest
on the Mortgage Loans in the related Trust Estate (after provision has been made
for the payment of interest at the applicable Pass-Through Rate or Net Mortgage
Rate, as the case may be, to Securityholders and for the payment of any
Originator's Retained Yield) at the time such collections are deposited into the
applicable Principal and Interest Account. As compensation for its servicing
duties, the Servicer and/or a Sub-Servicer and any Master Servicer will be
entitled to a monthly servicing fee as set forth in the related Prospectus
Supplement. Certain Sub-Servicers may also receive additional compensation in
the amount of all or a portion of the interest due and payable on the applicable
Mortgage Loan which is over and above the interest rate specified at the time
the Company committed to purchase the Mortgage Loan. See "Mortgage Loan
Program--Sub-Servicing by Originators." In addition, the Servicer or a
Sub-Servicer will retain all prepayment charges, assumption fees and late
payment charges, to the extent collected from Mortgagors, and any benefit which
may accrue as a result of the investment of funds in the Principal and Interest
Account or the applicable Distribution Account or in a Sub-Servicing Account, as
the case may be.
The Servicer generally 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 Master Servicer, the Trustee, 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 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 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
The Servicer will be required to deliver to the Trustee, the Master
Servicer (if applicable), the Rating Agencies and any Credit Enhancer on or
before a specified date of each year, beginning the first such date that is at
least a specified number of months after the Cut-Off Date, an officers'
certificate stating, as to each signer thereof, that (i) a review of the
activities of the Servicer during such preceding calendar year and of
performance
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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 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 Servicer to remedy such defaults.
On or before the last day of a specified month of each year, beginning
the first such date that is at least a specified number of months after the
Cut-Off Date, the Servicer will be required to cause to be delivered to the
Trustee, the Master Servicer (if applicable), the Rating Agencies and any Credit
Enhancer, if applicable, 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
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 Audit Program for Mortgage Bankers, and in either case stating such
firm's conclusions relating thereto.
Removal and Resignation of the Servicer
Each Pooling and Servicing Agreement provides that the 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 or subject to the consent of the Master Servicer or Financial Guaranty
Insurer and the Trustee. No such resignation will become effective until the
Trustee, the Master Servicer or a successor Servicer has assumed the Servicer's
obligations and duties under the Pooling and Servicing Agreement. The Trustee,
the Master Servicer, the Financial Guaranty Insurer or the Securityholders will
have the right, pursuant to the related Pooling and Servicing Agreement, to
remove the 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 Servicer and certain actions by the Servicer
indicating its insolvency or inability to pay its obligations; (b) the failure
of the Servicer to perform any one or more of its material obligations under the
Pooling and Servicing Agreement as to which the Servicer shall continue in
default with respect thereto for a period of sixty (60) days after notice by the
Trustee, the Master Servicer or any Financial Guaranty Insurer of said failure;
(c) the failure of the 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 Financial
Guaranty Insurer, if applicable, for a period of sixty (60) days after the
Servicer's discovery or receipt of notice thereof; or (d) the failure to deliver
to Trustee any proceeds or required payments.
The Pooling and Servicing Agreement may also provide that a Financial
Guaranty Insurer may remove the Servicer, or the Master Servicer pursuant to
clause (iii) below, 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 insured securities in
respect of such Payment Date; provided, however, that the Financial
Guaranty Insurer will have no right to remove the Servicer pursuant to
the provision described in this clause (i) if the Servicer can
demonstrate to the reasonable satisfaction of the Financial Guaranty
Insurer that such event was due to circumstances beyond the control of
the Servicer;
(ii) the failure by the Servicer to make any required
Servicing Advance;
(iii) the failure of the Servicer (or the Master Servicer, if
applicable) to perform one or more of its material obligations under
the Pooling and Servicing Agreement and such failure shall continue for
a period of 30 days;
(iv) the failure by the Servicer to make any required
Delinquency Advance or to pay any Compensating Interest; or
(v) the aggregate number of Mortgage Loans 91 or more days
delinquent exceeds a specified percentage.
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Resignation of the Master Servicer
Each applicable Pooling and Servicing Agreement provides that the
Master Servicer may not resign from its obligations and duties thereunder,
unless such duties and obligations are no longer permissible under applicable
law or the Trustee resigns. No such resignation is acceptable until a successor
Master Servicer assumes such duties and obligations.
Rights Upon Event of Default
So long as an Event of Default remains unremedied, the Trustee, the
Master Servicer or the Financial Guaranty Insurer (as provided in the related
Pooling and Servicing Agreement) may, by written notification to the Servicer,
terminate all of the rights and obligations of the Servicer under the Pooling
and Servicing Agreement (other than any rights of the Servicer as
Securityholder) covering such Trust Estate and in and to the Mortgage Loans and
the proceeds thereof, whereupon the Master Servicer, if designated in the
related Pooling and Servicing Agreement, the Trustee or, with the Financial
Guaranty Insurer's consent, its designee will succeed to all responsibilities,
duties and liabilities of the Servicer under such Pooling and Servicing
Agreement (other than the obligation to purchase Mortgage Loans under certain
circumstances) and will be entitled to similar compensation arrangements. In the
event that the Master Servicer and Trustee would be obligated to succeed the
Servicer but is unwilling or unable so to act, it may appoint, or petition a
court of competent jurisdiction for the appointment of, a FNMA-or FHLMC-approved
mortgage servicing institution with a net worth of at least $5,000,000 to act as
successor to the Servicer under the Pooling and Servicing Agreement (unless
otherwise set forth in the Pooling and Servicing Agreement). Pending such
appointment, the Master Servicer is obligated to act in such capacity.
Amendment
Each Pooling and Servicing Agreement may be amended by the Company, the
Servicer, the Master Servicer and the Trustee, with the prior approval of a
Financial Guaranty Insurer, if required, but without giving notice or the
consent of any of the holders of Securities covered by such Pooling and
Servicing Agreement, (i) to cure an ambiguity, (ii) to correct or supplement any
provision therein which may be inconsistent with any other provision therein,
(iii) to change the timing and/or nature of deposits in the Principal and
Interest Account or the Distribution Account or to change the name in which the
Principal and Interest Account is maintained to that of the Servicer alone;
provided that (a) the Remittance Date would in no event be later than the
related Payment Date, (b) such change would not adversely affect in any material
respect the interests of any Securityholder, as evidenced by an opinion of
counsel, and (c) such change would not adversely affect the then-current rating
of any rated classes of Securities, as evidenced by a letter from each
applicable Rating Agency, (iv) if a REMIC election has been made with respect to
the related Trust Estate, to modify, eliminate or add to any of its provisions
(A) to such extent as shall be necessary to maintain the qualification of the
Trust Estate as a REMIC or to avoid or minimize the risk of imposition of any
tax on the related Trust Estate, provided that the Trustee has received an
Opinion of Counsel to the effect that (a) such action is necessary or desirable
to maintain such qualifications or to avoid or minimize such risk, and (b) such
action will not adversely affect in any material respect the interests of any
holder of Securities covered by the Pooling and Servicing Agreement, or (B) to
restrict the transfer of the REMIC Residual Securities, provided that the
Company has determined that the then-current ratings of the classes of the
Securities that have been rated will not be adversely affected, as evidenced by
a letter from each applicable Rating Agency, and that any such amendment will
not give rise to any tax with respect to the transfer of the REMIC Residual
Securities to a non-permitted transferee, (v) to make any other provisions with
respect to matters or questions arising under such Pooling and Servicing
Agreement which are not materially inconsistent with the provisions thereof,
provided that such action will not adversely affect in any material respect the
interests of any Securityholder or (vi) to make any changes required by law.
The Pooling and Servicing Agreement may also be amended by the Company,
the Servicer, the Master Servicer and the Trustee with the consent of the
holders of Securities of each class affected thereby evidencing, in each case,
not less than 51% of the aggregate Percentage Interests constituting such class
for the purpose of adding any provisions to 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 holders of Securities covered by such
Pooling and Servicing Agreement, except that no such amendment may (i) reduce in
any manner the amount of, or delay the timing of, payments received on Mortgage
Loans which are required to be distributed on a Security of any class without
the consent of the holder of such Security or (ii) reduce the aforesaid
percentage of Securities of any class the holders of which are required to
consent to any such amendment without the consent of the holders of all
Securities of such class covered by such Pooling and Servicing Agreement then
outstanding.
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Notwithstanding the foregoing, if a REMIC election has been made with
respect to the related Trust Estate, the Trustee will not be entitled to consent
to any amendment to a Pooling and Servicing Agreement without having first
received an Opinion of Counsel to the effect that such amendment or the exercise
of any power granted to the Servicer, the Company or the Trustee in accordance
with such amendment will not result in the imposition of a tax on the related
Trust Estate or cause such Trust Estate to fail to qualify as a REMIC.
Each Pooling and Servicing Agreement may also be amended by the
Trustee, the Servicer, the Company or the Master Servicer at any time and from
time to time, with the prior written approval of a Financial Guaranty Insurer,
if required, and not less than a majority of the Percentage Interest represented
by each related class of Securities then outstanding, for the purpose of adding
any provisions or changing in any manner or eliminating any of the provisions of
such Pooling and Servicing Agreement or of modifying in any manner the rights of
the Securityholders thereunder; provided, however, that no such amendment shall
(a) change in any manner the amount of, or delay the timing of, payments which
are required to be distributed to any Securityholders without the consent of the
holder of such Security or (b) change the aforesaid percentages of Percentage
Interest which are required to consent to any such amendments, without the
consent of the holders of all Securities of the class or classes affected then
outstanding.
Termination; Retirement of Securities
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, a Financial Guaranty Insurance Policy 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
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 Servicer
because of such termination. 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 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 Servicer, the Company 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 Servicer, the Company 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 or Form 8-K 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. The commercial bank or trust company serving
as Trustee may have normal banking relationships with the Company and/or its
affiliates.
The Trustee may resign at any time, in which event the Company will be
obligated to appoint a successor Trustee. The Company may also remove the
Trustee if the Trustee ceases to be eligible to continue as such under the
Pooling and Servicing Agreement or if the Trustee becomes insolvent. Upon
becoming aware of such
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circumstances, the Company will be obligated to appoint a successor Trustee. The
Trustee may also be removed at any time by the holders of Securities evidencing
not less than 51% of the aggregate undivided interests (or, if so specified in
the related Prospectus Supplement, voting rights) in the related Trust Estate or
by the related Financial Guaranty Insurer or Credit Enhancer, if any. Any
resignation or removal of the Trustee and appointment of a successor Trustee
will not become effective until acceptance of the appointment by the successor
Trustee.
YIELD CONSIDERATIONS
The yield to maturity of a Security will depend on the price paid by
the holder for such Security, the Pass-Through Rate on any such Security
entitled to payments of interest (which Pass-Through Rate may vary if so
specified in the related Prospectus Supplement) and the rate of payment of
principal on such Security (or the rate at which the notional amount thereof is
reduced if such Security is not entitled to payments of principal) and other
factors.
Each month the interest payable on an actuarial type of Mortgage Loan
will be calculated as one-twelfth of the applicable Mortgage Rate multiplied by
the principal balance of such Mortgage Loan outstanding as of a specified day,
usually the first day of the month prior to the month in which the Payment Date
for the related series of Securities occurs, after giving effect to the payment
of principal due on such day, subject to any Deferred Interest. With respect to
date of payment Mortgage Loans, interest is charged to the Mortgagor at the
Mortgage Rate on the outstanding principal balance of such Note and calculated
based on the number of days elapsed between receipt of the Mortgagor's last
payment through receipt of the Mortgagor's most current payments. The amount of
such payments with respect to each Mortgage Loan distributed (or accrued in the
case of Deferred Interest or Accrual Securities) either monthly, quarterly or
semi-annually to holders of a class of Securities entitled to payments of
interest will be similarly calculated on the basis of such class specified
percentage of each such payment of interest (or accrual in the case of Accrual
Securities) and will be expressed as a fixed, adjustable or variable
Pass-Through Rate payable on the outstanding principal balance or notional
amount of such Security, calculated as described herein and in the related
Prospectus Supplement. Holders of Strip Securities or a class of Securities
having a fixed Pass-Through Rate that varies based on the weighted average
Mortgage Rate of the underlying Mortgage Loans will be affected by
disproportionate prepayments and repurchases of Mortgage Loans having higher Net
Mortgage Rates or rates applicable to the Strip Securities, as applicable.
The effective yield to maturity to each holder of fixed-rate Securities
entitled to payments of interest will be below that otherwise produced by the
applicable Pass-Through Rate and purchase price of such Security because, while
interest will accrue on each Mortgage Loan from the first day of each month, the
distribution of such interest will be made on the 25th day (or, if such day is
not a business day, the next succeeding business day) of the month (or, in the
case of quarterly-pay Securities, the twenty-fifth day of every third month, or,
in the case of semi-annually-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 Company, the Originators, the 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
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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 will likely be sold at a substantial
premium to its principal balance, if any, and any faster than anticipated rate
of prepayments will adversely affect the yield to holders thereof. In certain
circumstances, rapid prepayments may result in the failure of such holders to
recoup their original investment. In addition, the yield to maturity on certain
other types of classes of Securities, including Accrual Securities or certain
other classes in a series including more than one class of Securities, may be
relatively more sensitive to the rate of prepayment on the related Mortgage
Loans than other classes of Securities.
The timing of changes in the rate of principal payments on or
repurchases of the Mortgage Loans may significantly affect an investor's actual
yield to maturity, even if the average rate of principal payments experienced
over time is consistent with an investor's expectation. In general, the earlier
a prepayment of principal on the underlying Mortgage Loans or a repurchase
thereof, the greater will be the effect on an investor's yield to maturity. As a
result, the effect on an investor's yield of principal payments and repurchases
occurring at a rate higher (or lower) than the rate anticipated by the investor
during the period immediately following the issuance of a series of Securities
would not be fully offset by a subsequent like reduction (or increase) in the
rate of principal payments.
When a full prepayment is made on a Mortgage Loan, the Mortgagor is
charged interest on the principal amount of the Mortgage Loan so prepaid for the
number of days in the month actually elapsed up to the date of the prepayment,
at a daily rate determined by dividing the Mortgage Rate by 365. The effect of
prepayments in full will be to reduce the amount of interest paid in the next
succeeding month to holders of Securities entitled to payments of interest
because interest on the principal amount of any Mortgage Loan so prepaid will be
paid only to the date of prepayment rather than for a full month. A partial
prepayment of principal is applied so as to reduce the outstanding principal
balance of the related Mortgage Loan as of the first day of the month in which
such partial prepayment is received. As a result, unless otherwise specified in
the related Prospectus Supplement, the effect of a partial prepayment on a
Mortgage Loan will be to reduce the amount of interest passed through to holders
of Securities on the Payment Date following the receipt of such partial
prepayment by an amount equal to one month's interest at the applicable
Pass-Through Rate or Net Mortgage Rate, as the case may be, on the prepaid
amount. With respect to amounts due the Servicer from Sub-Servicers in respect
of partial principal prepayments, see "Description of the Securities--Payment on
Mortgage Loans; Deposits to Distribution Account." Neither full nor partial
principal prepayments are passed through until the month following receipt. See
"Maturity and Prepayment Considerations."
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, 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 month's 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."
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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 Company'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.
Generally, all of the Mortgage Loans may be prepaid without penalty in full or
in part at any time. The prepayment experience with respect to the Mortgage
Loans in a Mortgage Pool will affect the maturity, average life and yield of the
related series of Securities.
With respect to Balloon Loans, payment of the Balloon Amount (which,
based on the amortization schedule of such Mortgage Loans, may be a substantial
amount) will generally depend on the Mortgagor's ability to obtain refinancing
of such Mortgage Loan or to sell the Mortgaged Property prior to the maturity of
the Balloon Loan. The ability to obtain refinancing will depend on a number of
factors prevailing at the time refinancing or sale is required, including,
without limitation, real estate values, the Mortgagor's financial situation,
prevailing mortgage loan interest rates, the Mortgagor's equity in the related
Mortgaged Property, tax laws and prevailing general economic conditions. Neither
the Company, the 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. Generally all
Mortgage Loans will contain due-on-sale provisions permitting the mortgagee to
accelerate the maturity of the Mortgage Loan upon sale or certain transfers by
the Mortgagor of the underlying Mortgaged Property. Unless the related
Prospectus Supplement indicates otherwise, the Servicer will generally enforce
any due-on-sale clause to the extent it has knowledge of the conveyance or
proposed conveyance of the underlying Mortgaged Property and it is entitled to
do so under applicable law; provided, however, that the 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 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 Company 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 Company 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 generally will, (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
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certainty as to the rate of prepayments on the Mortgage Loans during any period
or over the life of any series of Securities.
As may be described in the related Prospectus Supplement, the related
Pooling and Servicing Agreement may provide that all or a portion of the
principal collected on or with respect to the related Mortgage Loans may be
applied by the related Trustee to the acquisition of additional Mortgage Loans
during a specified period (rather than used to fund payments of principal to
Securityholders during such period) with the result that the related securities
possess an interest-only period, also commonly referred to as a revolving
period, which will be followed by an amortization period. Any such interest-only
or revolving period may, upon the occurrence of certain events to be described
in the related Prospectus Supplement, terminate prior to the end of the
specified period and result in the earlier than expected amortization of the
related Securities.
In addition, and as may be described in the related Prospectus
Supplement, the related Pooling and Servicing Agreement may provide that all or
a portion of such collected principal may be retained by the Trustee (and held
in certain temporary investments, including Mortgage Loans) for a specified
period prior to being used to fund payments of principal to Securityholders.
The result of such retention and temporary investment by the Trustee of
such principal would be to slow the amortization rate of the related Securities
relative to the amortization rate of the related Mortgage Loans, or to attempt
to match the amortization rate of the related Securities to an amortization
schedule established at the time such Securities are issued. Any such feature
applicable to any Securities may terminate upon the occurrence of events to be
described in the related Prospectus Supplement, resulting in the current funding
of principal payments to the related Securityholders and an acceleration of the
amortization of such Securities.
Under certain circumstances, the Servicer, the Company 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 laws (which laws may differ substantially),
the summaries do not purport to be complete nor to reflect the laws of any
particular state nor to encompass the laws of all states in which the Mortgaged
Properties may be situated. The summaries are qualified in their entirety by
reference to the applicable federal and state laws governing the Mortgage Loans.
General
The Mortgage Loans will be secured by either deeds of trust or
mortgages, depending upon the prevailing practice in the state in which the
Mortgaged Property subject to a Mortgage Loan is located. In California,
Mortgage Loans are secured by deeds of trust. 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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Foreclosure
Foreclosure of a deed of trust is generally accomplished by a
non-judicial trustee's sale (private sale) under a specific provision in the
deed of trust and state laws which authorize the trustee to sell the property
upon any default by the borrower under the terms of the note or deed of trust.
Beside the non-judicial 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 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.
Rights of Redemption
In some states, after sale pursuant to a deed of trust or foreclosure
of a mortgage, the borrower and foreclosed junior lienors or other parties are
given a statutory period in which to redeem the property from the foreclosure
sale. In some states, redemption may occur only upon payment of the entire
principal balance of the loan, accrued interest and expenses of foreclosure. In
other states, redemption may be authorized if the former borrower pays only a
portion of the sums due. The effect of a statutory right of redemption is to
diminish the ability of the lender to sell the foreclosed property. The rights
of redemption would defeat the title of any purchaser subsequent to foreclosure
or sale under a deed of trust. Consequently, the practical effect of the
redemption right is to force the lender to maintain the property and pay the
expenses of ownership until the redemption period has expired. In some states,
there is no right to redeem property after a Trustee's sale under a deed of
trust.
Anti-Deficiency Legislation and Other Limitations on Lenders
Certain states have imposed statutory prohibitions that limit the
remedies of a beneficiary under a deed of trust or a mortgagee under a mortgage.
In some states including California, statutes limit the right of the beneficiary
or mortgagee to obtain a deficiency judgment against the borrower following
foreclosure. A deficiency judgment is a personal judgment against the former
borrower equal in most cases to the difference between the amount due to the
lender and the net amount realized upon the public sale of the real property. In
the case of a
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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. In
certain other states, the lender has the option of bringing a personal action
against the borrower on the debt without first exhausting such security;
however, in some of these states the lender, following judgment on such personal
action, may be deemed to have elected a remedy and may be precluded from
exercising remedies with respect to the security. Consequently, the practical
effect of the election requirement, in those states permitting such election, is
that lenders will usually proceed against the security first rather than
bringing a personal action against the borrower. Finally, in certain other
states, statutory provisions limit any deficiency judgment against the former
borrower following a foreclosure to the excess of the outstanding debt over the
fair value of the property at the time of the public sale. The purpose of these
statutes is generally to prevent a beneficiary or mortgagee from obtaining a
large deficiency judgment against the former borrower as a result of low or no
bids at the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments,
numerous other federal and state statutory provisions, including the federal
bankruptcy laws and state laws affording relief to debtors, may interfere with
or affect the ability of the secured mortgage lender to realize upon collateral
or enforce a deficiency judgment. For example, with respect to federal
bankruptcy law, a court with federal bankruptcy jurisdiction may permit a debtor
through his or her Chapter 11 or Chapter 13 rehabilitative plan to cure a
monetary default in respect of a mortgage loan on a debtor's residence by paying
arrearages within a reasonable time period and reinstating the original mortgage
loan payment schedule even though the lender accelerated the mortgage loan and
final judgment of foreclosure had been entered in state court (provided no sale
of the residence had yet occurred) prior to the filing of the debtor's petition.
Some courts with federal bankruptcy jurisdiction have approved plans, based on
the particular facts of the reorganization case, that effected the curing of a
mortgage loan default by paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction also have indicated that
the terms of a mortgage loan secured by property of the debtor may be modified.
These courts have allowed modifications that include reducing the amount of each
monthly payment, changing the rate of interest, altering the repayment schedule,
forgiving all or a portion of the debt and reducing the lender's security
interest to the value of the residence, thus leaving the lender a general
unsecured creditor for the difference between the value of the residence and the
outstanding balance of the loan.
California courts 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,
California courts have required that lenders 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 the California Fair Debt
Collection Practices Act. These laws and regulations impose specific statutory
liabilities upon lenders who originate mortgage loans and who fail to comply
with the provisions of the law. In some cases, this liability may affect
assignees of the mortgage loans.
Environmental Legislation
Certain states, including California, 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
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of these states, will have priority over prior recorded liens including the lien
of a mortgage. In California, 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 including
California, a secured party which takes a deed in lieu of foreclosure or
acquires a mortgaged property at a foreclosure sale or assumes active control
over the operation or management of a property so as to be deemed an "owner" or
"operator" of the property may be liable for the costs of cleaning up a
contaminated site. Although such costs could be substantial, it is unclear
whether they would be imposed on a lender (such as a Trust Estate) secured by
residential real property. In the event that title to a Mortgaged Property
securing a Mortgage Loan in a Trust Estate was acquired by the Trust and cleanup
costs were incurred in respect of the Mortgaged Property, the holders of the
related series of Securities might realize a loss if such costs were required to
be paid by the Trust. The 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.
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.
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Certain Provisions of California Deeds of Trust
Most institutional lenders in California, including the Company, 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 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 alterative 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
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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 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 effected by the Relief Act. Application of
the Relief Act would adversely affect, for an indeterminate period of time, the
ability of the Servicer to collect full amounts of interest on certain of the
Mortgage Loans. 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 (other than a Certificate Insurance Policy) provided in connection
with the related series of Securities. In addition, the Relief Act imposes
limitations that would impair the ability of the Servicer to foreclose on an
affected Mortgage Loan during the Mortgagor's period of active duty status, and,
under certain circumstances, during an additional three month period thereafter.
Thus, in the event that the Relief Act or similar legislation or regulations
applies 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.
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"), and (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. Such a discussion will be set forth in the applicable
Prospectus Supplement for any Trust issuing Securities characterized as
partnership interests. The Prospectus Supplement for each Series of Securities
will indicate whether a REMIC election (or elections) will be made for the
related Trust Estate and, if a REMIC election is to be made, will identify all
"regular interests" and "residual interests" in the REMIC. For purposes of this
discussion, references to a "Securityholder" or a "Holder" are to the beneficial
owner of a Security.
Grantor Trust Securities
With respect to each Series of Grantor Trust Securities, Arter &
Hadden, special tax counsel to the Sponsor, will deliver its opinion to the
Sponsor that (unless otherwise limited in the applicable Prospectus Supplement)
the related Grantor Trust Estate will be classified as a grantor trust and not
as a partnership or an association taxable as a 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 Grantor Trust Estate.
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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 an applicable Prospectus Supplement,
Arter & Hadden, 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) "qualifying real property loans" within the meaning of section
593(d) of the Code; (ii) "loans . . . secured by an interest in real property"
within the meaning of section 7701(a)(19)(C)(v) of the Code; and (iii)
"obligation[s] (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 "obligation[s] (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.
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 two percent 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 in the Holder's
income as it accrues (regardless of the Holder's method of accounting), as
described below under "Discount and Premium." The coupon stripping rules will
not apply, however, if (i) the pass-through rate is no more than 100 basis
points lower than the gross rate of interest payable on the underlying Mortgage
Loans and (ii) the difference between 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
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(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 Servicer, the Trustee will furnish to each Holder during such
year such customary factual information as the 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 an applicable 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, Arter & Hadden, special tax
counsel to the Sponsor, will deliver its opinion to the Sponsor that (unless
otherwise limited in the applicable 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 "Regular
Security") or a residual interest (a "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
Regular and Residual Securities will be "regular or residual interests
in a REMIC" within the meaning of section 7701(a)(19)(C)(xi) of the Code,
"qualifying real property loans" within the meaning of section 593(d) 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 percent 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 Regular and Residual Securities
that are qualifying assets under those sections during such calendar year may be
limited to the portion of the assets of such REMIC Trust that are qualified
mortgages. Similarly, income on the Regular and 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 Regular and Residual Securities and any reinvestment income
thereon. Regular and 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. Regular
Securities will also be qualified mortgages with respect to other REMICs.
Taxation of Holders of Regular Securities
Except as indicated below in this federal income tax discussion, the
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 Regular Securities that otherwise report
income under a cash method of accounting will be required to report
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income with respect to such Securities under an accrual method. For additional
tax consequences relating to Regular Securities purchased at a discount or with
premium, see "Discount and Premium," below.
Taxation of Holders of Residual Securities
Daily Portions. Except as indicated below, a Holder of a 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 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 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 Residual Security may have received full payment of the stated interest
and principal on its Residual Security.
The Trustee will provide to Holders of 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 Regular Securities
(but not the Residual Securities), even though 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. The basis to a REMIC Trust in the qualified mortgages is the
aggregate of the issue prices of all the Regular and Residual Securities in the
REMIC Trust on the Settlement Date. If, however, a substantial amount of a Class
of Regular or Residual Securities has not been sold to the public, then the fair
market value of all the Regular or 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 Regular and 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 86OG(a)(5) of the Code) will be treated as ordinary gain or loss.
A Holder of a 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 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 Regular
Securities exceeds the REMIC Trust's deduction for unaccrued original issue
discount relating to such 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 Regular Securities, may increase over
time as the earlier Classes of Regular Securities are paid, whereas interest
income with respect to any given Mortgage Loan
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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 Residual Security has an initial basis in its Security
equal to the amount paid for such 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 Residual Security. A
distribution on a Residual Security to a Holder is not included in gross income
to the extent it does not exceed such Holder's basis in the Residual Security
(adjusted as described above) and, to the extent it exceeds the adjusted basis
of the Residual Security, shall be treated as gain from the sale of the Residual
Security.
A Holder of a 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 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 Residual Security.
Excess Inclusions. Any excess inclusions with respect to a Residual
Security are subject to certain special tax rules. With respect to a Holder of a
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 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 Residual Security at the beginning of the calendar
quarter and 120 percent 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 Residual
Security as of the beginning of any calendar quarter is equal to the issue price
of the Residual Security, increased by the amount of daily accruals for all
prior quarters and decreased by any distributions made with respect to such
Residual Security before the beginning of such quarter. The issue price of a
Residual Security is the initial offering price to the public (excluding bond
houses and brokers) at which a substantial amount of the Residual 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.
For Holders of Residual Securities that are thrift institutions
described in section 593 of the Code, income from a Residual Security generally
may be offset by losses from other activities. Under the REMIC Regulations, such
an organization is treated as having applied its allowable deductions for the
year first to offset income that is not an excess inclusion and then to offset
that portion of its income that is an excess inclusion. For other Holders of
Residual Securities, any excess inclusions cannot be offset 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 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 Residual Securities, see "Foreign Investors" below.
The REMIC Regulations provide that an organization to which section 593
of the Code applies and which is the Holder of a Residual Security may not use
its allowable deductions to offset any excess inclusions with respect to such
Security if such Security does not have "significant value." For this purpose, a
Residual Security has significant value under the REMIC Regulations if (i) its
issue price is at least 2% of the aggregate of the issue prices of all the
Regular and Residual Securities in that REMIC Trust and (ii) its "anticipated
weighted average life" is at least 20% of the "anticipated weighted average
life" of such REMIC Trust.
In determining whether a Residual Security has significant value, the
anticipated weighted average life of such Security is based in part on the
Prepayment Assumption, except that all anticipated payments on such Security are
taken into account, regardless of their designation as principal or interest.
The anticipated weighted average life of a REMIC Trust is the weighted average
of the anticipated weighted average lives of the Securities.
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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
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
whether the test for significant value that is contained in the REMIC
Regulations and discussed in the two preceding paragraphs would be applicable.
If no such rule is applicable, excess inclusions should be calculated as
discussed above.
In the case of any Residual Securities that are held by a real estate
investment trust, the aggregate excess inclusions with respect to such 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
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 Residual Security.
Pass-Through of Servicing and Guaranty Fees to Individuals. A Holder of
a 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 percent of such
Holder's adjusted gross income. In addition, a Holder of a 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
percent 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 percent of the value of any property contributed to the
REMIC after the "startup day" (generally the same as the Settlement Date).
Exceptions are provided for cash contributions to a REMIC (i) during the three
month period beginning on the startup day, (ii) made to a qualified reserve fund
by a Holder of a residual interest, (iii) in the nature of a guarantee, (iv)
made to facilitate a qualified liquidation or clean-up call, and (v) as
otherwise permitted by Treasury regulations.
Net Income from Foreclosure Property. The Code imposes a tax on a REMIC
equal to the highest corporate rate on "net income from foreclosure property."
The terms "foreclosure property" (which includes property acquired by deed in
lieu of foreclosure) and "net income from foreclosure property" are defined by
reference to the rules 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 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 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 Residual Security is determined
as described above under "Taxation of Holders of 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
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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 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 Regular Security had income accrued
at a rate equal to 110 percent 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 Regular Security who purchased a
such 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 Residual Security sells its Residual Security at a
loss, the loss will not be recognized if, within six months before or after the
sale of the 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 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 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 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 Residual Security and certain
other provisions that are intended to meet this requirement are described in the
Pooling and Servicing Agreement, and will be discussed more fully in the
applicable Prospectus Supplement relating to the offering of any Residual
Security. In addition, a pass-through entity (including a nominee) that holds a
Residual Security may be subject to additional taxes if a disqualified
organization is a record-holder therein. A transferor of a Residual Security (or
an agent of a transferee of a 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.
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 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 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
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
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transfer of a 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
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 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 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 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 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 Residual Security or
in a fiduciary capacity. Each Holder of a Residual Security, by the acceptance
of its 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 Residual Security is required to treat items on its
return consistently with the treatment on the return of the REMIC Trust, unless
the Holder either files a statement identifying the inconsistency or establishes
that the inconsistency resulted from incorrect information received from the
REMIC Trust. The IRS may assert a deficiency resulting from a failure to comply
with the consistency requirement without instituting an administrative
proceeding at the REMIC Trust level. 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
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 Residual Security's adjusted basis in its 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 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, Arter & Hadden, special
tax counsel to the Sponsor, will deliver its opinion to the Sponsor that (unless
otherwise limited in the applicable 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.
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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, in any, between the
amount received and the Holder's adjusted basis in the Security. The adjusted
basis in the Security generally will equal its initial cost, increased by any
original issue discount or market discount previously included in the seller's
gross income with respect to the Security and reduced by the payments previously
received on the Security, other than payments of qualified stated interest, and
by any amortized premium.
In general (except as described in "Discount and Premium -- Market
Discount," below), except for certain financial institutions subject to section
582(c) of the Code, any gain or loss on the sale or exchange of a Debt Security
recognized by an investor who holds the Security as a capital asset (within the
meaning of section 1221 of the Code), will be capital gain or loss and will be
long-term or short-term depending on whether the Security has been held for more
than one year.
Discount and Premium
A Security purchased for an amount other than its outstanding principal
amount will be subject to the rules governing original issue discount, market
discount or premium. In addition, all Grantor Trust Strip Securities and certain
Grantor Trust Fractional Interest Securities will be treated as having original
issue discount by virtue of the coupon stripping rules in section 1286 of the
Code. In very general terms, (i) original issue discount is treated as a form of
interest and must be included in a Holder's income as it accrues (regardless of
the Holder's regular method of accounting) using a constant yield method; (ii)
market discount is treated as ordinary income and must be included in a Holder's
income as principal payments are made on the Security (or upon a sale of a
Security) and (iii) if a Holder so elects, premium may be amortized over the
life of the Security and offset against inclusions of interest income. These tax
consequences are discussed in greater detail below.
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 amount of the Securities was sold. The issue price also includes any
accrued interest attributable to the period between the beginning of the first
Interest Accrual 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 Distribution
Date over the interest that accrues for the period from the Settlement Date to
the first Distribution Date.
Notwithstanding the general definition, original issue discount will be
treated as zero if such discount is less than 0.25 percent 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 applicable 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 and applicable
by analogy to Grantor Trust Securities. Investors in Grantor Trust
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Strip Securities should be aware that there can be no assurance that the rules
described below will be applied to such Securities. 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
applicable Prospectus Supplement, the Trustee will report original issue
discount based on accrual periods of one month, each beginning on a payment date
(or, in the case of the first such period, the Settlement Date) and ending on
the day before the next payment date.
Under section 1272(a)(6) of the Code, the portion of original issue
discount treated as accruing for any accrual period will equal the excess, if
any, of (i) the sum of (A) the present values of all the distributions remaining
to be made on the Security, if any, as of the end of the accrual period and (B)
the distribution made on such Security 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
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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 percent of the
remaining stated redemption price at maturity of such Security multiplied by its
weighted average remaining life. Weighted average remaining life presumably
would be calculated in a manner similar to weighted average life, taking into
account payments (including prepayments) prior to the date of acquisition of the
Security by the subsequent purchaser. If market discount on a Security is
treated as zero under this rule, the actual amount of market discount must be
allocated to the remaining principal distributions on the Security and, when
each such distribution is received, gain equal to the discount allocated to such
distribution will be recognized.
Securities Purchased at a Premium
A purchaser of a Security that purchases such Security at a cost
greater than its remaining stated redemption price at maturity will be
considered to have purchased such Security (a "Premium Security") at a premium.
Such a 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 Distribution 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
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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 percent if recipients of
such distributions fail to furnish to the payor certain information, including
their taxpayer identification numbers, or otherwise fail to establish an
exemption from such tax. Any amounts deducted and withheld from a distribution
to a recipient would be allowed as a credit against such recipient's federal
income tax. Furthermore, certain penalties may be imposed by the IRS on a
recipient of distributions that is required to supply information but that does
not do so in the proper manner.
Foreign Investors
Grantor Trust Securities and Regular Securities
Distributions made on a Grantor Trust Security or a 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, or an estate or trust that is subject to U.S.
federal income tax regardless of the source of its income. 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 percent or more of the Residual Securities, 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 Residual Security that is a not a
U.S. Person generally will be treated as interest for purposes of applying the
30 percent (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 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 Regular Securities, as described above, but only to the extent that the
obligations directly underlying the REMIC Trust that issued the 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 "Taxation of
Holders of Residual Securities--Excess Inclusions.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), imposes certain fiduciary and prohibited transaction restrictions on
employee pension and welfare benefit plans subject to ERISA ("ERISA Plans").
Section 4975 of the Code imposes essentially the same prohibited transaction
restrictions on tax-qualified retirement plans described in Section 401(a) of
the Code ("Qualified Retirement Plans") and on Individual Retirement Accounts
("IRAs") described in Section 408 of the Code (collectively, "Tax-Favored
Plans").
Certain employee benefit plans, such as governmental plans (as defined
in Section 3(32) of ERISA), are not subject to the ERISA requirements discussed
herein. Accordingly, assets of such plans may be invested in Securities without
regard to the ERISA considerations described below, subject to the provisions of
applicable federal and state law. Any such plan that is a Qualified Retirement
Plan and exempt from taxation under Sections 401(a) and 501(a) of the Code,
however, is subject to the prohibited transaction rules set forth in Section 503
of the Code.
Section 404 of ERISA imposes general fiduciary requirements, including
those of investment prudence and diversification and the requirement that a
Plan's investment be made in accordance with the documents governing the Plan.
In addition, Section 406 of ERISA and Section 4975 of the Code prohibit a broad
range of transactions
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involving assets of ERISA Plans and Tax-Favored Plans (collectively, "Plans")
and persons ("Parties in Interest" under ERISA or "Disqualified Persons" under
the Code) who have certain specified relationships to the Plans, unless a
statutory or administrative exemption is available. Certain Parties in Interest
(or Disqualified Persons) that participate in a prohibited transaction may be
subject to a penalty (or an excise tax) imposed pursuant to Section 502(i) of
ERISA or Section 4975 of the Code, unless a statutory or administrative
exemption is available.
Plan Asset Regulations
A Plan's investment in Securities may cause the Mortgage Loans included
in a Mortgage Pool to be deemed Plan assets. The U.S. Department of Labor (the
"DOL") has promulgated regulations (the "DOL Regulations") concerning whether or
not a Plan's assets would be deemed to include an interest in the underlying
assets of an entity (such as a Trust Estate), for purposes of applying the
general fiduciary responsibility provisions of ERISA and the prohibited
transaction provisions of ERISA and the Code, when a Plan acquires an "equity
interest" (such as a Security) in such entity. Because of the factual nature of
certain of the rules set forth in the DOL Regulations, an investing Plan's
assets either may be deemed to include an interest in the assets of a Trust
Estate or may be deemed merely to include its interest in the Securities.
Therefore, Plans should not acquire or hold Securities in reliance upon the
availability of any exception under the DOL Regulations.
The prohibited transaction provisions of Section 406 of ERISA and
Section 4975 of the Code may apply to a Trust Estate and cause the Company, the
Servicer, any Sub-Servicer, the Trustee, the obligor under any credit
enhancement mechanism or certain affiliates thereof, to be considered or become
Parties in Interest or Disqualified Persons with respect to an investing Plan.
If so, the acquisition or holding of Securities by or on behalf of the investing
Plan could also give rise to a prohibited transaction under ERISA and the Code,
unless some statutory or administrative exemption is available. Securities
acquired by a Plan would be assets of that Plan. Under the DOL Regulations, the
Trust Estate, including the Mortgage Loans and the other assets held in the
Trust Estate, may also be deemed to be assets of each Plan that acquires
Securities. Special caution should be exercised before the assets of a Plan are
used to acquire a Security in such circumstances, especially if, with respect to
such assets, the Company, the Servicer, any Sub-Servicer, the Trustee, the
obligor under any credit enhancement mechanism or an affiliate thereof either
(i) has investment discretion with respect to the investment of Plan assets; or
(ii) has authority or responsibility to give (or regularly gives) investment
advice with respect to Plan assets for a fee pursuant to an agreement or
understanding that such advice will serve as a primary basis for investment
decisions with respect to such assets.
Any person who has discretionary authority or control respecting the
management or disposition of Plan assets, and any person who provides investment
advice with respect to such assets for a fee (in the manner described above), is
a fiduciary of the investing Plan. If the Mortgage Loans were to constitute Plan
assets, then any party exercising management or discretionary control regarding
those assets may be deemed to be a Plan "fiduciary," and thus subject to the
fiduciary requirements of ERISA and the prohibited transaction provisions of
ERISA and Section 4975 of the Code with respect to the investing Plan. In
addition, if the Mortgage Loans were to constitute Plan assets, then the
acquisition or holding of Securities by a Plan, as well as the operation of the
Trust Estate, may constitute or involve a prohibited transaction under ERISA and
the Code.
Prohibited Transaction Class Exemption
The DOL has issued an administrative exemption, Prohibited Transaction
Class Exemption 83-1 ("PTCE 83-1"), which generally exempts from the prohibited
transaction provisions of Section 406(a) of ERISA, and from the excise taxes
imposed by Sections 4975(a) and (b) of the Code by reason of Section
4975(c)(1)(A) through (D) of the Code, certain transactions involving
residential mortgage pool investment trusts relating to the purchase, sale and
holding of securities in the initial issuance of Securities and the servicing
and operation of "mortgage pools" (as defined below). PTCE 83-1 permits, subject
to certain general and specific conditions, transactions which might otherwise
be prohibited between Plans and Parties in Interest (or Disqualified Persons)
with respect to those Plans, related to the origination, maintenance and
termination of mortgage pools and the acquisition and holding of certain
mortgage pool pass-through Securities representing interests in such mortgage
pools by Plans, whether or not the Plan's assets would be deemed to include an
ownership interest in the mortgage loans in the mortgage pool. PTCE 83-1 does
not provide an exemption for Subordinate Securities.
PTCE 83-1 defines the term "mortgage pool" as "an investment pool the
corpus of which (1) is held in trust; and (2) consists solely of (a) interest
bearing obligations secured by either first or second mortgages or deeds of
trust on one-to four-family, residential property; (b) property which had
secured obligations and which has been
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acquired by foreclosure; and (c) undistributed cash." The Company expects that
each pool of Mortgage Loans will be a "mortgage pool" within the meaning of PTCE
83-1.
PTCE 83-1 defines the term "mortgage pool pass-through certificate" as
a "certificate representing a beneficial undivided fractional interest in a
mortgage pool and entitling the holder of such certificate to pass-through
payment of principal and interest from the pooled mortgage loans, less any fees
retained by the pool sponsor." The Company has been advised by Arter & Hadden
that, for purposes of applying PTCE 83-1, the term "mortgage pool pass-through
certificate" would include (i) Securities representing interests in a Trust
Estate consisting of Mortgage Loans issued in a series consisting of only a
single class of Securities; and (ii) Senior Securities representing interests in
a Trust Estate consisting of Mortgage Loans issued in a series in which there is
only one class of Senior Securities; provided that the Securities described in
clauses (i) and (ii) evidence the beneficial ownership of a specified portion of
both future interest payments and future principal payments with respect to the
Mortgage Loans.
It is not clear whether all types of Securities that may be offered
hereunder would be "mortgage pass-through certificates" for purposes of applying
PTCE 83-1, including, but not limited to, (a) a class of Securities that
evidences the beneficial ownership of interest payments only or principal
payments only, disproportionate interest and principal payments, or nominal
principal or interest payments, such as the Strip Securities; or (b) Securities
in a series including classes of Securities which differ as to timing,
sequential order, 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 Mortgage Pool; or (c) Securities evidencing an interest in a Trust Estate as
to which two or more REMIC elections have been made; or (d) a series including
other types of multiple classes. Accordingly, until further clarification by the
DOL, Plans should not acquire or hold Securities representing interests
described in this paragraph in reliance upon the availability of PTCE 83-1
without first consulting with their counsel regarding the application of PTCE
83-1 to the proposed acquisition and holding of such Securities.
PTCE 83-1 sets forth three general conditions that must be satisfied
for any transaction involving the purchase, sale and holding of "mortgage pool
pass-through certificates" and the servicing and operation of the "mortgage
pool" to be eligible for exemption: (1) the pool trustee must not be an
affiliate of the pool sponsor; (2) a system of insurance or other protection for
the pooled mortgage loans and property securing such loans, and for indemnifying
securityholders against reductions in pass-through payments due to property
damage or defaults in loan payments in an amount not less than the greater of
one percent of the aggregate principal balance of all covered pooled mortgages,
or the principal balance of the largest covered mortgage, must be maintained;
and (3) the amount of the payment retained by the pool sponsor together with
other funds inuring to its benefit must be limited to not more than adequate
consideration for forming the mortgage pools plus reasonable compensation for
services provided by the pool sponsor to the mortgage pool. PTCE 83-1 also
imposes additional specific conditions for certain types of transactions
involving an investing Plan and for situations in which the Parties in Interest
or Disqualified Persons are fiduciaries.
The Prospectus Supplement for a series will set forth whether the
Trustee in respect of that series is affiliated with the Company. If the credit
enhancement mechanism for a series of Securities constitutes a system of
insurance or other protection within the meaning of PTCE 83-1 and is maintained
in an amount not less than the greater of one percent of the aggregate principal
balance of the Mortgage Loans or the principal balance of the largest Mortgage
Loan, then the Company has been advised that the second general condition
referred to above will be satisfied. The Company will not receive total
compensation for forming and providing services to the Mortgage Pools which will
be more than adequate consideration. Each Plan fiduciary responsible for making
the investment decision whether to acquire or hold Securities must make its own
determination as to whether (i) the Securities constitute "mortgage pool
pass-through certificates" for purposes of applying PTCE 83-1, (ii) the second
and third general conditions will be satisfied, and (iii) the specific
conditions, not discussed herein, of PTCE 83-1 have been satisfied.
It should be noted that in promulgating PTCE 83-1 and its predecessor,
the DOL did not have under its consideration interests in pools of the exact
nature described herein. There are other class and individual prohibited
transaction exemptions issued by the DOL that could apply to a Plan's
acquisition or holding of Securities. There can be no assurance that any of
those exemptions will apply with respect to any particular Plan that acquires or
holds Securities or, even if all of the conditions specified therein were
satisfied, that the exemption would apply to all transactions involving the
Trust Estate. The applicable Prospectus Supplement under "ERISA Considerations"
may contain additional information regarding the application of PTCE 83-1, or
other prohibited transaction exemptions that may be available, with respect to
the series offered thereby.
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Tax Exempt Investors
A Plan that is exempt from federal income taxation pursuant to Section
501 of the Code (a "Tax Exempt Investor") nonetheless will be subject to federal
income taxation to the extent that its income is UBTI within the meaning of
Section 512 of the Code. All "excess inclusions" of a REMIC allocated to a REMIC
Residual Security held by a Tax Exempt Investor will be considered UBTI and thus
will be subject to federal income tax. See "Certain Federal Income Tax
Consequences--Taxation of Owners of REMIC Residual Securities--Excess
Inclusions."
Consultation With Counsel
Any Plan fiduciary that proposes to cause a Plan to acquire or hold
Securities should consult with its counsel with respect to the potential
applicability of the fiduciary responsibility provisions of ERISA and the
prohibited transaction provisions of ERISA and the Code to the proposed
investment and the availability of PTCE 83-1 or any other prohibited transaction
exemption.
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 Company 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
76
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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.
USE OF PROCEEDS
Substantially all of the net proceeds to be received from the sale of
Securities will be applied by the Company 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 Company for general corporate
purposes. The Company 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 Company, prevailing interest
rates, availability of funds and general market conditions.
METHODS OF DISTRIBUTION
The Securities offered hereby and by the related Prospectus Supplement
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 Company from such
sale.
The Company 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 (which may include affiliates of
the Company);
2. By placements by the Company with institutional investors
through dealers; and
3. By direct placements by the Company 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 Company whose identities and relationships to
the Company 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 Company 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 Company 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 Company.
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 Company will indemnify the
several underwriters and
77
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the underwriters will indemnify the Company against certain civil liabilities,
including liabilities under the Securities Act of 1933, as amended, or will
contribute to payments required to be made in respect thereof.
The Prospectus Supplement with respect to any series offered by
placements through dealers will contain information regarding the nature of such
offering and any agreements to be entered into between the Company and
purchasers of Securities of such series.
The Company anticipates that the Securities offered hereby will be sold
primarily to institutional investors or be placed with individuals by the
Company or an affiliate of the Company. 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 Company by Arter &
Hadden, Washington, D.C..
FINANCIAL INFORMATION
The Company has determined that its financial statements are not
material to the offering made hereby.
A Prospectus Supplement and the related Form 8-K (which shall be
incorporated by reference to this Registration Statement) 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.
78
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INDEX OF PRINCIPAL DEFINITIONS
Page
Accrual Securities......................................................... 5
Advance.................................................................... 9
Affiliated Originators..................................................... 3
Approved Guidelines........................................................ 8
APR........................................................................ 19
AQMOD...................................................................... ?
ARM Loans.................................................................. 16
Balloon Amount............................................................. 21
Balloon Loans.............................................................. 13
Bankruptcy Bond............................................................ 46
Bankruptcy Loss............................................................ 44
Bankruptcy Loss Amount..................................................... 44
Book-Entry Securities...................................................... 32
Bulk Acquisitions.......................................................... 8
Bulk Guidelines............................................................ 23
Buydown Account............................................................ 18
Buydown Agreement.......................................................... 37
Buydown Funds.............................................................. 18
Buydown Mortgage Loans..................................................... 18
Buydown Period............................................................. 18
Cede....................................................................... 11
Certificates............................................................... 4
Closing Date............................................................... 34
CLTV....................................................................... ?
Code....................................................................... 62
Combined Loan-to-Value-Ratio............................................... 19
Company.................................................................... 1
Company's Guidelines....................................................... 8
Compensating Interest...................................................... 39
Contract Sub-Servicers..................................................... 27
Conventional Loans......................................................... 17
Convertible Mortgage Loan.................................................. 22
Cooperative Loans.......................................................... ?
Cooperative Notes.......................................................... ?
Credit Enhancer............................................................ 17
Cut-Off Date............................................................... 18
Debt Securities............................................................ 10
Defaulted Mortgage Loss.................................................... 44
Deferred Interest.......................................................... 13
Deficient Valuation........................................................ 46
Deleted Mortgage Loan...................................................... 28
Delinquency Advances....................................................... 39
Designated Originator...................................................... 25
Detailed Description....................................................... 17
Determination Date......................................................... 39
Direct or Indirect Participants............................................ 16
Disqualified Persons....................................................... 74
Distribution Account....................................................... 36
DOL........................................................................ 74
DOL Regulations............................................................ 74
DTC........................................................................ 11
Due Date................................................................... 35
Due Period................................................................. 6
Eligible Account........................................................... 36
Equity Securities.......................................................... 5
ERISA...................................................................... 10
ERISA Plans................................................................ 73
Exchange Act............................................................... 11
Extraordinary Losses....................................................... 44
FDIC....................................................................... 26
Federal Corporations....................................................... 26
Financial Guaranty Insurance Policy........................................ 46
79
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Page
----
Financial Guaranty Insurer................................................. 46
FIRREA..................................................................... 26
Fixed-Income Securities.................................................... 5
FNMA....................................................................... 22
Forward Purchase Agreement................................................. 8
Fraud Loss................................................................. 44
Fraud Loss Amount.......................................................... 44
Garn-St. Germain Act....................................................... 60
Grantor Trust Estate....................................................... 62
Grantor Trust Fractional Interest Security................................. 63
Grantor Trust Securities................................................... 10
Grantor Trust Strip Security............................................... 63
Indenture.................................................................. 4
Indenture Trustee.......................................................... 4
Index...................................................................... 21
Indirect Participant....................................................... 32
Insurance Paying Agent..................................................... 46
Insurance Proceeds......................................................... 35
Insured Payment............................................................ 46
Interest Rate.............................................................. 5
Investment Company Act..................................................... 7
IRAs....................................................................... 73
IRS........................................................................ 64
Junior Lien Loans.......................................................... 19
Letter of Credit........................................................... 45
Letter of Credit Bank...................................................... 45
Liquidated Mortgage Loan................................................... 14
Liquidation Proceeds....................................................... 14
Loan Purchase Price........................................................ 27
Loan-to-Value Ratio........................................................ 17
Master Commitments......................................................... 24
Master Servicer............................................................ 3
Modified Loans............................................................. 21
Mortgage Assets............................................................ 17
Mortgage Asset Schedule.................................................... 17
Mortgage Loan Program...................................................... 21
Mortgage Loans............................................................. 1
Mortgage Notes............................................................. 20
Mortgage Pool.............................................................. 1
Mortgage Pool Insurance Policy............................................. 45
Mortgage Rate.............................................................. 18
Mortgaged Properties....................................................... 7
Mortgages.................................................................. 7
Mortgagor.................................................................. 13
Net Liquidation Proceeds................................................... 35
Net Mortgage Rate.......................................................... 54
Note Margin................................................................ 21
Notes...................................................................... 4
Originators................................................................ 1
Originator's Retained Yield................................................ 20
Participants............................................................... 32
Participating Originator................................................... 25
Parties in Interest........................................................ 74
Partnership Interests...................................................... 10
Pass-Through Rate.......................................................... 38
Paying Agent............................................................... 38
Payment Dates.............................................................. 6
Percentage Interest........................................................ 38
Permitted Investments...................................................... ?
Physical Certificates...................................................... 32
Physical Securities........................................................ 33
80
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Page
----
Plan....................................................................... 10
Plans...................................................................... 74
Policy Statement........................................................... 76
Pool Factor................................................................ 40
Pool Insurer............................................................... 37
Pooling and Servicing Agreement............................................ 4
Pre-Funding Account........................................................ 8
Principal Prepayments...................................................... 35
PTCE 83-1.................................................................. 74
Purchase Obligation........................................................ 12
Qualified Replacement Mortgage............................................. 28
Qualified Retirement Plans................................................. 73
Rating Agencies............................................................ 11
Realized Loss.............................................................. 43
Record Date................................................................ 6
Regular Security........................................................... 64
Relief Act................................................................. 17
REMIC...................................................................... 2
REMIC Regular Securities................................................... 10
REMIC Regulations.......................................................... 64
REMIC Residual Securities.................................................. 10
REMIC Securities........................................................... 62
REMIC Trust................................................................ 64
Remittance Date............................................................ 36
Remittance Period.......................................................... 6
REO........................................................................ 42
REO Property............................................................... 42
Residual Security.......................................................... 64
Reserve Fund............................................................... 46
RTC........................................................................ 26
Securities................................................................. 1
Securityholders............................................................ 1
Security Registrar......................................................... 32
Senior Mortgage Loan....................................................... ?
Senior Securities.......................................................... 31
Servicer................................................................... 1
Servicing Advances......................................................... 42
Servicing Agreement........................................................ 4
Settlement Date............................................................ 64
Single Family Loans........................................................ 20
SMMEA...................................................................... 10
Special Hazard Amount...................................................... 43
Special Hazard Insurance Policy............................................ 45
Special Hazard Insurer..................................................... 46
Special Hazard Loss........................................................ 44
Sponsor.................................................................... 1
Statistic Calculation Date................................................. 18
Strip Securities........................................................... 30
Sub-Servicers.............................................................. 1
Sub-Servicing Account...................................................... 35
Sub-Servicing Agreement.................................................... 27
Subordinate Amount......................................................... 44
Subordinate Securities..................................................... 5
Tax Exempt Investor........................................................ 76
Tax-Favored Plans.......................................................... 73
Title V.................................................................... 61
Title VIII................................................................. 61
Trust...................................................................... 1
Trust Agreement............................................................ 4
Trust Estate............................................................... 1
Trustee.................................................................... 3
81
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Page
----
UCC........................................................................ 32
Unaffiliated Originators................................................... 3
U.S. Person................................................................ 73
47240.1d
82
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No dealer, salesman or any other person has been authorized to give any
information or to make any representations not contained in this Prospectus
Supplement and the Prospectus and, if given or made, such information or
representations must not be relied upon as having been authorized by the Company
or by the Underwriter. This Prospectus Supplement and the Prospectus do not
constitute an offer to sell, or a solicitation of an offer to buy, the
securities offered hereby to anyone in any jurisdiction in which the person
making such offer or solicitation is not qualified to do so or to anyone to whom
it its unlawful to make any such offer or solicitation. Neither the delivery of
this Prospectus nor any sale made hereunder shall, under any circumstances,
create an implication that information herein or therein is correct as of any
time since the date of this Prospectus Supplement or the Prospectus.
----------------------
TABLE OF CONTENTS
Prospectus Supplement
Summary............................................................S-1
Risk Factors......................................................S-15
The Portfolio of Mortgage Loans...................................S-17
Use of Proceeds...................................................S-18
The Mortgage Loan Pool............................................S-19
Prepayment and Yield Considerations...............................S-29
Additional Information............................................S-33
Description of the Offered Certificates...........................S-33
The Company.......................................................S-43
The Certificate Insurance Policies and the Certificate Insurer....S-43
The Pooling and Servicing Agreement...............................S-47
Certain Federal Income Tax Consequences...........................S-50
ERISA Considerations..............................................S-51
Ratings...........................................................S-53
Legal Investment Considerations...................................S-53
Underwriting......................................................S-53
Report of Experts.................................................S-54
Certain Legal Matters.............................................S-54
Global Clearance, Settlement and
Tax Documentation Procedures..............................Annex I
Index to Location of Principal Defined Terms.......................A-1
Audited Financial Statements for the Certificate Insurer...........B-1
Unaudited Financial Statements for the Certificate Insurer.........C-1
Prospectus
Incorporation of Certain Information by Reference....................2
Summary of Prospectus................................................3
Risk Factors........................................................12
The Trusts..........................................................17
The Mortgage Pools..................................................20
Mortgage Loan Program...............................................22
Description of the Securities.......................................30
Subordination.......................................................43
Description of Credit Enhancement...................................44
Hazard Insurance; Claims Thereunder.................................49
The Company.........................................................49
The Pooling and Servicing Agreement.................................50
Yield Considerations................................................54
Maturity and Prepayment Considerations..............................56
Certain Legal Aspects of the Mortgage Loans and Related
Matters.............................................................58
Certain Federal Income Tax Consequences.............................62
ERISA Considerations............................................... 73
Legal Investment Matters............................................76
Use of Proceeds ....................................................77
Methods of Distribution.............................................77
Legal Matters.......................................................78
Financial Information...............................................78
Index to Location of Principal Defined Terms........................79
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 Prospectusent Supplemwhen Supplem
Prospectusmentnd a Supple Supplement and Prospectus when acting as underwriters
and with respect to their unsold allotments or subscriptions.
- - - --------------------------------------------------------------------------------
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<PAGE>
$75,000,000
[GRAPHIC OMITTED]
First Alliance Mortgage Loan Trust 1996-2
Company and Servicer
$29,614,000 7.225% Class A-1
Fixed Rate Group Certificates
$10,000,000 7.725% Class A-2
Fixed Rate Group Certificates
$10,386,000 8.225% Class A-3
Fixed Rate Group Certificates
$25,000,000 Class A-4
Variable Rate Group Certificates
Mortgage Loan Asset Backed Certificates
Series 1996-2
---------------------------
PROSPECTUS SUPPLEMENT
---------------------------
Prudential Securities Incorporated
June 10, 1996
<PAGE>
