<PAGE> 1
This filing is made pursuant
to Rule 424(b)(2) under
the Securities Act of
1933 in connection with
Registration No. 333-10185
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED MARCH 18, 1997)
AAMES MORTGAGE TRUST 1997-A
$215,000,000
MORTGAGE PASS-THROUGH CERTIFICATES,
SERIES 1997-A
$81,000,000 6.47% CLASS A-1 CERTIFICATES
$71,500,000 6.88% CLASS A-2 CERTIFICATES
$14,500,000 7.22% CLASS A-3 CERTIFICATES
$23,000,000 7.61% CLASS A-4 CERTIFICATES
$25,000,000 7.18% CLASS A-5 CERTIFICATES
AAMES CAPITAL CORPORATION
Sponsor and Servicer
The Mortgage Pass-Through Certificates, Series 1997-A, 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 A-5 Certificates (collectively, the
"Class A Certificates") and the Class R Certificate (the "Class R Certificate"
and, together with the Class A Certificates, the "Certificates"). Only the Class
A Certificates are offered hereby. The Certificates will represent undivided
beneficial ownership interests in Aames Mortgage Trust 1997-A (the "Trust")
established by Aames Capital Corporation (the "Sponsor") pursuant to a Pooling
and Servicing Agreement to be dated as of March 1, 1997 (the "Pooling and
Servicing Agreement") between the Sponsor, in its capacities as seller and
Servicer, and the trustee specified herein (the "Trustee").
(continued on next page)
(LOGO)
SEE "RISK FACTORS" STARTING ON PAGE S-18 HEREOF AND ON PAGE 20 OF THE
PROSPECTUS FOR A DESCRIPTION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY
PROSPECTIVE INVESTORS IN THE CLASS A CERTIFICATES OFFERED HEREBY.
------------------------
THE CLASS A CERTIFICATES WILL REPRESENT BENEFICIAL OWNERSHIP INTERESTS ONLY IN
THE TRUST AND WILL NOT REPRESENT ANY INTEREST IN OR OBLIGATION OF THE SPONSOR,
THE SERVICER, ANY ORIGINATOR, THE TRUSTEE OR ANY OF THEIR RESPECTIVE AFFILIATES.
NEITHER THE CLASS A CERTIFICATES NOR THE
UNDERLYING MORTGAGE LOANS WILL BE GUARANTEED OR INSURED BY ANY GOVERNMENTAL
AGENCY OR INSTRUMENTALITY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The Class A Certificates will be offered by the Underwriters named below
(the "Underwriters") from time to time to the public in negotiated transactions
or otherwise at varying prices to be determined at the time of the related sale.
Proceeds to the Sponsor from the sale of the Class A Certificates are
anticipated to be approximately $214,420,681.25 plus, with respect to the Class
A-1 Certificates, the Class A-2 Certificates, the Class A-3 Certificates, the
Class A-4 Certificates and the Class A-5 Certificates accrued interest from
March 1, 1997, before deducting expenses payable by the Sponsor, estimated to be
$300,000. The Class A Certificates are offered by the Underwriters subject to
prior sale when, as and if issued to and accepted by them and subject to
approval of certain legal matters by counsel for the Underwriters. The
Underwriters reserve the right to withdraw, cancel or modify such offer and to
reject orders in whole or in part. It is expected that delivery of the Class A
Certificates will be made in book-entry form only through the Same-Day Funds
Settlement System of The Depository Trust Company, Cedel Bank, societe anonyme
and the Euroclear System on or about March 26, 1997. The Class A Certificates
will be offered in Europe and the United States of America.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
CREDIT SUISSE FIRST BOSTON
MORGAN STANLEY & CO.
INCORPORATED
PRUDENTIAL SECURITIES INCORPORATED
March 18, 1997
<PAGE> 2
(continued from cover)
Initially, the assets of the Trust will consist primarily of a pool (the
"Mortgage Pool") of mortgage loans (the "Mortgage Loans") bearing fixed rates of
interest that are secured by first and junior liens on one- to four-family
residential properties, including units in condominium and planned unit
developments, along with (i) funds on deposit in the Prefunding Account and
Capitalized Interest Account and (ii) the Certificate Insurance Policy, as
described herein. The Mortgage Loans that were originated and identified by the
Sponsor for inclusion in the Mortgage Pool as of the Cut-off Date are
collectively referred to herein as the "Initial Mortgage Loans." Additional
mortgage loans that satisfy the criteria described herein (the "Subsequent
Mortgage Loans") will be purchased from the Sponsor by the Trust during the
Funding Period with amounts on deposit in the Prefunding Account. Distributions
on the Class A Certificates will be derived primarily from amounts received,
collected or recovered in respect of the Mortgage Loans.
The Class A Certificates will be unconditionally and irrevocably guaranteed
as to payment of interest due to Class A Certificateholders on each Distribution
Date and as to ultimate collection of the related Class A Certificate Principal
Balances, in each case pursuant to the terms of the Certificate Guaranty
Insurance Policy (the "Certificate Insurance Policy") issued by MBIA Insurance
Corporation. See "The Certificate Insurance Policy and the Certificate Insurer"
herein.
As described herein, the yield on the Class A Certificates will be affected
by the rate of prepayments of the Mortgage Loans and the timing of receipt of
such payments. Because a portion of the Mortgage Loans are secured by junior
liens, the rate of prepayments experienced thereon may be higher or lower than
would be the case if such Mortgage Loans were first lien Mortgage Loans. The
yield on the Class A Certificates will also be affected by Excess Cash that is
applied in reduction of the Class A Certificate Principal Balance on any
Distribution Date, as described herein. See "Risk Factors" herein.
As described herein, an election will be made to treat the Trust (other than
the Prefunding Account and the Capitalized Interest Account) as a "real estate
mortgage investment conduit" ("REMIC") pursuant to the Internal Revenue Code of
1986, as amended (the "Code"). The Class A Certificates will be "regular
interests" in such REMIC. See "Certain Federal Income Tax Consequences" herein
and in the Prospectus.
There is currently no secondary market for the Class A Certificates. The
Underwriters intend to make a secondary market for the Class A Certificates, but
have no obligation to do so. There can be no assurance that a secondary market
for any of the Class A Certificates will develop or, if one does develop, that
it will continue.
The Trust is subject to optional termination under the limited circumstances
described herein. Any such optional termination may result in an early
retirement of the Class A Certificates offered hereby. See "The Pooling and
Servicing Agreement -- Termination; Optional Termination" in the Prospectus.
THE CLASS A CERTIFICATES OFFERED BY THIS PROSPECTUS SUPPLEMENT CONSTITUTE A
SEPARATE SERIES OF CERTIFICATES BEING OFFERED BY THE SPONSOR PURSUANT TO ITS
PROSPECTUS DATED MARCH 18, 1997, OF WHICH THIS PROSPECTUS SUPPLEMENT IS A PART
AND THAT ACCOMPANIES THIS PROSPECTUS SUPPLEMENT. THE PROSPECTUS CONTAINS
IMPORTANT INFORMATION REGARDING THIS OFFERING THAT IS NOT CONTAINED HEREIN, AND
PROSPECTIVE INVESTORS ARE URGED TO READ THE PROSPECTUS AND THIS PROSPECTUS
SUPPLEMENT IN FULL. SALES OF CLASS A CERTIFICATES MAY NOT BE CONSUMMATED UNLESS
THE PROSPECTIVE INVESTOR HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS.
REFERENCE IS MADE TO THE INDEX OF PRINCIPAL TERMS HEREIN FOR THE LOCATION IN
THIS PROSPECTUS SUPPLEMENT OF THE DEFINITIONS OF CERTAIN CAPITALIZED TERMS USED
HEREIN, AND REFERENCE IS ALSO MADE TO THE INDEX OF PRINCIPAL TERMS IN THE
PROSPECTUS FOR THE LOCATION IN THE PROSPECTUS OF THE DEFINITIONS OF CERTAIN
CAPITALIZED TERMS USED BUT NOT OTHERWISE DEFINED HEREIN.
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE CLASS A CERTIFICATES, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND THE
RELATED PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS ACTING AS
UNDERWRITERS TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
FOR UNITED KINGDOM PURCHASERS: THE CLASS A CERTIFICATES MAY NOT BE OFFERED
OR SOLD IN THE UNITED KINGDOM OTHER THAN TO PERSONS WHOSE ORDINARY BUSINESS IS
TO BUY OR SELL SECURITIES, WHETHER AS PRINCIPAL OR AGENT (EXCEPT IN
CIRCUMSTANCES THAT DO NOT CONSTITUTE AN OFFER TO THE PUBLIC WITHIN THE MEANING
OF THE PUBLIC OFFERS OF SECURITIES REGULATION 1995), AND THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS MAY ONLY BE ISSUED OR PASSED ON TO ANY PERSON IN
THE UNITED KINGDOM IF THAT PERSON IS OF THE KIND DESCRIBED IN ARTICLE 11(3) OF
THE FINANCIAL SERVICES ACT 1986 (INVESTMENT ADVERTISEMENTS) (EXEMPTIONS) ORDER
1996.
S-2
<PAGE> 3
REPORTS TO CERTIFICATEHOLDERS
Monthly and annual reports concerning the Class A Certificates and the
Trust will be sent by the Trustee to all Certificateholders. So long as any
Class A Certificate is in book-entry form, such reports will be sent to Cede &
Co., as the nominee of The Depository Trust Company ("DTC") and as the
Certificateholder of such Class A Certificates pursuant to the Pooling and
Servicing Agreement described herein. DTC will supply such reports to all
persons acquiring beneficial ownership interests in the Class A Certificates.
See "Description of the Certificates -- Book-Entry Registration of Class A
Certificates" herein.
AVAILABLE INFORMATION
The Sponsor and Aames Capital Acceptance Corporation, an affiliate of the
Sponsor, have filed a Registration Statement under the Securities Act of 1933,
as amended (the "Securities Act"), with the Securities and Exchange Commission
(the "Commission") with respect to the Class A Certificates. The Registration
Statement and amendments thereof and the exhibits thereto may be inspected at
the Public Reference Room of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's regional offices at Seven World
Trade Center, 13th Floor, New York, New York 10048, and Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
materials can also be obtained at prescribed rates from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549.
Electronic filings made through the Electronic Data Gathering Analysis and
Retrieval System are publicly available through the Commission's Web Site
(http://www.sec.gov).
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
Certain documents filed with the Commission by or on behalf of the Trust
are incorporated by reference herein. See "Incorporation of Certain Documents by
Reference" in the Prospectus. In addition, the consolidated financial statements
of MBIA Insurance Corporation are hereby incorporated by reference in this
Prospectus Supplement to the extent provided under the heading "The Certificate
Insurance Policy and the Certificate Insurer." The Sponsor will provide to any
person, including any Certificate Owner, to whom this Prospectus Supplement is
delivered a copy of the above-referenced financial statements incorporated by
reference herein without charge upon written or oral request to: Aames Capital
Corporation, 3731 Wilshire Blvd., 10th Floor, Los Angeles, California 90010,
Attention: Corporate Secretary, (213) 351-6100.
S-3
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
CAPTION PAGE
- ---------------------------------------- ----
<S> <C>
REPORTS TO
CERTIFICATEHOLDERS.................... S-3
AVAILABLE INFORMATION................... S-3
INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE............................. S-3
SUMMARY OF TERMS........................ S-5
RISK FACTORS............................ S-18
Risks Associated with Underwriting
Standards........................ S-18
Risks Associated with Geographic
Concentration of Mortgaged
Properties....................... S-18
Risks Associated with Damaged
Mortgaged Properties............. S-19
Risks Associated with Junior
Loans............................ S-19
Risks Associated with Prepayment of
the Mortgage Loans............... S-20
The Subsequent Mortgage Loans and
the Prefunding Account........... S-21
Yield Considerations Relating to
Excess Cash...................... S-22
Environmental Statutes Affecting
Security Interests............... S-22
Risks Associated with Certain
Origination Fees................. S-22
Book-Entry Registration............. S-23
DESCRIPTION OF THE
CERTIFICATES.......................... S-23
General............................. S-23
Book-Entry Registration of Class A
Certificates..................... S-24
Assignment of Mortgage Loans........ S-27
Payments on Mortgage Loans and
Deposits to the Collection
Account.......................... S-29
Distributions on the Certificates... S-30
Prefunding Account.................. S-36
Capitalized Interest Account........ S-36
Overcollateralization Feature....... S-37
The Certificate Insurance Policy.... S-38
The Certificate Insurer Premium..... S-39
Monthly Advances; Servicing
Advances; Compensating Interest
and Interest Shortfalls.......... S-40
Reports to Certificateholders....... S-41
Termination; Retirement of the
Certificates..................... S-42
<CAPTION>
CAPTION PAGE
- ---------------------------------------- ----
<S> <C>
The Trustee......................... S-43
THE MORTGAGE LOANS...................... S-43
General............................. S-43
Initial Mortgage Loans.............. S-44
Conveyance of Subsequent Mortgage
Loans............................ S-44
PREPAYMENT AND YIELD CONSIDERATIONS..... S-45
Projected Prepayments and Yields for
the Class A Certificates......... S-46
ORIGINATION AND SERVICING OF THE
MORTGAGE LOANS........................ S-49
The Originators..................... S-49
Underwriting of Mortgage Loans...... S-50
Mortgage Loan Delinquency and
Foreclosure Experience........... S-50
Servicing of Mortgage Loans......... S-51
Sub-Servicing....................... S-52
Realization upon Defaulted Mortgage
Loans............................ S-52
Hazard Insurance.................... S-53
Servicing and Other Compensation;
Payment of Expenses.............. S-54
Certain Matters Regarding Servicer's
Servicing Obligations............ S-54
THE CERTIFICATE INSURANCE POLICY AND THE
CERTIFICATE INSURER................... S-55
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES.......................... S-58
ERISA CONSIDERATIONS.................... S-58
USE OF PROCEEDS......................... S-60
LEGAL INVESTMENT CONSIDERATIONS......... S-60
UNDERWRITING............................ S-60
REPORT OF EXPERTS....................... S-61
LEGAL MATTERS........................... S-61
RATING OF THE CLASS A CERTIFICATES...... S-61
INDEX OF PRINCIPAL TERMS................ S-63
ANNEX A: DESCRIPTION OF THE MORTGAGE
POOL........................... A-1
ANNEX B: GLOBAL CLEARANCE, SETTLEMENT
AND TAX DOCUMENTATION
PROCEDURES..................... B-1
</TABLE>
S-4
<PAGE> 5
SUMMARY OF TERMS
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus Supplement and the
accompanying Prospectus.
Issuer..................... Aames Mortgage Trust 1997-A (the "Trust").
Certificates Offered....... Mortgage Pass-Through Certificates, Series 1997-A,
Class A-1 Certificates (the "Class A-1
Certificates"), Class A-2 Certificates (the
"Class A-2 Certificates"), Class A-3 Certificates
(the "Class A-3 Certificates"), Class A-4
Certificates (the "Class A-4 Certificates") and
Class A-5 Certificates (the "Class A-5
Certificates" and, together with the Class A-1
Certificates, the Class A-2 Certificates, the
Class A-3 Certificates and the Class A-4
Certificates, the "Class A Certificates"). The
Class A Certificates will be offered in
book-entry form only. See "Description of the
Certificates -- Book-Entry Registration of Class
A Certificates" herein.
The Sponsor................ Aames Capital Corporation, a California corporation
(the "Sponsor"). The principal office of the
Sponsor is located in Los Angeles, California.
The Sponsor is a wholly owned subsidiary of Aames
Financial Corporation, a Delaware corporation.
See "The Sponsor" in the Prospectus.
The Servicer............... Aames Capital Corporation will act as servicer of
the Mortgage Loans (in such capacity, the
"Servicer"). The Servicer will appoint one or
more mortgage servicing institutions (each, a
"Sub-Servicer"), which may be affiliates of the
Sponsor, initially to service and administer
certain Mortgage Loans on behalf of the Servicer.
See "Origination and Servicing of the Mortgage
Loans -- Sub-Servicing" herein and "The Pooling
and Servicing Agreement -- Sub-Servicers" in the
Prospectus.
The Trustee................ Bankers Trust Company of California, N.A. (the
"Trustee").
Cut-off Date............... March 1, 1997.
Closing Date............... On or about March 26, 1997.
Description of the
Certificates............. The Mortgage Pass-Through Certificates, Series
1997-A (the "Certificates"), will consist of two
Classes of Certificates, the Class A Certificates
(consisting of five subclasses, the Class A-1
Certificates, the Class A-2 Certificates, the
Class A-3 Certificates, the Class A-4
Certificates and the Class A-5 Certificates) and
a Class of Certificates evidencing the residual
interest in the Trust (the "Class R
Certificate").
Registered holders of the Class A-1 Certificates
are referred to herein as the "Class A-1
Certificateholders"; registered holders of the
Class A-2 Certificates are referred to herein as
the "Class A-2 Certificateholders"; registered
holders of the Class A-3 Certificates are
referred to herein as the "Class A-3
Certificateholders"; registered holders of the
Class A-4 Certificates are referred to herein as
the "Class A-4 Certificateholders"; and
registered holders of the Class A-5 Certificates
are referred to herein as the "Class A-5
Certificateholders" (the Class A-1
Certificateholders, the Class A-2
Certificateholders, the Class A-3
Certificateholders, the Class A-4
Certificateholders, and the
S-5
<PAGE> 6
Class A-5 Certificateholders, are sometimes
collectively referred to herein as the "Class A
Certificateholders"). The registered holder of
the Class R Certificate is referred to herein as
the "Class R Certificateholder". The Class A
Certificateholders and the Class R
Certificateholder are sometimes collectively
referred to herein as the "Certificateholders".
The Certificates will represent undivided
beneficial ownership interests in the Trust to be
created pursuant to a Pooling and Servicing
Agreement to be dated as of March 1, 1997 (the
"Pooling and Servicing Agreement") between the
Sponsor, in its capacities as seller and
Servicer, and the Trustee. Only the Class A
Certificates are being offered hereby.
Initially, the assets of the Trust will consist of
(i) a pool (the "Mortgage Pool") of home equity
mortgage loans described herein (the "Initial
Mortgage Loans") bearing fixed rates of interest
that are secured by first and junior lien
mortgages or deeds of trust on one- to
four-family residential properties, including
units in condominium and planned unit
developments (the "Mortgaged Properties"); (ii)
all payments in respect of principal of the
respective Mortgage Loans received on and after
the Cut-off Date; (iii) all payments in respect
of interest accrued on the respective Mortgage
Loans from and after the Cut-off Date (or from
and after the related Subsequent Cut-off Date in
the case of each Subsequent Mortgage Loan),
irrespective of when received; (iv) security
interests in the Mortgaged Properties; (v)
amounts to be deposited in the Prefunding Account
that will be available for the purchase of
Subsequent Mortgage Loans during the Funding
Period; (vi) amounts to be deposited in the
Capitalized Interest Account; (vii) the
Certificate Insurance Policy issued by MBIA
Insurance Corporation (the "Certificate
Insurer"); and (viii) certain other property.
The Initial Pool Balance is $163,617,805.83 (which
balance is subject to reduction in the event
mortgage loans are removed from the Mortgage Pool
prior to the Closing Date). See "The Mortgage
Loans -- General" herein.
Original Class A-1
Certificate Principal
Balance.................. $81,000,000.
Original Class A-2
Certificate Principal
Balance.................. $71,500,000.
Original Class A-3
Certificate Principal
Balance.................. $14,500,000.
Original Class A-4
Certificate Principal
Balance.................. $23,000,000.
Original Class A-5
Certificate Principal
Balance.................. $25,000,000.
Original Class A
Certificate
Principal Balance........ $215,000,000.
Class A-1 Pass-Through
Rate..................... The Class A-1 Pass-Through Rate will be 6.47% per
annum.
S-6
<PAGE> 7
Class A-2 Pass-Through
Rate..................... The Class A-2 Pass-Through Rate will be 6.88% per
annum.
Class A-3 Pass-Through
Rate..................... The Class A-3 Pass-Through Rate will be 7.22% per
annum.
Class A-4 Pass-Through
Rate..................... The Class A-4 Pass-Through Rate will be 7.61% per
annum.
Class A-5 Pass-Through
Rate..................... The Class A-5 Pass-Through Rate will be 7.18% per
annum.
Record Date................ Distributions will be made on each Distribution
Date to Class A Certificateholders of record on
the last Business Day of the immediately
preceding calendar month (each, a "Record Date"),
except that the final distribution in respect of
the Class A Certificates will be made only upon
presentation and surrender of such Certificates
at the office or agency designated by the Trustee
for that purpose. See "Description of the
Certificates -- Distributions on the
Certificates" herein.
Distributions on the Class
A Certificates
A. General............... Distributions on the Class A Certificates will be
made on the 15th day of each month or, if such
day is not a Business Day, on the next succeeding
Business Day (each, a "Distribution Date"),
commencing in April 1997, to each Class A
Certificateholder of record on the related Record
Date. On each Distribution Date, distributions
will be made on each Class of Class A
Certificates from Available Funds for such
Distribution Date.
1. Class A Interest
Distributions...... On each Distribution Date, the Class A Certificates
will be entitled to distributions in respect of
Class A Monthly Interest.
As of any Distribution Date, "Class A Monthly
Interest" for the Class A Certificates will
consist of Class A-1 Monthly Interest, Class A-2
Monthly Interest, Class A-3 Monthly Interest,
Class A-4 Monthly Interest and Class A-5 Monthly
Interest for such Distribution Date. "Class A-1
Monthly Interest" will be, with respect to the
first Distribution Date, an amount equal to 30
days of interest at the Class A-1 Pass-Through
Rate on the Original Class A-1 Certificate
Principal Balance and, with respect to any
subsequent Distribution Date, an amount equal to
30 days of interest at the Class A-1 Pass-Through
Rate on the Class A-1 Certificate Principal
Balance as of the preceding Distribution Date
(after giving effect to the distribution, if any,
in reduction of principal made on the Class A-1
Certificates on such preceding Distribution
Date), in either case net of any applicable
Interest Shortfalls. "Class A-2 Monthly Interest"
will be, with respect to the first Distribution
Date, an amount equal to 30 days of interest at
the Class A-2 Pass-Through Rate on the Original
Class A-2 Certificate Principal Balance and, with
respect to any subsequent Distribution Date, an
amount equal to 30 days of interest at the Class
A-2 Pass-Through Rate on the Class A-2
Certificate Principal Balance as of the preceding
Distribution Date (after giving effect to the
distribution, if any, in reduction of principal
made on the
S-7
<PAGE> 8
Class A-2 Certificates on such preceding
Distribution Date), in either case net of any
applicable Interest Shortfalls. "Class A-3
Monthly Interest" will be, with respect to the
first Distribution Date, an amount equal to 30
days of interest at the Class A-3 Pass-Through
Rate on the Original Class A-3 Certificate
Principal Balance and, with respect to any
subsequent Distribution Date, an amount equal to
30 days of interest at the Class A-3 Pass-Through
Rate on the Class A-3 Certificate Principal
Balance as of the preceding Distribution Date
(after giving effect to the distribution, if any,
in reduction of principal made on the Class A-3
Certificates on such preceding Distribution
Date), in either case net of any applicable
Interest Shortfalls. "Class A-4 Monthly Interest"
will be, with respect to the first Distribution
Date, an amount equal to 30 days of interest at
the Class A-4 Pass-Through Rate on the Original
Class A-4 Certificate Principal Balance and, with
respect to any subsequent Distribution Date, an
amount equal to 30 days of interest at the Class
A-4 Pass-Through Rate on the Class A-4
Certificate Principal Balance as of the preceding
Distribution Date (after giving effect to the
distribution, if any, in reduction of principal
made on the Class A-4 Certificates on such
preceding Distribution Date), in either case net
of any applicable Interest Shortfalls. "Class A-5
Monthly Interest" will be, with respect to the
first Distribution Date, an amount equal to 30
days of interest at the Class A-5 Pass-Through
Rate on the Original Class A-5 Certificate
Principal Balance and, with respect to any
subsequent Distribution Date, an amount equal to
30 days of interest at the Class A-5 Pass-Through
Rate on the Class A-5 Certificate Principal
Balance as of the preceding Distribution Date
(after giving effect to the distribution, if any,
in reduction of principal made on the Class A-5
Certificates on such preceding Distribution
Date), in either case net of any applicable
Interest Shortfalls. All calculations of interest
on the Class A Certificates will be computed on
the basis of a 360-day year consisting of twelve
30-day months.
If, with respect to any Distribution Date, funds
are not available from Available Funds to
distribute to the Class A Certificateholders the
full amount of the Class A Monthly Interest, the
deficiency will be covered by payments made
pursuant to the Certificate Insurance Policy in
respect thereof for such Distribution Date. See
"Description of the Certificates -- The
Certificate Insurance Policy" and "The
Certificate Insurance Policy and the Certificate
Insurer" herein.
2. Class A Principal
Distributions...... On each Distribution Date, Monthly Principal will
be distributed on the Class A Certificates in
reduction of the Class A Certificate Principal
Balance. "Monthly Principal" with respect to any
Distribution Date will be equal to the aggregate
of amounts collected, received or otherwise
recovered in respect of principal on the Mortgage
Loans during or in respect of the related
Collection Period, subject to reduction for any
Coverage Surplus with respect to such
Distribution Date as described herein. The Class
A Certificates pay sequentially. However,
commencing on the April 2000 Distribution Date,
the Class A-5 Certificateholders are entitled to
receive from Monthly Principal on each
Distribution Date the applicable Class A-5
Monthly Principal Lockout Distribution before
each other subclass of Class A
S-8
<PAGE> 9
Certificates receives any Monthly Principal and
thereafter, any remaining Monthly Principal will
be distributed first to Class A-1
Certificateholders, in reduction of the Class A-1
Certificate Principal Balance, until such Class
A-1 Certificate Principal Balance is reduced to
zero, then to Class A-2 Certificateholders, in
reduction of the Class A-2 Certificate Principal
Balance, until such Class A-2 Certificate
Principal Balance is reduced to zero, then to
Class A-3 Certificateholders, in reduction of the
Class A-3 Certificate Principal Balance, until
such Class A-3 Certificate Principal Balance is
reduced to zero, then to Class A-4
Certificateholders, in reduction of the Class A-4
Certificate Principal Balance, until such Class
A-4 Certificate Principal Balance is reduced to
zero, and then to Class A-5 Certificateholders,
in reduction of the Class A-5 Certificate
Principal Balance, until such Class A-5
Certificate Principal Balance is reduced to zero.
The "Class A-5 Monthly Principal Lockout
Distribution" for any Distribution Date will be
the lesser of (a) the product of (i) the
applicable Class A-5 Lockout Percentage, (ii) the
Class A-5 Pro Rata Distribution for such
Distribution Date and (iii) Monthly Principal for
such Distribution Date and (b) Monthly Principal
for such Distribution Date.
The "Class A-5 Lockout Percentage" for each
Distribution Date shall be as follows:
<TABLE>
<CAPTION>
DISTRIBUTION DATES CLASS A-5
OCCURRING IN LOCKOUT PERCENTAGE
------------------------- ------------------
<S> <C>
April 1997-March 2000 0%
April 2000-March 2002 45%
April 2002-March 2003 80%
April 2003-March 2004 100%
April 2004 and thereafter 300%
</TABLE>
The "Class A-5 Pro Rata Distribution" for any
Distribution Date will equal the percentage
equivalent of a fraction, the numerator of which
is the Class A-5 Certificate Principal Balance
and the denominator of which is the Class A
Certificate Principal Balance, in each case
immediately prior to such Distribution Date. See
"Description of the Certificates -- Distributions
on the Certificates" herein.
3. Distributions of
Excess Cash........ On each Distribution Date with respect to which the
Coverage Amount is less than the Required
Coverage Amount for such Distribution Date,
Excess Cash derived from Available Funds, if any,
will be distributed on the Class A Certificates,
in reduction of the Class A Certificate Principal
Balance, up to the amount necessary for the
Coverage Amount to equal the applicable Required
Coverage Amount. "Excess Cash" with respect to
any Distribution Date will be equal to Available
Funds on such Distribution Date, reduced by the
sum of (i) the Class A Monthly Interest for such
Distribution Date, (ii) the Monthly Principal for
such Distribution Date, (iii) the Certificate
Insurer Premium for such Distribution Date and
(iv) any amounts payable to the Certificate
Insurer for Insured Amounts paid on prior
Distribution Dates and not yet reimbursed and any
unpaid Certificate Insurer Premium from prior
Distribution Dates plus inter-
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<PAGE> 10
est thereon. Any distributions in respect of
Excess Cash on the Class A Certificates will be
distributed to the Class A Certificates
sequentially. However, commencing on the April
2000 Distribution Date, Excess Cash will be
distributed first to the Class A-5
Certificateholders up to the Class A-5 Excess
Cash Lockout Distribution and thereafter to the
Class A-1 Certificates, then to the Class A-2
Certificates, then to the Class A-3 Certificates,
then to the Class A-4 Certificates, and then to
the Class A-5 Certificates as described under the
caption "-- Application of Distributions on the
Class A Certificates" herein.
The "Class A-5 Excess Cash Lockout Distribution"
for any Distribution Date will be the lesser of
(a) the product of (i) the applicable Class A-5
Lockout Percentage, (ii) the Class A-5 Pro Rata
Distribution for such Distribution Date and (iii)
the lesser of (A) the amount by which the
Required Coverage Amount exceeds the Coverage
Amount and (B) Excess Cash for such Distribution
Date and (b) Excess Cash for such Distribution
Date.
Any Excess Cash not required to be distributed on
any Distribution Date, subject to the right to
reimbursement of the Servicer for any amounts to
which it may then be entitled, shall be
distributed to the Class R Certificateholder.
Amounts so distributed to the Class R
Certificateholder on a Distribution Date will not
be available to pay amounts due to Class A
Certificateholders on subsequent Distribution
Dates. See "Description of the
Certificates -- Distributions on the
Certificates" herein.
4. Application of
Distributions on the
Class A
Certificates........ Distributions on the Class A Certificates will be
allocated among the Class A-1 Certificateholders,
Class A-2 Certificateholders, Class A-3
Certificateholders, Class A-4 Certificateholders,
and Class A-5 Certificateholders in the following
manner. All distributions in respect of interest
on the Class A Certificates will be distributed
pro rata to Class A-1 Certificateholders, Class
A-2 Certificateholders, Class A-3
Certificateholders, Class A-4 Certificateholders,
and Class A-5 Certificateholders in proportion to
the Class A-1 Monthly Interest, Class A-2 Monthly
Interest, Class A-3 Monthly Interest, Class A-4
Monthly Interest, and Class A-5 Monthly Interest
for the related Distribution Date. All
distributions in respect of principal on the
Class A Certificates for any Distribution Date
will be distributed sequentially, except as
specified above with respect to the Class A-5
Certificates, in an amount not to exceed the
amount required to reduce the Certificate
Principal Balance of the related subclass to
zero, but not prior to the Distribution Date on
which the Certificate Principal Balance of each
subclass of Class A Certificates that is
sequentially prior to such subclass has been
reduced to zero. See "Description of the
Certificates -- Distributions on the
Certificates" herein.
B. Available Funds....... "Available Funds" for any Distribution Date will
generally be the sum of amounts collected,
received or otherwise recovered by or on behalf
of the Servicer on or with respect to the
Mortgage Loans during the calendar month
immediately preceding the month in which such
Distribution Date occurs (each, a "Collection
Period"), net of
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<PAGE> 11
amounts representing interest accrued on such
Mortgage Loans in respect of any period prior to
the Cut-off Date (or prior to the related
Subsequent Cut-off Date in the case of each
Subsequent Mortgage Loan), the related Servicing
Fee and any additional servicing compensation
paid to the Servicer, Payments Ahead and
reimbursements for certain Advances (other than
those included in liquidation expenses reimbursed
from related Liquidation Proceeds), plus the
amount of any Monthly Advances and Compensating
Interest Payments made by the Servicer for such
Distribution Date, any amounts deposited in the
Certificate Account by the Sponsor or the
Servicer in respect of the purchase, repurchase
or substitution of Mortgage Loans during the
related Collection Period, amounts deposited by
the Sponsor in respect of interest for the first
two Collection Periods and any amounts deposited
in the Certificate Account during such Collection
Period from the Prefunding Account and the
Capitalized Interest Account or in connection
with the termination of the Trust, all as more
fully described under "Description of the
Certificates -- Distributions on the
Certificates" herein.
C. Overcollateralization
Feature............... Credit enhancement with respect to the Class A
Certificates is expected to result from the
application of Excess Cash on each Distribution
Date to the reduction of the Certificate
Principal Balance of the Class A Certificates so
that over time the Aggregate Principal Balance of
the Mortgage Loans will exceed the aggregate
Certificate Principal Balance of the Class A
Certificates. This overcollateralization is
intended to result in receipts, collections and
recoveries on the Mortgage Loans in excess of the
amount necessary to pay the related Class A
Monthly Interest and the Monthly Principal
required to be distributed on the Class A
Certificates on any Distribution Date and to
reduce the Certificate Principal Balances of each
subclass of the Class A Certificates to zero
prior to the applicable Final Scheduled Payment
Date. Excess Cash will be distributed on the
Class A Certificates on each Distribution Date to
the extent necessary to reduce the Class A
Certificate Principal Balance so that the related
Coverage Amount is equal to the Required Coverage
Amount for such Distribution Date. Any Excess
Cash that is not distributed to the Class A
Certificates on a given Distribution Date will be
distributed to the Class R Certificates.
The "Coverage Amount" for any Distribution Date
will be equal to the amount by which the
aggregate of the Principal Balances of the
Mortgage Loans as of the end of the related
Collection Period (plus, in the case of the April
1997 Distribution Date, the aggregate of the
Principal Balances of any Subsequent Mortgage
Loans added to the Mortgage Pool after March 31,
1997 and prior to the end of the Funding Period)
exceeds the Class A Certificate Principal Balance
for such Distribution Date after taking into
account distributions of Monthly Principal
(disregarding any permitted reduction in Monthly
Principal due to a Coverage Surplus) made on such
Distribution Date. The "Required Coverage Amount"
for any Distribution Date will be equal to the
amount specified as such in the Pooling and
Servicing Agreement. The "Coverage Surplus" for
any Distribution Date will be the amount, if any,
by which the Coverage Amount for such
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<PAGE> 12
Distribution Date exceeds the then applicable
Required Coverage Amount. The "Coverage Deficit"
for any Distribution Date will be the amount, if
any, by which the Class A Certificate Principal
Balance on such Distribution Date (after taking
into account the Monthly Principal and Excess
Cash to be distributed on such Distribution Date
in reduction of the Class A Certificate Principal
Balance) exceeds the aggregate of the Principal
Balances of the Mortgage Loans at the end of the
related Collection Period (plus, in the case of
the April 1997 Distribution Date, the aggregate
of the Principal Balances of any Subsequent
Mortgage Loans added to the Mortgage Pool after
March 31, 1997 and prior to the end of the
Funding Period).
On the Closing Date, the initial Coverage Amount
(the amount by which the sum of the Initial Pool
Balance and the Prefunding Account Deposit
exceeds the Original Class A Certificate
Principal Balance) is expected to be zero. The
initial Coverage Amount is not indicative of the
quality of the Mortgage Loans nor is it intended
to reflect the loss, default or delinquency
experience anticipated on the Mortgage Loans.
The Pooling and Servicing Agreement will provide
that the Required Coverage Amount may increase or
decrease from time to time upon the occurrence of
certain events. Any increase in the Required
Coverage Amount may result in an accelerated
amortization of any subclass of the Class A
Certificates until such Required Coverage Amount
is reached, and any decrease in the Required
Coverage Amount will result in a decelerated
amortization of one or more subclasses of the
Class A Certificates until such Required Coverage
Amount is reached. See "Description of the
Certificates -- Overcollateralization Feature"
herein.
D. Certificate Insurance
Policy................ The Certificate Insurance Policy will be issued on
the Closing Date by the Certificate Insurer in
favor of the Trustee for the benefit of the Class
A Certificateholders. If, with respect to any
Distribution Date, sufficient funds are not
available from Available Funds to distribute the
Class A Monthly Interest, or if a Coverage
Deficit exists with respect to such Distribution
Date, the Trustee will make a draw on the
Certificate Insurance Policy in an amount equal
to the amount necessary to pay the full amount of
the related Class A Monthly Interest on such
Distribution Date and the amount of any Coverage
Deficit with respect to such Distribution Date,
as more fully described under "Description of the
Certificates -- The Certificate Insurance Policy"
herein. See also "The Certificate Insurance
Policy and the Certificate Insurer" herein.
E. Final Scheduled
Payment Date.......... The "Final Scheduled Payment Dates" for the Class A
Certificates are set forth below, although it is
anticipated that the actual final payment date
for each subclass of Class A Certificates will
occur significantly
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<PAGE> 13
earlier than such Final Scheduled Payment Date.
See "Prepayment and Yield Considerations" herein.
<TABLE>
<CAPTION>
FINAL SCHEDULED
PAYMENT DATE
-------------------
<S> <C>
Class A-1 Certificates............... September 15, 2013
Class A-2 Certificates............... May 15, 2024
Class A-3 Certificates............... August 15, 2025
Class A-4 Certificates............... June 15, 2029
Class A-5 Certificates............... June 15, 2029
</TABLE>
Forward Purchase
Commitment; Prefunding
Account.................. On the Closing Date, the Sponsor will make a
deposit (the "Prefunding Account Deposit") in the
amount of approximately $51,382,194.17 to a
segregated account (the "Prefunding Account") in
the name of the Trustee. The Prefunding Account
Deposit shall be allocated for the purchase of
Subsequent Mortgage Loans. The Prefunding Account
Deposit may be increased by an amount equal to
the aggregate of the principal balances of any
mortgage loans removed from the Mortgage Pool
prior to the Closing Date as described herein,
provided that any such increase shall not exceed
$10,000,000. See "The Mortgage Loans -- General"
herein. During the period (the "Funding Period")
from the Closing Date until the earlier of (i)
the date on which the amount on deposit in the
Prefunding Account is reduced to zero and (ii)
April 14, 1997, the amount on deposit in the
Prefunding Account will be allocated for purchase
of Subsequent Mortgage Loans from the Sponsor in
accordance with the applicable provisions of the
Pooling and Servicing Agreement. Subsequent
Mortgage Loans purchased by and added to the
Trust on any Subsequent Transfer Date must
satisfy the criteria set forth in the Pooling and
Servicing Agreement and must be approved by the
Certificate Insurer. Any date on which such
Subsequent Mortgage Loans are conveyed by the
Sponsor to the Trust is a "Subsequent Transfer
Date." On the Distribution Date in April 1997,
any portion of the Prefunding Account Deposit
that was not applied to purchase Subsequent
Mortgage Loans during the Funding Period will be
distributed in reduction of the Class A
Certificate Principal Balance. Although it is
intended that the principal amount of Subsequent
Mortgage Loans sold to the Trust will require
application of substantially all of the
Prefunding Account Deposit and it is not
currently anticipated that there will be any
material amount of principal distributions from
amounts remaining on deposit in the Prefunding
Account, no assurance can be given that such a
distribution with respect to the Class A
Certificates will not occur on the Distribution
Date in April 1997. In any event, it is unlikely
that the Sponsor will be able to deliver
Subsequent Mortgage Loans with aggregate
principal balances that exactly equal the
Prefunding Account Deposit, and any portion of
the Prefunding Account Deposit that was not
applied to purchase Subsequent Mortgage Loans
during the Funding Period will be distributed on
the April 1997 Distribution Date in reduction of
the Class A Certificate Principal Balance. The
Prefunding Account will not be part of the REMIC
Pool. See "Description of the
Certificates -- Prefunding Account" herein.
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<PAGE> 14
Capitalized Interest
Account.................... On the Closing Date, the Sponsor will deposit cash
in the name of the Trustee in a segregated
account (the "Capitalized Interest Account"). The
Capitalized Interest Account will be maintained
with the Trustee in its corporate trust
department. The amount on deposit in the
Capitalized Interest Account will be specifically
allocated to cover shortfalls in interest on the
Class A Certificates that may arise as a result
of the utilization of the Purchase Account for
the purchase by the Trust of Subsequent Mortgage
Loans during the Funding Period and will be so
applied by the Trustee on the April 1997
Distribution Date. The Capitalized Interest
Account will not be part of the REMIC Pool. See
"Description of the Certificates -- Capitalized
Interest Account" herein.
Monthly Advances........... The Servicer is required to make an advance (each,
a "Monthly Advance") on each Distribution Date
(i) in respect of delinquent payments of interest
on the Mortgage Loans for the related Collection
Period, subject to certain limitations described
herein and (ii) to cover interest at the Mortgage
Interest Rate on each Mortgage Loan that is not
delinquent as of the close of business on the
last day of the related Collection Period for the
period from and including the due date of the
related monthly payment to the end of such
Collection Period preceding such Distribution
Date. See "Description of the Certificates --
Monthly Advances; Servicing Advances;
Compensating Interest and Interest Shortfalls"
herein.
Compensating Interest and
Interest Shortfalls...... With respect to any Mortgage Loan (i) as to which a
prepayment in whole or in part was received, (ii)
that became a Liquidated Mortgage Loan or (iii)
that was otherwise charged off during a
Collection Period, the Servicer will be required
to remit to the Trustee, from amounts otherwise
payable to the Servicer as the Servicing Fee for
the related Collection Period, an amount
generally calculated to ensure that a full
month's interest on each such Mortgage Loan (less
the applicable Servicing Fee attributable to such
Mortgage Loan) is available for distribution to
the holders of the Class A Certificates on the
applicable Distribution Date (each such amount, a
"Compensating Interest Payment"). If the
Servicing Fee for the related Collection Period
is insufficient to make any portion of such
Compensating Interest Payments, the resulting
shortfall (a "Prepayment Interest Shortfall")
will reduce the amount of interest distributable
in respect of the Class A Certificates on the
related Distribution Date and such reduction will
not be recoverable thereafter.
In addition, the application to any Mortgage Loan
of the Soldiers' and Sailors' Civil Relief Act of
1940, as amended (the "Relief Act"), or similar
legislation may adversely affect, for an
indeterminate period of time, the ability of the
Servicer to collect full amounts of interest on
such Mortgage Loan ("Relief Act Shortfalls" and,
together with Prepayment Interest Shortfalls,
"Interest Shortfalls"). Interest Shortfalls will
not be covered by the Certificate Insurance
Policy. See "Risk Factors -- Limitations on
Interest Payments and Foreclosures" in the
Prospectus.
Certificate Insurer
Premium.................... The Certificate Insurer will be entitled to receive
from the Trust a monthly premium (the
"Certificate Insurer Premium") payable out of
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<PAGE> 15
Available Funds on each Distribution Date from
amounts on deposit in the Certificate Account
after reimbursement to the Certificate Insurer of
certain Insured Amounts. The Certificate Insurer
Premium as of any Distribution Date will equal
one-twelfth ( 1/12) of the product of the
applicable Insurer Premium Rate and the Class A
Certificate Principal Balance immediately prior
to such Distribution Date. The "Insurer Premium
Rate" will be as set forth in the Pooling and
Servicing Agreement. See "Description of the
Certificates -- The Certificate Insurer Premium"
herein.
Servicing Fee.............. The primary compensation payable to the Servicer on
each Distribution Date in respect of the related
Collection Period (the "Servicing Fee") will
equal one-twelfth (1/12) of the product of (a)
the applicable Servicing Fee Rate and (b) the
aggregate of the Principal Balances of the
Mortgage Loans at the beginning of such
Collection Period. The "Servicing Fee Rate" will
be 0.50% for each Collection Period. The Servicer
will also be entitled to retain late fees,
prepayment charges and certain other amounts and
charges as additional servicing compensation. See
"Origination and Servicing of the Mortgage
Loans -- Servicing and Other Compensation;
Payment of Expenses" herein.
The Mortgage Loans......... The statistical information presented in this
Prospectus Supplement regarding the Mortgage Pool
is based on the Initial Mortgage Loans as of the
Cut-off Date. The statistical information does
not take into account any Subsequent Mortgage
Loans that may be added to the Mortgage Pool
during the Funding Period through application of
amounts on deposit in the Prefunding Account.
Certain mortgage loans may be removed, prior to
the Closing Date, from the Mortgage Pool as
described herein. In such event, an amount equal
to the aggregate principal balances of such
mortgage loans, but in no event more than
$10,000,000, would be added to the Prefunding
Account Deposit on the Closing Date. As a result,
the statistical information presented herein may
vary in certain limited respects from comparable
information based on the actual composition of
the Mortgage Pool on the Closing Date.
As of the Cut-off Date, the Mortgage Pool consists
of a total of 2,782 Initial Mortgage Loans that
had an aggregate principal balance, determined as
of the Cut-off Date of $163,617,805.83 (the
"Initial Pool Balance"), after application of all
payments of principal received in respect of such
Initial Mortgage Loans before the Cut-off Date.
Such Initial Pool Balance is subject to reduction
in the event mortgage loans are removed from the
Mortgage Pool prior to the Closing Date. The
Mortgage Loans are closed-end, fixed rate, home
equity mortgage loans secured by first, second or
third liens on the related Mortgaged Properties
that have been originated by the Sponsor or
acquired by the Sponsor from certain affiliates
of the Sponsor (the "Affiliated Originators") and
institutions not affiliated with the Sponsor (the
"Unaffiliated Originators" and, together with the
Affiliated Originators, the "Originators"). See
"Origination and Servicing of the Mortgage
Loans -- The Originators" and "-- Underwriting of
Mortgage Loans" herein.
Approximately 22.90% of the Initial Mortgage Loans
(by Initial Pool Balance) are secured by
Mortgaged Properties located in California. See
"The Mortgage Loans -- General" herein and "ANNEX
A:
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<PAGE> 16
Description of the Mortgage Pool" for detailed
information about the Initial Mortgage Loans.
Optional Termination....... On any Distribution Date when the aggregate of the
Principal Balances of the Mortgage Loans in the
Mortgage Pool (the "Pool Balance") as of such
Distribution Date is less than 10% of the sum of
the Initial Pool Balance and the original
Prefunding Account Deposit (the first such
Distribution Date, the "Clean-up Call Date"), the
Servicer may purchase from the Trust all
remaining Mortgage Loans and all property
acquired in respect of any Mortgage Loan held by
the Trust and thereby effect an early retirement
of the Class A Certificates. The purchase price
will generally be equal to the Principal Balance
of each Mortgage Loan in the Mortgage Pool at
such time plus the fair market value of each
Mortgaged Property then held by the Trust,
together with any unpaid accrued interest on such
Mortgage Loan and certain amounts payable to the
Certificate Insurer under the Pooling and
Servicing Agreement.
If, on any Distribution Date, Mortgage Loans with
original Cut-off Date aggregate Principal
Balances equal to or in excess of 25% of the sum
of the Initial Pool Balance and the Prefunding
Account Deposit have become Liquidated Mortgage
Loans, the Certificate Insurer will have the
option to purchase all remaining Mortgage Loans
and all property acquired in respect of any
Mortgage Loan held by the Trust and thereby
effect an early retirement of the Certificates.
The purchase price for such Mortgage Loans will
be the price set forth in the immediately
preceding paragraph plus any outstanding unpaid
fees and expenses of the Trustee and Servicer.
See "Description of Certificates -- Termination;
Retirement of the Certificates" herein.
Rating..................... It is a condition to the issuance of the Class A
Certificates that each of the Class A-1
Certificates, the Class A-2 Certificates, the
Class A-3 Certificates, the Class A-4
Certificates and the Class A-5 Certificates, be
rated "Aaa" by Moody's Investors Service, Inc.
("Moody's"), "AAA" by Standard and Poor's, a
division of The McGraw-Hill Companies, Inc.
("S&P") and "AAA" by Fitch Investors Service,
L.P. ("Fitch" and, together with Moody's and S&P,
the "Rating Agencies"). A security rating is not
a recommendation to buy, sell or hold the
securities and may be subject to revision or
withdrawal at any time by the assigning Rating
Agency. See "Rating of the Class A Certificates"
herein.
Certain Federal Income Tax
Consequences............. An election will be made to treat the Trust (other
than the Prefunding Account and the Capitalized
Interest Account) as a real estate mortgage
investment conduit (the "REMIC") for federal
income tax purposes. The Class A-1 Certificates,
Class A-2 Certificates, Class A-3 Certificates,
Class A-4 Certificates and Class A-5 Certificates
will be designated as the regular interests in
the REMIC and generally will be treated as newly
originated debt instruments for federal income
tax purposes. The Class R Certificate will be
designated as the residual interest in the REMIC.
Beneficial owners of the Class A Certificates
will be required to report income on such
Certificates in accordance with the accrual
method of accounting. It is anticipated that the
Class A Certificates will be issued without
original issue discount for federal income tax
purposes. Certificate-
S-16
<PAGE> 17
holders are urged to consult their tax advisors
with respect to the tax consequences of holding
the Class A Certificates. See "Certain Federal
Income Tax Consequences" herein and in the
Prospectus.
ERISA Considerations....... Subject to the satisfaction of certain conditions
set forth herein, the Class A Certificates may be
acquired and held by a pension or other employee
benefit plan subject to the Employee Retirement
Income Security Act of 1974, as amended ("ERISA")
and/or Section 4975 of the Internal Revenue Code
of 1986, 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"). See "Legal Investment Considerations"
herein and in the Prospectus.
Risk Factors............... For a discussion of certain factors that should be
considered by prospective investors in the Class
A Certificates, including certain yield and
prepayment risks, see "Risk Factors" herein and
in the Prospectus.
Registration and
Denominations; Form of
Class A Certificates..... The Class A Certificates will be issued in minimum
denominations of $1,000 and integral multiples of
$1 in excess thereof. Persons acquiring
beneficial ownership interests in the Class A
Certificates ("Certificate Owners") will hold
their Certificates through DTC, in the United
States, or Cedel Bank, societe anonyme ("Cedel")
or the Euroclear System ("Euroclear") in Europe.
Transfers within DTC, Cedel or Euroclear, as the
case may be, will be in accordance with the usual
rules and operating procedures of the relevant
system. So long as the Class A Certificates are
Book-Entry Certificates, such Certificates will
be evidenced by one or more Certificates
registered in the name of Cede & Co., as the
nominee of DTC, or Citibank N.A. or Morgan
Guaranty Trust Company of New York, the relevant
depositaries of Cedel and Euroclear,
respectively, and each a participating member of
DTC. No Certificate Owner will be entitled to
receive a definitive certificate representing
such person's interest, except in the event that
Definitive Certificates are issued under the
limited circumstances described herein. See "Risk
Factors -- Book-Entry Registration", "Description
of the Certificates -- Book-Entry Registration of
Class A Certificates" herein, "ANNEX B: Global
Clearance, Settlement and Tax Documentation
Procedures" hereto and "Description of the
Certificates -- Form of
Certificates -- Book-Entry Registration" in the
Prospectus.
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<PAGE> 18
RISK FACTORS
Prospective investors in the Class A Certificates should consider the
following risk factors (as well as the factors set forth under "Risk Factors" in
the Prospectus) in connection with the purchase of the Class A Certificates. Any
statistical information presented below is based upon the characteristics of the
Initial Mortgage Loans as of the date of this Prospectus Supplement. Such
information may vary as a result of the possibility that certain mortgage loans
may be removed from the Mortgage Pool prior to the Closing Date.
RISKS ASSOCIATED WITH UNDERWRITING STANDARDS. All of the Mortgage Loans
will have been underwritten and originated or, in the case of Mortgage Loans
acquired by the Sponsor from Unaffiliated Originators, re-underwritten by the
Sponsor, in either case pursuant to the Sponsor's Guidelines (as described in
the Prospectus under the caption "The Originators -- Underwriting Guidelines"),
which, in most cases, rely on the value and adequacy of the related Mortgaged
Property as collateral and, to a lesser extent, on the creditworthiness of the
Mortgagor.
No assurance can be given that the values of the Mortgaged Properties will
not decline from those on the dates the related Mortgage Loans were originated
and any such decline could render the information set forth herein with respect
to the Combined Loan-to-Value Ratios of such Mortgage Loans an unreliable
measure of security for the related debt. If the residential real estate market
should experience an overall decline in property values such that the
outstanding principal balances of the Mortgage Loans (including any senior liens
on the related Mortgaged Properties) become equal to or greater than the values
of such Mortgaged Properties, the actual rate of delinquencies, foreclosures and
losses on the related Mortgage Loans could be higher than those now generally
experienced in the mortgage lending industry. Even assuming that the Mortgaged
Properties provide adequate security for the Mortgage Loans, substantial delays
could be encountered in connection with the foreclosure and liquidation of
defaulted Mortgage Loans and corresponding delays in the receipt of related
proceeds by Class A Certificateholders could occur. In the event that any
Mortgaged Properties fail to provide adequate security for the related Mortgage
Loans, any resulting losses will be covered by funds made available through
operation of the overcollateralization feature described herein, or, if
necessary, by amounts paid under the Certificate Insurance Policy to the extent
of the Class A Monthly Interest due to the holders of the Class A Certificates
on the related Distribution Date and the amount of any Coverage Deficit with
respect to such Distribution Date. See "Certain Legal Aspects of the Mortgage
Loans and Related Matters -- Foreclosure/Repossession," "-- Rights of
Redemption" and "The Pooling and Servicing Agreement -- Realization upon
Defaulted Mortgage Loans" in the Prospectus.
In general, a prospective borrower applying for a Mortgage Loan is required
to fill out a detailed application designed to provide the related Originator
with pertinent information. As part of the description of the borrower's
financial condition, the borrower generally is required to provide a current
list of assets and liabilities and a statement of income and expenses, as well
as an authorization to apply for a credit report that summarizes the borrower's
credit history. The Originator obtains a credit report from one or more credit
reporting agencies. In many cases, the borrower's credit history will include
major derogatory credit items such as credit write-offs, outstanding judgments
and prior bankruptcies. The Originator generally verifies the borrower's
employment, but in many cases does not verify the borrower's income. Because
certain Mortgage Loans may have been underwritten pursuant to standards that
rely to a greater extent on the value of the related Mortgaged Properties than
on the creditworthiness of the related Mortgagor, the actual rates of
delinquencies, foreclosures and losses on such Mortgage Loans could be higher
than those historically experienced in the mortgage lending industry in general,
particularly in periods during which the values of the related Mortgaged
Properties decline. See "The Originators -- Underwriting Guidelines" in the
Prospectus.
RISKS ASSOCIATED WITH GEOGRAPHIC CONCENTRATION OF MORTGAGED
PROPERTIES. Approximately 22.90% of the Initial Mortgage Loans (by Initial Pool
Balance) are secured by Mortgaged Properties located in California. The
California residential real estate market has experienced a sustained decline
over the last several years. In general, declines in the California residential
real estate market may adversely affect the values of the Mortgaged Properties
securing such Mortgage Loans such that the Principal Balances of such Mortgage
Loans, together with any primary financing on such Mortgaged Properties, will
equal or exceed the value of such Mortgaged Properties. In addition, adverse
economic conditions in California (which may or may not affect real property
values) may affect the timely payment by borrowers of scheduled payments of
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<PAGE> 19
principal and interest on such Mortgage Loans and, accordingly, the actual rates
of delinquencies, foreclosures and losses on such Mortgage Loans could be higher
than those currently experienced in the mortgage lending industry in general.
RISKS ASSOCIATED WITH DAMAGED MORTGAGED PROPERTIES. Generally, the
standard form of hazard insurance policy required to be maintained under the
terms of each Mortgage Loan does not cover physical damage resulting from floods
and other water-related causes or from earth movement (including earthquakes,
landslides and mudflows). Certain Initial Mortgage Loans are, and certain
Subsequent Mortgage Loans may be, secured by Mortgaged Properties located in
areas that have been affected by other natural disasters excluded from coverage
under such standard hazard insurance policies. See "Origination and Servicing of
the Mortgage Loans -- Hazard Insurance" herein. During the latter part of 1996
and the early part of 1997, major flooding occurred in parts of Ohio, Kentucky
and Indiana that may have damaged some of the Mortgaged Properties securing
Mortgage Loans conveyed to the Trust. Approximately 6.31% of the Mortgage Loans
(by Initial Pool Balance) are secured by Mortgaged Properties located in the
states of Ohio, Kentucky and Indiana, but there can be no assurance as to the
number of Mortgaged Properties securing Initial Mortgage Loans, if any, that may
have been damaged by such flooding or the extent of any such damage.
If a Mortgaged Property has been materially damaged since the Cut-off Date
due to flooding or other water-related causes or due to an earthquake or other
earth movement and such damage results in losses on the related Mortgage Loan,
such losses will be covered by funds made available through operation of the
overcollateralization feature described herein, or, if necessary, by amounts
paid under the Certificate Insurance Policy to the extent of the Class A Monthly
Interest due to the holders of the Class A Certificates on the related
Distribution Date and the amount of any Coverage Deficit with respect to such
Distribution Date. See "Description of the Certificates -- Overcollateralization
Feature -- Overcollateralization and the Certificate Insurance Policy" and
"-- The Certificate Insurance Policy" and "The Certificate Insurance Policy and
the Certificate Insurer" herein.
However, under the Pooling and Servicing Agreement, the Sponsor will
represent that, as of the Cut-off Date, each Mortgaged Property is free of
substantial damage and is in good repair. In the event that any uncured breach
of such representation materially and adversely affects the interest of
Certificateholders in the related Mortgage Loan, the Sponsor will be required to
repurchase the Mortgage Loan or deliver a substitute Mortgage Loan therefor. To
the extent the Sponsor repurchases such Mortgage Loan, such repurchase will
accelerate the timing of principal distributions and may thereby affect the
yields and weighted average lives of the Class A Certificates.
RISKS ASSOCIATED WITH JUNIOR LOANS. Because a portion of the Mortgage
Loans is secured by junior liens ("Junior Loans") subordinate to the rights of
the beneficiary under each related senior lien, the proceeds from any
liquidation, insurance or condemnation proceedings will be available to satisfy
the principal balance of a Mortgage Loan only to the extent that the claims, if
any, of each such senior beneficiary are satisfied in full, including any
related foreclosure costs. In addition, a beneficiary of a junior lien may not
foreclose on the Mortgaged Property securing such lien unless it forecloses
subject to the related senior lien(s), in which case it must either make
payments on each senior lien in the event of default thereunder or pay the
entire amount of each senior lien to the applicable beneficiary prior to the
foreclosure sale. In servicing home equity mortgage loans in its portfolio, it
is the practice of the Servicer to satisfy each such senior lien 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 the related home
equity mortgage loan or otherwise. The Trust will have no source of funds to
satisfy any such senior lien or make payments due to each related senior
beneficiary. See "Risk Factors -- Nature of the Security for Mortgage
Loans -- Risks Associated with Junior Liens" and "Certain Legal Aspects of the
Mortgage Loans and Related Matters -- Foreclosure/Repossession" in the
Prospectus.
Even assuming that the Mortgaged Properties provide adequate security for
the related Mortgage Loans, substantial delays could be encountered in
connection with the foreclosure and liquidation of defaulted Mortgage Loans and
corresponding delays in the receipt of related proceeds by Class A
Certificateholders could occur. An action to foreclose on a Mortgaged Property
securing a Mortgage Loan is regulated by state statutes and rules and is subject
to many of the same delays and expenses as other lawsuits if defenses or
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counter-claims are interposed, sometimes requiring several years to complete.
Furthermore, an action to obtain a deficiency judgment is generally not
permitted following a non-judicial foreclosure 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 and sell the Mortgaged
Property or to obtain Net Liquidation Proceeds sufficient to repay all amounts
due on the related Mortgage Loan. In the event that any Mortgaged Properties
fail to provide adequate security for the related Mortgage Loans, any resulting
losses will be covered by funds made available through operation of the
overcollateralization feature described herein or, if necessary, by amounts paid
under the Certificate Insurance Policy to the extent of the Class A Monthly
Interest due on the related Distribution Date and the amount of any Coverage
Deficit with respect to such Distribution Date. See "Certain Legal Aspects of
the Mortgage Loans and Related Matters -- Foreclosure/Repossession," "-- Certain
Provisions of California Deeds of Trust," "-- Anti-deficiency Legislation and
other Limitations on Lenders" and "The Pooling and Servicing
Agreement -- Realization upon Defaulted Mortgage Loans" in the Prospectus.
In addition, other factors may affect the prepayment rate of Junior Loans
such as the amounts of, and interest rates on, the underlying senior mortgage
loans, if any, and the use of first lien mortgage loans as long-term financing
for home purchase and Junior Loans as shorter-term financing for a variety of
purposes, including home improvement, education expenses and purchases of
consumer durables such as automobiles. Accordingly, Junior Loans may experience
a higher rate of prepayments than traditional first lien mortgage loans. In
addition, any future limitations on the right of borrowers to deduct interest
payments on Junior Loans for federal income tax purposes may further increase
the rate of prepayments of such Junior Loans. See "Maturity, Prepayment and
Yield Considerations" in the Prospectus.
RISKS ASSOCIATED WITH PREPAYMENT OF THE MORTGAGE LOANS. All of the
Mortgage Loans may be prepaid in full or in part at any time, generally upon the
payment to the Servicer of a prepayment charge. The rate of prepayments of the
Mortgage Loans cannot be predicted and may be affected by a wide variety of
general economic, social, competitive and other factors, including state and
federal income tax policies (including possible future changes affecting the
deductibility for federal income tax purposes of interest payments on mortgage
loans), interest rates (including the amounts of and interest rates on any
underlying senior mortgage loans), the availability of alternative financing and
homeowner mobility. Therefore, no assurance can be given as to the level of
prepayments that the Trust will experience. A number of factors suggest that the
prepayment behavior of the Mortgage Pool may be significantly different from
that of a pool of conventional first lien residential mortgage loans with
equivalent interest rates and maturities. One such factor is that the principal
balance of the average Mortgage Loan is smaller than that of the average
conventional first lien mortgage loan. A smaller principal balance may be easier
for a borrower to refinance or otherwise prepay than a larger balance and,
therefore, a higher prepayment rate may result for the Mortgage Pool than for a
pool of conventional first lien mortgage loans, irrespective of the relative
average interest rates and the general interest rate environment. Accordingly,
the Mortgage Loans may experience higher rates of prepayment than conventional
first lien mortgage loans. Conversely, a borrower with a Mortgage Loan having a
small principal balance may view refinancing such Mortgage Loan at a lower
interest rate as less attractive because the impact to the borrower of lower
interest rates on the size of the related monthly payment may be perceived as
insignificant. Moreover, borrowers under the Mortgage Loans may have limited
access to alternative financing, which may limit refinancing options, or may be
required to incur relatively higher origination costs than borrowers under
conventional first lien mortgage loans, which may discourage refinancing
activity. As a result, the Mortgage Loans may prepay at slower rates than those
of conventional first lien loans. See "Risk Factors -- Yield, Maturity and
Prepayment Considerations" and "Maturity, Prepayment and Yield Considerations"
in the Prospectus.
Prepayments may result from voluntary early payments by borrowers
(including payments in connection with refinancing of any related senior
mortgage loans), sales of Mortgaged Properties subject to "due-on-sale" clauses
as to which the Servicer exercises its rights thereunder and liquidations due to
default, as well as the receipt of proceeds from hazard, credit life and
disability insurance policies. In addition, repurchases or purchases from the
Trust of Mortgage Loans required or permitted to be made by the Sponsor, the
Servicer and, under certain limited circumstances, the Certificate Insurer under
the Pooling and Servicing Agreement will have the same effect on the holders of
the Class A Certificates as a prepayment of the related Mortgage
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Loans. Prepayments and such repurchases and purchases will accelerate the
receipt of distributions of Monthly Principal on the Class A Certificates. See
"The Pooling and Servicing Agreement -- Assignment of Mortgage Loans" and
"-- Termination; Optional Termination" and "Certain Legal Aspects of the
Mortgage Loans and Related Matters -- Enforceability of Due-on-Sale Clauses" in
the Prospectus. The Servicer may solicit refinancings from existing borrowers
under loans originated by Affiliated Originators, which may have the effect of
increasing the rate of prepayment, due to refinancings, on the Mortgage Loans.
See "Origination and Servicing of the Mortgage Loans -- Servicing of the
Mortgage Loans" herein.
Prepayments, liquidations, repurchases and purchases of the Mortgage Loans
will result in distributions to Class A Certificateholders of principal amounts
that would otherwise be distributed over the remaining terms of the Mortgage
Loans. The extent to which the yield to maturity of a Class A Certificate may
vary from the anticipated yield will depend upon the degree to which it is
purchased at a premium or discount and the degree to which the timing of
payments thereon is sensitive to prepayments, liquidations, repurchases and
purchases of Mortgage Loans. In the case of any Class A Certificate purchased at
a discount, an investor should consider the risk that a slower than anticipated
rate of principal payments on the Mortgage Loans could result in an actual yield
to such investor that is lower than the anticipated yield and, in the case of
any Class A Certificate purchased at a premium, the risk that a faster than
anticipated rate of prepayments, liquidations, repurchases and purchases could
result in an actual yield to such investor that is lower than the anticipated
yield. Further, there can be no assurance that Class A Certificateholders will
be able to reinvest distributions in respect of prepayments, liquidations,
repurchases and purchases of the Mortgage Loans in securities or other
instruments that have a yield comparable to that of the Class A Certificates.
If prepayments on the Mortgage Loans occur at a slower rate than that
anticipated in connection with the pricing of the Class A Certificates, the
actual yield to investor in certain subclasses of the Class A Certificates may
be affected by the commencement of the Class A-5 Monthly Principal Lockout
Distribution and the Class A-5 Excess Cash Lockout Distribution. Commencing on
the April 2000 Distribution Date, distributions in respect of Monthly Principal
and Excess Cash will be made first to the Class A-5 Certificateholders up to the
Class A-5 Monthly Principal Lockout Distribution and the Class A-5 Excess Cash
Lockout Distribution. Such distribution will have the effect of reducing the
aggregate amounts of Monthly Principal and Excess Cash available to make the
sequential distributions thereof to the other Class A Certificateholders.
THE SUBSEQUENT MORTGAGE LOANS AND THE PREFUNDING ACCOUNT. Any conveyance
of Subsequent Mortgage Loans is subject to the following conditions, among
others: (i) each Subsequent Mortgage Loan must satisfy the representations and
warranties specified in the Pooling and Servicing Agreement and each related
subsequent transfer agreement; (ii) the Sponsor will not select such Subsequent
Mortgage Loans in a manner that it believes is adverse to the interests of the
Class A Certificateholders; (iii) the Mortgage Loans in the Mortgage Pool as of
the date such transfer is deemed to occur (the "Subsequent Cut-off Date"),
including the Subsequent Mortgage Loans to be conveyed by the Sponsor as of such
Dates, will satisfy the criteria set forth in the Pooling and Servicing
Agreement; and (iv) the Subsequent Mortgage Loans will have been approved by the
Certificate Insurer and, in instances deemed appropriate thereby, the foregoing
requirements for Subsequent Mortgage Loans may be waived or modified. Following
the transfer of Subsequent Mortgage Loans to the Trust, the aggregate
characteristics of the Mortgage Loans then included in the Mortgage Pool may
vary from those of the Initial Mortgage Loans included in the Mortgage Pool as
of the Cut-off Date. A Current Report on Form 8-K containing a description of
the Mortgage Loans included in the final Mortgage Pool as of the end of the
Funding Period in a form comparable to the description of the Initial Mortgage
Loans contained in "ANNEX A: Description of the Mortgage Pool" will be filed
with the Commission within 15 days after expiration of the Funding Period. See
"The Mortgage Loans -- Conveyance of Subsequent Mortgage Loans" herein.
If, by the end of the Funding Period, amounts on deposit in the Prefunding
Account have not been fully applied to the purchase of Subsequent Mortgage
Loans, the portion of the Prefunding Account Deposit that is remaining at the
end of the Funding Period will be distributed in reduction of the Class A
Certificate Principal Balance. Although it is intended that the principal amount
of Subsequent Mortgage Loans sold to the Trust will require application of
substantially all of the Prefunding Account Deposit and it is not currently
anticipated that there will be any material amount of principal distributions
from amounts remaining on deposit in the Prefunding Account in reduction of the
Class A Certificate Principal Balance, no assurance can
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be given that such a distribution will not occur on the Distribution Date in
April 1997. In any event, it is unlikely that the Sponsor will be able to
deliver Subsequent Mortgage Loans with aggregate principal balances that exactly
equal the Prefunding Account Deposit. Any portion of the Prefunding Account
Deposit that is not applied to acquire Subsequent Mortgage Loans during the
Funding Period will be paid on the April 1997 Distribution Date in reduction of
the Class A Certificate Principal Balance.
YIELD CONSIDERATIONS RELATING TO EXCESS CASH. Excess Cash will be
distributed in reduction of the Class A Certificate Principal Balance on each
Distribution Date to the extent the then applicable Required Coverage Amount
exceeds the Coverage Amount for such Distribution Date. If purchased at a
premium or a discount, the yield to maturity on a Class A Certificate will be
affected by the rate at which Excess Cash is distributed in reduction of the
Class A Certificate Principal Balance. If the actual rate of such Excess Cash
distributions is slower than the rate anticipated by an investor who purchases a
Class A Certificate at a discount, the actual yield to such investor will be
lower than such investor's anticipated yield. If the actual rate of such Excess
Cash distributions is faster than the rate anticipated by an investor who
purchases a Class A Certificate at a premium, the actual yield to such investor
will be lower than such investor's anticipated yield. The amount of Excess Cash
on any Distribution Date will be affected by the actual amount of interest
received, collected or recovered in respect of the Mortgage Loans during the
related Collection Period and such amount will be influenced by changes in the
weighted average of the Mortgage Interest Rates resulting from prepayments and
liquidations of Mortgage Loans. The amount of Excess Cash distributions applied
in reduction of the related Class A Certificate Principal Balance on each
Distribution Date will be based on the then applicable Required Coverage Amount,
which may increase or decrease during the period any subclass of Class A
Certificates remains outstanding. Any increase in a Required Coverage Amount may
result in an accelerated rate of amortization of the Class A Certificates until
the Coverage Amount equals such Required Coverage Amount and any decrease in a
Required Coverage Amount will result in a decelerated rate of amortization of
the Class A Certificates until the Coverage Amount equals such Required Coverage
Amount.
ENVIRONMENTAL STATUTES AFFECTING SECURITY INTERESTS. A substantial portion
of the Initial Mortgage Loans are secured by Mortgaged Properties located in
states that may impose a statutory lien for associated costs on property that is
the subject of a clean-up 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, although
in some states, including California, it will not have priority over prior
recorded liens, including the lien of a mortgage. In addition, under federal
environmental statutes and under the laws of many states, including California,
a secured party that takes a deed in lieu of foreclosure, acquires a mortgaged
property at a foreclosure sale or, prior to foreclosure, has been involved in
decisions or actions that may lead to contamination of a property, may be liable
for the costs of cleaning up a contaminated site. See "Certain Legal Aspects of
the Mortgage Loans and Related Matters -- Environmental Considerations" in the
Prospectus. Any such liens or costs imposed in connection with a clean-up action
by the state may impede the ability of the Servicer to foreclose on or sell the
related Mortgaged Property or to obtain Net Liquidation Proceeds sufficient to
repay all amounts due on the related Mortgage Loan. Any resulting losses will be
covered by funds made available through operation of the overcollateralization
feature described herein or, if necessary, by amounts paid under the Certificate
Insurance Policy to the extent of the Class A Monthly Interest due on the
related Distribution Date and the amount of any Coverage Deficit with respect to
such Distribution Date.
RISKS ASSOCIATED WITH CERTAIN ORIGINATION FEES. Fees earned on the
origination of loans, placement of related insurance and other services provided
by the Sponsor and Affiliated Originators are often paid by the borrower out of
related loan proceeds. From time to time, in the ordinary course of their
businesses, originators of home equity loans have been named in legal actions
brought by mortgagors challenging the amount or method of imposing or disclosing
such fees. To date, no such action has been decided against the Sponsor or any
Affiliated Originator. If such an action against any Originator with respect to
any Mortgage Loan were successful, a court might require that the principal
balances of the related Mortgage Loans be reduced by the amount of contested
fees or charges. Any such reductions could result in substantial Realized Losses
during one or more Collection Periods, potentially leading to a Coverage
Deficit. In the event of such a
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Coverage Deficit, payments by the Certificate Insurer would result in
accelerated distributions in reduction of the Class A Certificate Principal
Balance.
BOOK-ENTRY REGISTRATION. Issuance of the Class A Certificates in
book-entry form may reduce the liquidity of such Certificates in the secondary
trading market because investors may be unwilling to purchase Class A
Certificates for which they cannot obtain physical certificates.
Because transactions in the Class A Certificates can be effected only
through DTC, Cedel, Euroclear, participating organizations, indirect
participants and certain banks, the ability of a Certificate Owner to pledge a
Class A Certificate to persons or entities that do not participate in the DTC,
Cedel or Euroclear system, or otherwise to take actions in respect of such
Certificate, may be limited due to lack of a physical certificate representing
such Class A Certificate.
Certificate Owners may experience some delay in their receipt of
distributions of interest of and principal on the Class A Certificates because
such distributions will be forwarded by the Trustee to DTC and DTC will credit
such distributions to the accounts of its Participants which will thereafter
credit them to the accounts of Certificate Owners either directly or indirectly
through indirect participants. See "Description of the
Certificates -- Book-Entry Registration of Class A Certificates" herein, "ANNEX
B: Global Clearance, Settlement and Tax Documentation Procedures" hereto and
"Description of the Certificates -- Form of Certificates -- Book-Entry
Registration" in the Prospectus.
DESCRIPTION OF THE CERTIFICATES
The Class A Certificates will be issued pursuant to a Pooling and Servicing
Agreement, to be dated as of March 1, 1997 (the "Pooling and Servicing
Agreement"), between the Sponsor, in its capacities as seller and Servicer, and
the Trustee. The following summaries describe the material provisions of the
Pooling and Servicing Agreement but do not purport to be complete. The Sponsor
will provide a copy of the Pooling and Servicing Agreement (without exhibits)
without charge upon the written request of a Certificate Owner addressed to:
Aames Capital Corporation, 3731 Wilshire Blvd., 10th Floor, Los Angeles,
California 90010, Attention: Corporate Secretary.
GENERAL
The Certificates will evidence undivided beneficial ownership interests in
the Trust created pursuant to the Pooling and Servicing Agreement. The Class A-1
Certificates, the Class A-2 Certificates, the Class A-3 Certificates, the Class
A-4 Certificates and the Class A-5 Certificates will respectively evidence the
right to receive from the Trust (i) the Class A-1 Certificate Principal Balance,
plus interest at the Class A-1 Pass-Through Rate, (ii) the Class A-2 Certificate
Principal Balance, plus interest at the Class A-2 Pass-Through Rate, (iii) the
Class A-3 Certificate Principal Balance, plus interest at the Class A-3
Pass-Through Rate, (iv) the Class A-4 Certificate Principal Balance, plus
interest at the Class A-4 Pass-Through Rate and (v) the Class A-5 Certificate
Principal Balance, plus interest at the Class A-5 Pass-Through Rate, as
described herein. The holder of the Class R Certificate (which has no stated
principal balance) is not entitled to any distributions with respect to any
Distribution Date until such time as the Coverage Amount exceeds the then
applicable Required Coverage Amount and the Certificate Insurer and the
Servicer, in that order, have been reimbursed amounts to which they may be
entitled. The Class R Certificateholder will thereafter be entitled to certain
amounts as described herein under "-- Distributions on the Certificates."
The assets of the Trust will consist of (a) the Mortgage Loans that from
time to time are subject to the Pooling and Servicing Agreement; (b) the assets
that from time to time are required by the Pooling and Servicing Agreement to be
deposited in the Collection Account and the Certificate Account, held in the
Prefunding Account and the Capitalized Interest Account or invested in Permitted
Investments (see "-- Payments on Mortgage Loans and Deposits to the Collection
Account" herein); (c) all rights of the mortgagee under any insurance policy
covering a Mortgage Loan or the related Mortgaged Property;
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(d) property and any proceeds thereof acquired by foreclosure of the Mortgage
Loans, deed in lieu of foreclosure or a comparable conversion; and (e) the
Certificate Insurance Policy.
The Sponsor will designate in the Pooling and Servicing Agreement, for
purposes of the Code, the Class A Certificates as "regular interests," and the
Class R Certificate as the sole class of "residual interests," in a REMIC
generally comprised of the Mortgage Pool, the Collection Account, the
Certificate Account and the Certificate Insurance Policy (the "REMIC Pool"). The
Prefunding Account and the Capitalized Interest Account will not be part of the
REMIC Pool. The Closing Date will be designated as the "Startup Day" (within the
meaning of the Code) of the REMIC. See "Certain Federal Income Tax Consequences"
in the Prospectus.
The Class A Certificates will be issued in minimum denominations of $1,000
and integral dollar multiples of $1 in excess thereof.
BOOK-ENTRY REGISTRATION OF CLASS A CERTIFICATES
The Class A Certificates initially will be book-entry Certificates (the
"Book-Entry Certificates"). Persons acquiring beneficial ownership interests in
the Class A Certificates ("Certificate Owners") will hold such Certificates
through the Depository Trust Company ("DTC"), in the United States, or Cedel
Bank, societe anonyme ("Cedel") or the Euroclear System ("Euroclear"), in
Europe, if they are participants of such systems, or indirectly through
organizations that are participants in such systems. The Book-Entry Certificates
will be issued in one or more certificates, representing the aggregate principal
balance of the Class A Certificates, and will initially be registered in the
name of Cede & Co. ("Cede"), the nominee of DTC. Cedel and Euroclear will hold
omnibus positions on behalf of Cedel Participants and Euroclear Participants,
respectively, 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 N.A. ("Citibank") will act as depositary for Cedel and
Morgan Guaranty Trust Company of New York ("Morgan") will act as depositary for
Euroclear (Citibank and Morgan, 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 Certificate Principal Balances of $1,000 and in
integral multiples of $1 in excess thereof. Except as described below, no person
acquiring a Book-Entry Certificate 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
"Certificateholder" of the Class A Certificates will be Cede, as nominee of DTC.
Certificate Owners will not be Certificateholders as that term is used in the
Pooling and Servicing Agreement. Certificate Owners are permitted to exercise
their rights only indirectly through DTC and its Participants (including Cedel
and Euroclear).
The beneficial 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 Certificate
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 Participant and on the records of Cedel
or Euroclear, as appropriate).
Certificate Owners will receive all distributions of principal of, and
interest on, the Class A Certificates from the Trustee through DTC and its
Participants (including Cedel and Euroclear). While the Class A 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 the Certificates and is required to receive
and transmit distributions of principal of, and interest on, such Certificates.
Participants and indirect participants with whom Certificate 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
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Certificate Owners. Accordingly, although Certificate Owners will not possess
certificates, the Rules provide a mechanism by which Certificate Owners will
receive distributions and will be able to transfer their interests.
Certificate Owners will not receive or be entitled to receive certificates
representing their respective interests in the Class A Certificates, except
under the limited circumstances described below. Unless and until Definitive
Certificates are issued, Certificate Owners who are not Participants may
transfer ownership of Class A Certificates only through Participants and
indirect participants by instructing such Participants and indirect participants
to transfer Class A Certificates, by book-entry transfer, through DTC for the
account of the purchasers of such Class A Certificates, which account is
maintained with their respective Participants. Under the Rules and in accordance
with DTC's normal procedures, transfers of ownership of Class A 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 Certificate 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
Participants 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 or Euroclear Participant to a Participant will be received with
value on the DTC settlement date but will be available in the relevant Cedel or
Euroclear cash account only as of the business day following settlement in DTC.
For information with respect to tax documentation procedures relating to the
Certificates, see "Certain Federal Income Tax Consequences -- Non-U.S.
Persons -- Senior Certificates" and "-- Information Reporting and Backup
Withholding" in the Prospectus and in "ANNEX B: Global Clearance, Settlement and
Tax Documentation Procedures -- Certain U.S. Federal Income Tax Documentation
Requirements" 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 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 ("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 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 its
Participants as in effect from time to time.
Cedel is incorporated under the laws of Luxembourg as a professional
depository. Cedel holds securities for its participating organizations ("Cedel
Participants") and facilitates the clearance and settlement of securities
transactions between Cedel Participants through electronic book-entry changes in
accounts of Cedel Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in Cedel in any of 28
currencies, including United States dollars. Cedel provides to its Cedel
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally
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traded securities and securities lending and borrowing. Cedel interfaces with
domestic markets in several countries. As a professional depository, Cedel is
subject to regulation by the Luxembourg Monetary Institute. Cedel Participants
are recognized financial institutions around the world, including underwriters,
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations. Indirect access to Cedel is also available to
others, such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a Cedel Participant, either directly
or indirectly.
Euroclear was created in 1968 to hold securities for its participants
("Euroclear Participants") and to clear and settle transactions between
Euroclear Participants, through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may be settled through Euroclear in any of 32 currencies,
including United States dollars. Euroclear provides various other services,
including securities lending and borrowing, and interfaces with domestic markets
in several countries generally similar to the arrangements for cross-market
transfers with DTC described above. Euroclear is operated by the Brussels,
Belgium office of Morgan Guaranty Trust Company of New York (the "Euroclear
Operator"), under contract with Euroclear Clearance Systems S.C., a Belgian
cooperative corporation (the "Cooperative"). All operations are conducted by the
Euroclear Operator, and all Euroclear securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear Operator, not the
Cooperative. The Cooperative establishes policy for Euroclear on behalf of
Euroclear Participants. Euroclear Participants include banks (including central
banks), securities brokers and dealers and other professional financial
intermediaries. Indirect access to Euroclear is also available to other firms
that clear through or maintain a custodial relationship with a Euroclear
Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation that 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
(the "Federal Reserve Board") 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 to 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
Distribution Date by the Trustee to DTC. DTC will be responsible for crediting
the amount of such payments to the accounts of the applicable Participants in
accordance with DTC's normal procedures. Each Participant will be responsible
for disbursing such payments to the Certificate Owners 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 Certificate Owners
that it represents.
Under a book-entry format, Certificate Owners may experience some delay in
their receipt of payments because 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. See "Certain Federal Income Tax
Consequences -- Non-U.S. Persons -- Senior Certificates" in the Prospectus and
"-- Information Reporting and Backup Withholding" in "ANNEX B: Global Clearance,
Settlement and Tax Documentation Procedures" hereto. Because DTC has indicated
that it will act only on behalf of Financial Intermediaries, the ability of
Certificate Owners 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
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representing 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 because certain potential investors may be
unwilling to purchase Certificates for which they cannot obtain physical
certificates.
Monthly and annual reports on the Trust will be provided to Cede, as
nominee of DTC, and may be made available by Cede to Certificate Owners upon
request, in accordance with the Rules, and to the Financial Intermediaries to
whose DTC accounts the related Book-Entry Certificates 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 a
Certificateholder 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
other action permitted to be taken by a Certificateholder 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 Class A Certificates that conflict with actions taken with
respect to other Class A Certificates.
Definitive Certificates will be issued in registered form to Certificate
Owners, or their nominees, rather than to DTC, only if (i) DTC or the Sponsor
advises the Trustee in writing that DTC is no longer willing or able to
discharge properly its responsibilities as nominee and depositary with respect
to the Class A Certificates and the Sponsor or the Trustee is unable to locate a
qualified successor, (ii) the Sponsor, at its option, advises the Trustee that
it elects to terminate the book-entry system through DTC, or (iii) after an
Event of Default under the Pooling and Servicing Agreement, the Certificate
Owners representing not less than 51% of the Class A Certificate Principal
Balance of the book-entry certificates advise the Trustee and DTC that the
book-entry system is no longer in the best interests of such Certificate Owners.
Upon issuance of Definitive Certificates to Certificate Owners, such
Certificates will be transferable directly (and not exclusively on a book-entry
basis) and registered holders will deal directly with the Trustee with respect
to transfers, notices and distributions. See "Description of the
Certificates -- Form of Certificates -- General" in the Prospectus.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all Certificate
Owners of the occurrence of such event and the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the global 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 Certificateholders
under the Pooling and Servicing Agreement.
Although DTC, Cedel and Euroclear have agreed to the foregoing procedures
in order to facilitate transfer of Class A 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.
ASSIGNMENT OF MORTGAGE LOANS
At the time of issuance of the Certificates, the Sponsor will assign to the
Trustee all of its right, title and interest in and to the Initial Mortgage
Loans, including all principal received on or after the Cut-off Date and all
interest accrued from and including the Cut-off Date (or, in the case of each
Subsequent Mortgage Loan, from and including the related Subsequent Cut-off
Date), together with its right, title and interest in and to the proceeds of any
related insurance policies received from and after the Cut-off Date (or, in the
case of each Subsequent Mortgage Loan, from and including the related Subsequent
Cut-off Date). The Trustee, concurrently with such assignment, will deliver the
Certificates at the direction of the Sponsor in exchange for, among other
things, the Initial Mortgage Loans. Each Initial Mortgage Loan will be
identified in a schedule appearing as an exhibit to the Pooling and Servicing
Agreement (the "Mortgage Loan Schedule") that will provide information about
each Mortgage Loan, including, among other things, its identifying number and
the name of the related Mortgagor, the street address of the related Mortgaged
Property, its date of origination,
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the original number of months to stated maturity, the original stated maturity,
its original Principal Balance, its Principal Balance as of the Cut-off Date or
related Subsequent Cut-off Date, as appropriate (the "Cut-off Date Principal
Balance"), its interest rate as of the Cut-off Date or related Subsequent
Cut-off Date, as appropriate and its monthly payment as of the Cut-off Date or
related Subsequent Cut-off Date, as appropriate.
Following the Closing Date, the Trustee on behalf of the Trust will be
obligated to purchase from the Sponsor, from time to time on or before April 14,
1997, subject to the availability thereof, Subsequent Mortgage Loans consisting
of closed-end, fixed rate, home equity mortgage loans. In connection with each
purchase of Subsequent Mortgage Loans, the Trustee on behalf of the Trust will
pay to the Sponsor from amounts comprising the Prefunding Account Deposit a cash
purchase price of not more than 100% of the principal balance thereof; the Trust
may pay a cash purchase price of less than 100% for the purpose of increasing
the Coverage Amount, but in no event less than the fair market value of the
Subsequent Mortgage Loans. In connection with any purchase of Subsequent
Mortgage Loans pursuant to the Pooling and Servicing Agreement, the Sponsor will
assign to the Trustee as of the related Subsequent Cut-off Date all of its
right, title and interest in and to such Subsequent Mortgage Loans as provided
above with respect to the Initial Mortgage Loans and will identify such
Subsequent Mortgage Loans in a schedule that conforms to the Mortgage Loan
Schedule.
The Pooling and Servicing Agreement will require the Sponsor to deliver to
the Trustee the Mortgage Loans, the related Mortgage Notes endorsed without
recourse to the Trustee, the related mortgages or deeds of trust with evidence
of recording thereon, assignments of the mortgages in recordable form, the title
policies with respect to the related Mortgaged Properties, all intervening
mortgage assignments, if applicable, and certain other documents relating to the
Mortgage Loans (the "Mortgage Files"). Assignments of the Mortgage Loans to the
Trustee (or its nominee) will be recorded in the appropriate public office for
real property records in the states where such recording is required to protect
the Trustee's interest in the Mortgage Loans against the claims of any
subsequent transferee or any successor to or creditor of the Sponsor. The
Trustee will hold such documents in trust for the benefit of the
Certificateholders and the Certificate Insurer.
The Trustee will review the Mortgage Files delivered to it within 45 days
following such delivery, and if any document required to be included in any
Mortgage File is found to be missing or to be defective in any material respect
and such defect is not cured within 60 days following notification thereof to
the Sponsor by the Trustee, the Sponsor will be obligated to repurchase the
related Mortgage Loan from the Trust or substitute a Qualified Replacement
Mortgage, in the manner described below.
Because certain of the assignments by the Sponsor to the Trustee of
Mortgage Loans will not be recorded, it may be possible for the Sponsor to
transfer such Mortgage Loans to bona fide purchasers for value without notice,
notwithstanding the rights of the Trustee. However, in most instances, the
Sponsor would not be able to deliver the original documents evidencing the
Mortgage Notes or the mortgages because, under the terms of the Pooling and
Servicing Agreement, such documents will be retained in the possession of the
Trustee, except when released to the Servicer in connection with its servicing
activities. Moreover, a subsequent transferee who failed to obtain delivery of
the original evidence of indebtedness generally would not, in the absence of
special facts, be able to defeat the interests of the Trustee in a Mortgage Loan
so long as such evidence of indebtedness remained in the possession of the
Trustee.
The Sponsor will make certain representations and warranties as to the
accuracy in all material respects of the information set forth on the Mortgage
Loan Schedule. In addition, the Sponsor will make certain other representations
and warranties regarding the Mortgage Loans, including, for instance, that each
Mortgage Loan, at its origination, complied in all material respects with
applicable state and federal laws, that each mortgage is a valid lien of the
applicable priority, that, as of the Cut-off Date or related Subsequent Cut-off
Date, as appropriate, no Mortgage Loan was 90 or more days contractually
delinquent (except that with respect to one Mortgage Loan a payment received
prior to the Cut-off Date was not credited until after the Cut-off Date causing
such Mortgage Loan to be recorded as being 90 or more days past due on the
Cut-off Date), that each Mortgaged Property consists of a one- to four-family
residential property or unit in a condominium or planned unit development, that
the Sponsor had good title to each Mortgage Loan prior to
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the sale and assignment by the Sponsor and that the Originator was authorized to
originate each Mortgage Loan. See "The Pooling and Servicing
Agreement -- Assignment of Mortgage Loans" in the Prospectus.
If with respect to any Mortgage Loan (1) a defect in any document
constituting a part of the related Mortgage File remains uncured and materially
and adversely affects the value of such Mortgage Loan or the interests of the
Certificateholders or the Certificate Insurer in such Mortgage Loan or (2) a
breach of any representation or warranty made by the Sponsor in the Pooling and
Servicing Agreement relating to such Mortgage Loan occurs and such breach
materially and adversely affects the value of such Mortgage Loan or the
interests of the Certificateholders or the Certificate Insurer in such Mortgage
Loan, the Sponsor will be required to repurchase the related Mortgage Loan (any
such Mortgage Loan, a "Defective Mortgage Loan") from the Trust at a price equal
to its Principal Balance together with one month's interest at the Mortgage
Interest Rate (net of the applicable Servicing Fee Rate) on such Defective
Mortgage Loan, less any payments received during the related Collection Period
in respect of such Defective Mortgage Loan (the "Purchase Price"). The Sponsor
will also have the option, but not the obligation, during the two years (or such
longer period as permitted by the applicable REMIC regulations) immediately
following the Closing Date, to substitute for such Defective Mortgage Loan a
Mortgage Loan conforming to the requirements of the Pooling and Servicing
Agreement (a "Qualified Replacement Mortgage"). Upon delivery of a Qualified
Replacement Mortgage and deposit of certain amounts in the Collection Account as
set forth in the Pooling and Servicing Agreement, or deposit of the Purchase
Price in the Collection Account and receipt by the Trustee of written
notification of any such substitution or repurchase, as the case may be, the
Trustee shall execute and deliver an instrument of transfer or assignment
necessary to vest in the Sponsor legal and beneficial ownership of such
Defective Mortgage Loan (including any property acquired in respect thereof or
proceeds of any insurance policy with respect thereto).
The obligation of the Sponsor to cure, repurchase or substitute any
Mortgage Loan as described above will constitute the sole remedy available to
Certificateholders or the Trustee for a Defective Mortgage Loan.
The Pooling and Servicing Agreement additionally provides that the Servicer
will have the option, but not the obligation, to purchase from the Trust at the
Purchase Price (i) any Mortgage Loan as to which the related Mortgagor has
failed to make scheduled payments thereon for three consecutive months at any
time following the Cut-off Date or related Subsequent Cut-off Date, as
appropriate, and (ii) during the 90-day period following the Closing Date, any
Mortgage Loan as to which a scheduled payment thereon becomes 60 or more days
contractually delinquent; provided, however, that the aggregate of the Principal
Balances of the Mortgage Loans so purchased by the Servicer may not exceed 5% of
the sum of the Cut-off Date Pool Balance and the Purchase Account Deposit. See
"The Pooling and Servicing Agreement -- Realization upon Defaulted Mortgage
Loans" in the Prospectus.
PAYMENTS ON MORTGAGE LOANS AND DEPOSITS TO THE COLLECTION ACCOUNT
The Servicer shall establish and maintain an account or, with respect to
certain Mortgage Loans serviced by a Sub-Servicer, shall cause the related
Sub-Servicer to establish and maintain an account (collectively, the "Collection
Account") into which all collections on or with respect to the Mortgage Loans
will be deposited and the Trustee shall establish and maintain an account (the
"Certificate Account" and, together with the Collection Account, the "Accounts")
from which all distributions with respect to the Certificates will be made. All
amounts held in the Accounts shall be invested in Permitted Investments that
mature not later than the date which is one Business Day prior to the Deposit
Date for the related Distribution Date next succeeding the date of investment. A
"Business Day" will be any day other than a Saturday or Sunday or a day on which
banking institutions in the State of California or the State of New York are
required or authorized by law, executive order or governmental decree to be
closed. "Permitted Investments" will be specified in the Pooling and Servicing
Agreement and will be limited to investments which are approved by the
Certificate Insurer and meet the criteria of the Rating Agencies from time to
time as being consistent with their then current ratings of the Class A
Certificates. See "The Pooling and Servicing Agreement -- Permitted Investments"
in the Prospectus. No Permitted Investment shall be sold or disposed of at a
gain prior to maturity unless the Servicer has obtained a satisfactory opinion
of counsel that such sale or disposition will not cause the REMIC Pool to be
subject to the tax on income from prohibited transactions imposed by
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Code Section 860F(a)(1), otherwise subject the REMIC Pool to tax or cause the
REMIC Pool to fail to qualify as a REMIC. Investment income on monies on deposit
in the Certificate Account and the Collection Account will not be available for
distribution to Certificateholders or otherwise subject to any claims or rights
of the Certificateholders and will be paid to Servicer as additional servicing
compensation. The Servicer will be liable for any losses resulting from such
investments.
The Servicer will deposit, or cause the related Sub-Servicer to deposit,
into the Collection Account not later than two Business Days after receipt, all
payments on or in respect of the Mortgage Loans received from or on behalf of
Mortgagors and all proceeds of Mortgage Loans. On the date in each month
specified in the Pooling and Servicing Agreement, which date shall be no later
than three Business Days prior to the related Distribution Date (the "Deposit
Date"), Available Funds will be transferred from the Collection Account to the
Certificate Account. Notwithstanding the foregoing, payments and collections
that do not constitute Available Funds (e.g., amounts representing interest
accrued on Mortgage Loans in respect of any period prior to the Cut-off Date,
fees, late payment charges, prepayment charges, charges for checks returned for
insufficient funds, extension or other administrative charges or other amounts
received for application towards the payment of taxes, insurance premiums,
assessments and similar items) will not be required to be deposited into the
Collection Account.
The Servicer may make withdrawals from the Collection Account to make the
deposits to the Certificate Account, to pay the monthly Servicing Fee to itself,
to reimburse itself for certain Advances that it has made and for which it may
be entitled to reimbursement under the Pooling and Servicing Agreement, for any
other expenses incurred by it for which it may be entitled to reimbursement
under the Pooling and Servicing Agreement and to withdraw any amount not
required to have been deposited therein.
DISTRIBUTIONS ON THE CERTIFICATES
Distributions of principal and interest on the Class A Certificates will be
made by the Trustee (in such capacity, the "Paying Agent") on the fifteenth day
of each month or, if such day is not a Business Day, on the next succeeding
Business Day (each, a "Distribution Date") commencing in April 1997 to holders
of record of the related Class of Class A Certificates as of the close of
business on the last Business Day of the calendar month immediately preceding
such Distribution Date (each, a "Record Date") in an amount equal to the product
of such Certificateholders' Percentage Interest and the amount distributed in
respect of the related Class of Class A Certificates. The "Percentage Interest"
represented by any Class A-1 Certificate, Class A-2 Certificate, Class A-3
Certificate, Class A-4 Certificate or Class A-5 Certificate will be equal to the
percentage obtained by dividing the Certificate Principal Balance of such Class
A-1 Certificate, Class A-2 Certificate, Class A-3 Certificate, Class A-4
Certificate or Class A-5 Certificate, respectively, by the aggregate of the
principal balances of all Certificates of the same subclass.
Provided no Certificate Insurer Default has occurred and is continuing, on
each Distribution Date, the Paying Agent will distribute the following amounts
in the following order of priority, to the extent of Available Funds:
(a) to the Certificate Insurer, the aggregate amount necessary to
reimburse the Certificate Insurer for any unreimbursed payments of Insured
Payments prior to such Distribution Date and the amount of any unpaid
Certificate Insurer Premium for prior Distribution Dates with interest
thereon in accordance with the Pooling and Servicing Agreement; provided,
however, that the Certificate Insurer's right to such reimbursement is
subject to the right of Class A-1 Certificateholders, Class A-2
Certificateholders, Class A-3 Certificateholders, Class A-4
Certificateholders and Class A-5 Certificateholders to receive Class A-1
Monthly Interest, Class A-2 Monthly Interest, Class A-3 Monthly Interest,
Class A-4 Monthly Interest and Class A-5 Monthly Interest, respectively,
and any Coverage Deficit for the Class A Certificates with respect to such
Distribution Date;
(b) to the Certificate Insurer, an amount equal to the Certificate
Insurer Premium for such Distribution Date;
(c) concurrently to the Class A-1 Certificateholders, Class A-2
Certificateholders, Class A-3 Certificateholders, Class A-4
Certificateholders and Class A-5 Certificateholders, Class A-1 Monthly
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Interest, Class A-2 Monthly Interest, Class A-3 Monthly Interest, Class A-4
Monthly Interest and Class A-5 Monthly Interest, respectively;
(d) commencing on the April 2000 Distribution Date, to the Class A-5
Certificateholders, Monthly Principal up to the Class A-5 Monthly Principal
Lockout Distribution in reduction of the Class A-5 Certificate Principal
Balance;
(e) to the Class A-1 Certificateholders, the remaining amount of
Monthly Principal, in reduction of the Class A-1 Certificate Principal
Balance until such Class A-1 Certificate Principal Balance is reduced to
zero, then to Class A-2 Certificateholders, the remaining amount of Monthly
Principal, in reduction of the Class A-2 Certificate Principal Balance,
until such Class A-2 Certificate Principal Balance is reduced to zero, then
to Class A-3 Certificateholders, the remaining amount of Monthly Principal
in reduction of the Class A-3 Certificate Principal Balance, until such
Class A-3 Certificate Principal Balance is reduced to zero, then to Class
A-4 Certificateholders, the remaining amount of Monthly Principal in
reduction of the Class A-4 Certificate Principal Balance, until such Class
A-4 Certificate Principal Balance is reduced to zero, and then to Class A-5
Certificateholders, the remaining amount of Monthly Principal in reduction
of the Class A-5 Certificate Principal Balance, until such Class A-5
Certificate Principal Balance is reduced to zero;
(f) commencing on the April 2000 Distribution Date, to the Class A-5
Certificateholders, the amount, if any, of Excess Cash, up to the Class A-5
Excess Cash Lockout Distribution, in reduction of the Class A-5 Certificate
Principal Balance;
(g) to the Class A-1 Certificateholders, the amount, if any, of Excess
Cash remaining after distribution pursuant to clause (f) above in reduction
of the Class A-1 Certificate Principal Balance, up to an amount equal to
the lesser of (1) the amount necessary for the Coverage Amount to equal the
Required Coverage Amount on such Distribution Date and (2) the amount
necessary to reduce the Class A-1 Certificate Principal Balance to zero;
(h) to the Class A-2 Certificateholders, the amount, if any, of Excess
Cash remaining after distribution pursuant to clauses (f) and (g) above in
reduction of the Class A-2 Certificate Principal Balance, up to an amount
equal to the lesser of (1) the amount necessary for the Coverage Amount to
equal the Required Coverage Amount on such Distribution Date and (2) the
amount necessary to reduce the Class A-2 Certificate Principal Balance to
zero;
(i) to the Class A-3 Certificateholders, the amount, if any, of Excess
Cash remaining after distribution pursuant to clauses (f), (g) and (h)
above in reduction of the Class A-3 Certificate Principal Balance, up to an
amount equal to the lesser of (1) the amount necessary for the Coverage
Amount to equal the Required Coverage Amount on such Distribution Date and
(2) the amount necessary to reduce the Class A-3 Certificate Principal
Balance to zero;
(j) to the Class A-4 Certificateholders, the amount, if any, of Excess
Cash remaining after distribution pursuant to clauses (f) through (i) above
in reduction of the Class A-4 Certificate Principal Balance, up to an
amount equal to the lesser of (1) the amount necessary for the Coverage
Amount to equal the Required Coverage Amount on such Distribution Date and
(2) the amount necessary to reduce the Class A-4 Certificate Principal
Balance to zero;
(k) to the Class A-5 Certificateholders, the amount, if any, of Excess
Cash remaining after distribution pursuant to clauses (f) through (j)
above, in reduction of the Class A-5 Certificate Principal Balance, up to
an amount equal to the lesser of (1) the amount necessary for the Coverage
Amount to equal the Required Coverage Amount on such Distribution Date and
(2) the amount necessary to reduce the Class A-5 Certificate Principal
Balance to zero; and
(l) to the Class R Certificateholder, subject to the right of the
Servicer to be reimbursed for any prior unreimbursed Advances, any
Available Funds remaining in the Certificate Account.
In the event that, on a particular Distribution Date, Available Funds and
any available Excess Cash are not sufficient to pay any portion of the Class A
Monthly Interest, the Trustee will make a claim on the Certificate Insurance
Policy in an amount equal to such deficiency and apply the Insured Payment
received in
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respect of such claim to the payment of such deficiency. In addition, the
Trustee will make a claim on the Certificate Insurance Policy in an amount equal
to any Coverage Deficit with respect to any Distribution Date (after taking into
account distributions in respect of Monthly Principal and Excess Cash on such
Distribution Date) and apply the portion of the Insured Payment related to such
Coverage Deficit to reduce the Class A Certificate Principal Balance on such
Distribution Date by the amount of such Coverage Deficit. Any Insured Payment so
distributed to make up any Coverage Deficit shall be distributed as Monthly
Principal first to the Class A-5 Certificateholders up to the Class A-5 Monthly
Principal Lockout Distribution, and thereafter to Class A-1 Certificateholders,
in reduction of the Class A-1 Certificate Principal Balance, until such Class
A-1 Certificate Principal Balance is reduced to zero, then to Class A-2
Certificateholders, in reduction of the Class A-2 Certificate Principal Balance,
until such Class A-2 Certificate Principal Balance is reduced to zero, then to
the Class A-3 Certificateholders, in reduction of the Class A-3 Certificate
Principal Balance, until such Class A-3 Certificate Principal Balance is reduced
to zero, then to the Class A-4 Certificateholders, in reduction of the Class A-4
Certificate Principal Balance, until such Class A-4 Certificate Principal
Balance is reduced to zero, and then to the Class A-5 Certificateholders, in
reduction of the Class A-5 Certificate Principal Balance, until such Class A-5
Certificate Principal Balance is reduced to zero.
Notwithstanding the foregoing, on any Distribution Date on or after which a
Certificate Insurer Default has occurred, any amounts distributable as principal
to the Class A Certificateholders shall be distributed concurrently to the Class
A Certificateholders, pro rata, based on the outstanding Certificate Principal
Balances of each subclass as of such Distribution Date, until such Certificate
Principal Balances have each been reduced to zero. "Certificate Insurer Default"
means the occurrence and continuance of a failure by the Certificate Insurer to
make any Insured Payment under the terms of the Certificate Insurance Policy or
certain events of insolvency or bankruptcy with respect to the Certificate
Insurer.
In no event will the aggregate distributions of principal to holders of the
Class A-1 Certificates, Class A-2 Certificates, Class A-3 Certificates, Class
A-4 Certificates or Class A-5 Certificates exceed the Original Class A-1
Certificate Principal Balance, the Original Class A-2 Certificate Principal
Balance, the Original Class A-3 Certificate Principal Balance, the Original
Class A-4 Certificate Principal Balance or the Original Class A-5 Certificate
Principal Balance, respectively.
As of any Distribution Date, "Class A Monthly Interest" will consist of
Class A-1 Monthly Interest, Class A-2 Monthly Interest, Class A-3 Monthly
Interest, Class A-4 Monthly Interest and Class A-5 Monthly Interest. "Class A-1
Monthly Interest" will be an amount equal to (a) with respect to the April 1997
Distribution Date, 30 days of interest at the Class A-1 Pass-Through Rate on the
Original Class A-1 Certificate Principal Balance, and (b) with respect to any
subsequent Distribution Date, 30 days of interest at the Class A-1 Pass-Through
Rate on the Class A-1 Certificate Principal Balance as of the preceding
Distribution Date (after giving effect to the distribution, if any, in reduction
of principal made on the Class A-1 Certificates on such preceding Distribution
Date), in either case net of any applicable Interest Shortfalls. "Class A-2
Monthly Interest" will be distributed to Class A-2 Certificateholders on each
Distribution Date in an amount equal to, with respect to the April 1997
Distribution Date, 30 days of interest at the Class A-2 Pass-Through Rate on the
Original Class A-2 Certificate Principal Balance and, with respect to any
subsequent Distribution Date, 30 days of interest at the Class A-2 Pass-Through
Rate on the Class A-2 Certificate Principal Balance as of the preceding
Distribution Date (after giving effect to the distribution, if any, in reduction
of principal made on the Class A-2 Certificates on such preceding Distribution
Date), in either case net of any applicable Interest Shortfalls. "Class A-3
Monthly Interest" will be distributed to the Class A-3 Certificateholders on
each Distribution Date in an amount equal to, with respect to the April 1997
Distribution Date, 30 days of interest at the Class A-3 Pass-Through Rate on the
Original Class A-3 Certificate Principal Balance and, with respect to any
subsequent Distribution Date, 30 days of interest at the Class A-3 Pass-Through
Rate on the Class A-3 Certificate Principal Balance as of the preceding
Distribution Date (after giving effect to the distribution, if any, in reduction
of principal made on the Class A-3 Certificates on such preceding Distribution
Date), in either case net of any applicable Interest Shortfalls. "Class A-4
Monthly Interest" will be distributed to the Class A-4 Certificateholders on
each Distribution Date in an amount equal to, with respect to the April 1997
Distribution Date, 30 days of interest at the Class A-4 Pass-Through Rate on the
Original Class A-4 Certificate Principal Balance and, with respect to any
subsequent
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Distribution Date, 30 days of interest at the Class A-4 Pass-Through Rate on the
Class A-4 Certificate Principal Balance as of the preceding Distribution Date
(after giving effect to the distribution, if any, in reduction of principal made
on the Class A-4 Certificates on such preceding Distribution Date), in either
case net of any applicable Interest Shortfalls. "Class A-5 Monthly Interest"
will be distributed to the Class A-5 Certificateholders on each Distribution
Date in an amount equal to, with respect to the April 1997 Distribution Date, 30
days of interest at the Class A-5 Pass-Through Rate on the Original Class A-5
Certificate Principal Balance and, with respect to any subsequent Distribution
Date, 30 days of interest at the Class A-5 Pass-Through Rate on the Class A-5
Certificate Principal Balance as of the preceding Distribution Date (after
giving effect to the distribution, if any, in reduction of principal made on the
Class A-5 Certificates on such preceding Distribution Date), in either case net
of any applicable Interest Shortfalls.
All calculations of interest on the Class A-1 Certificates, Class A-2
Certificates, Class A-3 Certificates, Class A-4 Certificates and Class A-5
Certificates will be computed on the basis of a 360-day year consisting of
twelve 30-day months.
The "Class A-1 Pass-Through Rate" will be a fixed rate of 6.47% per annum.
The "Class A-2 Pass-Through Rate" will be a fixed rate of 6.88% per annum.
The "Class A-3 Pass-Through Rate" will be a fixed rate of 7.22% per annum.
The "Class A-4 Pass-Through Rate" will be a fixed rate of 7.61% per annum.
The "Class A-5 Pass-Through Rate" will be a fixed rate of 7.18% per annum.
The "Class A Certificate Principal Balance" will equal, as of any
Distribution Date, the sum of the Class A-1 Certificate Principal Balance, Class
A-2 Certificate Principal Balance, Class A-3 Certificate Principal Balance,
Class A-4 Certificate Principal Balance, and Class A-5 Certificate Principal
Balance for such Distribution Date. The "Class A-1 Certificate Principal
Balance" will equal, as of any Distribution Date, the Original Class A-1
Certificate Principal Balance less all Monthly Principal and Excess Cash
distributed in respect of principal to Class A-1 Certificateholders on previous
Distribution Dates (exclusive, for the sole purpose of effecting the Certificate
Insurer's subrogation rights, of payments made by the Certificate Insurer in
respect of any Coverage Deficit and paid to the Class A-1 Certificates under the
Certificate Insurance Policy, except to the extent reimbursed to the Certificate
Insurer pursuant to the Pooling and Servicing Agreement). The "Class A-2
Certificate Principal Balance" will equal, as of any Distribution Date, the
Original Class A-2 Certificate Principal Balance less all Monthly Principal and
Excess Cash distributed in respect of principal to Class A-2 Certificateholders
on previous Distribution Dates (exclusive, for the sole purpose of effecting the
Certificate Insurer's subrogation rights, of payments made by the Certificate
Insurer in respect of any Coverage Deficit and paid to the Class A-2
Certificates under the Certificate Insurance Policy, except to the extent
reimbursed to the Certificate Insurer pursuant to the Pooling and Servicing
Agreement). The "Class A-3 Certificate Principal Balance" will equal, as of any
Distribution Date, the Original Class A-3 Certificate Principal Balance less all
Monthly Principal and Excess Cash distributed in respect of principal to Class
A-3 Certificateholders on previous Distribution Dates (exclusive, for the sole
purpose of effecting the Certificate Insurer's subrogation rights, of payments
made by the Certificate Insurer in respect of any Coverage Deficit and paid to
the Class A-3 Certificates under the Certificate Insurance Policy, except to the
extent reimbursed to the Certificate Insurer pursuant to the Pooling and
Servicing Agreement). The "Class A-4 Certificate Principal Balance" will equal,
as of any Distribution Date, the Original Class A-4 Certificate Principal
Balance less all Monthly Principal and Excess Cash distributed in respect of
principal to Class A-4 Certificateholders on previous Distribution Dates
(exclusive, for the sole purpose of effecting the Certificate Insurer's
subrogation rights, of payments made by the Certificate Insurer in respect of
any Coverage Deficit and paid to the Class A-4 Certificates under the
Certificate Insurance Policy, except to the extent reimbursed to the Certificate
Insurer pursuant to the Pooling and Servicing Agreement). The "Class A-5
Certificate Principal Balance" will equal, as of any Distribution Date, the
Original Class A-5 Certificate Principal Balance less all Monthly Principal and
Excess Cash distributed in respect of principal to Class A-5 Certificateholders
on previous Distribution Dates (exclusive, for the sole purpose of effecting the
Certificate Insurer's subrogation rights, of payments made by the Certificate
Insurer
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in respect of any Coverage Deficit and paid to the Class A-5 Certificates under
the Certificate Insurance Policy, except to the extent reimbursed to the
Certificate Insurer pursuant to the Pooling and Servicing Agreement).
"Monthly Principal" for any Distribution Date will be an amount equal to
(A) the aggregate of (i) any Principal Payments received in respect of the
Mortgage Loans during the related Collection Period, (ii) Net Liquidation
Proceeds and Trust Insurance Proceeds allocable to principal recovered or
collected in respect of the Mortgage Loans during the related Collection Period,
(iii) the aggregate of the amounts allocable to principal deposited in the
Certificate Account on the related Deposit Date by the Sponsor or the Servicer
in connection with a purchase, repurchase or substitution of any Mortgage Loans
pursuant to the Pooling and Servicing Agreement, (iv) the aggregate of amounts
remitted by the Sponsor or the Certificate Insurer to the Trustee in connection
with the termination of the Trust upon liquidation of the remaining Mortgage
Loans pursuant to the Pooling and Servicing Agreement, and (v) with respect to
the first Distribution Date, the amount, if any, of the Prefunding Account
Deposit that is not applied for the purchase of Subsequent Mortgage Loans during
the Funding Period, reduced by (B) the amount of any Coverage Surplus with
respect to such Distribution Date. The "Principal Balance" of a Mortgage Loan
with respect to any Determination Date is the actual outstanding principal
balance thereof as of the close of business on the Determination Date in the
preceding month (or, in the case of the first Distribution Date, as of the
Cut-off Date), less (i) any Principal Payments received in respect of such
Mortgage Loan during the related Collection Period, (ii) Net Liquidation
Proceeds and Trust Insurance Proceeds allocable to principal recovered or
collected in respect of such Mortgage Loan during the related Collection Period,
(iii) the portion of the Purchase Price allocable to principal remitted by the
Sponsor or the Servicer to the Trustee on the next succeeding Deposit Date in
connection with a purchase, repurchase or substitution of such Mortgage Loan
pursuant to the Pooling and Servicing Agreement, to the extent such amount is
actually remitted on such Deposit Date, (iv) the amount to be remitted by the
Sponsor to the Trustee on the next succeeding Deposit Date in connection with a
substitution of a Qualified Replacement Mortgage for such Mortgage Loan pursuant
to the Pooling and Servicing Agreement, to the extent such amount is actually
remitted on such Deposit Date and (v) the amount to be remitted by the
Certificate Insurer to the Trustee on the next succeeding Deposit Date in
connection with a purchase of such Mortgage Loan pursuant to the Pooling and
Servicing Agreement; provided, however, that Mortgage Loans that have become
Liquidated Mortgage Loans since the preceding Determination Date (or, in the
case of the first Determination Date, since the Cut-off Date) will be deemed to
have a Principal Balance of zero on the current Determination Date (and for each
subsequent date).
"Determination Date" means, as to any Distribution Date, the last day of
the calendar month immediately preceding the calendar month in which such
Distribution Date occurs. "Principal Payment" means, as to any Mortgage Loan and
Collection Period, all amounts received or, in the case of the principal portion
of any Payment Ahead, deemed to have been received by the Servicer from or on
behalf of the related Mortgagor during such Collection Period which, at the time
of receipt or, in the case of any Payment Ahead, at the time such Payment Ahead
is deemed to have been received, were applied or were required to be applied by
the Servicer in reduction of the Principal Balance of such Mortgage Loan.
"Payment Ahead" means any payment of one or more scheduled monthly payments
remitted by a Mortgagor with respect to a Mortgage Note in excess of the
scheduled monthly payment due during such Collection Period with respect to such
Mortgage Note, which sums the related Mortgagor has instructed the Servicer to
apply to scheduled monthly payments due in one or more subsequent Collection
Periods. "Principal Prepayment" means any Mortgagor payment or other recovery in
respect of principal on a Mortgage Loan (including Net Liquidation Proceeds)
which, in the case of a Mortgagor payment, is received in advance of its
scheduled due date and is not accompanied by an amount as to interest
representing scheduled interest for any month subsequent to the month of such
payment, or that was accompanied by instructions from the related Mortgagor
directing the Servicer to apply such payment to the Principal Balance of such
Mortgage Loan currently. "Liquidated Mortgage Loan" means, as to any
Distribution Date, any Mortgage Loan as to which the Servicer has determined
during the related Collection Period, in accordance with its customary servicing
procedures, that all Liquidation Proceeds which it expects to recover from or on
account of such Mortgage Loan have been recovered.
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"Available Funds" with respect to any Distribution Date will consist of the
sum of the amounts described in clauses (a) through (j) below, less (i) the
Servicing Fee in respect of the related Collection Period, (ii) Advances
previously made that are reimbursable to the Servicer (other than those included
in liquidation expenses for any Liquidated Mortgage Loan and reimbursed from the
related Liquidation Proceeds) in such Collection Period to the extent permitted
by the Pooling and Servicing Agreement and (iii) the aggregate amounts deposited
into the Collection Account or Certificate Account that may not be withdrawn
therefrom pursuant to a final and nonappealable order of a United States
bankruptcy court of competent jurisdiction imposing a stay pursuant to Section
362 of the United States Bankruptcy Code and that would otherwise have been
included in Available Funds on such Distribution Date:
(a) the total amount of interest payments on or in respect of the
Mortgage Loans received by or on behalf of the Servicer during the related
Collection Period, net of amounts representing interest accrued on such
Mortgage Loans in respect of any period prior to the Cut-off Date (or, with
respect to each Subsequent Mortgage Loan, the related Subsequent Cut-off
Date), plus any Compensating Interest Payments made by the Servicer in
respect of the related Mortgage Loans and any net income from related REO
Properties for such Collection Period;
(b) all Principal Payments received or deemed to be received during
the related Collection Period in respect of the Mortgage Loans;
(c) the aggregate of any proceeds from or in respect of any policy of
insurance covering a Mortgage Loan that are received during the related
Collection Period and applied by the Servicer to reduce the Principal
Balance of the related Mortgage Loan ("Trust Insurance Proceeds") (which
proceeds will not include any amounts applied to the restoration or repair
of the related Mortgaged Property or released to the related Mortgagor in
accordance with applicable law, the Servicer's customary servicing
procedures or the terms of the related Mortgage Loan);
(d) the aggregate of any other proceeds received by the Servicer
during the related Collection Period in connection with the liquidation of
any Mortgaged Property securing a Mortgage Loan, whether through trustee's
sale, foreclosure, condemnation, taking by eminent domain or otherwise
(including any insurance proceeds to the extent not duplicative of amounts
in clause (c) above) ("Liquidation Proceeds"), less expenses incurred by
the Servicer in connection with the liquidation of such Mortgage Loan ("Net
Liquidation Proceeds");
(e) the aggregate of the amounts received in respect of any Mortgage
Loans that are required or permitted to be purchased, repurchased or
substituted by the Sponsor or the Servicer, as the case may be, during the
related Collection Period as described in "-- Assignment of Mortgage Loans"
and "Origination and Servicing of the Mortgage Loans -- Servicing of
Mortgage Loans" herein, to the extent such amounts are received by the
Trustee on or before the related Deposit Date;
(f) the amount of any Monthly Advances made in respect of the Mortgage
Loans for such Distribution Date;
(g) the aggregate of amounts deposited in the Certificate Account by
the Servicer or the Certificate Insurer, as the case may be, during such
Collection Period in connection with a termination of the Trust as
described under "-- Termination; Retirement of the Certificates" herein;
(h) in the case of the April 1997 Distribution Date, amounts, if any,
remaining in the Prefunding Account and the Capitalized Interest Account
immediately prior to such Distribution Date (in each case net of
reinvestment income payable to the Sponsor);
(i) in the case of the April 1997 Distribution Date, amounts deposited
by the Sponsor representing 30 days of interest, computed at the related
Mortgage Interest Rate, on each Initial Mortgage Loan that does not have a
monthly payment due in the Collection Period relating to such Distribution
Date; and
(j) in the case of the May 1997 Distribution Date, amounts deposited
by the Sponsor representing 30 days of interest, computed at the related
Mortgage Interest Rate, on each Subsequent Mortgage
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Loan that does not have a monthly payment due in the Collection Period
relating to such Distribution Date.
PREFUNDING ACCOUNT
On the Closing Date, the Sponsor will deposit cash in the aggregate amount
of approximately $51,382,194.17 (the "Prefunding Account Deposit") in a
segregated account (the "Prefunding Account"), which account will be part of the
Trust and will be maintained with the Trustee in its corporate trust department.
All Mortgage Loans purchased by the Trust through application of amounts on
deposit in the Prefunding Account are referred to herein as the "Subsequent
Mortgage Loans." The Prefunding Account Deposit may be increased by an amount
equal to the aggregate of the principal balances of any mortgage loans removed
from the Mortgage Pool prior to the Closing Date, provided that any such
increase shall not exceed $10,000,000. During the period (the "Funding Period")
from the Closing Date until the earlier of (i) the date on which the amount on
deposit in the Prefunding Account is reduced to zero and (ii) April 14, 1997,
the amount on deposit in the Prefunding Account will be allocated for purchase
of Subsequent Mortgage Loans from the Sponsor in accordance with the applicable
provisions of the Pooling and Servicing Agreement. Subsequent Mortgage Loans
purchased by and added to the Trust on any Subsequent Transfer Date must satisfy
the criteria set forth in the Pooling and Servicing Agreement and must be
approved by the Certificate Insurer, provided that in instances deemed
appropriate thereby, such criteria may be waived or modified. On the
Distribution Date in April 1997, the Prefunding Account Deposit that is not
applied to purchase Subsequent Mortgage Loans during the Funding Period will be
applied to reduce the Class A Certificate Principal Balance. Although it is
intended that the principal amount of Subsequent Mortgage Loans sold to the
Trust will require application of substantially all of the Prefunding Account
Deposit and it is not currently anticipated that there will be any material
amount of principal distributions from amounts remaining on deposit in the
Prefunding Account in reduction of the Class A Certificate Principal Balance, no
assurance can be given that such a distribution will not occur on the
Distribution Date in April 1997. In any event, it is unlikely that the Sponsor
will be able to deliver Subsequent Mortgage Loans with aggregate principal
balances that exactly equal the Prefunding Account Deposit, and any portion of
the Prefunding Account Deposit remaining at the end of the Funding Period will
be distributed on the April 1997 Distribution Date in reduction of the Class A
Certificate Principal Balance, thereby reducing the weighted average lives of
the Class A Certificates.
Amounts remaining on deposit in the Prefunding Account after the purchase
of the Subsequent Mortgage Loans will be invested in Permitted Investments as
defined in the Pooling and Servicing Agreement. Permitted Investments are
required to mature as may be necessary for the purchase of Subsequent Mortgage
Loans on any Subsequent Transfer Date no later than the Business Day prior to
the related Subsequent Transfer Date and, in any case, no later than the
Business Day prior to the April 1997 Distribution Date. All interest and any
other investment earnings on amounts on deposit in the Prefunding Account will
be distributed to the Sponsor on the April 1997 Distribution Date. The
Prefunding Account will not be part of the REMIC Pool.
CAPITALIZED INTEREST ACCOUNT
On the Closing Date, the Sponsor will deposit cash in a segregated account
(the "Capitalized Interest Account"), which account will be part of the Trust
and will be maintained with the Trustee in its corporate trust department. The
amount on deposit in the Capitalized Interest Account will be specifically
allocated to cover shortfalls in interest on the Class A Certificates that may
arise as a result of the utilization of the Prefunding Account for the purchase
by the Trust of Subsequent Mortgage Loans after the Cut-off Date and will be so
applied by the Trustee on the April 1997 Distribution Date. In the unlikely
event that the full amount allocated to cover interest shortfalls in respect of
the Class A Certificates is not required for such purpose, the amount remaining
(net of reinvestment income payable to the Sponsor) will be deposited in the
Certificate Account and will be part of Available Funds.
Amounts on deposit in the Capitalized Interest Account will be invested in
Permitted Investments as defined in the Pooling and Servicing Agreement. All
such Permitted Investments are required to mature no
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later than the Business Day prior to the April 1997 Distribution Date as
specified in the Pooling and Servicing Agreement. All interest and any other
investment earnings on amounts on deposit in the Capitalized Interest Account
will be distributed to the Sponsor on the April 1997 Distribution Date. The
Capitalized Interest Account will not be part of the REMIC Pool.
OVERCOLLATERALIZATION FEATURE
Credit enhancement with respect to the Class A Certificates is expected to
result from the application of Excess Cash on each Distribution Date to the
reduction of the Certificate Principal Balance of the Class A Certificates so
that over time the Aggregate Principal Balance of the Mortgage Loans will exceed
the Class A Certificate Principal Balance. This overcollateralization is
intended to result in receipts, collections and recoveries on the Mortgage Loans
in excess of the amount necessary to pay the related Class A Monthly Interest on
any Distribution Date and to reduce the Class A Certificate Principal Balance to
zero no later than the Final Scheduled Payment Date. Excess Cash will be
distributed on the Class A Certificates on each Distribution Date to reduce the
Class A Certificate Principal Balance until the related Coverage Amount equals
the Required Coverage Amount. Any Excess Cash that is not distributed on a given
Distribution Date will be distributed in the order of priority set forth above
under "-- Distributions on the Certificates". Amounts distributed to the Class R
Certificateholder on any Distribution Date will not be available to pay amounts
due to Class A Certificateholders on subsequent Distribution Dates.
The "Excess Cash" for any Distribution Date will be equal to Available
Funds for the related Distribution Date, reduced by (i) the amount of the Class
A Monthly Interest for such Distribution Date, (ii) the Monthly Principal for
such Distribution Date, (iii) the Certificate Insurer Premium with respect to
such Distribution Date and (iv) any amounts payable to the Certificate Insurer
for unreimbursed Insured Payments paid on prior Distribution Dates and the
amount of any unpaid Certificate Insurer Premium from prior Distribution Dates
plus interest thereon in accordance with the Pooling and Servicing Agreement.
The "Coverage Amount" with respect to any Distribution Date is the amount,
if any, by which (x) the Pool Balance as of the end of the related Collection
Period (plus, in the case of the April 1997 Distribution Date, the aggregate of
the Principal Balances of any Subsequent Mortgage Loans added to the Mortgage
Pool after March 31, 1997 and prior to the end of the Funding Period) exceeds
(y) the Class A Certificate Principal Balance as of such Distribution Date after
taking into account distributions of Monthly Principal (disregarding any
permitted reduction in Monthly Principal due to a Coverage Surplus) made on such
Distribution Date. The required level of the Coverage Amount with respect to any
Distribution Date (the "Required Coverage Amount") will be equal to the amount
specified as such in the Pooling and Servicing Agreement. The Pooling and
Servicing Agreement will provide that the applicable Required Coverage Amount in
respect of the Class A Certificates may increase or decrease during the period
any subclass of Class A Certificates remains outstanding. Any increase in the
applicable Required Coverage Amount may result in an accelerated amortization of
one or more subclasses of Class A Certificates until such Required Coverage
Amount is reached. Conversely, any decrease in the Required Coverage Amount will
result in a decelerated amortization of one or more subclasses of Class A
Certificates until such Required Coverage Amount is reached.
The application of Excess Cash to reduce the Class A Certificate Principal
Balance on any Distribution Date will have the effect of accelerating the
amortization of the Class A Certificates relative to the amortization of the
Mortgage Loans.
In the event that the Required Coverage Amount is permitted to decrease or
"step down" on any Distribution Date in the future, the Pooling and Servicing
Agreement will provide that all or a portion of the Excess Cash that would
otherwise be distributed on any such Distribution Date in reduction of the Class
A Certificate Principal Balance will be applied to reimburse the Certificate
Insurer for amounts to which it may be then entitled, and thereafter applied to
reimburse the Servicer for any amounts to which it may then be entitled. Any
remaining Excess Cash shall be distributed to the holder of the Class R
Certificate. This may have the effect of decelerating the amortization of the
Class A Certificates relative to the amortization of the related Mortgage Loans,
and of reducing the related Coverage Amount. With respect to any Distribution
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Date, a "Coverage Surplus" means, the amount, if any, by which (x) the Coverage
Amount for such Distribution Date exceeds (y) the then applicable Required
Coverage Amount for such Distribution Date. As a technical matter, a Coverage
Surplus may result even prior to the occurrence of any decrease or "step down"
in the Required Coverage Amount because the Class A Certificates will be
entitled to receive 100% of collected principal on the Mortgage Loans, even
though the Class A Certificate Principal Balance will, as a result of the
accelerated amortization caused by the application of the Excess Cash, be less
than the Pool Balance, in the absence of any Realized Losses on the Mortgage
Loans.
The Pooling and Servicing Agreement will provide that, on any Distribution
Date, all amounts collected on the Mortgage Loans in respect of principal during
the applicable Collection Period will be distributed to holders of the Class A
Certificates in reduction of the Class A Certificate Principal Balance on such
Distribution Date, except as provided above with respect to any Distribution
Date for which there exists a Coverage Surplus. If any Mortgage Loan became a
Liquidated Mortgage Loan during such prior Collection Period, the Net
Liquidation Proceeds related thereto may be less than the Principal Balance of
the related Mortgage Loan plus accrued and unpaid interest thereon; the amount
of any such deficiency is a "Realized Loss." In addition, the Pooling and
Servicing Agreement will provide that the Principal Balance of any Mortgage Loan
that becomes a Liquidated Mortgage Loan shall equal zero. The Pooling and
Servicing Agreement will not require that the amount of any Realized Loss be
distributed to Class A Certificateholders on the Distribution Date following the
event of loss. However, the occurrence of a Realized Loss will reduce the
Coverage Amount, and will result in more Excess Cash, if any, being distributed
in reduction of the Class A Certificate Principal Balance on subsequent
Distribution Dates than would be the case in the absence of such Realized Loss.
The effect of the foregoing is to allocate losses to the Class R
Certificateholder by reducing, or eliminating entirely, payments of Excess Cash
to which such Class R Certificateholder would otherwise be entitled.
Overcollateralization and the Certificate Insurance Policy. The Pooling
and Servicing Agreement will require the Trustee to make a claim for a
Deficiency Amount under the Certificate Insurance Policy not later than the
third Business Day prior to any Distribution Date as to which the Trustee has
determined that a Coverage Deficit will occur for the purpose of applying the
proceeds of such Insured Payment as a payment of principal to the Class A
Certificateholders on such Distribution Date. With respect to any Distribution
Date, a "Coverage Deficit" will mean the amount, if any, by which (x) the Class
A Certificate Principal Balance, after taking into account all distributions to
be made on such Distribution Date in reduction thereof, exceeds (y) the
aggregate of the Principal Balances of the Mortgage Loans as of the end of the
applicable Collection Period (plus, in the case of the April 1997 Distribution
Date, the aggregate of the Principal Balances of any Subsequent Mortgage Loans
added to the Mortgage Pool after March 31, 1997 and prior to the end of the
Funding Period). Accordingly, the Certificate Insurance Policy is similar to the
provisions described above insofar as the Certificate Insurance Policy
guarantees ultimate collection of the full amount of the Class A Certificate
Principal Balance, rather than current payments of the amounts of any Realized
Losses to the Class A Certificateholders. INVESTORS IN THE CLASS A CERTIFICATES
SHOULD REALIZE THAT, UNDER CERTAIN LOSS OR DELINQUENCY SCENARIOS, THEY MAY
TEMPORARILY RECEIVE NO DISTRIBUTIONS IN REDUCTION OF THE CLASS A CERTIFICATE
PRINCIPAL BALANCE.
THE CERTIFICATE INSURANCE POLICY
The Certificate Insurer will issue a Certificate Insurance Policy in favor
of the Trustee for the benefit of the Class A Certificateholders. The
Certificate Insurance Policy unconditionally and irrevocably guarantees payment
of the Class A Monthly Interest and any Coverage Deficit in respect of each
Class of Class A Certificates on each Distribution Date. Insured Payments paid
by the Certificate Insurer under the Certificate Insurance Policy will not cover
any Interest Shortfalls for the related Distribution Date.
The Certificate Insurer will be obligated under the Certificate Insurance
Policy to pay to the Trustee on each Distribution Date the full Deficiency
Amount. See "The Certificate Insurance Policy and the Certificate Insurer"
herein.
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Any Deficiency Amount distributed to the Class A Certificateholders will be
allocated first to make up any shortfall on such Distribution Date in the Class
A Monthly Interest and second to make up any Coverage Deficit on such
Distribution Date. Any Deficiency Amount distributed in respect of any shortfall
in Class A Monthly Interest shall be distributed pro rata to Class A-1
Certificateholders, Class A-2 Certificateholders, Class A-3 Certificateholders,
Class A-4 Certificateholders, and Class A-5 Certificateholders in proportion to
the shortfalls in Class A-1 Monthly Interest, Class A-2 Monthly Interest, Class
A-3 Monthly Interest, Class A-4 Monthly Interest, and Class A-5 Monthly
Interest. Any Deficiency Amount distributed in respect of any Coverage Deficit
shall be distributed first to the Class A-5 Certificateholders, to the extent
that the Class A-5 Lockout Distribution has not been made in full on such
Distribution Date, in reduction of the Class A-5 Certificate Principal Balance,
then to Class A-1 Certificateholders, in reduction of the Class A-1 Certificate
Principal Balance, until the Class A-1 Certificate Principal Balance is reduced
to zero, then to Class A-2 Certificateholders, in reduction of the Class A-2
Certificate Principal Balance, until the Class A-2 Certificate Principal Balance
is reduced to zero, then to Class A-3 Certificateholders, in reduction of the
Class A-3 Certificate Principal Balance, until the Class A-3 Certificate
Principal Balance is reduced to zero, then to Class A-4 Certificateholders, in
reduction of the Class A-4 Certificate Principal Balance, until the Class A-4
Certificate Principal Balance is reduced to zero, and then to Class A-5
Certificateholders, in reduction of the Class A-5 Certificate Principal Balance,
until the Class A-5 Certificate Principal Balance is reduced to zero.
The Certificate Insurer will be subrogated to the rights of holders of the
Class A Certificates to receive any payments on the Class A Certificates for
which the Certificate Insurer paid Insured Payments that were not subsequently
reimbursed; provided, however, that the Certificate Insurer is not entitled to
reimbursement on any Distribution Date for previously paid Insured Payments
unless the holders of the related subclass of Class A Certificates will receive
the full amount of the applicable Class A Monthly Interest on such Distribution
Date and no Coverage Deficit exists.
The Certificate Insurance Policy does not guarantee to the holders of any
Class A Certificates any specific rate of prepayments of principal of the
Mortgage Loans. Payments of principal on the Class A Certificates are covered
only to the extent of any Coverage Deficit on a Distribution Date, but such
coverage will result in ultimate collection of the Certificate Principal Balance
of each subclass of Class A Certificates.
In general, the protection afforded by the Certificate Insurance Policy is
protection for credit risk and not for prepayment risk. A claim may not be made
under the Certificate Insurance Policy in an attempt to guarantee or insure that
any particular rate of prepayment is experienced by the Trust.
Pursuant to the terms of the Pooling and Servicing Agreement, unless a
default by the Certificate Insurer exists, the Certificate Insurer shall be
deemed to be the only Class A Certificateholder for all purposes (other than
with respect to payment on the Certificates), will be entitled to exercise all
rights of the Class A Certificateholders thereunder, without the consent of such
Certificateholders, and the Class A Certificateholders may exercise such rights
only with the prior written consent of the Certificate Insurer. In addition, the
Certificate Insurer will, as a third party beneficiary to the Pooling and
Servicing Agreement, have, among others, the following rights: (i) the right to
give notices of breach or to terminate the rights and obligations of the
Servicer under the Pooling and Servicing Agreement in the event of an Event of
Default by the Servicer; (ii) the right to direct the actions of the Trustee
during the continuation of a Servicer default; (iii) the right to require the
Sponsor to repurchase Mortgage Loans for breaches of representations and
warranties or defects in documentation; and (iv) the right to direct
foreclosures upon the failure of the Servicer to do so in accordance with the
Pooling and Servicing Agreement. The Certificate Insurer's consent will be
required prior to, among other things, (a) the appointment of any successor
Trustee or Servicer or (b) any amendment to the Pooling and Servicing Agreement
(which consent will not be unreasonably withheld).
THE CERTIFICATE INSURER PREMIUM
The Certificate Insurer will be entitled to receive a monthly premium from
the Trust (the "Certificate Insurer Premium") payable out of Available Funds on
each Distribution Date. The Certificate Insurer Premium as of any Distribution
Date will equal one-twelfth (1/12) of the product of the applicable Insurer
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Premium Rate and the Class A Certificate Principal Balance immediately prior to
such Distribution Date. The "Insurer Premium Rate" will be as set forth in the
Pooling and Servicing Agreement. See "-- Distributions on the Certificates"
herein.
MONTHLY ADVANCES; SERVICING ADVANCES; COMPENSATING INTEREST AND INTEREST
SHORTFALLS
Not later than the close of business on the Deposit Date prior to each
Distribution Date, the Servicer will be required to remit a Monthly Advance, if
any, to the Trustee for deposit in the Certificate Account to be distributed on
the related Distribution Date. A "Monthly Advance" will be equal to the sum of
(i) the interest portions of the aggregate amount of monthly payments (net of
the related Servicing Fee) due on the Mortgage Loans during the related
Collection Period (or, in the case of the first two Collection Periods, the
interest portions of such monthly payments that represent interest accrued from
and including the Cut-off Date) but delinquent as of the close of business on
the last day of the related Collection Period, (ii) interest on each Mortgage
Loan that is not delinquent as of the close of business on the last day of the
related Collection Period at the related Mortgage Interest Rate for the period
from and including the due date of the monthly payment in the related Collection
Period to the end of such Collection Period and (iii) with respect to each
Mortgaged Property which was acquired in foreclosure or similar action (each, an
"REO Property") during or prior to the related Collection Period and as to which
final sale did not occur during the related Collection Period, an amount equal
to the excess, if any, of interest on the Principal Balance of the Mortgage Loan
relating to such REO Property for the related Collection Period at the related
Mortgage Interest Rate (net of the Servicing Fee) over the net income from the
REO Property transferred to the Certificate Account for such Distribution Date.
In the course of performing its servicing obligations during any Collection
Period, the Servicer will pay all reasonable and customary "out-of-pocket" costs
and expenses incurred in the performance of its servicing obligations as it
deems appropriate and advisable under the circumstances ("Servicing Advances"
and, together with Monthly Advances, "Advances"), including, but not limited to,
the cost of (i) maintaining REO Properties; (ii) any enforcement or judicial
proceedings, including foreclosures; (iii) the management and liquidation of any
Mortgaged Property acquired in satisfaction of the related Mortgage Loan; and
(iv) payments in respect of real estate taxes and assessments and insurance
premiums.
The Pooling and Servicing Agreement provides that the Servicer may pay all
or a portion of any Advance out of amounts on deposit in the Collection Account
which are being held for distribution on a subsequent Distribution Date relating
to such Collection Period; any such amounts so used are required to be replaced
by the Servicer by deposit to the Collection Account on or before the Deposit
Date relating to such subsequent Distribution Date.
The Servicer may recover Monthly Advances and Servicing Advances, if not
theretofore recovered from the Mortgagor on whose behalf such Servicing Advance
or Monthly Advance was made, from subsequent collections on the related Mortgage
Loan, including Liquidation Proceeds, Trust Insurance Proceeds and such other
amounts as may be collected by the Servicer from the Mortgagor or otherwise
relating to the Mortgage Loan. To the extent the Servicer, in its good faith
business judgment, determines that any Advance will not be ultimately
recoverable from subsequent collections, Trust Insurance Proceeds, Liquidation
Proceeds on the related Mortgage Loans or otherwise ("Nonrecoverable Advances"),
the Servicer may reimburse itself on the first Distribution Date thereafter on
which Available Funds remaining in the Certificate Account would otherwise be
distributable to the Class R Certificateholder.
The Servicer will not be required to make any Advance which it determines
would be a Nonrecoverable Advance.
With respect to each Mortgage Loan (i) as to which a prepayment in whole or
in part was received, (ii) that became a Liquidated Mortgage Loan or (iii) that
was otherwise charged off during the Collection Period related to a Distribution
Date, the Servicer will be required with respect to such Distribution Date to
remit to the Trustee, from amounts otherwise payable to the Servicer as the
Servicing Fee for the related Collection Period, an amount equal to the excess,
if any, of (a) 30 days' interest on the Principal Balance of each such Mortgage
Loan (immediately prior to such payment) at the related Mortgage Interest Rate,
net of
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<PAGE> 41
the applicable Servicing Fee, less (b) the amount of interest actually received
on such Mortgage Loan during such Collection Period (each such amount, a
"Compensating Interest Payment") for distribution on the related Class of Class
A Certificates on such Distribution Date. The Servicer will not be entitled to
be reimbursed from collections on the Mortgage Loans or any assets of the Trust
for any Compensating Interest Payments made. If the Servicing Fee in respect of
such Collection Period is insufficient to make the entire required Compensating
Interest Payment, the resulting shortfall (a "Prepayment Interest Shortfall")
will reduce the amount of interest due and payable on the related Class of Class
A Certificates on such Distribution Date and such reduction will not be
recoverable thereafter.
In addition, the application of the Relief Act, or similar legislation to
any Mortgage Loan may adversely affect, for an indeterminate period of time, the
ability of the Servicer to collect full amounts of interest on such Mortgage
Loan ("Relief Act Shortfalls"; Relief Act Shortfalls and Prepayment Interest
Shortfalls are, collectively, "Interest Shortfalls"). See "Risk
Factors -- Limitations on Interest Payments and Foreclosures" in the Prospectus.
Interest Shortfalls will not be covered by the Certificate Insurance Policy.
REPORTS TO CERTIFICATEHOLDERS
Concurrently with each distribution to Certificateholders, the Trustee will
mail a statement to each Class A Certificateholder in the form required by the
Pooling and Servicing Agreement and setting forth the following information:
(a) the amount of such distribution to Class A-1 Certificateholders,
Class A-2 Certificateholders, Class A-3 Certificateholders, Class A-4
Certificateholders and Class A-5 Certificateholders allocable to (i)
Monthly Principal and (ii) any Excess Cash distribution;
(b) the amount of such distribution to Class A-1 Certificateholders,
Class A-2 Certificateholders, Class A-3 Certificateholders, Class A-4
Certificateholders and Class A-5 Certificateholders allocable to Class A
Monthly Interest;
(c) the Class A-1 Certificate Principal Balance, the Class A-2
Certificate Principal Balance, the Class A-3 Certificate Principal Balance,
the Class A-4 Certificate Principal Balance and the Class A-5 Certificate
Principal Balance after giving effect to the distribution of Monthly
Principal and any Excess Cash on such Distribution Date;
(d) the Pool Balance for the following Distribution Date;
(e) the amount of unreimbursed Monthly Advances and/or Servicing
Advances, if any;
(f) the number and the aggregate of the Principal Balances of the
Mortgage Loans that are delinquent (i) one month, (ii) two months and (iii)
three or more months as of the end of the related Collection Period;
(g) the aggregate of the Principal Balances of the Mortgage Loans that
are in foreclosure or other similar proceedings and the book value of any
real estate acquired through foreclosure or grant of a deed in lieu of
foreclosure;
(h) the Deficiency Amount, if any, for such Distribution Date;
(i) the amount of the Servicing Fee paid to or retained by the
Servicer for the related Collection Period; and
(j) the Coverage Amount, the then applicable Required Coverage Amount,
the Coverage Surplus, if any, and the Coverage Deficit, if any.
In the case of information furnished pursuant to clauses (a) through (c)
above, the amounts shall be expressed as a dollar amount per Class A-1
Certificate, Class A-2 Certificate, Class A-3 Certificate, Class A-4 Certificate
or Class A-5 Certificate with a $1,000 principal denomination.
Within 90 days after the end of each calendar year, the Trustee will mail
to each person who at any time during such calendar year was a Class A
Certificateholder and to the Underwriters a statement containing the
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information set forth in clauses (a) and (b) above, aggregated for such calendar
year or, in the case of each person who was a Class A Certificateholder for a
portion of such calendar year, setting forth such information for each month
thereof.
TERMINATION; RETIREMENT OF THE CERTIFICATES
The obligations created by the Pooling and Servicing Agreement will
terminate upon the payment to Certificateholders of all amounts held in the
Certificate Account or by or on behalf of the Servicer and required to be paid
to the Certificateholders pursuant to the Pooling and Servicing Agreement
following the earlier of (a) the purchase by the Servicer of all Mortgage Loans
and all property acquired in respect of any Mortgage Loan remaining in the Trust
at a price not less than the sum of (x) 100% of the Principal Balance of each
Mortgage Loan (other than any Mortgage Loan as to which title to the underlying
Mortgaged Property has been acquired and whose fair market value is included
pursuant to clause (y) below) as of the final Distribution Date, and (y) the
fair market value of each Mortgaged Property then held by the Trust (as
determined by the Servicer as of the close of business on the third Business Day
next preceding the date upon which notice of any such termination is furnished
to Certificateholders), plus one month's interest at the interest rate on each
Mortgage Loan (including any Mortgage Loan as to which title to the underlying
Mortgaged Property has been acquired by the Trust) less any payments of
principal and interest received during the related Collection Period in respect
of such Mortgage Loans, plus certain amounts payable to the Certificate Insurer
under the Pooling and Servicing Agreement; and (b) the final payment or other
liquidation of the Principal Balance of the last Mortgage Loan remaining in the
Trust or the disposition of all property remaining in the Trust acquired in
respect of any Mortgage Loan. In no event, however, will the Trust continue
beyond the expiration of 21 years from the death of the last 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
Certificateholder, and the final distribution will be made only upon surrender
and cancellation of the Certificates at an office or agency appointed by the
Trustee which will be specified in the notice of termination. The right of the
Servicer to make the purchase described in clause (a) above is conditioned upon
the Pool Balance prior to such purchase being less than 10% of the sum of the
Initial Pool Balance and the Prefunding Account Deposit.
In addition, the Certificate Insurer will have the option to purchase from
the Trust all Mortgage Loans and all property acquired in respect of any
Mortgage Loan then remaining in the Trust at the price set forth in the
immediately preceding paragraph plus the amount of any outstanding and unpaid
fees and expenses of the Trustee and the Servicer if, on any Distribution Date,
Mortgage Loans having Principal Balances as of the Cut-off Date aggregating 25%
or more of the sum of the Initial Pool Balance and the Prefunding Account
Deposit have become Liquidated Mortgage Loans.
The Pooling and Servicing Agreement will provide that notice of any
termination, specifying the final Distribution Date upon which the
Certificateholders may surrender their Certificates to the Trustee for payment
of the final distribution and cancellation, will be given promptly by the
Trustee by letter to Certificateholders specifying (a) the Distribution Date for
the final distribution, (b) the amount of any such final distribution and (c)
that the final distribution will be made only upon presentation and surrender of
the Certificates at the office or agency of the Trustee therein specified.
If the termination of the Trust is in connection with a purchase of the
assets of the Trust by the Servicer or the Certificate Insurer and the fair
market value of any acquired property is less than the Principal Balance of the
related Mortgage Loan, then the excess of such Principal Balance over such fair
market value shall be allocated in reduction of the amounts otherwise
distributable on the final Distribution Date in the following order of priority:
first, to the Class R Certificateholder and, second, to the Class A
Certificateholders. The distribution on the final Distribution Date in
connection with the purchase by the Servicer or the Certificate Insurer of the
assets of the Trust shall be in lieu of the distribution otherwise required to
be made on such Distribution Date in respect of the Class A Certificates.
Any such termination of the Trust by the Servicer or the Certificate
Insurer will be effected only pursuant to a "qualified liquidation" as defined
in Code Section 860F(a)(4)(A) and the receipt by the Trustee and the
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Certificate Insurer of a satisfactory opinion of counsel that such purchase will
not (i) result in the imposition of a tax on "prohibited transactions" under
Code Section 860F(a)(1) or (ii) cause the REMIC Pool to fail to qualify as a
REMIC.
THE TRUSTEE
Bankers Trust Company of California, N.A., will be the Trustee under the
Pooling and Servicing Agreement. The Pooling and Servicing Agreement will
provide that the Trustee is entitled to certain fees and reimbursement of
expenses. The Trustee may resign at any time, in which event the Servicer will
be obligated to appoint a successor Trustee. The Servicer 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 circumstances, the Servicer will be obligated to appoint
a successor Trustee. 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. See "The Pooling and Servicing
Agreement -- The Trustee" in the Prospectus.
THE MORTGAGE LOANS
GENERAL
The following is a brief description of certain terms of the Initial
Mortgage Loans based on the Initial Mortgage Loans as of the Cut-off Date.
Certain mortgage loans may be removed, prior to the Closing Date, from the
Mortgage Pool as described herein, in which case an amount equal to the
aggregate principal balances of such mortgage loans, but in no event more than
$10,000,000, will be added to the Prefunding Account Deposit on the Closing
Date. As a result, the statistical information presented below regarding the
Initial Mortgage Loans set forth herein may vary in certain limited respects
from comparable information based on the actual composition of the Mortgage Pool
at the Closing Date. In addition, the Mortgage Pool may vary from the
description below due to a number of factors, including prepayments and the
acquisition of Subsequent Mortgage Loans. See "-- Conveyance of Subsequent
Mortgage Loans" herein.
None of the Mortgage Loans is or will be insured or guaranteed by the
Sponsor, the Servicer, the Trustee, any Originator or any of their respective
affiliates, or by any governmental agency or other person.
A schedule of the Initial Mortgage Loans as of the Closing Date will be
attached to the Pooling and Servicing Agreement delivered to the Trustee upon
delivery of the Certificates. A Current Report on Form 8-K containing a
description of the Mortgage Loans included in the final Mortgage Pool as of the
end of the Commitment Period in a form comparable to the description of the
Initial Mortgage Loans contained in "ANNEX A: Description of the Mortgage Pool"
will be filed with the Commission within 15 days after the expiration of the
Commitment Period.
The information expressed as a percentage of the Initial Pool Balance may
not total 100% due to rounding. For a more detailed description of certain
characteristics of the Initial Mortgage Loans in tabular form, see "ANNEX A:
Description of the Mortgage Pool" at the end of this Prospectus Supplement.
Each Mortgage Loan will have the interest due thereon computed on an
actuarial basis. Each Mortgage Loan generally will provide for the payment of a
charge if the principal thereof is paid prior to its stated maturity date. Such
charge, however, will not be available to the Trust but will instead be paid to
the Servicer as additional servicing compensation. All of the Mortgage Loans
will be required to be covered by standard hazard insurance policies insuring
against certain losses.
In connection with the assignment of the Initial Mortgage Loans to the
Trust, the Sponsor will represent and warrant that, among other things, as of
the Cut-off Date, no Mortgage Loan was 90 or more days contractually delinquent
(except that with respect to one Mortgage Loan a payment received prior to the
Cut-off Date was not credited until after the Cut-off Date causing such Mortgage
Loan to be recorded as being 90 or more days past due on the Cut-off Date), not
more than 0.48% of the Initial Mortgage Loans (by Initial Pool Balance) were 60
or more days contractually delinquent and not more than 4.19% of the Initial
Mortgage
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Loans were 30 or more days contractually delinquent. However, investors in the
Class A Certificates should be aware that only approximately 14.62% (by Initial
Pool Balance) of the Mortgage Loans had a first monthly payment due before
February 1, 1997 and it was not possible for any Mortgage Loan other than such
Initial Mortgage Loans to have had two or more monthly payments past due as of
the Cut-off Date.
INITIAL MORTGAGE LOANS
The Initial Pool Balance is $163,617,805.83. Approximately 90.56%, 6.48%
and 2.96% of the related Mortgaged Properties (by Initial Pool Balance) were
single family residences, two- to four-family residences and units in
condominium or planned unit developments, respectively, and no more than 0.52%
of the Mortgage Loans (by Initial Pool Balance) were secured by Mortgaged
Properties located in any single ZIP code.
The original weighted average Combined Loan-to-Value Ratio of all Initial
Mortgage Loans was approximately 67.91%. The maximum and average current
balances as of the Cut-off Date were approximately $500,000 and $58,813,
respectively. The average appraised value of the Mortgaged Properties securing
Mortgage Loans was approximately $115,461 at the time of origination of such
Mortgage Loans. The "Combined Loan-to-Value Ratio" is the sum of the outstanding
principal balance (at origination of each Mortgage Loan) of each mortgage loan,
if any, senior to such Mortgage Loan and the original Principal Balance of such
Mortgage Loan as a percentage of the appraised valuation (or, if the Mortgage
Loan was obtained in connection with the purchase of the related Mortgaged
Property, the purchase price, if less) of the related Mortgaged Property
determined by the Originator at the time of origination of such Mortgage Loan.
See "Risk Factors -- Risks Associated with Underwriting Standards" herein.
The Initial Mortgage Loans bear fixed interest rates (each, a "Mortgage
Interest Rate") that range from approximately 7.49% per annum to 17.75% per
annum. As of the Cut-off Date, the weighted average Mortgage Interest Rate of
the Initial Mortgage Loans was approximately 10.62% per annum.
The weighted average remaining term to stated maturity of the Initial
Mortgage Loans was approximately 297 months. The weighted average original term
to maturity of the Initial Mortgage Loans was approximately 298 months. As of
the Cut-off Date, the weighted average seasoning of the Initial Mortgage Loans
was approximately one month.
Based on the aggregate of the Principal Balances of the Initial Mortgage
Loans as of the Cut-off Date, approximately 94.73% of the Mortgage Loans (by
Initial Pool Balance) provide for the payment of principal and interest on a
level basis to fully amortize such Mortgage Loan over its stated term. The
remaining approximately 5.27% of the Mortgage Loans (by Initial Pool Balance)
are Balloon Loans which provide for regular monthly payments of principal and
interest computed on the basis of an amortization term that is longer than the
related term to stated maturity, with a "balloon" payment due at stated maturity
that will be significantly larger than the monthly payments. The Mortgage Loans
have original terms to stated maturity of up to 30 years.
CONVEYANCE OF SUBSEQUENT MORTGAGE LOANS
The obligation of the Trust to purchase the Subsequent Mortgage Loans on a
Subsequent Transfer Date for assignment to the Mortgage Pool is subject to the
following requirements: (i) no Subsequent Mortgage Loans may be 59 or more days
contractually delinquent as of the related Subsequent Cut-off Dates and not more
than 4.19% of the Subsequent Mortgage Loans purchased by the Trust, by aggregate
Principal Balance, will be 30 days or more contractually delinquent as of the
related Subsequent Cut-off Dates, (ii) the original term to stated maturity of
such Subsequent Mortgage Loans may not exceed 30 years, (iii) each Subsequent
Mortgage Loan will have an interest rate of not less than 8.24%, (iv) such
Subsequent Mortgage Loans will be underwritten or re-underwritten, as
applicable, in accordance with the criteria set forth under "The
Originators -- Underwriting Guidelines -- Sponsor's Guidelines" in the
Prospectus, and (v) following the purchase of such Subsequent Mortgage Loans by
the Trust, the Mortgage Loans (including the Subsequent Mortgage Loans) (a) will
have a weighted average Mortgage Interest Rate of at least 10.57%; and (b) will
each have a principal balance not in excess of $500,000. See "Risk
Factors -- The Subsequent Mortgage
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Loans and the Prefunding Account" herein. In addition, the transfer of
Subsequent Mortgage Loans to the Trust on the Closing Date is subject to the
approval of the Certificate Insurer and in each case under circumstances deemed
appropriate by the Certificate Insurer, such requirements may be waived or
modified.
PREPAYMENT AND YIELD CONSIDERATIONS
The weighted average life of and, if purchased at other than par, the yield
to maturity on a Class A Certificate will be directly related to the rate of
payment of principal of the Mortgage Loans, including for this purpose voluntary
payment in full of Mortgage Loans prior to stated maturity, liquidations due to
defaults, casualties and condemnations, and repurchases of Mortgage Loans by the
Sponsor or the Servicer or purchases of the Mortgage Loans by the Certificate
Insurer. The actual rate of principal prepayments on the Mortgage Loans may be
influenced by a variety of economic, tax, geographic, demographic, social,
competitive, legal and other factors and has fluctuated considerably in recent
years. In addition, the rate of principal prepayments may be affected by
specific factors relating to the Mortgage Loans, including, among other things,
the age of the Mortgage Loans, the geographic locations of the Mortgaged
Properties and the extent of the Mortgagors' equity in such Mortgaged
Properties, and changes in the Mortgagors' housing needs, job transfers and
unemployment.
Because all amounts available for distribution on the Class A Certificates
after distributions in respect of the Class A Monthly Interest, including all or
a portion of the Excess Cash, are applied as reductions of the Class A
Certificate Principal Balance, the weighted average lives of such Certificates
will be influenced by the amount of Excess Cash so applied. Because Excess Cash
attributable to the overcollateralization feature is derived, in part, from
interest collections on the Mortgage Loans and will be applied to reduce the
Class A Certificate Principal Balance, the aggregate payments in reduction of
the Class A Certificate Principal Balance on a Distribution Date will usually be
greater than the aggregate amount of principal payments (including prepayments)
on the Mortgage Loans distributable on such Distribution Date. As a consequence,
Excess Cash available for distribution in reduction of the Class A Certificate
Principal Balance will increase in proportion to the outstanding Class A
Certificate Principal Balance over time in the absence of offsetting Realized
Losses on the Mortgage Loans.
Excess Cash will be distributed on the Class A Certificates in reduction of
the Class A Certificate Principal Balance on each Distribution Date to the
extent the then applicable Required Coverage Amount exceeds the Coverage Amount
on such Distribution Date. If a Class A Certificate is purchased at other than
par, its yield to maturity will be affected by the rate at which Excess Cash is
distributed to Class A Certificateholders. If the actual rate of Excess Cash
distributions applied in reduction of the Class A Certificate Principal Balance
is slower than the rate anticipated by an investor who purchases a Class A
Certificate at a discount, the actual yield to such investor will be lower than
such investor's anticipated yield. If the actual rate of Excess Cash
distributions applied in reduction of the Class A Certificate Principal Balance
is faster than the rate anticipated by an investor who purchases a Class A
Certificate at a premium, the actual yield to such investor will be lower than
such investor's anticipated yield. The amount of Excess Cash on any Distribution
Date will be affected by, among other things, the actual amount of interest
received, collected or recovered in respect of the Mortgage Loans during the
related Collection Period and such amount will be influenced by changes in the
weighted average of the Mortgage Interest Rates resulting from prepayment and
liquidations of Mortgage Loans. The amount of Excess Cash distributed to the
Class A Certificateholders applied in reduction of the Class A Certificate
Principal Balance on each Distribution Date will be based on the Required
Coverage Amount, which may increase or decrease during the period any subclass
of Class A Certificates remains outstanding. Any increase in the Required
Coverage Amount may result in an accelerated amortization of one or more
subclasses of Class A Certificates until such Required Coverage Amount is
reached. Conversely, any decrease in the Required Coverage Amount will result in
a decelerated amortization of one or more subclasses of Class A Certificates
until such Required Coverage Amount is reached.
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,
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the earlier the payment of principal of the Mortgage Loans the greater the
effect will be 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. The Sponsor makes no representations or warranties as to the rate
of prepayment or the factors to be considered in connection with such
determination.
PROJECTED PREPAYMENTS AND YIELDS FOR THE CLASS A CERTIFICATES
If a Class A Certificate is purchased at other than par, its yield to
maturity will be affected by the rate of the payment of principal on the
Mortgage Loans. If the actual rate of payments on the Mortgage Loans is slower
than the rate anticipated by an investor who purchases a Class A Certificate 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 is
faster than the rate anticipated by an investor who purchases a Class A
Certificate at a premium, the actual yield to such investor will be lower than
such investor's anticipated yield.
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 rate
on such mortgage loans. However, the monthly payment on a home equity loan is
often smaller than the monthly payment on a purchase money first mortgage loan.
Consequently, a decrease in the interest rate payable results in a smaller
reduction in the amount of the monthly payment on the smaller balance loan.
Conversely, if prevailing interest rates rise appreciably above the interest
rate 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.
The "Final Scheduled Payment Dates" for the Class A Certificates are set
forth in the "Summary of Terms" herein. For the Class A-1 Certificates, the
Class A-2 Certificates and the Class A-3 Certificates, the Final Scheduled
Payment Date is the latest date on which the Certificate Principal Balances of
the Class A Certificates would be reduced to zero, assuming (i) no prepayments
are received on the Mortgage Loans; (ii) scheduled monthly payments on the
Mortgage Loans are timely received and (iii) the Required Coverage Amount is
zero. The Final Scheduled Payment Date for the Class A-4 Certificates and Class
A-5 Certificates is the Distribution Date two years and three months after the
latest scheduled maturity date of any Initial Mortgage Loan. The weighted
average lives of the Class A Certificates are likely to be shorter, and the
actual final Distribution Date could occur significantly earlier than the Final
Scheduled Payment Dates because (i) prepayments are likely to occur which shall
be applied to the payment of the Class A Certificate Principal Balances of the
Class A Certificates, (ii) distributions of Excess Cash may occur on each
Distribution Date which will accelerate the amortization of the Class A
Certificates, (iii) the Servicer may cause a termination of the Trust when the
aggregate Principal Balance of the Mortgage Loans in the Trust has declined to
less than 10% of the sum of the Initial Pool Balance and the Prefunding Account
Deposit, (iv) the Certificate Insurer may cause a termination of the Trust on
any Distribution Date on which Mortgage Loans having Principal Balances as of
the Cut-off Date aggregating 25% or more of the sum of the Initial Pool Balance
and the Prefunding Account Deposit have become Liquidated Mortgage Loans and (v)
in certain periods, the Class A-5 Certificates may be entitled to a greater
percentage of certain monthly principal distributions than other subclasses
relative to their Certificate Principal Balances.
The table entitled "Weighted Average Lives" has been prepared on the basis
of the following assumptions, except as set forth in the respective tables: (i)
the Class A Certificates are purchased on March 26, 1997; (ii) on April 1, 1997
the Trustee on behalf of the Trust purchases Subsequent Mortgage Loans with
aggregate Principal Balances equal to the Prefunding Account Deposit; (iii) with
respect to the initial Collection Period, the Mortgage Loans include 30 days of
interest and a deposit in the amount of $300,000 in respect of interest were
contributed to the Trust; (iv) scheduled payments are timely received on the
first day of each month commencing in March 1997 (April 1997 with respect to the
Subsequent Mortgage
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Loans); (v) distributions on the Class A Certificates are received, in cash, on
the 15th day of each month, commencing in April 1997; (vi) 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;
(vii) prepayments represent payment in full of individual Mortgage Loans and are
received on the last day of each month, commencing in March 1997 (April 1997
with respect to the Subsequent Mortgage Loans) and include 30 days' interest
thereon; (viii) the Mortgage Loans prepay according to the indicated Prepayment
Scenario as described below; (ix) early termination occurs in the manner set
forth in the respective tables; (x) Excess Cash will be applied to build
overcollateralization to the levels specified in the Pooling and Servicing
Agreement; and (xi) the Mortgage Loans have the following characteristics:
INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
REMAINING ORIGINAL
MORTGAGE AMORTIZATION TERM TO
AMORTIZATION PRINCIPAL INTEREST REMAINING TERM TO TERM MATURITY
METHOD BALANCE RATE MATURITY (MONTHS) (MONTHS) (MONTHS)
- ----------------------- --------------- -------- ----------------- ------------ --------
<S> <C> <C> <C> <C> <C>
Balloon $ 8,623,910.58 12.8955% 176 357 178
Level Pay $ 4,786,481.19 10.5599% 109 109 109
Level Pay $ 38,307,240.33 10.5749% 179 179 179
Level Pay $ 3,346,553.51 10.6297% 239 239 240
Level Pay $108,553,620.22 10.4610% 359 359 360
</TABLE>
SUBSEQUENT MORTGAGE LOANS
<TABLE>
<CAPTION>
REMAINING ORIGINAL
MORTGAGE AMORTIZATION TERM TO
AMORTIZATION PRINCIPAL INTEREST REMAINING TERM TO TERM MATURITY
METHOD BALANCE RATE MATURITY (MONTHS) (MONTHS) (MONTHS)
- ----------------------- -------------- -------- ----------------- ------------ --------
<S> <C> <C> <C> <C> <C>
Balloon $ 2,708,234.88 12.8955% 178 359 178
Level Pay $ 1,503,136.56 10.5599% 109 109 109
Level Pay $12,029,925.78 10.5749% 179 179 179
Level Pay $ 1,050,944.68 10.6297% 240 240 240
Level Pay $34,089,952.27 10.4610% 360 360 360
</TABLE>
"Weighted average life" refers to the average amount of time that will
elapse from the date of issuance of a security until each dollar of principal of
such security will be repaid to the investor. The weighted average lives of the
Class A Certificates will be influenced by the rate at which principal payments
on the Mortgage Loans are made, which may be in the form of scheduled
amortization or prepayments (for this purpose, the term "prepayment" includes
prepayments and liquidations due to default). The weighted average lives of the
Class A Certificates also will be influenced by the overcollateralization
feature because collections otherwise payable to the Class R Certificate are
applied as principal prepayments to the Class A Certificates until the
outstanding Class A Certificate Principal Balance is less than the Pool Balance
by an amount equal to the Required Coverage Amount. These prepayments have the
effect of accelerating the amortization of the Class A Certificates, thereby
shortening their respective weighted average lives.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The prepayment model used in this Prospectus
Supplement is the "Standard 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. The 100%
Standard Prepayment Assumption assumes constant prepayment rates of 4% per annum
of the then outstanding principal balance of such mortgage loans in the first
month of the life of the mortgage loans and an additional 1.818% (precisely
20/11%) per annum in each month thereafter until the twelfth month. Beginning in
the twelfth month and in each month thereafter during the life of the mortgage
loans, the 100% Standard Prepayment Assumption assumes a constant prepayment
rate of 24% per annum each month. As used in the table below, the 0%
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Standard Prepayment Assumption assumes prepayment rates equal to 0% of the
Standard Prepayment Assumption (i.e., no prepayments). Correspondingly, the 100%
Standard Prepayment Assumption assumes prepayment rates equal to 100% of the
Standard Prepayment Assumption, and so forth. The Standard Prepayment Assumption
does not purport to be a historical description of prepayment experience or a
prediction of the anticipated rate of prepayment of any pool of mortgage loans,
including the Mortgage Loans. The Sponsor is not aware of any statistics that
provide a reliable basis for predicting the amount or the timing of receipt of
prepayments on the related mortgage loans.
The Prepayment Scenarios are defined as follows:
<TABLE>
<CAPTION>
SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V SCENARIO VI
---------- ----------- ------------ ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Percentage of Standard
Prepayment Assumption......... 0% 50% 75% 100% 125% 150%
</TABLE>
WEIGHTED AVERAGE LIVES
CLASS A-1 CERTIFICATES
<TABLE>
<CAPTION>
TO MATURITY TO CALL
--------------------------------------------- ---------------------------------------------
PREPAYMENT WEIGHTED AVERAGE LIFE EXPECTED FINAL WEIGHTED AVERAGE LIFE EXPECTED FINAL
SCENARIO (YEARS)(1) PAYMENT(1) (YEARS)(2) PAYMENT(2)
- ----------- --------------------- ------------------- --------------------- -------------------
<S> <C> <C> <C> <C>
I.......... 8.41 February 15, 2012 8.41 February 15, 2012
II......... 1.63 July 15, 2000 1.63 July 15, 2000
III........ 1.23 August 15, 1999 1.23 August 15, 1999
IV......... 1.01 February 15, 1999 1.01 February 15, 1999
V.......... 0.87 October 15, 1998 0.87 October 15, 1998
VI......... 0.78 July 15, 1998 0.78 July 15, 1998
</TABLE>
- ---------------
(1) Assuming no early termination by repurchase of the Mortgage Loans.
(2) Assuming early termination by repurchase of the Mortgage Loans on the
Clean-Up Call Date.
CLASS A-2 CERTIFICATES
<TABLE>
<CAPTION>
TO MATURITY TO CALL
--------------------------------------------- ---------------------------------------------
PREPAYMENT WEIGHTED AVERAGE LIFE EXPECTED FINAL WEIGHTED AVERAGE LIFE EXPECTED FINAL
SCENARIO (YEARS)(1) PAYMENT(1) (YEARS)(2) PAYMENT(2)
- ----------- --------------------- ------------------- --------------------- -------------------
<S> <C> <C> <C> <C>
I.......... 21.91 February 15, 2024 21.91 February 15, 2024
II......... 6.16 February 15, 2008 6.16 February 15, 2008
III........ 4.01 October 15, 2003 4.01 October 15, 2003
IV......... 3.01 December 15, 2001 3.01 December 15, 2001
V.......... 2.42 November 15, 2000 2.42 November 15, 2000
VI......... 2.03 March 15, 2000 2.03 March 15, 2000
</TABLE>
- ---------------
(1) Assuming no early termination by repurchase of the Mortgage Loans.
(2) Assuming early termination by repurchase of the Mortgage Loans on the
Clean-up Call Date.
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<PAGE> 49
CLASS A-3 CERTIFICATES
<TABLE>
<CAPTION>
TO MATURITY TO CALL
--------------------------------------------- ---------------------------------------------
PREPAYMENT WEIGHTED AVERAGE LIFE EXPECTED FINAL WEIGHTED AVERAGE LIFE EXPECTED FINAL
SCENARIO (YEARS)(1) PAYMENT(1) (YEARS)(2) PAYMENT(2)
- ----------- --------------------- ------------------- --------------------- -------------------
<S> <C> <C> <C> <C>
I.......... 27.59 June 15, 2025 27.59 June 15, 2025
II......... 12.32 February 15, 2011 12.32 February 15, 2011
III........ 8.09 January 15, 2007 8.09 January 15, 2007
IV......... 5.32 May 15, 2003 5.32 May 15, 2003
V.......... 4.10 October 15, 2001 4.10 October 15, 2001
VI......... 3.28 November 15, 2000 3.28 November 15, 2000
</TABLE>
- ---------------
(1) Assuming no early termination by repurchase of the Mortgage Loans.
(2) Assuming early termination by repurchase of the Mortgage Loans on the
Clean-up Call Date.
CLASS A-4 CERTIFICATES
<TABLE>
<CAPTION>
TO MATURITY TO CALL
--------------------------------------------- ---------------------------------------------
PREPAYMENT WEIGHTED AVERAGE LIFE EXPECTED FINAL WEIGHTED AVERAGE LIFE EXPECTED FINAL
SCENARIO (YEARS)(1) PAYMENT(1) (YEARS)(2) PAYMENT(2)
- ----------- --------------------- ------------------- --------------------- -------------------
<S> <C> <C> <C> <C>
I.......... 29.10 February 15, 2027 28.45 September 15, 2025
II......... 18.27 September 15, 2024 14.58 November 15, 2011
III........ 13.47 July 15, 2019 10.64 December 15, 2007
IV......... 9.96 July 15, 2014 7.80 June 15, 2005
V.......... 7.18 April 15, 2011 5.84 October 15, 2003
VI......... 5.16 November 15, 2008 4.61 August 15, 2002
</TABLE>
- ---------------
(1) Assuming no early termination by repurchase of the Mortgage Loans.
(2) Assuming early termination by repurchase of the Mortgage Loans on the
Clean-up Call Date.
CLASS A-5 CERTIFICATES
<TABLE>
<CAPTION>
TO MATURITY TO CALL
--------------------------------------------- ---------------------------------------------
PREPAYMENT WEIGHTED AVERAGE LIFE EXPECTED FINAL WEIGHTED AVERAGE LIFE EXPECTED FINAL
SCENARIO (YEARS)(1) PAYMENT(1) (YEARS)(2) PAYMENT(2)
- ----------- --------------------- ------------------- --------------------- -------------------
<S> <C> <C> <C> <C>
I.......... 12.92 December 15, 2026 12.92 September 15, 2025
II......... 7.73 June 15, 2024 7.71 November 15, 2011
III........ 6.96 April 15, 2019 6.91 December 15, 2007
IV......... 6.46 May 15, 2014 6.31 June 15, 2005
V.......... 6.11 February 15, 2011 5.59 October 15, 2003
VI......... 5.82 September 15, 2008 4.88 August 15, 2002
</TABLE>
- ---------------
(1) Assuming no early termination by repurchase of the Mortgage Loans.
(2) Assuming early termination by repurchase of the Mortgage Loans on the
Clean-up Call Date.
ORIGINATION AND SERVICING OF THE MORTGAGE LOANS
THE ORIGINATORS
Approximately 77.87% of the Initial Mortgage Loans (by Initial Pool
Balance) were originated by one or more affiliates of the Sponsor (the
"Affiliated Originators"). The remaining approximately 22.13% of the Initial
Mortgage Loans were acquired by the Sponsor in arm's-length transactions from
entities not affiliated with the Sponsor (the "Unaffiliated Originators" and,
together with the Affiliated Originators, the "Originators"). Certain of the
Subsequent Mortgage Loans will be originated by Unaffiliated Originators, and no
assurance can be given that the proportion of Mortgage Loans in the final
Mortgage Pool (after inclusion of any Subsequent Mortgage Loans) that have been
originated by Unaffiliated Originators will not be materially
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different from the proportion of Initial Mortgage Loans originated by
Unaffiliated Originators. See "The Originators" in the Prospectus.
UNDERWRITING OF MORTGAGE LOANS
Mortgage Loans originated by Affiliated Originators have been underwritten
in accordance with standard guidelines (the "Sponsor's Guidelines") developed by
the Sponsor and the related Affiliated Originator for customary application in
the Affiliated Originator's loan origination activities, as described in the
Prospectus. Mortgage Loans originated by Unaffiliated Originators are
re-underwritten in accordance with applicable Sponsor's Guidelines. See "The
Originators -- Underwriting Guidelines" in the Prospectus.
MORTGAGE LOAN DELINQUENCY AND FORECLOSURE EXPERIENCE
Certain information concerning the delinquency and foreclosure experience,
for the three year period ended June 30, 1996, with respect to home equity
mortgage loans serviced by affiliates of the Sponsor, including home equity
loans pooled and sold in the secondary market, is set forth under the caption
"The Sponsor -- Mortgage Loan Delinquency and Foreclosure Experience" in the
Prospectus. Such information includes delinquency and foreclosure experience
with respect to home equity mortgage loans originated by Affiliated Originators
or purchased by the Sponsor and, in each case, serviced by or on behalf of the
Sponsor as of the end of the period indicated.
The following table sets forth delinquency and foreclosure experience of
home equity loans included in the Sponsor's servicing portfolio for the six
months ended December 31, 1996:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------
<S> <C>
Percentage of dollar amount of delinquent loans to loans serviced
(period end)(1)(2)
One month............................................................... 3.8%
Two months.............................................................. 1.8%
Three or more months:
Not foreclosed(3).................................................. 7.5%
Foreclosed(4)...................................................... 1.1%
-------
Total......................................................... 14.2%
=======
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, 1996
-----------------
<S> <C>
Percentage of dollar amount of loans foreclosed to loans serviced (period
end)(2).................................................................... 0.78%
Number of loans foreclosed................................................... 211
Principal amount at time of foreclosure of foreclosed loans (in thousands)... $17,472
Losses on foreclosed loans included in pools of loans securitized (in
thousands)................................................................. $(1,804)
</TABLE>
- ---------------
(1) Delinquent loans are loans for which more than one payment is due.
(2) The delinquency and foreclosure percentages are calculated on the basis of
the total dollar amount of mortgage loans originated or purchased by the
Sponsor and, in each case, serviced by the Sponsor, or the Sponsor and any
subservicers, as applicable, as of the end of the periods indicated.
(3) Represents loans which are in foreclosure but as to which foreclosure
proceedings have not concluded.
(4) Represents properties acquired following a foreclosure sale and still
serviced by the Sponsor at period end.
There is no assurance that the delinquency, foreclosure and loss experience
with respect to any of the Mortgage Loans will be comparable to the experience
reflected above or in the Prospectus. Because certain Mortgage Loans may have
been underwritten pursuant to standards that rely primarily on the value of the
related Mortgaged Properties rather than the creditworthiness of the related
Mortgagor, the actual rates of delinquencies, foreclosures and losses on such
Mortgage Loans could be higher than those historically experienced in the
mortgage lending industry in general, particularly in periods during which the
values of the related Mortgaged Properties decline. In addition, the rate of
delinquencies, foreclosures and losses with respect to the Mortgage Loans will
also be affected by, among other things, interest rate fluctuations and
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<PAGE> 51
general and regional economic conditions. See "Risk Factors -- Nature of the
Security for Mortgage Loans" and "The Originators -- Underwriting Guidelines" in
the Prospectus.
SERVICING OF MORTGAGE LOANS
The Servicer will service the Mortgage Loans in accordance with the
provisions of the Pooling and Servicing Agreement and the policies, procedures
and practices customarily employed by the Servicer in servicing other comparable
mortgage loans. Consistent with the foregoing, the Servicer may, in its
discretion (a) waive any assumption fees, late payment charges, charges for
checks returned for insufficient funds or other fees which may be collected in
the ordinary course of servicing a Mortgage Loan, (b) arrange a schedule for the
payment of delinquent payments on the related Mortgage Loan, subject to
conditions set forth in the Pooling and Servicing Agreement, if a Mortgagor is
in default or about to be in default because of such Mortgagor's financial
condition, or (c) modify monthly payments on Mortgage Loans in accordance with
the Servicer's general policy on mortgage loans subject to the Relief Act.
In any case in which the Servicer becomes aware that a Mortgaged Property
has been or is about to be conveyed by the related Mortgagor, the Pooling and
Servicing Agreement will require the Servicer to enforce any due-on-sale clause
contained in the related Mortgage Note or mortgage, to the extent permitted by
the related Mortgage Note and mortgage and applicable law or regulation, but
only to the extent such enforcement will not adversely affect or jeopardize
coverage under any related insurance policy or result in legal action by the
Mortgagor. Additionally, the Servicer may, with the prior written consent of the
Certificate Insurer, 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 related promissory note
and, to the extent permitted by applicable law, the Mortgagor remains liable
thereon or, if such person satisfies the Servicer's then current underwriting
standards for mortgage loans similar to the Mortgage Loans and the Servicer
finds it appropriate, the Mortgagor is released from liability thereon. Any fees
collected by the Servicer for entering into an assumption or substitution of
liability agreement will be retained by the Servicer as additional servicing
compensation. See "Certain Legal Aspects of the Mortgage Loans and Related
Matters -- Enforceability of Due-on-Sale Clauses" in the Prospectus.
The Servicer, acting as agent for the Trust, will not consent to the
subsequent placement of a deed of trust or mortgage, as applicable, on any
Mortgaged Property that is of equal or higher priority to that of the lien
securing the related Mortgage Loan unless such Mortgage Loan is prepaid in full,
thereby removing such Mortgage Loan from the Trust. If, notwithstanding the
foregoing, the placement of a lien or liens of equal or higher priority to that
of the lien securing the related Mortgage Loan is consented to by the Servicer,
the Pooling and Servicing Agreement will require that the Servicer purchase such
Mortgage Loan at the applicable Purchase Price.
The procedures of the Servicer with respect to day to day servicing of the
Mortgage Loans may vary considerably depending on the particular Mortgage Loan,
the Mortgaged Property, the Mortgagor, the presence of an acceptable party to
assume a Mortgage Loan and the laws of the jurisdiction in which the Mortgaged
Property is located. Generally, it is the current practice of the Servicer to
send borrowers a monthly billing statement ten days prior to the monthly payment
due date. Although borrowers generally make loan payments within ten to fifteen
days after the due date, if a borrower fails to pay the monthly payment within
such time period, the Servicer will commence collection efforts by notifying the
borrower of the delinquency. Under the terms of each Mortgage Loan, the
Mortgagor agrees to pay a late charge (which the Servicer is entitled to retain
as additional servicing compensation under the Pooling and Servicing Agreement)
if a monthly payment on a Mortgage Loan is not received within the number of
days specified in the Mortgage Note after its due date. If the Mortgage Loan
remains delinquent, the Servicer will attempt to contact the Mortgagor to
determine the cause of the delinquency and to obtain a commitment to cure the
delinquency at the earliest possible time.
As a general matter, if efforts to obtain payment have not been successful
shortly after the due date of the next subsequently scheduled installment, a
pre-foreclosure notice will be sent to the Mortgagor providing 30 days' notice
of impending foreclosure action. During the 30 day notice period, collection
efforts continue. However, if no substantial progress has been made in obtaining
delinquent monies from the Mortgagor, foreclosure proceedings will be commenced.
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<PAGE> 52
Regulations and practices regarding foreclosure vary greatly from state to
state. Generally, the Servicer will have commenced foreclosure proceedings prior
to the time when a loan is 90 days delinquent. If the Servicer determines that
purchasing a property securing a mortgage loan will minimize the loss associated
with such defaulted loan, the Servicer may bid at the foreclosure sale for such
property or accept a deed in lieu of foreclosure. After the Servicer acquires
title to a mortgaged property by foreclosure or deed in lieu of foreclosure, a
real estate broker is selected to list and advertise the property.
Servicing and collection practices may change over time in accordance with,
among other things, the Servicer's business judgment, changes in portfolio and
applicable laws and regulations.
Due to changes in interest rates, property appreciation, loan seasoning and
other factors, borrowers with mortgage loans serviced by the Servicer may be the
subject of solicitations from competitors of the Servicer to refinance their
loans (including the Mortgage Loans). In order to maintain an ongoing
relationship with such borrowers, the Servicer or an Affiliated Originator will
usually solicit the refinancing of such loans pursuant to criteria that are
applied to all loans then being serviced by the Servicer and not pursuant to
criteria that would specifically target the Mortgage Loans. Such solicitations
by the Servicer or an Affiliated Originator may include certain incentives (such
as reduced origination or closing costs or pre-approved applications). Any such
loans actually refinanced by the Servicer or an Affiliated Originator will
generate fee income to the refinancing lender. Any refinancing of the Mortgage
Loans, whether such refinancing is effected by the Servicer, an Affiliated
Originator or a competitor, will affect the rate of prepayment of the Mortgage
Loans.
SUB-SERVICING
The Servicer will enter into sub-servicing agreements with other mortgage
servicing institutions, which may include affiliates of the Sponsor, meeting the
requirements set forth in the Pooling and Servicing Agreement (each, a
"Sub-Servicer"), to initially service and administer certain Mortgage Loans on
behalf of the Servicer. Any such sub-servicing arrangements will provide that
the Sub-Servicer will service the Mortgage Loans specified therein in accordance
with the provisions and requirements of the Pooling and Servicing Agreement, but
will not relieve the Servicer of any liability associated with servicing the
Mortgage Loans. Compensation for the services of the Sub-Servicer will be paid
by the Servicer.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
The Servicer will foreclose upon or otherwise comparably convert to
ownership Mortgaged Properties securing such of the Mortgage Loans as come into
default and as to which no satisfactory arrangements can be made for the
collection of delinquent payments; provided, however, that if the Servicer has
actual knowledge or reasonably believes that any Mortgaged Property is
contaminated by hazardous or toxic wastes or substances, the Servicer need not
cause the Trust to acquire title to such Mortgaged Property in a foreclosure or
similar proceeding. In connection with such foreclosure or other conversion, the
Servicer will follow such practices as it deems necessary or advisable and as
are in keeping with its general mortgage loan servicing activities; provided,
however, that the Servicer will not be required to expend its own funds in
connection with foreclosure or other conversion, correction of a default on a
senior deed of trust or restoration of any Mortgaged Property unless the
Servicer determines that such foreclosure, correction or restoration will
increase Net Liquidation Proceeds.
In the event that the Trust acquires any Mortgaged Property in connection
with a default or imminent default on a Mortgage Loan, such Mortgaged Property
will be disposed of by or on behalf of the Trust within two years after its
acquisition by the Trust, unless (i) the Servicer, on behalf of the Trust, has
applied for and received an extension of such two-year period pursuant to the
applicable Code provisions, in which case the Servicer shall sell such Mortgaged
Property within the applicable extension period or (ii) at the request of the
Servicer, the Trustee and Certificate Insurer shall have received a satisfactory
opinion of counsel to the effect that the holding by the Trust of such Mortgaged
Property more than two years after its acquisition will not result in a tax on
prohibited transactions imposed by the Code, otherwise subject the REMIC Pool to
tax or cause it to fail to qualify as a REMIC at any time any Certificates are
outstanding. The Servicer will further ensure that the Mortgaged Property is
administered so that it constitutes "foreclosure property" as defined in the
Code, that the sale of such Mortgaged Property does not result in the receipt by
the REMIC Pool of any
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<PAGE> 53
income from non-permitted assets as described in the Code and that the REMIC
Pool does not derive any "net income from foreclosure property" as defined in
the Code.
HAZARD INSURANCE
Each Mortgage Loan that is secured by a first- or second-lien mortgage or
deed of trust, as applicable, on the related Mortgaged Property requires the
Mortgagor to maintain a hazard insurance policy for the corresponding Mortgaged
Property. Hazard insurance policies generally insure against loss by fire and by
hazards included within the term "extended coverage" for the term of the
corresponding Mortgage Loan. Upon acquisition by the Sponsor of each Mortgage
Loan, the Sponsor will have confirmed the existence of such hazard insurance and
required that it be named as a joint loss-payee on the policy. In the event that
the Mortgagor did not obtain such hazard insurance prior to the close of escrow,
the Originator obtains a hazard insurance policy on behalf of the borrower and
deducts the cost of such policy from the net funds paid to the borrower.
However, if the Mortgagor obtains the necessary insurance within 30 days from
the close of escrow, the Originator will refund a prorated portion of the cost
of such Originator-obtained insurance to the Mortgagor. Such Originator-obtained
insurance insures only against loss by fire.
When a Mortgage Loan that is originated in California is secured by a
second or third priority deed of trust on the related Mortgaged Property, the
Originator will generally attempt to obtain, on the Mortgagor's behalf, a policy
of contingent dual insurance (a "CDI Policy") which insures the Mortgaged
Property against loss by fire in an amount equal to the original principal
amount of the Mortgage Loan, naming the Originator as joint loss-payee. Any
transfer of the related Mortgage Loan will include an assignment of the benefits
of such CDI Policy. The entire premium for such CDI Policy is deducted from the
net funds paid to the Mortgagor. In the event that the principal amount of such
Mortgage Loan exceeds $100,000, the Mortgagor must provide additional hazard
insurance to cover such amounts in excess thereof. In the event that the
Mortgagor declines to obtain a CDI Policy, he may provide an endorsement of an
existing hazard insurance policy or obtain new hazard insurance covering the
full amount of the Mortgage Loan. In addition, if a CDI Policy is obtained on
behalf of a Mortgagor who shows proof of the necessary insurance within 30 days
after the close of escrow, the Originator will refund the cost of such CDI
Policy to the Mortgagor. CDI Policies are generally not obtained with respect to
loans secured by Mortgaged Properties located outside of California.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements on the property by hazards
such as fire, lightning, explosion and smoke. Other hazards may be covered if
specified in the policy. Although the policies are underwritten by different
insurers and therefore do not contain identical terms and conditions, generally
such policies do not cover physical damage resulting from the following: war,
revolution, governmental actions, floods and other water-related causes, earth
movement (including earthquakes, landslides and mudflows), nuclear reactions,
pollution, wet or dry rot, vermin, rodents, insects or domestic animals, theft
and, in certain cases, vandalism. The foregoing list is merely indicative of
certain kinds of uninsured risks and is not intended to be all-inclusive. The
existence of a hazard insurance policy is verified upon origination of any
Mortgage Loan meeting the criteria set forth above and the Servicer will
maintain a record and monitor scheduled expirations of the related coverage,
except with respect to policies that have no stated scheduled expiration. In the
event the Servicer is made aware of any such expiration or cancellation, the
Servicer will generally force-place hazard insurance covering loss by fire in an
amount equal to 110% of the Principal Balance of the related Mortgage Loan.
The Servicer will be required under the Pooling and Servicing Agreement to
maintain on property acquired in foreclosure, or by deed in lieu of foreclosure,
hazard insurance with extended coverage in an amount which is at least equal to
the lesser of (a) the maximum insurable value of the improvements which are a
part of the Mortgaged Property or (b) the combined Principal Balance of such
Mortgage Loan and the principal balance of each senior mortgage loan plus
accrued interest and estimated liquidation expenses. The Pooling and Servicing
Agreement will provide that the Servicer may satisfy this obligation by
maintaining a blanket policy insuring against hazard losses on the Mortgage
Loans issued by an insurer acceptable to the Rating Agencies and the Certificate
Insurer. If such blanket policy contains a deductible clause, the Servicer will
deposit in the Collection Account in respect of the related Distribution Date
amounts which would have
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<PAGE> 54
been deposited therein but for such clause. Generally, the Servicer will
maintain no other policies of insurance on the Mortgage Loans or the Mortgaged
Properties.
SERVICING AND OTHER COMPENSATION; PAYMENT OF EXPENSES
The Servicing Fee will be the primary compensation to be paid to the
Servicer in respect of its servicing activities and will be paid to the Servicer
on each Deposit Date out of collections of interest received on or in respect of
the Mortgage Loans for the related Collection Period. The Servicing Fee will
equal one-twelfth (1/12) of the product of (a) the applicable Servicing Fee
Rate and (b) the Aggregate Principal Balance of the Mortgage Loans at the
beginning of such Collection Period. The "Servicing Fee Rate" will be 0.50% for
each Collection Period. In addition, the Servicer will retain the benefit, if
any, from any investment of funds in the Collection Account and the Certificate
Account. Assumption fees, late payment charges, prepayment charges, charges for
checks returned for insufficient funds, and extension and other administrative
charges, to the extent collected from Mortgagors, will be retained by the
Servicer as additional servicing compensation.
The Servicer will pay certain ongoing expenses associated with the Trust
and incurred by it in connection with its responsibilities as Servicer under the
Pooling and Servicing Agreement, including, among other things, the payment of
fees for any Sub-Servicers. In addition, the Servicer will be entitled to
reimbursement for certain expenses incurred by it in connection with Liquidated
Mortgage Loans and the restoration of Mortgaged Properties, such right of
reimbursement being prior to the rights of Certificateholders to receive any
related insurance proceeds or Net Liquidation Proceeds. See "Description of the
Certificates -- Monthly Advances; Servicing Advances; Compensating Interest and
Interest Shortfalls" herein.
CERTAIN MATTERS REGARDING SERVICER'S SERVICING OBLIGATIONS
The Pooling and Servicing Agreement will provide that the Servicer may not
resign from its obligations and duties as the Servicer thereunder, except upon
determination that its duties thereunder are no longer permissible under
applicable law or regulation or are in material conflict by reason of applicable
law or regulation with any other of its activities carried on as of the date of
the Pooling and Servicing Agreement. No such resignation will become effective
until the Trustee or a successor servicer has assumed the servicing obligations
and duties of the Servicer under the Pooling and Servicing Agreement.
The Pooling and Servicing Agreement will also provide that neither the
Servicer, nor any of its directors, officers, employees or agents, will be
liable to the Trustee, the Trust or the Certificateholders for any action taken
or for refraining from the taking of any action by the Servicer pursuant to the
Pooling and Servicing Agreement, or for errors in judgment; provided, however,
that neither the Servicer nor any such person will be protected against any
liability which would otherwise be imposed by reason of willful misfeasance, bad
faith or negligence in the performance of duties of the Servicer, or by reason
of reckless disregard of obligations and duties of the Servicer, thereunder.
In addition, the Pooling and Servicing Agreement will provide that the
Servicer will not be under any obligation to appear in, prosecute or defend any
legal action which is not incidental to its duties to service the Mortgage Loans
under the Pooling and Servicing Agreement and which in its opinion may involve
it in any expense or liability.
The Pooling and Servicing Agreement will provide that any corporation or
other entity (a) into which the Servicer may be merged or consolidated, (b)
which may result from any merger, conversion or consolidation to which the
Servicer shall be a party, or (c) which may succeed to all or substantially all
of the business of the Servicer, will, in any case where an assumption is not
effected by operation of law, execute an agreement of assumption to perform
every obligation of the Servicer under the Pooling and Servicing Agreement, and
will be the successor to the Servicer thereunder without the execution or filing
of any document or any further act by any of the parties to the Pooling and
Servicing Agreement; provided, however, that if the Servicer in any of the
foregoing cases is not the surviving entity, the surviving entity shall execute
an agreement of assumption to perform every obligation of the Servicer
thereunder and the Certificate Insurer shall have approved such successor
servicer and each Rating Agency shall have confirmed its ratings of the Class A
Certificates in connection therewith.
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<PAGE> 55
THE CERTIFICATE INSURANCE POLICY 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 Policy, thereby
unconditionally and irrevocably guarantees to any Class A Certificateholder that
an amount equal to each full and complete Insured Payment will be received by
the Trustee, or its successors, as trustee for the Class A Certificateholders,
on behalf of the Class A Certificateholders from the Certificate Insurer, for
distribution by the Trustee to each Class A Certificateholder of each Class A
Certificateholder's share of the Insured Payment. The Certificate Insurer's
obligations under the Certificate Insurance Policy 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 paid only at the time
set forth in the Certificate Insurance Policy 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 Policy
does not cover shortfalls, if any, attributable to the liability of the Trust,
any 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 (as described below) 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 Class A Certificateholder 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 Class A Certificateholder 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 Class A Certificateholder and not to any Class A
Certificateholder directly unless such Class A Certificateholder has returned
principal or interest paid on the Class A Certificates to such receiver or
trustee in bankruptcy, in which case such payment shall be disbursed to such
Class A Certificateholder.
The Certificate Insurer will pay any other amount payable under the
Certificate Insurance Policy no later than 12:00 noon New York City time on the
later of the Distribution Date on which the related Deficiency Amount is due or
the third 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 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 Policy unless
otherwise stated in the Certificate Insurance Policy will be disbursed by the
Fiscal Agent to the Trustee on behalf of the Class A Certificateholders 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.
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<PAGE> 56
The Fiscal Agent is the agent of the Certificate Insurer only and the
Fiscal Agent shall in no event be liable to Class A Certificateholders 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 Policy.
As used in the Certificate Insurance Policy, the following terms have the
following meanings:
"Agreement" means the Pooling and Servicing Agreement dated as of March 1,
1997 between Aames Capital Corporation, as seller and servicer, and the Trustee,
as trustee, without regard to any amendment or supplement unless the Certificate
Insurer shall have consented to such amendment or supplement in writing.
"Business Day" means any day other than a Saturday, 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.
"Deficiency Amount" means, with respect to any Distribution Date, the sum
of (i) the amount, if any, by which the Class A Monthly Interest exceeds the
amount of Available Funds remaining after distributions pursuant to clauses (a)
and (b) described under the heading "Description of the
Certificates -- Distributions on the Certificates" and (ii) the Coverage
Deficit, if any.
"Insured Payment" means (i) as of any Distribution Date, any Deficiency
Amount and (ii) any Preference Amount.
"Notice" means the telephonic or telegraphic notice, promptly confirmed in
writing by telecopy substantially in the form of Exhibit A attached to the
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 Distribution Date.
"Preference Amount" means any amount previously distributed to a Class A
Certificateholder on the Class A Certificates that is recoverable and sought to
be recovered as a voidable preference by a trustee in 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 Policy 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 Policy,
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 Policy or service of process on
the Fiscal Agent may be made at the address listed below for the Fiscal Agent or
such other address as the Certificate Insurer shall specify in writing to the
Trustee.
The notice address of the Fiscal Agent is 15th Floor, 61 Broadway, 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 Policy is 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 Policy is not covered
by the Property/Casualty Insurance Security Fund specified in Article 76 of the
New York Insurance Law.
The Certificate Insurance Policy is not cancelable for any reason. The
premium on the Certificate Insurance Policy is 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 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 and is subject
to regulation under the laws of all 50 states, the District of Columbia, the
Commonwealth of Puerto Rico, the
S-56
<PAGE> 57
Commonwealth of the Northern Mariana Islands, the Virgin Islands of the United
States and the Territory of Guam. The Certificate Insurer has two European
branches, one in the Republic of France and the other in the Kingdom of Spain.
New York has laws prescribing minimum capital requirements, limiting classes and
concentrations of investments and requiring the approval of policy rates and
forms. State laws also regulate the amount of both the aggregate and individual
risks that may be insured, the payments of dividends by the Certificate Insurer,
changes in control and transactions among affiliates. Additionally, the
Certificate Insurer is required to maintain contingency reserves on its
liabilities in certain amounts and for certain periods of time.
The consolidated financial statements of the Certificate Insurer, a wholly
owned subsidiary of MBIA Inc., and its subsidiaries as of December 31, 1995 and
December 31, 1994 and for the three years 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, and the
consolidated financial statements of the Certificate Insurer and its
subsidiaries for the nine months ended September 30, 1996 and for the periods
ending September 30, 1996 and September 30, 1995 included in the Quarterly
Report on Form 10-Q of MBIA Inc. for the period ending September 30, 1996, are
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.
All financial statements of the Certificate Insurer and its subsidiaries
included in the documents filed by MBIA Inc. pursuant to Section 13(a), 13(c),
14 or 15(d) of the Securities Exchange Act of 1934, as amended, subsequent to
the date of this Prospectus Supplement and prior to the termination of the
offering of the Class A Certificates shall be deemed to be incorporated by
reference into this Prospectus Supplement and to be a part hereof from the
respective dates of filing such documents.
The 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"):
<TABLE>
<CAPTION>
SAP
---------------------------------------
DECEMBER 31, 1995 SEPTEMBER 30, 1996
(AUDITED) (UNAUDITED)
----------------- ------------------
(IN MILLIONS)
<S> <C> <C>
Admitted Assets..................................... $ 3,814 4,348
Liabilities......................................... 2,540 2,911
Capital and Surplus................................. 1,274 1,437
</TABLE>
<TABLE>
<CAPTION>
GAAP
---------------------------------------
DECEMBER 31, 1995 SEPTEMBER 30, 1996
(AUDITED) (UNAUDITED)
----------------- ------------------
(IN MILLIONS)
<S> <C> <C>
Assets.............................................. $ 4,463 4,861
Liabilities......................................... 1,937 2,161
Shareholder's Equity................................ 2,526 2,700
</TABLE>
Copies of the financial statements of the Certificate Insurer incorporated
by reference herein and copies of the Certificate Insurer's 1995 year-end
audited financial statements prepared in accordance with statutory accounting
practices are available, without charge, from the Certificate Insurer. The
address of the Certificate Insurer is 113 King Street, Armonk, New York 10504.
The telephone number of the Certificate Insurer is (914) 273-4545.
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 herefrom, other than
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<PAGE> 58
with respect to the accuracy of the information regarding the Certificate
Insurance Policy and Certificate Insurer set forth under the heading "The
Certificate Insurance Policy and the Certificate Insurer." Additionally, the
Certificate Insurer makes no representation regarding the Certificates or the
advisability of investing in the Certificates.
Moody's rates the claims paying ability of the Certificate Insurer "Aaa."
S&P rates the claims paying ability of the Certificate Insurer "AAA."
Fitch 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 guarantee the market price of the
Class A Certificates nor does it guarantee that the ratings on the Class A
Certificates will not be reversed or withdrawn.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
An election will be made to treat the Trust (other than the Prefunding
Account and the Capitalized Interest Account), and the Trust (other than the
Prefunding Account and the Capitalized Interest Account) will qualify, as a
REMIC for federal income tax purposes. The Class A-1 Certificates, Class A-2
Certificates, Class A-3 Certificates, Class A-4 Certificates and Class A-5
Certificates will be designated as regular interests in the REMIC, and the Class
R Certificate will be designated as the residual interest in the REMIC. See
"Certain Federal Income Tax Consequences" in the Prospectus.
The Class A Certificates generally will be treated as newly originated debt
instruments for federal income tax purposes. Beneficial owners of the Class A
Certificates will be required to report income on such Certificates in
accordance with the accrual method of accounting. It is anticipated that the
Class A Certificates will be issued without original issue discount for federal
income tax purposes. Certificateholders are urged to consult their tax advisors
with respect to the tax consequences of holding the Class A Certificates.
The Prepayment Assumption that is to be used in determining whether any
subclass of Class A Certificates is issued with original issue discount and the
rate of accrual of original issue discount is 100% of the Standard Prepayment
Assumption. No representation is made as to the actual rate at which the
Mortgage Loans will prepay. See "Certain Federal Income Tax
Consequences -- Taxation of Regular Certificates" in the Prospectus.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and the Code impose certain requirements on employee benefit plans and certain
other retirement plans and arrangements, as well as on collective investment
funds and separate accounts in which such plans or arrangements are invested
(all of which are hereinafter referred to as a "Plan") and on persons who are
fiduciaries with respect to such Plans. Any Plan fiduciary which proposes to
cause a Plan to acquire any of the Class A Certificates will be required to
determine whether such an investment is permitted under the governing Plan
instruments and is prudent and appropriate for the Plan in view of its overall
investment policy and the composition and diversification of its portfolio. In
addition, ERISA and the Code prohibit certain transactions involving the assets
of a Plan and "disqualified persons" (within the meaning of the Code) and
certain specified relationships to the Plan. Therefore, a Plan fiduciary
considering an investment in the Class A Certificates should also consider
whether such an investment might constitute or give rise to a prohibited
transaction under ERISA or the Code. Any Plan fiduciary which proposes to cause
a Plan to acquire any of the Class A Certificates should consult with its
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<PAGE> 59
counsel with respect to the potential consequences under ERISA and the Code of
the Plan's acquisition and ownership of Class A Certificates.
The U.S. Department of Labor has granted to Donaldson, Lufkin & Jenrette
Securities Corporation an administrative exemption (Prohibited Transaction
Exemption 90-53, as amended; Exemption Application No. D-8346, 55 Fed. Reg.
50250 (1990)) (the "Exemption") from certain of the prohibited transaction rules
of ERISA and the related excise tax provisions of Section 4975 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;
(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 Moody's S&P, Fitch or Duff & Phelps Credit Rating
Co. ("D&P");
(4) the trustee must not be an affiliate of any other member of the
Restricted Group;
(5) the sum of all payments made to and retained by the underwriters
in connection with the distribution of the certificates represents not more
than reasonable compensation for underwriting the certificates; the sum of
all payments made to and retained by the sponsor pursuant to the assignment
of the mortgage loans to the trust represents not more than the fair market
value of such mortgage loans; the sum of all payments made to and retained
by the servicer and any other servicer represents not more than reasonable
compensation for such person's services under the pooling and servicing
agreement and reimbursement of such person's reasonable expenses in
connection therewith;
(6) the Plan investing in the certificates is an "accredited investor"
as defined in Rule 501(a)(1) of Regulation D of the Commission under the
Securities Act of 1933, as amended; and
(7) the trust must also meet the following requirements:
(i) the corpus of the trust must consist solely of assets of the
type that have been included in other investment pools;
(ii) certificates in such investment pools must have been rated in
one of the three highest rating categories of Moody's, S&P, Fitch or D&P
for at least one year prior the Plan's acquisition of certificates; and
(iii) certificates evidencing interest in such other investment
pools must have been purchased by investors other than Plans for at
least one year prior to any Plan's acquisition of 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 (as defined herein); (ii) such fiduciary (or its affiliate)
is an obligor with respect to 5% 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 25% of all of the certificates of that class
outstanding at the time of the acquisition; and (iv) immediately after the
acquisition, no more than 25% 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 served by the same entity. The
Exemption does not apply to Plans sponsored by the Sponsor, the Underwriters,
the Trustee, the Servicer, the Certificate Insurer, any obligor with respect to
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<PAGE> 60
mortgage loans included in the trust constituting more than 5% of the aggregate
unamortized principal balance of the assets in the trust, or any affiliate of
such parties (the "Restricted Group").
Notwithstanding the foregoing, the Exemption will not apply if the
Subsequent Mortgage Loans are not identified on the Closing Date. The Sponsor
intends to so identify the Subsequent Mortgage Loans on the Closing Date. In the
event that all Subsequent Mortgage Loans are not identified on the Closing Date,
entities using the assets of Plans will not be permitted to purchase, and should
not purchase, Class A Certificates until such time as such Subsequent Mortgage
Loans are identified or the Commitment Period has expired.
USE OF PROCEEDS
The Sponsor intends to use the net proceeds to be received from the sale of
the Class A Certificates to pay off certain indebtedness incurred in connection
with the acquisition of the Initial Mortgage Loans, to fund the Prefunding
Account and the Capitalized Interest Account and to pay other expenses
associated with the pooling of the Mortgage Loans and the issuance of the
Certificates.
LEGAL INVESTMENT CONSIDERATIONS
The Class A Certificates will not constitute "mortgage related securities"
for purposes of 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. No representation is made herein as to whether the
Class A Certificates constitute legal investments for any entity under any
applicable statute, law, rule, regulation or order. Prospective purchasers are
urged to consult with their counsel concerning the status of the Class A
Certificates as legal investments for such purchasers prior to investing in the
Class A Certificates.
UNDERWRITING
Under the terms set forth in the Underwriting Agreement and the related
Pricing Agreement, (collectively, the "Underwriting Agreement") for the sale of
the Class A Certificates, dated March 18, 1997, the Sponsor has agreed to sell,
and Donaldson, Lufkin & Jenrette Securities Corporation, Credit Suisse First
Boston Corporation, Morgan Stanley & Co. Incorporated and Prudential Securities
Incorporated (collectively, the "Underwriters") have severally agreed to
purchase, the respective principal amounts of Class A Certificates set forth
opposite their respective names below. In the Underwriting Agreement, the
Underwriters have agreed, subject to the terms and conditions set forth therein,
to purchase the entire principal amount of the Class A Certificates.
<TABLE>
<CAPTION>
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT OF
CLASS A-1 CLASS A-2 CLASS A-3 CLASS A-4 CLASS A-5
UNDERWRITER CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES
- ------------------------------ ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Donaldson, Lufkin & Jenrette
Securities Corporation...... $32,400,000 $28,600,000 $ 5,800,000 $ 9,200,000 $10,000,000
Credit Suisse First Boston
Corporation................. $24,300,000 $21,450,000 $ 4,350,000 $ 6,900,000 $ 7,500,000
Morgan Stanley & Co.
Incorporated................ $12,150,000 $10,725,000 $ 2,175,000 $ 3,450,000 $ 3,750,000
Prudential Securities
Incorporated................ $12,150,000 $10,725,000 $ 2,175,000 $ 3,450,000 $ 3,750,000
----------- ----------- ----------- ----------- -----------
Total.................. $81,000,000 $71,500,000 $14,500,000 $23,000,000 $25,000,000
========== ========== ========== ========== ==========
</TABLE>
The Underwriters have informed the Sponsor that they propose to offer the
Class A Certificates for sale from time to time in one or more negotiated
transactions, or otherwise, at varying prices to be determined, in each case, at
the time of the related sale. The Underwriters may effect such transactions by
selling the Class A Certificates to or through dealers, and such dealers may
receive compensation in the form of underwriting discounts, concessions or
commissions from the Underwriters. In connection with the sale of the Class A
Certificates, the Underwriters may be deemed to have received compensation from
the Sponsor in the
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<PAGE> 61
form of underwriting compensation. The Underwriters and any dealers that
participate with the Underwriters in the distribution of the Class A
Certificates may be deemed to be underwriters and any commissions received by
them and any profit on the resale of the Class A Certificates by them may be
deemed to be underwriting discounts and commissions under the Securities Act.
The Sponsor has agreed to indemnify the Underwriters against certain
liabilities including liabilities under the Securities Act.
The Sponsor has been advised by the Underwriters that the Underwriters
intend to make a market in the Class A Certificates, as permitted by applicable
laws and regulations. The Underwriters are not obligated, however, to make a
market in the Class A Certificates and such market-making may be discontinued at
any time at the sole discretion of the Underwriters. Accordingly, no assurance
can be given as to the liquidity of, or trading markets for, the Class A
Certificates.
Each of the Underwriters has represented that: (i) it has not offered or
sold and will not offer or sell, prior to the date six months after their date
of issuance, any Class A Certificates to persons in the United Kingdom, except
to persons whose activities involve them in acquiring, holding, managing or
disposing of investments (as principal or agent) for the purposes of their
businesses or otherwise in circumstances which have not resulted in and will not
result in an offer to the public in the United Kingdom within the meaning of the
Public Offers of Securities Regulations 1995; (ii) it has complied and will
comply with all applicable provisions of the Financial Services Act 1986 with
respect to anything done by it in relation to the Class A Certificates in, from
or otherwise involving the United Kingdom; and (iii) it has only issued or
passed on and will only issue or pass on in the United Kingdom any document
received by it in connection with the issuance of the Class A Certificates to a
person who is of a kind described in Article 11(3) of the Financial Services Act
1986 (Investment Advertisements) (Exemptions) Order 1996 or is a person to whom
the document can lawfully be issued or passed on.
REPORT OF EXPERTS
The 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, incorporated by reference
in this Prospectus Supplement, have been incorporated herein in reliance on the
report of Coopers & Lybrand L.L.P., independent accountants, given on the
authority of that firm as experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters with respect to the Certificates will be passed upon
for the Sponsor by Andrews & Kurth L.L.P. Stroock & Stroock & Lavan LLP will act
as counsel for the Underwriters. Certain legal matters relating to the
Certificate Insurer and the Certificate Insurance Policy will be passed upon by
Kutak Rock, counsel to the Certificate Insurer.
RATING OF THE CLASS A CERTIFICATES
It is a condition to the issuance of each of the Class A-1 Certificates,
the Class A-2 Certificates, the Class A-3 Certificates, the Class A-4
Certificates and the Class A-5 Certificates that each shall be rated "Aaa" by
Moody's, "AAA" by S&P and "AAA" by Fitch.
Explanations of the significance of such ratings may be obtained from
Moody's, 99 Church Street, New York, New York 10007, S&P, 25 Broadway, New York,
New York 10004 and Fitch, One State Street Plaza, New York, New York 10004. Each
rating will be the view only of the assigning Rating Agency.
The ratings on the Class A Certificates are based in substantial part on
the claims-paying ability of the Certificate Insurer. Any change in the ratings
of the Certificate Insurer by the Rating Agencies may result in a change in the
ratings of the Class A Certificates.
There is no assurance that any rating assigned to the Class A Certificates
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 or liquidity of the Class A Certificates.
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The ratings of the Class A Certificates should be evaluated independently
from similar ratings on other types of securities. A security rating is not a
recommendation to buy, sell or hold securities.
There can be no assurance as to whether any other rating agency will rate
the Class A Certificates, or, if one does, what rating will be assigned by such
other rating agency. A rating on the Class A Certificates by another rating
agency, if assigned at all, may be lower than the ratings assigned to the Class
A Certificates by Moody's, S&P or Fitch.
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<PAGE> 63
INDEX OF PRINCIPAL TERMS
<TABLE>
<CAPTION>
PAGE(S)
------------
<S> <C>
Accounts....................................................................... S-29
Advances....................................................................... S-40
Affiliated Originators......................................................... S-15
Agreement...................................................................... S-55
Available Funds................................................................ S-10
Book-Entry Certificates........................................................ S-24, S-35
Business Day................................................................... S-29, S-56
Capitalized Interest Account................................................... S-13
CDI Policy..................................................................... S-53
Cede........................................................................... S-24
Cedel.......................................................................... S-17
Cedel Participants............................................................. S-25
Certificate Account............................................................ S-29
Certificate Insurance Policy................................................... S-2
Certificate Insurer Default.................................................... S-32
Certificateholders............................................................. S-6
Certificate Insurer............................................................ S-6
Certificate Insurer Premium.................................................... S-14
Certificate Owners............................................................. S-17
Certificates................................................................... S-1
Citibank....................................................................... S-24
Class A Certificateholders..................................................... S-6
Class A Certificate Principal Balance.......................................... S-33
Class A Certificates........................................................... S-1
Class A Monthly Interest....................................................... S-7
Class A-1 Certificateholders................................................... S-5
Class A-1 Certificate Principal Balance........................................ S-33
Class A-1 Certificates......................................................... S-5
Class A-1 Monthly Interest..................................................... S-7
Class A-1 Pass-Through Rate.................................................... S-7
Class A-2 Certificateholders................................................... S-5
Class A-2 Certificate Principal Balance........................................ S-33
Class A-2 Certificates......................................................... S-5
Class A-2 Monthly Interest..................................................... S-7
Class A-2 Pass-Through Rate.................................................... S-7
Class A-3 Certificateholders................................................... S-5
Class A-3 Certificate Principal Balance........................................ S-33
Class A-3 Certificates......................................................... S-5
Class A-3 Monthly Interest..................................................... S-8
Class A-3 Pass-Through Rate.................................................... S-7
Class A-4 Certificateholders................................................... S-5
Class A-4 Certificate Principal Balance........................................ S-33
Class A-4 Certificates......................................................... S-5
Class A-4 Monthly Interest..................................................... S-8
Class A-4 Pass-Through Rate.................................................... S-7
Class A-5 Certificateholders................................................... S-5
Class A-5 Certificate Principal Balance........................................ S-33
Class A-5 Certificates......................................................... S-5
Class A-5 Excess Cash Lockout Distribution..................................... S-9
</TABLE>
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<PAGE> 64
<TABLE>
<CAPTION>
PAGE(S)
------------
<S> <C>
Class A-5 Monthly Principal Lockout Distribution............................... S-9
Class A-5 Lockout Percentage................................................... S-9
Class A-5 Pro Rata Distribution................................................ S-9
Class A-5 Monthly Interest..................................................... S-8
Class A-5 Pass-Through Rate.................................................... S-7
Class R Certificate............................................................ S-1
Class R Certificateholder...................................................... S-6
Clean-up Call Date............................................................. S-15
Closing Date................................................................... S-5
Code........................................................................... S-2
Collection Account............................................................. S-29
Collection Period.............................................................. S-10
Combined Loan-to-Value Ratio................................................... S-44
Commission..................................................................... S-3
Compensating Interest Payment.................................................. S-14
Cooperative.................................................................... S-26
Coverage Amount................................................................ S-11
Coverage Deficit............................................................... S-11
Coverage Surplus............................................................... S-11
Cut-off Date................................................................... S-5
Cut-off Date Principal Balance................................................. S-27
D&P............................................................................ S-59
Defective Mortgage Loan........................................................ S-28
Deficiency Amount.............................................................. S-39
Definitive Certificate......................................................... S-24
Deposit Date................................................................... S-29
Determination Date............................................................. S-34
Distribution Date.............................................................. S-7
DTC............................................................................ S-3
ERISA.......................................................................... S-16
Euroclear...................................................................... S-17
Euroclear Operator............................................................. S-26
Euroclear Participants......................................................... S-25
European Depositaries.......................................................... S-24
Excess Cash.................................................................... S-9
Exemption...................................................................... S-58
Federal Reserve Board.......................................................... S-26
Final Scheduled Payment Dates.................................................. S-12
Financial Intermediary......................................................... S-24
Fiscal Agent................................................................... S-55
Fitch.......................................................................... S-16
Funding Period................................................................. S-13
GAAP........................................................................... S-57
Global Securities.............................................................. B-1
Initial Mortgage Loans......................................................... S-2
Initial Pool Balance........................................................... S-6
Insured Payment................................................................ S-56
Insurer Premium Rate........................................................... S-14
Interest Shortfalls............................................................ S-14
Junior Loans................................................................... S-19
Liquidated Mortgage Loan....................................................... S-34
</TABLE>
S-64
<PAGE> 65
<TABLE>
<CAPTION>
PAGE(S)
------------
<S> <C>
Liquidation Proceeds........................................................... S-35
Monthly Advance................................................................ S-40
Monthly Principal.............................................................. S-34
Moody's........................................................................ S-16
Morgan......................................................................... S-24
Mortgage Files................................................................. S-28
Mortgage Interest Rate......................................................... S-44
Mortgage Loans................................................................. S-2
Mortgage Loan Schedule......................................................... S-27
Mortgage Pool.................................................................. S-2
Mortgaged Properties........................................................... S-6
Net Liquidation Proceeds....................................................... S-35
Nonrecoverable Advances........................................................ S-40
Non-U.S. Person................................................................ B-3
Notice......................................................................... S-56
Original Class A Certificate Principal Balance................................. S-74
Original Class A-1 Certificate Principal Balance............................... S-6
Original Class A-2 Certificate Principal Balance............................... S-6
Original Class A-3 Certificate Principal Balance............................... S-6
Original Class A-4 Certificate Principal Balance............................... S-6
Original Class A-5 Certificate Principal Balance............................... S-6
Originators.................................................................... S-15
Participants................................................................... S-25
Paying Agent................................................................... S-30
Payment Ahead.................................................................. S-34
Percentage Interest............................................................ S-30
Permitted Investments.......................................................... S-29
Plan........................................................................... S-58
Pool Balance................................................................... S-15
Pooling and Servicing Agreement................................................ S-1
Preference Amount.............................................................. S-56
Prefunding Account............................................................. S-13
Prefunding Account Deposit..................................................... S-13
Prepayment Interest Shortfall.................................................. S-14
Prepayment Scenario............................................................ S-48
Principal Balance.............................................................. S-33
Principal Payment.............................................................. S-34
Principal Prepayment........................................................... S-34
Purchase Price................................................................. S-29
Qualified Replacement Mortgage................................................. S-29
Rating Agencies................................................................ S-16
Realized Loss.................................................................. S-49
Record Date.................................................................... S-7
Relevant Depositary............................................................ S-24
Relief Act..................................................................... S-14
Relief Act Shortfalls.......................................................... S-14
REMIC.......................................................................... S-2
REMIC Pool..................................................................... S-24
REO Property................................................................... S-40
Required Coverage Amount....................................................... S-11
Restricted Group............................................................... S-59
</TABLE>
S-65
<PAGE> 66
<TABLE>
<CAPTION>
PAGE(S)
------------
<S> <C>
Rules.......................................................................... S-24
S&P............................................................................ S-16
SAP............................................................................ S-57
Securities Act................................................................. S-3
Servicer....................................................................... S-5
Servicing Advances............................................................. S-40
Servicing Fee.................................................................. S-15
Servicing Fee Rate............................................................. S-15
SMMEA.......................................................................... S-17
Sponsor........................................................................ S-1
Sponsor's Guidelines........................................................... S-50
Standard Prepayment Assumption................................................. S-47
Starting Day................................................................... S-23
Subsequent Cut-off Date........................................................ S-21
Subsequent Mortgage Loans...................................................... S-2
Subsequent Transfer Date....................................................... S-13
Sub-Servicer................................................................... S-5
Terms and Conditions........................................................... S-26
Trust.......................................................................... S-1
Trustee........................................................................ S-1
Trust Insurance Proceeds....................................................... S-35
Unaffiliated Originators....................................................... S-15
Underwriters................................................................... S-1
Underwriting Agreement......................................................... S-60
U.S. Person.................................................................... B-3
Weighted average life.......................................................... S-47
</TABLE>
S-66
<PAGE> 67
ANNEX A
DESCRIPTION OF THE MORTGAGE POOL
The following is a brief description of certain terms of the Initial
Mortgage Loans as of the Cut-off Date. Certain mortgage loans may be removed,
prior to the Closing Date, from the Mortgage Pool as described herein, in which
case an amount equal to the aggregate principal balances of such mortgage loans,
but in no event more than $10,000,000, will be added to the Prefunding Account
Deposit on the Closing Date. As a result, the statistical information presented
below regarding the Initial Mortgage Loans as of the Cut-off Date may vary in
certain limited respects from comparable information based on the actual
composition of the Mortgage Pool at the Closing Date. In addition, the actual
Mortgage Pool may vary from the description below due to a number of factors,
including the purchase of Subsequent Mortgage Loans and prepayments of the
Initial Mortgage Loans. See "-- Conveyance of Subsequent Mortgage Loans" herein.
The information expressed as a percentage of the Initial Pool Balance may
not total 100% due to rounding.
Each Mortgage Loan in the Trust will be secured by a first, second or third
lien with respect to the related Mortgaged Property and will bear a fixed rate
of interest. Distributions on the Class A Certificates will be derived primarily
from amounts received, collected or recovered in respect of the Mortgage Loans.
A-1
<PAGE> 68
TYPE OF MORTGAGED PROPERTY
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Single Family Residence........................ 2,511 $ 148,176,588.20 90.56%
Two- to Four-Family Residence.................. 174 10,596,555.61 6.48
Condominium Unit............................... 97 4,844,662.02 2.96
----- ---------------- ------
Total................................... 2,782 $ 163,617,805.83 100.00%
===== ================ ======
</TABLE>
OCCUPANCY STATUS
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE
OCCUPANCY STATUS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Owner Occupied/Primary Residence............... 2,562 $ 152,894,571.67 93.45%
Non-Owner Occupied/Investment Property......... 220 10,723,234.16 6.55
----- ---------------- ------
Total................................... 2,782 $ 163,617,805.83 100.00%
===== ================ ======
</TABLE>
PRIORITY OF LIEN
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE
LIEN PRIORITY MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
First Lien..................................... 2,222 $ 146,642,957.40 89.63%
Second Lien.................................... 550 16,633,772.77 10.17
Third Lien..................................... 10 341,075.66 0.21
----- ---------------- ------
Total................................... 2,782 $ 163,617,805.83 100.00%
===== ================ ======
</TABLE>
ORIGINATOR STATUS
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE
ORIGINATOR MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Affiliated..................................... 2,238 $ 127,406,508.08 77.87%
Unaffiliated................................... 544 36,211,297.75 22.13
----- ---------------- ------
Total................................... 2,782 $ 163,617,805.83 100.00%
===== ================ ======
</TABLE>
A-2
<PAGE> 69
TYPE OF LOAN BY AMORTIZATION METHOD
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE
AMORTIZATION METHOD MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Fully Amortizing............................... 2,634 $ 154,993,895.25 94.73%
Partially Amortizing/Balloon................... 148 8,623,910.58 5.27
----- ---------------- ------
Total................................ 2,782 $ 163,617,805.83 100.00%
===== ================ ======
</TABLE>
COMBINED LOAN-TO-VALUE RATIOS
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE
RANGE OF COMBINED NUMBER OF AGGREGATE UNPAID AGGREGATE
LOAN-TO-VALUE RATIOS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
0.0% to 50.0%................................. 472 $ 19,016,737.90 11.62%
50.1% to 55.0%................................. 129 6,655,089.02 4.07
55.1% to 60.0%................................. 217 11,347,246.22 6.94
60.1% to 65.0%................................. 476 24,803,125.67 15.16
65.1% to 70.0%................................. 379 21,810,106.65 13.33
70.1% to 75.0%................................. 591 34,105,469.11 20.84
75.1% to 80.0%................................. 293 25,731,527.94 15.73
80.1% to 85.0%................................. 206 18,207,123.34 11.13
85.1% to 90.0%................................. 16 1,715,013.41 1.05
90.1% to 95.0%................................. 1 80,674.36 0.05
95.1% to 100.0%................................ 1 87,941.91 0.05
Over 100.0% 1 57,750.30 0.04
----- ---------------- ------
Total................................ 2,782 $ 163,617,805.83 100.00%
===== ================ ======
</TABLE>
ORIGINAL TERM TO MATURITY
<TABLE>
<CAPTION>
PERCENTAGE OF
RANGE OF CUT-OFF DATE
ORIGINAL TERMS TO NUMBER OF AGGREGATE UNPAID AGGREGATE
MATURITY (MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
0-60......................................... 32 $ 540,669.49 0.33%
61-120........................................ 170 4,354,485.95 2.66
121-180........................................ 1,054 45,512,266.45 27.82
181-240........................................ 78 4,656,763.72 2.85
241-300........................................ 7 524,630.34 0.32
301-360........................................ 1,441 108,028,989.88 66.03
----- ---------------- ------
Total................................ 2,782 $ 163,617,805.83 100.00%
===== ================ ======
</TABLE>
A-3
<PAGE> 70
REMAINING TERM TO MATURITY
<TABLE>
<CAPTION>
PERCENTAGE OF
RANGE OF CUT-OFF DATE
REMAINING TERMS TO NUMBER OF AGGREGATE UNPAID AGGREGATE
MATURITY (MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
0-60......................................... 32 $ 540,669.49 0.33%
61-120........................................ 170 4,354,485.95 2.66
121-180........................................ 1,060 45,755,327.88 27.96
181-240........................................ 72 4,413,702.29 2.70
241-300........................................ 7 524,630.34 0.32
301-360........................................ 1,441 108,028,989.88 66.03
----- ---------------- ------
Total................................ 2,782 $ 163,617,805.83 100.00%
===== ================ ======
</TABLE>
RANGE OF MORTGAGE INTEREST RATES
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE
RANGE OF MORTGAGE NUMBER OF AGGREGATE UNPAID AGGREGATE
INTEREST RATES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
7.001% to 7.500%............................. 3 $ 186,614.80 0.11%
7.501% to 8.000%............................. 33 2,297,808.94 1.40
8.001% to 8.500%............................. 111 9,678,005.01 5.92
8.501% to 9.000%............................. 207 16,387,782.89 10.02
9.001% to 9.500%............................. 228 17,263,389.91 10.55
9.501% to 10.000%............................. 375 28,235,496.70 17.26
10.001% to 10.500%............................. 373 21,469,568.63 13.12
10.501% to 11.000%............................. 340 18,864,917.06 11.53
11.001% to 11.500%............................. 257 11,549,000.29 7.06
11.501% to 12.000%............................. 201 9,394,626.13 5.74
12.001% to 12.500%............................. 154 6,508,560.72 3.98
12.501% to 13.000%............................. 120 5,581,316.21 3.41
13.001% to 13.500%............................. 80 2,827,844.43 1.73
13.501% to 14.000%............................. 102 4,677,976.83 2.86
14.001% to 14.500%............................. 77 3,535,549.48 2.16
14.501% to 15.000%............................. 54 2,485,722.41 1.52
15.001% to 15.500%............................. 32 1,305,288.85 0.80
15.501% to 16.000%............................. 14 560,857.29 0.34
16.001% to 16.500%............................. 5 177,947.31 0.11
16.501% to 17.000%............................. 11 396,394.07 0.24
17.001% to 17.500%............................. 3 186,146.95 0.11
17.501% to 18.000%............................. 2 46,990.92 0.03
----- ---------------- ------
Total................................ 2,782 $ 163,617,805.83 100.00%
===== ================ ======
</TABLE>
A-4
<PAGE> 71
CUT-OFF DATE PRINCIPAL BALANCE
<TABLE>
<CAPTION>
PERCENTAGE OF
RANGE OF CUT-OFF DATE
CUT-OFF DATE NUMBER OF AGGREGATE UNPAID AGGREGATE
PRINCIPAL BALANCES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
$0.00 to $50,000.00..................... 1,528 $ 45,945,701.43 28.08%
$50,000.01 to $100,000.00..................... 886 62,997,704.87 38.50
$100,000.01 to $150,000.00..................... 247 29,374,105.81 17.95
$150,000.01 to $200,000.00..................... 73 12,843,152.53 7.85
$200,000.01 to $250,000.00..................... 30 6,762,737.90 4.13
$250,000.01 to $300,000.00..................... 9 2,509,955.31 1.53
$300,000.01 to $350,000.00..................... 6 1,959,664.99 1.20
$350,000.01 to $400,000.00..................... 2 724,782.99 0.44
$450,000.01 to $500,000.00..................... 1 500,000.00 0.31
----- ---------------- ------
Total................................ 2,782 $ 163,617,805.83 100.00%
===== ================ ======
</TABLE>
ORIGINAL PRINCIPAL BALANCE
<TABLE>
<CAPTION>
PERCENTAGE OF
RANGE CUT-OFF DATE
OF ORIGINAL NUMBER OF AGGREGATE UNPAID AGGREGATE
PRINCIPAL BALANCES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
$0.00 to $50,000.00..................... 1,527 $ 45,945,129.29 28.08%
$50,000.01 to $100,000.00..................... 886 62,997,704.87 38.50
$100,000.01 to $150,000.00..................... 248 29,374,677.95 17.95
$150,000.01 to $200,000.00..................... 73 12,843,152.53 7.85
$200,000.01 to $250,000.00..................... 30 6,762,737.90 4.13
$250,000.01 to $300,000.00..................... 9 2,509,955.31 1.53
$300,000.01 to $350,000.00..................... 6 1,959,664.99 1.20
$350,000.01 to $400,000.00..................... 2 724,782.99 0.44
$450,000.01 to $500,000.00..................... 1 500,000.00 0.31
----- ---------------- ------
Total................................ 2,782 $ 163,617,805.83 100.00%
===== ================ ======
</TABLE>
A-5
<PAGE> 72
GEOGRAPHICAL DISTRIBUTION OF MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE
STATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
California..................................... 511 $ 37,465,415.21 22.90%
Florida........................................ 360 20,723,961.48 12.67
Washington..................................... 138 8,437,360.49 5.16
Oregon......................................... 105 7,942,820.23 4.85
Illinois....................................... 153 7,690,087.32 4.70
Hawaii......................................... 39 7,627,441.11 4.66
Pennsylvania................................... 162 7,099,921.03 4.34
Colorado....................................... 112 6,751,237.70 4.13
Ohio........................................... 147 5,947,038.04 3.63
Arizona........................................ 109 5,546,400.65 3.39
Maryland....................................... 98 4,938,393.94 3.02
Utah........................................... 90 4,933,092.17 3.02
Michigan....................................... 121 4,652,562.71 2.84
Indiana........................................ 97 4,167,848.60 2.55
New Jersey..................................... 40 3,416,481.08 2.09
Georgia........................................ 65 3,351,322.93 2.05
Minnesota...................................... 56 3,358,982.44 2.05
Connecticut.................................... 39 2,163,294.37 1.32
Tennessee...................................... 60 2,110,231.35 1.29
Virginia....................................... 41 1,920,742.10 1.17
Nevada......................................... 35 1,893,797.79 1.16
Texas.......................................... 39 1,901,356.21 1.16
New York....................................... 23 1,662,152.46 1.02
North Carolina................................. 27 1,383,390.78 0.85
Missouri....................................... 17 1,049,825.66 0.64
Idaho.......................................... 9 825,888.50 0.50
Arkansas....................................... 12 599,738.82 0.37
Louisiana...................................... 14 571,640.47 0.35
Washington, D.C................................ 4 546,990.67 0.33
Oklahoma....................................... 13 494,215.00 0.30
Rhode Island................................... 6 434,430.05 0.27
Massachusetts.................................. 6 393,202.69 0.24
New Mexico..................................... 4 374,498.89 0.23
Mississippi.................................... 7 306,050.00 0.19
South Carolina................................. 7 239,070.20 0.15
Kentucky....................................... 5 216,000.00 0.13
Vermont........................................ 3 198,873.64 0.12
Montana........................................ 4 176,132.20 0.11
Iowa........................................... 2 42,650.36 0.03
Wyoming........................................ 1 44,716.49 0.03
Kansas......................................... 1 18,550.00 0.01
----- ---------------- ------
Total................................ 2,782 $ 163,617,805.83 100.00%
===== ================ ======
</TABLE>
A-6
<PAGE> 73
ANNEX B
GLOBAL CLEARANCE, SETTLEMENT AND
TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Mortgage
Pass-Through Certificates, Series 1997-A (the "Global Securities") will be
available only in book-entry form. Investors in the Global Securities may hold
such Global Securities through DTC, Cedel or Euroclear. The Global Securities
will be tradeable as home market instruments in both the European and U.S.
domestic markets. Initial settlement and all secondary trades will settle in
same-day funds.
Secondary market trading between investors holding Global Securities
through Cedel and Euroclear will be conducted in the ordinary way in accordance
with their normal rules and operating procedures and in accordance with
conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedure applicable to
U.S. corporate debt obligations and prior Mortgage Pass-Through Certificates
issues.
Secondary cross-market trading between participants of Cedel or Euroclear
and Participants holding Certificates will be effected on a
delivery-against-payment basis through the Relevant Depositaries of Cedel and
Euroclear (in such capacity) and as Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
Cede, as nominee of DTC. Investors' interests in the Global Securities will be
represented through financial institutions acting on their behalf as direct and
indirect participants in DTC. As a result, Cedel and Euroclear will hold
positions on behalf of their participants through their Relevant Depositaries,
which in turn will hold such positions in accounts as Participants.
Investors electing to hold their Global Securities through DTC will follow
DTC settlement practice. 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
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Because 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 Participants. Second market trading between Participants
will be settled using the procedures applicable to prior mortgage pass-through
certificates issues in same-day funds.
Trading between Cedel and/or Euroclear Participants. Secondary market
trading between Cedel Participants or Euroclear Participant 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 Participant to the
account of a Cedel Participant or a Euroclear Participant,
B-1
<PAGE> 74
the purchaser will send instructions to Cedel or Euroclear through a Cedel
Participant or Euroclear Participant at least one business day prior to
settlement. Cedel or Euroclear will instruct the respective Depositary, as the
case may be, to receive the Global Securities against payment. Payment will
include interest accrued on the Global Securities from and including the last
coupon payment date to and 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 respective Depositary to the 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 Participant and Euroclear Participant will need to make available to
the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within Cedel or Euroclear. Under this approach,
they may take on credit exposure to Cedel or Euroclear until the Global
Securities are credited to their accounts one day later.
As an alternative, if Cedel or Euroclear has extended a line of credit to
them, Cedel Participants or Euroclear Participants can elect not to preposition
funds and allow that credit line to be drawn upon to finance settlement. Under
this procedure, Cedel Participants or Euroclear Participants purchasing Global
Securities would incur overdraft charges for one day, assuming they clear the
overdraft when the Global Securities are credited to their accounts. However,
interest on the Global Securities would accrue from the value date. Therefore,
in many cases the investment income on the Global Securities earned during that
one-day period may substantially reduce or offset the amount of such overdraft
charges, although this result will depend on each Cedel. Participants or
Euroclear Participant's particular cost of funds.
Because the settlement is taking place during New York business hours,
Participant can employ their usual procedures for sending Global Securities to
the respective European Depositary for the benefit of Cedel Participants or
Euroclear Participants. The sale proceeds will be available to the DTC seller on
the settlement date. Thus, to the Participants a cross-market transaction will
settle no differently than a trade between two 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 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 Relevant Depositary, as appropriate, to deliver the Global
Securities to the 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 the Cedel Participant or Euroclear
Participant the following day, and receipt of the cash proceeds in the Cedel
Participant's or Euroclear Participant's account would be back-valued to the
value date (which would be the preceding day, when settlement occurred in New
York). Should the Cedel Participant or Euroclear Participant have a line of
credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the back valuation
will extinguish any overdraft incurred over that one-day period. If settlement
is not completed on the intended value date (i.e., the trade fails), receipt of
the cash proceeds in the Cedel Participant's or Euroclear Participant's account
would instead be valued as of the actual settlement date.
B-2
<PAGE> 75
Finally, day traders that use Cedel or Euroclear and that purchase Global
Securities from Participants for delivery to Cedel Participants or Euroclear
Participants should note that these trades would automatically fail on the sale
side unless affirmative action were taken. At least three techniques should be
readily available to eliminate this potential problem:
(a) borrowing though Cedel or Euroclear for one day (until the
purchase side of the day trade is reflected in their Cedel or Euroclear
accounts) in accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a 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 Participant is at least
one day prior to the value date for the sale to the Cedel Participant or
Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through Cedel or
Euroclear (or through DTC if the holder has an address outside the U.S.) will be
subject to the 30% U.S. withholding tax that generally applies to payments of
interest (including original issue discount) on registered debt issued by U.S.
Persons, unless (i) each clearing system, bank or other financial institution
that holds customers' securities in the ordinary course of its trade or business
in the chain of intermediaries between such beneficial owner and the U.S. entity
required to withhold tax complies with applicable certification requirements and
(ii) such beneficial owner takes one of the following steps to obtain an
exemption or reduced tax rate:
Exemption for non-U.S. Persons (Form W-8). Beneficial owners of
Global Securities that are Non-U.S. Persons can obtain a complete exemption
from the withholding tax by filing a signed Form W-8 (Certificate of
Foreign Status). If the information shown on Form W-8 changes, a new Form
W-8 must be filed within 30 days of such change.
Exemption for non-U.S. Persons with effectively connected income (Form
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a
U.S. branch, for which the interest income is effectively connected with
its conduct of a trade or business in the United States, can obtain an
exemption from the withholding tax by filing Form 4224 (Exemption from
Withholding of Tax on Income Effectively Connected with the Conduct of a
Trade or Business in the United States).
Exemption or reduced rate for non-U.S. Persons resident in treaty
countries (Form 1001). Non-U.S. Persons residing in a country that has a
tax treaty with the United States can obtain an exemption or reduced tax
rate depending on the treaty terms) by filing Form 1001 (Ownership,
Exemption or Reduced Rate Certificate). If the treaty provides only for a
reduced rate, withholding tax will be imposed at that rate unless the filer
alternatively files Form W-8. Form 1001 may be filed by the Certificate
Owners or their agents.
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 Certificate 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 though whom
it holds (the clearing agency, in the case of persons holding directly on
the books of the clearing agency). Form W-8 and Form 1001 are effective for
three calendar years, and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation or partnership organized in or under the laws of the
United States or any political subdivision thereof, (iii) an estate the income
of which is subject to United States federal income tax, regardless of the
source of its
B-3
<PAGE> 76
income, (iv) a trust if (a) a court within the United States is able to exercise
primary supervision over the administration of the trust and (b) one or more
United States Fiduciaries have the authority to control all substantial
decisions of the trust. The term "Non-U.S. Person" means any person who is not a
U.S. Person. This summary does not deal with all aspects of U.S. federal income
tax withholding that may be relevant to foreign holders of Global Securities.
Investors are advised to consult their own tax advisors for specific tax advice
concerning their holding and disposing of Global Securities.
B-4
<PAGE> 77
PROSPECTUS
DATED MARCH 18, 1997
$2,800,000,000
ASSET-BACKED CERTIFICATES AND BONDS
(EACH ISSUABLE IN SERIES)
AAMES CAPITAL CORPORATION
AAMES CAPITAL ACCEPTANCE CORP.
(INCLUDING CERTAIN LIMITED PURPOSE ENTITIES FORMED
BY AAMES CAPITAL ACCEPTANCE CORP. FROM TIME TO TIME IN
CONNECTION WITH THE ISSUANCE OF SERIES OF ASSET-BACKED BONDS)
This Prospectus relates to Asset-Backed Certificates (the "Certificates")
and Asset-Backed Bonds (the "Bonds" and, together with the Certificates, the
"Securities"), each issuable in series (each, a "Series"), that may be sold from
time to time by Aames Capital Corporation ("ACC") or Aames Capital Acceptance
Corp. ("ACAC") (either such entity, the "Transferor" and, together, the
"Transferors") on terms determined at the time of sale and described in the
related Prospectus Supplement. As specified in the related Prospectus
Supplement, the Securities of each Series will be either Certificates that will
evidence a beneficial undivided interest in assets deposited in a trust fund
(each, a "Trust") by a Transferor pursuant to a Pooling and Servicing Agreement
(each, a "Pooling and Servicing Agreement") to be entered into among the related
Transferor, ACC, as servicer (the "Servicer"), and the trustee specified in the
related Prospectus Supplement (the "Trustee"), or Bonds that will be secured by
a trust estate (each, a "Trust Estate") comprised of assets pledged to the
related Trustee by either ACAC or a separate entity formed by ACAC solely for
the purpose of issuing the Bonds of the related Series (either such entity, as
applicable, the "Bond Issuer") pursuant to an Indenture (each, an "Indenture")
to be entered into at the date the related Series of Bonds is issued.
(continued on next page)
---------------------------
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION APPEARING HEREIN UNDER THE
CAPTION "RISK FACTORS" BEGINNING ON PAGE 20 BEFORE PURCHASING ANY SECURITIES.
---------------------------
BONDS OF A SERIES WILL CONSTITUTE NON-RECOURSE OBLIGATIONS OF THE RELATED BOND
ISSUER. CERTIFICATES OF A SERIES WILL EVIDENCE INTERESTS ONLY IN THE RELATED
TRUST. EXCEPT AS OTHERWISE SET FORTH HEREIN AND IN THE RELATED PROSPECTUS
SUPPLEMENT, THE SECURITIES WILL NOT REPRESENT AN INTEREST IN OR OBLIGATION OF
THE SERVICER, ANY ORIGINATOR, THE TRUSTEE OR ANY OF THEIR RESPECTIVE AFFILIATES.
NEITHER THE SECURITIES NOR THE UNDERLYING MORTGAGE LOANS WILL BE GUARANTEED OR
INSURED BY ANY GOVERNMENTAL AGENCY OR ANY OTHER PERSON OR ENTITY, EXCEPT AS SET
FORTH IN THE RELATED PROSPECTUS SUPPLEMENT.
---------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS OR THE RELATED PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
---------------------------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
THIS PROSPECTUS MAY NOT BE USED TO CONSUMMATE SALES OF SECURITIES OF ANY SERIES
UNLESS ACCOMPANIED BY THE RELATED PROSPECTUS SUPPLEMENT.
<PAGE> 78
(continued from previous page)
The primary assets of each Trust or Trust Estate, as applicable, will
consist of one or more pools (each, a "Mortgage Pool") of mortgage loans
(collectively, the "Mortgage Loans") secured by first or junior liens on one- to
four-family residential properties. The Mortgage Loans will be acquired by the
related Transferor, either directly or indirectly, from one or more affiliated
or unaffiliated entities (the "Originators"). A Trust or Trust Estate, as
applicable, may include, in addition to the Mortgage Loans, (i) if specified in
the related Prospectus Supplement, funds on deposit in one or more prefunding
accounts and/or capitalized interest accounts and (ii) financial guaranty
insurance policies, cash accounts, letters of credit, limited guaranty insurance
policies, third party guarantees or other forms of credit enhancement, to the
extent described in the related Prospectus Supplement. Amounts on deposit in a
prefunding account for any Series will be applied for the acquisition of
additional Mortgage Loans during the related funding period specified in the
related Prospectus Supplement in the manner specified therein.
Each Series of Certificates will be issued in one or more classes (each, a
"Class"). Each Class of Certificates will evidence a beneficial interest of a
specified percentage (which may be 0%) or portion of future interest payments
and a specified percentage (which may be 0%) or portion of future principal
payments on the Mortgage Loans in the related Trust. A Series of Certificates
may include one or more senior Classes that receive certain preferential
treatment with respect to one or more other Classes of Certificates of such
Series. One or more Classes of Certificates of a Series may be entitled to
receive distributions of principal, interest or any combination thereof prior to
one or more other Classes of Certificates of such Series or after the occurrence
of specified events, or may be required to absorb one or more types of losses
prior to one or more other Classes of Certificates, in each case as specified in
the related Prospectus Supplement. Each Series of Bonds will be issued in a
single Class.
Distributions or payments, as applicable, to holders of Securities
("Securityholders") will be made on certain dates specified in the related
Prospectus Supplement (each, a "Distribution Date," with respect to
Certificates, or a "Payment Date," with respect to Bonds), which may occur at
monthly, quarterly, semi-annually or at such other intervals as are specified
therein.
Bonds of a Series will constitute non-recourse obligations of the related
Bond Issuer. Certificates of a Series will evidence interests only in the
related Trust. Except as otherwise set forth herein and in the related
Prospectus Supplement, the Securities will not represent an obligation of or
interest in the Servicer, any Originator or any of their respective affiliates
or any other person. Unless otherwise specified in the related Prospectus
Supplement, the obligations of a Transferor with respect to a Series of
Securities will be limited to those arising in respect of certain
representations and warranties on the Mortgage Loans. The principal obligations
of the Servicer with respect to the related Series of Securities will be limited
to obligations pursuant to certain representations and warranties and to its
contractual servicing obligations under the Pooling and Servicing Agreement,
with respect to Certificates, or a servicing agreement (each, a "Servicing
Agreement") to be entered into among ACC, as Servicer, the related Bond Issuer
and the Trustee, with respect to Bonds, including any obligation it may have to
advance delinquent payments on the Mortgage Loans in the related Trust or Trust
Estate, as applicable.
THE YIELD ON THE SECURITIES OF A GIVEN SERIES MAY BE AFFECTED BY, AMONG
OTHER THINGS, THE RATE OF PAYMENT OF PRINCIPAL (INCLUDING PREPAYMENTS) OF THE
MORTGAGE LOANS IN THE RELATED TRUST OR TRUST ESTATE, AS APPLICABLE, AND THE
TIMING OF RECEIPT OF SUCH PAYMENTS AS DESCRIBED HEREIN AND IN THE RELATED
PROSPECTUS SUPPLEMENT. A TRUST MAY BE SUBJECT TO EARLY TERMINATION UNDER THE
CIRCUMSTANCES DESCRIBED HEREIN AND IN THE RELATED PROSPECTUS SUPPLEMENT. THE
BONDS OF ANY SERIES MAY BE SUBJECT TO OPTIONAL REDEMPTION UNDER THE
CIRCUMSTANCES DESCRIBED HEREIN AND IN THE RELATED PROSPECTUS SUPPLEMENT. SEE
"RISK FACTORS -- YIELD, MATURITY AND PREPAYMENT CONSIDERATIONS" AND "MATURITY,
PREPAYMENT AND YIELD CONSIDERATIONS" HEREIN.
If specified in a Prospectus Supplement relating to a Series of
Certificates, one or more elections may be made to treat each Trust or specified
portions thereof as a "real estate mortgage investment conduit" ("REMIC") for
federal income tax purposes.
Offers of the Securities may be made through one or more different methods,
including offerings through underwriters as more fully described under "Method
of Distribution" herein and under "Underwriting" in the related Prospectus
Supplement. Prior to issuance, there will have been no market for the Securities
of any Series, and there can be no assurance that a secondary market for the
Securities will develop or, if it does develop, that it will continue.
2
<PAGE> 79
UNTIL 90 DAYS AFTER THE DATE OF EACH PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE SECURITIES COVERED BY SUCH PROSPECTUS SUPPLEMENT,
WHETHER OR NOT PARTICIPATING IN THE DISTRIBUTION THEREOF, MAY BE REQUIRED TO
DELIVER SUCH PROSPECTUS SUPPLEMENT AND THIS PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS AND PROSPECTUS SUPPLEMENT WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to a Series of Securities to be offered
hereunder, among other things, will set forth with respect to such Series of
Securities: (i) a description of such Securities; (ii) the rate of interest, the
"Certificate Rate" or "Bond Rate" or other applicable rate (or the manner of
determining such rate) and authorized denominations of such Securities; (iii)
certain information concerning the Mortgage Loans and financial guaranty
insurance policies, cash accounts, letters of credit, limited guaranty insurance
policies, third party guarantees or other forms of credit enhancement, if any,
relating to one or more Mortgage Pools or all or part of the related Securities;
(iv) in the case of Certificates, the specified interest of each Class of
Certificates in, and manner and priority of, the distributions on the Mortgage
Loans; (v) in the case of Certificates, information as to the nature and extent
of subordination with respect to such Certificates, if any; (vi) the
Distribution Dates or Payment Dates, as applicable; (vii) the amount, if any,
deposited in the related Prefunding Account, the length of the related Funding
Period or the Revolving Period and the criteria for determining which additional
Mortgage Loans may become assets of the related Trust or Trust Estate, as
applicable; (viii) in the case of Certificates, the circumstances, if any, under
which the related Trust may be subject to early termination; (ix) in the case of
Bonds, the circumstances, if any, under which such Bonds may be subject to
redemption; (x) in the case of Certificates, whether a REMIC election will be
made and the designation of the regular and residual interest therein; and (xi)
additional information with respect to the plan of distribution of such
Securities.
AVAILABLE INFORMATION
The Transferors have filed a Registration Statement under the Securities
Act of 1933, as amended (the "1933 Act"), with the Securities and Exchange
Commission (the "Commission") with respect to the Securities. The Registration
Statement and amendments thereof and the exhibits thereto may be inspected at
the Public Reference Room of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's regional offices at Seven World
Trade Center, 13th Floor, New York, New York 10048, and Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
materials can also be obtained at prescribed rates from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549.
Electronic filings made through the Electronic Data Gathering Analysis and
Retrieval System are publicly available through the Commission's Web Site
(http://www.sec.gov).
No person has been authorized to give any information or to make any
representation regarding the Series of Securities referred to in the
accompanying Prospectus Supplement other than those contained or incorporated by
reference in this Prospectus and such Prospectus Supplement with respect to such
Series and, if given or made, such information or representations must not be
relied upon. This Prospectus and the accompanying Prospectus Supplement do not
constitute an offer to sell or a solicitation of an offer to buy any securities
other than the Securities offered hereby and thereby nor an offer of the
Securities to any person in any state or other jurisdiction in which such offer
would be unlawful. The delivery of this Prospectus at any time does not imply
that information herein is correct as of any time subsequent to its date.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed with the Commission relating to the Trust or Trust
Estate, as applicable, referred to in the accompanying Prospectus Supplement
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), after the date of this Prospectus and
prior to the termination of any offering of the related Securities or relating
to the terms or collateral with respect to such
3
<PAGE> 80
offering shall be deemed to be incorporated by reference in this Prospectus and
to be part of this Prospectus from the date of the filing of such documents. Any
statement contained in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for all purposes
of this Prospectus to the extent that a statement contained herein (or in the
accompanying Prospectus Supplement) or in any other subsequently filed document
that also is or is deemed to be incorporated by reference modifies or replaces
such statement. Any such statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The Trustee or Transferor with respect to any Series of Securities will
provide without charge to each person to whom this Prospectus is delivered, on
the written or oral request of such person, a copy of any or all of the
documents referred to above that may be incorporated by reference in this
Prospectus (not including exhibits to the information that is incorporated by
reference unless such exhibits are specifically incorporated by reference into
the information that this Prospectus incorporates). Such requests should be
directed to the Corporate Trust Office of the Trustee specified in the
accompanying Prospectus Supplement.
Except as otherwise specified in the related Prospectus Supplement, no
information that relates to any Series of Securities other than the Series
referred to in the accompanying Prospectus Supplement shall be deemed to be
incorporated by reference in this Prospectus.
REPORTS TO SECURITYHOLDERS
Monthly and annual reports concerning any Securities and the related assets
included in the Trust or Trust Estate, as applicable, will be sent by the
Trustee to all related Securityholders. See "Description of the Securities
-- Reports to Securityholders" herein. If the Securities of a Series are to be
issued in book-entry form, such reports will be sent to the Securityholder of
record, and beneficial owners of such Securities will have to rely on the
procedures described herein under "Description of the Securities -- Form of
Securities -- Book-Entry Registration" to obtain such reports.
4
<PAGE> 81
TABLE OF CONTENTS
<TABLE>
<CAPTION>
CAPTION PAGE
- ----------------------------------------------------- ----
<S> <C>
SUMMARY.............................................. 6
RISK FACTORS......................................... 20
Limited Liquidity................................. 20
Limited Assets; Limited Obligations............... 20
Nature of the Security for Mortgage Loans......... 20
Legal Considerations.............................. 23
Yield, Maturity and Prepayment Considerations..... 24
Limitations on Interest Payments and
Foreclosures.................................... 26
Security Rating................................... 26
Book-Entry Registration........................... 26
Funds Available for Redemptions at the Request of
Bondholders..................................... 27
THE TRUSTS AND TRUST ESTATES......................... 27
The Mortgage Loans -- General..................... 28
Forward Commitments; Prefunding Accounts;
Capitalized Interest Accounts................... 29
USE OF PROCEEDS...................................... 30
AAMES CAPITAL CORPORATION............................ 31
AAMES CAPITAL ACCEPTANCE CORP. ...................... 31
THE SERVICER......................................... 31
General........................................... 31
Mortgage Loan Delinquency and Foreclosure
Experience...................................... 31
THE ORIGINATORS...................................... 33
Underwriting Guidelines........................... 33
Representations by Originators and the
Transferors..................................... 34
DESCRIPTION OF THE SECURITIES........................ 35
General........................................... 35
Form of Securities................................ 36
Distributions and Payments on Securities.......... 37
Revolving Period and Amortization Period;
Transferor Interest............................. 40
Reports to Securityholders........................ 41
CREDIT ENHANCEMENT................................... 42
Subordination..................................... 43
Reserve Accounts.................................. 43
Financial Guaranty Insurance Policies............. 44
Mortgage Pool Insurance Policies.................. 44
Special Hazard Insurance Policies................. 45
Bankruptcy Bonds.................................. 46
Cross Support..................................... 46
Other Insurance, Guarantees and Similar
Instruments or Agreements....................... 46
Maintenance of Credit Enhancement................. 46
MATURITY, PREPAYMENT AND YIELD CONSIDERATIONS........ 47
THE POOLING AND SERVICING AGREEMENT.................. 49
Assignment of Mortgage Loans...................... 50
Payments on the Mortgage Loans.................... 52
Investment of Accounts............................ 53
Permitted Investments............................. 53
Monthly Advances and Compensating Interest........ 54
Realization upon Defaulted Mortgage Loans......... 54
General Servicing Procedures...................... 55
Sub-Servicers..................................... 55
Servicing and Other Compensation and Payment of
Expenses........................................ 55
Maintenance of Hazard Insurance................... 56
Enforcement of Due-on-Sale Clauses................ 57
Voting............................................ 57
Amendments........................................ 57
Certificate Events of Default..................... 58
Rights upon Certificate Events of Default......... 58
Termination; Optional Termination................. 59
<CAPTION>
CAPTION PAGE
- ----------------------------------------------------- ----
<S> <C>
Evidence as to Compliance......................... 59
Indemnification of Officers and Directors of the
Transferors..................................... 60
The Trustee....................................... 60
THE INDENTURE........................................ 60
General........................................... 60
Modification of Indenture......................... 61
Bond Events of Default............................ 61
Rights upon Bond Events of Default................ 62
List of Bondholders............................... 63
Annual Compliance Statement....................... 63
Trustee's Annual Report........................... 63
Satisfaction and Discharge of Indenture........... 63
Redemption of Bonds............................... 63
Reports by Trustee to Bondholders................. 63
Limitation on Suits............................... 63
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS AND
RELATED MATTERS..................................... 64
Nature of the Mortgage Loans...................... 64
Foreclosure/Repossession.......................... 64
Rights of Redemption.............................. 65
Certain Provisions of California Deeds of Trust... 66
Anti-deficiency Legislation and Other Limitations
on Lenders...................................... 66
Enforceability of Due-on-Sale Clauses............. 67
Prepayment Charges................................ 67
Applicability of Usury Laws....................... 68
Soldiers' and Sailors' Civil Relief Act........... 68
Environmental Considerations...................... 68
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.............. 69
Taxation of Certificates.......................... 69
General........................................... 69
Taxation of Debt Certificates (Including Regular
Certificates)................................... 69
Taxation of Certificates as to Which a REMIC
Election Has Been Made.......................... 75
Taxation of the REMIC and its Holders............. 75
REMIC Expenses; Single Class REMICs............... 76
Taxation of the REMIC............................. 76
Taxation of Holders of Residual Certificates...... 78
Administrative Matters............................ 80
Tax Status as a Grantor Trust..................... 80
Tax Characterization of the Trust as a
Partnership; Tax Consequences to Holders of the
Certificates Issued By a Partnership............ 83
Certain Certificates Treated as Indebtedness...... 87
Taxation of Bonds................................. 89
Miscellaneous Tax Aspects......................... 89
Tax Treatment of Foreign Investors................ 90
STATE TAX CONSIDERATIONS............................. 91
ERISA CONSIDERATIONS................................. 91
Plan Asset Regulations............................ 91
Prohibited Transaction Class Exemption............ 92
LEGAL INVESTMENT CONSIDERATIONS...................... 93
SMMEA............................................. 93
FFIEC Policy Statement............................ 94
General........................................... 94
METHOD OF DISTRIBUTION............................... 94
LEGAL MATTERS........................................ 95
FINANCIAL INFORMATION................................ 95
RATING............................................... 95
INDEX OF PRINCIPAL TERMS............................. 97
</TABLE>
5
<PAGE> 82
SUMMARY
This Summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus and in the related Prospectus
Supplement. Reference is made to the Index of Principal Terms for the location
in this Prospectus of the definitions of certain capitalized terms not otherwise
defined in this Summary.
Securities Offered.................. Up to $2,800,000,000 aggregate
principal amount of Asset-Backed
Certificates (the "Certificates") and
Asset-Backed Bonds (the "Bonds" and,
together with the Certificates, the
"Securities"), issuable in series
(each, a "Series").
The Transferors..................... Aames Capital Corporation, a
California Corporation ("ACC"), and a
wholly owned subsidiary of Aames
Financial Corporation ("AFC"), and
Aames Capital Acceptance Corp., a
Delaware corporation ("ACAC" and,
together with ACC, the
"Transferors"), and a wholly owned
limited purpose finance subsidiary of
AFC. The principal office of each
Transferor is located in Los Angeles,
California. See "Aames Capital
Corporation" and "Aames Capital
Acceptance Corp." herein.
The Servicer........................ ACC, as Servicer (the "Servicer").
See "The Pooling and Servicing
Agreement -- General Servicing
Procedures" herein.
Sub-Servicers....................... The Servicer may appoint one or more
mortgage servicing institutions
(each, a "Sub-Servicer") to service
and administer the Mortgage Loans in
a Mortgage Pool if so indicated in
the related Prospectus Supplement.
The Trustee......................... The trustee (the "Trustee") for each
Series of Securities will be
specified in the related Prospectus
Supplement.
The Securities...................... Each Series of Certificates will be
issued at the direction of the
related Transferor by a separate
trust fund (each, a "Trust"), created
pursuant to an agreement (each, a
"Pooling and Servicing Agreement")
among the related Transferor, the
Servicer and the Trustee. Each
Certificate will represent an
interest of the type described in the
related Prospectus Supplement in the
assets of the related Trust. The
Certificates of any Series may be
issued in one or more classes (each,
a "Class"), as specified in the
related Prospectus Supplement. A
Series of Certificates may include
one or more Classes of senior
Certificates (collectively, the
"Senior Certificates") that receive
certain preferential treatment
specified in the related Prospectus
Supplement with respect to one or
more Classes of subordinate
Certificates (collectively, the
"Subordinated Certificates"). Holders
of Certificates are referred to
herein as "Certificateholders."
6
<PAGE> 83
Each Series of Bonds will be
non-recourse obligations of either
ACAC or a separate entity (which may
be organized as a trust, partnership,
limited liability company or
corporation) formed by ACAC solely
for the purpose of issuing the Bonds
of the related Series (either such
entity, as applicable, the "Bond
Issuer"). The Bond Issuer will be
identified and described in the
Prospectus Supplement relating to a
Series of Bonds and will not have,
nor be expected in the future to
have, any significant assets
available for payments on such Series
of Bonds, other than the assets
included in the related Trust Estate.
Each Series of Bonds will be issued
pursuant to an indenture (each, an
"Indenture") between the related Bond
Issuer and the related Trustee, and
the assets included in the trust
estate (each, a "Trust Estate")
pledged to secure such Series will be
the sole source of payments on the
Bonds. The Bonds of any Series will
be issuable in a single class.
Holders of Bonds are referred to
herein as "Bondholders" and, together
with Certificateholders, as
"Securityholders."
The assets of each Trust or Trust
Estate, as applicable, will consist
primarily of the Mortgage Loans.
Certain Series of Securities may be
covered by a Financial Guaranty
Insurance Policy, a Mortgage Pool
Insurance Policy, a Special Hazard
Insurance Policy, a Bankruptcy Bond
or other insurance policies, cash
accounts, letters of credit, limited
guaranty insurance policies, third
party guarantees or other forms of
credit enhancement, as described
herein and in the related Prospectus
Supplement. See "Credit Enhancement"
herein.
Each Class of Certificates within a
Series will evidence the interests
specified in the related Prospectus
Supplement, which may (i) include the
right to receive distributions
allocable only to principal, only to
interest or to any combination
thereof; (ii) include the right to
receive distributions only of
prepayments of principal throughout
the lives of the Certificates or
during specified periods; (iii) be
subordinated in the right to receive
distributions of scheduled payments
of principal, prepayments of
principal, interest or any
combination thereof to one or more
other Classes of Certificates of such
Series throughout the lives of the
Certificates or during specified
periods or may be subordinated with
respect to certain losses or
delinquencies; (iv) include the right
to receive such distributions only
after the occurrence of events
specified in the related Prospectus
Supplement; (v) include the right to
receive distributions in accordance
with a schedule or formula or on the
basis of collections
7
<PAGE> 84
from designated portions of the
assets in the related Trust; (vi)
include, as to Certificates entitled
to distributions allocable to
interest, the right to receive
interest at a fixed rate or an
adjustable rate; and (vii) include,
as to Certificates entitled to
distributions allocable to interest,
the right to distributions allocable
to interest only after the occurrence
of events specified in the related
Prospectus Supplement and, in each
case, may accrue interest until such
events occur, as specified in such
Prospectus Supplement. The timing and
amount of such distributions may vary
among Classes as specified in the
related Prospectus Supplement.
Unless otherwise specified in the
related Prospectus Supplement, the
Securities will be issuable in fully
registered form, in the minimum
denominations set forth in such
Prospectus Supplement. See
"Description of the Securities"
herein.
The Mortgage Loans.................. The primary assets of each Trust or
Trust Estate, as applicable, will
consist of one or more pools (each, a
"Mortgage Pool") of first and junior
lien mortgage loans or deeds of trust
(the "Mortgage Loans"), including any
note or other instrument of
indebtedness (each, a "Mortgage
Note").
The Mortgage Pool for a given Series
of Securities will be transferred
pursuant to the related Pooling and
Servicing Agreement or Indenture, as
applicable. The Mortgage Loans will
be secured by one- to four-family
residential properties, including
townhouses, condominiums and
manufactured housing (which is
permanently affixed to and treated as
real property under local law), but
excluding co-operatives and mobile
homes. To the extent provided in the
related Prospectus Supplement,
additional Mortgage Loans may be
periodically added as assets of the
related Trust or Trust Estate, as
applicable, or may be removed from
time to time if certain asset tests
are met, all as described in the
related Prospectus Supplement.
The Mortgage Loans will not be
insured or guaranteed by any
governmental agency.
The Mortgage Loans to be included in
any Mortgage Pool will be described
in the related Prospectus Supplement.
The Mortgage Loans will have interest
payable thereon at (i) fixed rates
specified in the related Prospectus
Supplement, (ii) adjustable rates
computed as specified in the related
Prospectus Supplement or (iii)
graduated or other variable rates
described in the related Prospectus
Supplement. Unless otherwise
specified in the related Prospectus
8
<PAGE> 85
Supplement, each Mortgage Loan will
require monthly payment of principal
and interest. Scheduled payments of
principal on any Mortgage Loan may be
computed (i) on a level debt service
basis that will result in full
amortization over the stated term of
such Mortgage Loan, (ii) in the case
of a Balloon Loan, on the basis of an
assumed amortization schedule that is
significantly longer than the
original term of maturity of such
Mortgage Loan and will require
payment of a substantial amount of
principal at the stated maturity
specified in the related Mortgage
Note or (iii) on such other basis as
is specified in the related
Prospectus Supplement.
If so specified in the Prospectus
Supplement relating to a Series of
Certificates, the Mortgage Pool may
be divided into two or more groups
based on certain characteristics of
the related Mortgage Loans (such as
type or amount of Mortgage Rate,
remaining term to maturity or type of
Mortgaged Property) and amounts
received, collected or recovered in
respect of any such group will be the
primary source from which
distributions on certain Classes of
Certificates will be derived.
The property securing a Mortgage Loan
(each, a "Mortgaged Property") may be
located in any one of the fifty
states or the District of Columbia.
Unless otherwise specified in the
related Prospectus Supplement, all of
the Mortgage Loans will be covered by
Standard Hazard Insurance Policies
insuring against certain losses due
to fire and other causes.
The Prospectus Supplement for each
Series of Securities will specify
with respect to all Mortgage Loans
included in each related Mortgage
Pool, among other things, (i) the
aggregate outstanding principal
balance and the average outstanding
principal balance of the Mortgage
Loans in such Mortgage Pool as of the
date specified in the Prospectus
Supplement (the "Cut-off Date"), (ii)
the largest principal balance of any
of the Mortgage Loans, (iii) the
types of Mortgaged Properties
securing the Mortgage Loans, (iv) the
original terms to maturity of the
Mortgage Loans, (v) the weighted
average term to maturity of the
Mortgage Loans as of the Cut-off Date
and the range of the terms to
maturity, (vi) the ranges of the
Combined Loan-to-Value Ratios at
origination, (vii) the weighted
average Mortgage Rate and ranges of
Mortgage Rates borne by the Mortgage
Loans and (viii) the geographic
distribution of the Mortgaged
Properties on a state-by-state basis.
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<PAGE> 86
Revolving Period and Amortization
Period; Transferor Interest......... If the Prospectus Supplement relating
to a Series of Certificates so
provides, there may be a period
commencing on the date of issuance of
a Class or Classes of such
Certificates and ending on the date
set forth in the related Prospectus
Supplement (the "Revolving Period")
during which no principal payments
will be made to one or more Classes
of Certificates of the related Series
as are identified in such Prospectus
Supplement. All collections of
principal otherwise allocated to such
Class or Classes of Certificates may
be (i) utilized by the Trust during
such period to acquire additional
Mortgage Loans that satisfy the
criteria described in the related
Prospectus Supplement, (ii) held in
an account and invested in Eligible
Investments for later distribution to
Certificateholders, (iii) applied to
those Class or Classes of
Certificates, if any, of the same or
different Series as specified in the
related Prospectus Supplement as then
are in amortization or (iv) otherwise
applied as specified in the related
Prospectus Supplement.
An "Amortization Period" is the
period, if any, specified as such in
the Prospectus Supplement relating to
a Series of Certificates during which
an amount of principal is payable to
holders of one or more Classes of
such Series of Certificates. If so
specified in the related Prospectus
Supplement, during an Amortization
Period all or a portion of principal
collections on the Mortgage Loans may
be applied as specified above for a
Revolving Period and, to the extent
not so applied, will be distributed
to the Class or Classes of
Certificates of the same or different
Series as specified in the related
Prospectus Supplement as then being
entitled to payments of principal. In
addition, if so specified in the
related Prospectus Supplement,
amounts deposited in certain accounts
for the benefit of one or more
Classes of Certificates may be
released from time to time or on a
specified date and applied as a
payment of principal on such Class or
Classes of Certificates. The related
Prospectus Supplement will set forth
the circumstances that will result in
the commencement of an Amortization
Period.
Each Trust that has a Revolving
Period may also issue to the related
Transferor a certificate evidencing
an undivided beneficial interest (the
"Transferor Interest") in the Trust
not represented by the other
Certificates issued by such Trust. As
further described in the Prospectus
Supplement relating to a Series of
Certificates, the value of such
Transferor Interest will fluctuate as
the amount of the assets of the Trust
fluctuates and the outstanding amount
of
10
<PAGE> 87
the Certificates of the related
Series of Certificates is reduced.
Forward Commitments; Prefunding
Accounts and Capitalized Interest
Accounts............................ If so specified in the related
Prospectus Supplement, the related
Pooling and Servicing Agreement or
Indenture, as applicable, may contain
provisions pursuant to which the
related Transferor will agree to
transfer additional Mortgage Loans
into the related Mortgage Pool for a
specified period of time (the
"Funding Period") following the date
on which the related Securities are
issued (such provisions being
referred to herein as a "Forward
Commitment"). Any Forward Commitment
will require that any Mortgage Loans
so transferred conform to the
requirements specified in the related
Pooling and Servicing Agreement or
Indenture, as applicable. If a
Forward Commitment is to be utilized,
unless otherwise specified in the
related Prospectus Supplement, a
deposit will be made to a segregated
account (each, a "Prefunding
Account") in an amount equal to all
or a portion of the proceeds received
by the related Transferor in
connection with the sale of the
Securities of the related Series
(such amount, the "Prefunding
Amount"). Subsequently, the
additional Mortgage Loans will be
conveyed by the related Transferor to
the related Trust in exchange for
cash from the related Prefunding
Account in one or more transfers. The
related Pooling and Servicing
Agreement or Indenture, as
applicable, will require that, if any
of the Prefunding Amount is not
applied to acquire additional
Mortgage Loans by the end of the
Funding Period, then any amounts
remaining on deposit in the
Prefunding Account will be released
from the Prefunding Account and
distributed or paid, as applicable,
in reduction of the principal balance
of the related Securities as
specified in the related Prospectus
Supplement.
If a Prefunding Account is
established, a segregated account
(each, a "Capitalized Interest
Account") may also be established for
the related Series. On the closing
date for such Series, all or a
portion of the proceeds received by
the related Transferor in connection
with the sale of the Securities of
the related Series may be deposited
in the Capitalized Interest Account
and used to fund the excess, if any,
of (x) the sum of (i) the amount of
interest accrued on the Securities of
such Series specified in the related
Prospectus Supplement and, (ii) if
specified in the related Prospectus
Supplement, certain fees or expenses
during the Funding Period such as
Trustee fees and credit enhancement
fees, over (y) the amount of interest
available therefor from the Mort-
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<PAGE> 88
gage Loans included in the original
Mortgage Pool. If so specified in the
related Prospectus Supplement,
amounts on deposit in the Capitalized
Interest Account may be released to
the related Transferor prior to the
end of the Funding Period subject to
the satisfaction of certain tests
specified in the related Prospectus
Supplement. Any amounts on deposit in
the Capitalized Interest Account at
the end of the Funding Period that
are not necessary for such purposes
will be distributed to the person
specified in the related Prospectus
Supplement.
Credit Enhancement.................. The Mortgage Loans included in a
Trust or Trust Estate, applicable,
the Securities of the related Series
or, in the case of Certificates, one
or more Classes of Certificates of
the related Series may have the
benefit of one or more types of
credit enhancement, as described in
the related Prospectus Supplement.
The protection against losses
afforded by any such credit support
will be limited. Such credit
enhancement may include one or more
of the following types or another
type of credit enhancement as
specified in the Prospectus
Supplement:
A. Subordinated Certificates... In the case of a Series of
Certificates, the rights of the
holders of any Subordinated
Certificates of such Series to
receive distributions with respect to
the related Trust will be
subordinated to the rights of the
holders of the Senior Certificates of
the same Series to receive
distributions to the extent described
in the related Prospectus Supplement.
This subordination is intended to
enhance the likelihood of regular
receipt by holders of Senior
Certificates of the full amount of
payments which such holders would be
entitled to receive if there had been
no losses; however, there can be no
assurance that the Senior
Certificates will receive the full
amount of payments to which they are
entitled as a result of such
subordination or the existence of the
Reserve Accounts described below. The
protection afforded to the holders of
Senior Certificates through
subordination may be accomplished by
the preferential right of such
Certificateholders to receive, prior
to any distribution being made in
respect of the related Subordinated
Certificates, the amounts of
principal and interest due to them on
each Distribution Date out of the
funds available for distribution on
such date in the related Certificate
Account to the extent described in
the related Prospectus Supplement.
The protection afforded to the
holders of Senior Certificates
through subordination also may be
accomplished by allocating certain
types of losses or delinquencies to
the related Subordinated Certificates
to the extent described in the
related Prospectus Supplement.
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<PAGE> 89
If so specified in the related
Prospectus Supplement, a Subordinated
Class of Certificates may be senior
to other Classes of Certificates with
respect to the right to receive
certain types of payments or with
respect to allocation of certain
losses or delinquencies. If so
specified in the related Prospectus
Supplement, subordination may apply
only in the event of certain types of
losses not covered by other forms of
credit enhancement, such as hazard
losses not covered by Standard Hazard
Insurance Policies or losses due to
the bankruptcy of the borrower under
a Mortgage Loan (the "Mortgagor") not
covered by a Bankruptcy Bond. The
related Prospectus Supplement will
set forth information concerning the
amount of subordination of a Class or
Classes of Subordinated Certificates
in a Series, the circumstances in
which such subordination will be
applicable and the manner, if any, in
which the amount of subordination
will decrease over time.
B. Reserve Account............. If so specified in the related
Prospectus Supplement, one or more
reserve or spread accounts (each, a
"Reserve Account") may be established
and maintained, in whole or in part,
by the deposit therein of
distributions allocable to the
holders of the Securities of the
related Series or, in the case of
Certificates, specified Classes of
the Certificates of the related
Series for a specified time or until
a specified level is reached. The
related Prospectus Supplement will
set forth information concerning the
manner of funding any Reserve Account
and the conditions under which
amounts in any such Reserve Account
will be used to make distributions or
payments to holders of such
Securities or released to holders of
Securities, the Servicer, the related
Transferor or another entity, as
applicable.
C. Financial Guaranty Insurance
Policy.................... If so specified in the related
Prospectus Supplement, a financial
guaranty insurance policy or policies
(each, a "Financial Guaranty
Insurance Policy") may be obtained
and maintained for Securities of the
related Series or, in the case of
Certificates, specified Classes of
the Certificates of the related
Series. A Financial Guaranty
Insurance Policy generally will
unconditionally and irrevocably
guarantee that the full amount of
principal and interest distributable
or payable, as applicable, to
Securityholders on any Distribution
Date or Payment Date, as applicable,
as well as any other amounts
specified in the related Prospectus
Supplement (the "Insured Amount"),
will be available for distribution or
payment, as applicable, to
Securityholders on such date. The
terms of any such Financial Guaranty
Insurance Policy will be described in
the related Prospectus Supplement.
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<PAGE> 90
D. Mortgage Pool Insurance
Policy.................... If so specified in the related
Prospectus Supplement, a mortgage
pool insurance policy or policies
(each, a "Mortgage Pool Insurance
Policy") may be obtained and
maintained for all or certain of the
Mortgage Loans in the related
Mortgage Pool, limited in scope,
covering losses on the related
Mortgage Loans up to a maximum
amount. The terms of any such
Mortgage Pool Insurance Policy will
be described in the related
Prospectus Supplement.
E. Special Hazard Insurance
Policy.................... If so specified in the related
Prospectus Supplement, certain
physical risks with respect to the
related Mortgaged Properties that
would not otherwise be insured
against by Standard Hazard Insurance
Policies may be covered by a special
hazard insurance policy or policies
(each, a "Special Hazard Insurance
Policy"). Each Special Hazard
Insurance Policy will be limited in
scope and will cover losses up to a
maximum amount. The terms of any such
Special Hazard Insurance Policy will
be described in the related
Prospectus Supplement.
F. Bankruptcy Bond............. If so specified in the related
Prospectus Supplement, a mortgagor
bankruptcy bond or bonds (each, a
"Bankruptcy Bond") may be obtained to
cover certain losses resulting from a
reduction by a bankruptcy court of
scheduled payments of principal or
interest on a Mortgage Loan or a
reduction by such court of the
principal amount of a Mortgage Loan.
The level of coverage and other terms
of each Bankruptcy Bond will be
specified in the related Prospectus
Supplement.
G. Cross Support............... If so specified in the Prospectus
Supplement relating to a Series of
Certificates, the interests of
separate Trusts or separate groups of
assets in a single Trust may be
evidenced by separate Classes of the
related Series of Certificates. In
such case, credit support may be
provided by a cross-support feature
which requires that distributions be
made with respect to certain
Certificates evidencing interests in
one or more Trusts or asset groups
prior to distributions to other
Certificates evidencing interests in
other Trusts or asset groups. If
specified in the related Prospectus
Supplement, the coverage provided by
one or more other forms of credit
support, such as Reserve Accounts or
Financial Guaranty Insurance
Policies, may apply concurrently to
two or more separate Trusts, without
priority among such Trusts, until the
credit support is exhausted. If
applicable, the Prospectus Supplement
will identify the Trusts or asset
groups to which such credit support
relates and the manner of determining
the amount of the coverage provided
14
<PAGE> 91
thereby and of the application of
such coverage to the identified
Trusts or asset groups.
H. Other Credit Enhancement.... Other credit enhancement
arrangements, including, but not
limited to, letters of credit or
third party guarantees, may be used
to provide coverage for certain risks
of losses on the Mortgage Loans in a
given Trust or Trust Estate, as
applicable. These arrangements may be
in addition to or in lieu of any
forms of credit support described in
this Prospectus. The related
Prospectus Supplement will describe
any such arrangements, including
information as to the extent of
coverage and any conditions thereto
or limitations thereon. Any such
arrangement must be acceptable to
each nationally recognized
statistical rating agency that is
engaged by the related Transferor to
provide a rating for any Securities
of the related Series (each, a
"Rating Agency").
Advances............................ Unless otherwise specified in the
related Prospectus Supplement, the
Servicer and, if applicable, each
Sub-Servicer will be obligated each
month (or at such other intervals
specified in the related Prospectus
Supplement) to advance amounts
corresponding to all or a portion of
delinquent interest payments on such
Mortgage Loan until the date on which
the related Mortgaged Property is
sold at a foreclosure sale or the
related Mortgage Loan is otherwise
liquidated or charged off. Any such
obligation to make advances may be
limited to amounts deemed to be
recoverable from late payments or
liquidation proceeds, for specified
periods or, in the case of a given
Series of Certificates, to amounts
due to holders of any Senior
Certificates, or any combination
thereof, in each case as specified in
the related Prospectus Supplement.
See "The Pooling and Servicing
Agreement -- Monthly Advances and
Compensating Interest" herein.
Compensating Interest............... Unless otherwise specified in the
related Prospectus Supplement, with
respect to each Mortgage Loan as to
which a prepayment is received, that
becomes a Liquidated Mortgage Loan or
is otherwise charged-off during the
Collection Period related to a
Distribution Date or Payment Date, as
applicable, the Servicer will be
required with respect to such date to
remit to the Trustee, from amounts
otherwise payable to the Servicer as
servicing compensation, an amount
generally representing the excess of
30 days of interest on the principal
balance of such Mortgage Loan prior
to such prepayment, liquidation or
charge-off over the amount of
interest actually received on the
related Mortgage Loan during the
applicable Collection Period. See
"The Pooling and Servicing Agree-
15
<PAGE> 92
ment -- Monthly Advances and
Compensating Interest" herein.
Optional Termination with Respect to
Certificates........................ The related Transferor, the Servicer
or certain other entities specified
in the Prospectus Supplement relating
to a Series of Certificates may have
the option to effect early retirement
of such Series of Certificates by
acquiring the Mortgage Loans in the
Trust, subject to the aggregate
principal balance of the related
Mortgage Loans 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 the related Series. Typically,
the related Transferor, the Servicer
or such other entity will cause the
retirement of a Series of
Certificates when servicing of the
then remaining amount of Mortgage
Loans becomes inefficient. See "The
Pooling and Servicing
Agreement -- Termination; Optional
Termination" herein.
Redemption of Bonds................. To the extent provided in the
Prospectus Supplement relating to a
Series of Bonds, the Bonds of any
Series may be (i) redeemed at the
request of holders of such Bonds;
(ii) redeemed at the option of the
related Bond Issuer or another party
specified in the related Prospectus
Supplement; or (iii) subject to
special redemption under certain
circumstances. The circumstances and
terms under which the Bonds of a
given Series may be redeemed will be
described in the related Prospectus
Supplement.
Certain Federal Income Tax
Consequences........................ Investors are advised to consult
their tax advisors and to review
"Certain Federal Income Tax
Consequences" herein and in the
related Prospectus Supplement.
I. Certificates
A. REMIC....................... If an election is to be made to treat
the Trust for a Series of
Certificates as a REMIC for federal
income tax purposes, the related
Prospectus Supplement will specify
which Class or Classes thereof will
be designated as regular interests in
the REMIC ("Regular Certificates")
and which Class of Certificates will
be designated as the residual
interest in the REMIC ("Residual
Certificates"). To the extent
provided herein and in the related
Prospectus Supplement, Certificates
representing an interest in the REMIC
will be considered "qualifying real
property loans" within the meaning of
Section 593(d) of the Internal
Revenue Code of 1986, as amended (the
"Code"), "real estate assets" for
purposes of Section 856(c)(5)(A) of
the Code and assets described in
Section 7701(a)(19)(C) of the Code.
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<PAGE> 93
For federal income tax purposes,
Regular Certificates generally will
be treated as debt obligations of the
Trust with payment terms equivalent
to the terms of such Certificates.
Holders of Regular Certificates will
be required to report income with
respect to such Certificates under an
accrual method, regardless of their
normal tax accounting method.
Original issue discount, if any, on
Regular Certificates will be
includible in the income of the
Certificateholders thereof as it
accrues, in advance of receipt of the
cash attributable thereto, which rate
of accrual will be determined based
on a reasonable assumed prepayment
rate. The Residual Certificates
generally will not be treated as
evidences of indebtedness for federal
income tax purposes, but instead, as
representing rights to the taxable
income or net loss of the REMIC.
B. Grantor Trust............... If so specified in the Prospectus
Supplement relating to a Series of
Certificates, the Trust for a Series
of Certificates will be classified as
a grantor trust for federal income
tax purposes and not as an
association taxable as a corporation.
Holders of Certificates of such
Series will be treated for such
purposes, subject to the possible
application of the stripped bond
rules, as owners of undivided
interests in the related Mortgage
Loans and generally will be required
to report as income their pro rata
share of the entire gross income
(including amounts paid as reasonable
servicing compensation) from the
Mortgage Loans and will be entitled,
subject to certain limitations, to
deduct their pro rata share of
expenses of the Trust.
To the extent provided herein and in
the related Prospectus Supplement,
Certificates of such Series will
represent interests in "qualifying
real property loans" within the
meaning of Section 593(d) of the
Code, "real estate assets" for
purposes of Section 856(c)(5)(A) of
the Code and "[l]oans . . .
principally secured by an interest in
real property" within the meaning of
Section 7701(a)(19)(C)(v) of the
Code.
C. Certificates Treated as
Debt...................... If so specified in the Prospectus
Supplement relating to a Series of
Certificates, a Trust may issue
Certificates that will be
characterized as indebtedness for
federal income tax purposes of the
related Transferor secured by the
related Mortgage Loans. Each investor
in an interest in the Certificates of
the related Series, by acceptance of
its interest therein, will agree to
treat such Certificates as debt for
federal, state and local income and
franchise tax purposes.
II. Bonds........................... For federal income tax purposes,
Bonds generally will be treated as
debt obligations of the related Bond
17
<PAGE> 94
Issuer. Holders of Bonds will not be
required to report income with
respect to such Bonds under an
accrual method, unless the
Bondholders otherwise use the accrual
method. Bonds will not represent
interests in "qualifying real
property loans" within the meaning of
Section 593(d) of the Code, "real
estate assets" for purposes of
Section 856(c)(5)(A) of the Code and
"[l]oans . . . principally secured by
an interest in real property" within
the meaning of Section
7701(a)(19)(C)(v) of the Code.
ERISA Considerations................ Fiduciaries of employee benefit plans
subject to Title I of the Employee
Retirement Income Security Act of
1974, as amended ("ERISA"), should
consider the ERISA fiduciary
investment standards before
authorizing an investment by a plan
in a Series of Securities. In
addition, fiduciaries of employee
benefit plans subject to Title I of
ERISA, as well as certain plans not
subject to ERISA, but which are
subject to Section 4975 of the Code,
such as individual retirement
accounts and Keogh plans covering
only a sole proprietor or partners
(collectively, "Plan(s)"), should
consult with their legal counsel to
determine whether an investment in a
Series of Securities will cause the
Mortgage Loans included in the
related Mortgage Pool, to be
considered plan assets pursuant to
the plan asset regulations set forth
in 29 C.F.R. Section 2510.3-101 (the
"Plan Asset Regulations"), thereby
subjecting the Plan to the prohibited
transaction rules with respect to the
Mortgage Loans and the Trustee or the
Servicer to the fiduciary investment
standards of ERISA, or cause the
excise tax provisions of Section 4975
of the Code to apply to the Mortgage
Loans in the absence of an exemption
granted by the Department of Labor
applicable to the purchase, sale,
transfer or holding of a Series of
Securities. See "ERISA
Considerations" herein.
Rating.............................. At the date of issuance, the
Securities offered pursuant to the
related Prospectus Supplement will be
rated in one of the four highest
rating categories by one or more
Rating Agencies. See "Rating" herein.
Legal Investment.................... Unless otherwise indicated in the
related Prospectus Supplement, the
Securities of any Series will 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 invest-
18
<PAGE> 95
ment in Securities of the related
Series. Any such institution should
consult its own legal advisors in
determining whether and the extent to
which a Series of Securities
constitutes legal investments for
such investors. See "Legal Investment
Considerations" herein.
Registration of Securities.......... Unless otherwise specified in the
related Prospectus Supplement, the
Securities will be issued as physical
securities ("Definitive Securities")
in fully registered form in the
denominations specified in the
related Prospectus Supplement. The
Securities may be represented,
however, by a single certificate or
bond, as applicable, registered in
the name of Cede & Co. ("Cede"), as
nominee of The Depository Trust
Company ("DTC"), or another nominee
if so specified in the related
Prospectus Supplement. In such case,
the beneficial owners thereof will
not be entitled to receive Definitive
Securities representing their
respective interests, except in
certain circumstances described in
the related Prospectus Supplement.
See "Description of the
Securities -- Form of
Securities -- Book-Entry
Registration" herein.
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<PAGE> 96
RISK FACTORS
LIMITED LIQUIDITY
Prior to issuance, there will have been no market for the Securities of any
Series. There can be no assurance that a secondary market for the Securities
will develop or, if a secondary market does develop, that it will provide
Securityholders with liquidity of investment or that it will continue for the
lives of the Securities. Unless otherwise indicated in the related Prospectus
Supplement, the Securities will not constitute "mortgage related securities"
under the Secondary Mortgage Market Enhancement Act of 1984, as amended
("SMMEA"), and certain investors may be subject to legal restrictions that
preclude their purchase of any such non-SMMEA Certificates. In addition, with
respect to a given Series of Certificates, certain Classes of Certificates may
be restricted as to transferability to certain entities if so specified in the
related Prospectus Supplement. Any restrictions on the purchase or
transferability of the Securities of a given Series may have a negative effect
on the development of a secondary market in such Securities.
LIMITED ASSETS; LIMITED OBLIGATIONS
Proceeds of the assets of any Trust or Trust Estate, as applicable,
including the Mortgage Loans, any Reserve Account and any Financial Guaranty
Insurance Policy or other form of credit enhancement, will be the sole source of
funds for the required distributions or payments, as applicable, on the
Securities of the related Series and there will be no recourse to the related
Transferor or any other entity in the event that such proceeds are insufficient
or otherwise unavailable to make any such required distributions or payments, as
applicable, on such Securities. The Certificates of any Series will represent
beneficial interests in the related Trust only. The Bonds of any Series will be
non-recourse obligations of the related Bond Issuer, and the assets of the
related Trust Estate will be the sole source of payments on the Bonds. The
Securities will not represent an interest in or obligation of the Servicer, any
Originator, the Trustee, any Sub-Servicer or any other person. Neither the
Securities nor the Mortgage Loans will be insured or guaranteed by any
governmental agency or instrumentality. Except as otherwise specified in the
related Prospectus Supplement, neither the Securities nor the underlying
Mortgage Loans will be guaranteed or insured by the related Transferor, the
Servicer, the related Originators, the Trustee, any Sub-Servicer or any of their
respective affiliates. The only obligations of the foregoing entities with
respect to the Securities or the Mortgage Loans will be the obligations (if any)
of the related Transferor pursuant to certain limited representations and
warranties made with respect to the Mortgage Loans, and the servicing
obligations of the Servicer and any Sub-Servicer under the related Agreement
(including their respective limited obligations to make certain advances in the
event of delinquencies on the Mortgage Loans, but only to the extent deemed
recoverable). Notwithstanding the foregoing, and as specified 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 provider of such credit enhancement.
NATURE OF THE SECURITY FOR MORTGAGE LOANS
Risks Associated with Any Decline in Value of Mortgaged Properties. An
overall decline in the market value of residential real estate, the general
condition of a Mortgaged Property or other factors, including acts of nature
such as hurricanes, floods, tornadoes or earthquakes, could adversely affect the
values of the Mortgaged Properties such that the outstanding balances of the
Mortgage Loans, together with any other liens on the Mortgaged Properties, equal
or exceed the value of the Mortgaged Properties. Such a decline could, in
certain circumstances, result in the interest in the Mortgaged Property held by
the related Trust or Trust Estate, as applicable, being extinguished. In
addition, certain areas of the country may from time to time experience
significant declines in real estate values. The related Transferor will not be
able to quantify the impact of any such declines in the value of any Mortgaged
Properties or predict whether, to what extent or how long such declines may
continue. Because certain Mortgage Loans may have been underwritten pursuant to
standards that rely primarily on the value of the related Mortgaged Properties
rather than the creditworthiness of the borrowers under such Mortgage Loans
(each, a "Mortgagor"), the actual rates of delinquencies, foreclosures and
losses on such Mortgage Loans, particularly in periods during which the value of
the related
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Mortgaged Properties has declined, could be higher than those historically
experienced by the mortgage lending industry in general.
Risks Associated with Junior Liens. Certain of the Mortgage Loans will be
home equity loans secured by junior liens (each, a "Junior Loan") subordinate to
the rights of the mortgagees under the related senior mortgages (each, a "Senior
Lien"). As a result, the proceeds from any liquidation, insurance or
condemnation proceedings will be available to satisfy the principal balance of a
Junior Loan only to the extent that the claims, if any, of each such Senior Lien
are satisfied in full, including any related foreclosure costs. In addition, a
junior mortgagee may not foreclose on the Mortgaged Property securing the
related Junior Loan unless it forecloses subject to the related Senior Lien, in
which case it must either pay the entire amount of each Senior Lien to the
applicable mortgagee at or prior to the foreclosure sale or undertake the
obligation to make payments on each Senior Lien in the event of a default
thereunder. Generally, a servicer will satisfy each such Senior Lien at or prior
to the foreclosure sale only to the extent it determines that any amounts so
paid will be recoverable from future payments and collections on the Junior Loan
or otherwise. No Trust or Trust Estate will have any source of funds to satisfy
any such Senior Lien or make payments due under any Senior Lien. See "Certain
Legal Aspects of the Mortgage Loans and Related
Matters -- Foreclosure/Repossession" herein.
Risks Associated with Balloon Loans. Certain of the Mortgage Loans may
constitute "Balloon Loans." Balloon Loans are loans originated with a term to
stated maturity that is shorter than the period on which the corresponding
amortization schedule is based. As a result, upon the maturity of a Balloon
Loan, the Mortgagor will be required to make a "balloon payment" which will be
significantly larger than the previous monthly payments due on such Balloon
Loan. The ability of such Mortgagor to repay a Balloon Loan at maturity
frequently will depend on such Mortgagor's ability to refinance the Mortgage
Loan. The ability of a Mortgagor to refinance such a Mortgage Loan will be
affected by a number of factors, including the prevailing level of 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 Loan, 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 related
Transferor, the Servicer, the Originators, the Trustee or any other entity will
be obligated to provide funds to refinance any Balloon Loan.
Risks Associated with Bankruptcy of the Mortgagor. General economic
conditions and other factors (which may not affect real property values) have an
impact on the ability of Mortgagors to repay Mortgage Loans. Loss of earnings,
illness, divorce and other similar factors may lead to an increase in
delinquencies, defaults and bankruptcy filings by Mortgagors. In the event of
personal bankruptcy of a Mortgagor, a bankruptcy court may suspend or reduce the
payments of principal and interest to be paid with respect to the related
Mortgage Loan or permanently reduce the principal balance of such Mortgage Loan,
thus either delaying or permanently limiting the amount ultimately received by
the related Trust or Trust Estate in respect of such Mortgage Loan. Moreover, if
a bankruptcy court were to prevent the Trustee for the related Trust or Trust
Estate, as applicable, or the related Servicer from causing a transfer of the
related Mortgaged Property in connection with a foreclosure or similar
proceeding, any remaining balance on the related Mortgage Loan may not be
recoverable and the related Trust or Trust Estate may experience a loss to the
extent of any such remaining balance.
Risks Associated with Defaulted Mortgage Loans. 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 distribution or payment
of related proceeds to the related Securityholders could occur. An action to
foreclose on a Mortgaged Property securing a Mortgage Loan is regulated by state
statutes and rules and is subject to many of the same delays and expenses as
other lawsuits if defenses or counterclaims are interposed, sometimes requiring
several years to
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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 or any Sub-Servicer to foreclose on or sell
the Mortgaged Property or to obtain Liquidation Proceeds (net of expenses)
sufficient to repay all amounts due on the related Mortgage Loan. The Servicer
or any Sub-Servicer will be entitled to deduct from Liquidation Proceeds all
expenses reasonably incurred in attempting to recover amounts due on the related
Liquidated Mortgage Loan and not yet repaid, including unreimbursed Monthly
Advances and Servicing Advances, payments to prior lienholders, legal fees and
costs of legal action, real estate taxes, and maintenance and preservation
expenses. In the event that any of the Mortgaged Properties fail to provide
adequate security for the related Mortgage Loans, and the credit enhancement for
the related Series is not available to cover resulting shortfalls,
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 Mortgage Loans at the
time of default. Therefore, assuming that the Servicer or any SubServicer took
the same steps in realizing upon a defaulted Mortgage Loan having a small
remaining principal balance as it would in the case of a defaulted Mortgage Loan
having a larger principal balance, the amount realized after expenses of
liquidation would be smaller as a percentage of the outstanding principal
balance of the smaller Mortgage Loan than would be the case with a larger
Mortgage Loan. Because the average outstanding principal balances of Mortgage
Loans that are Junior Loans generally are smaller relative to the average
outstanding principal balances of Mortgage Loans that are first mortgage loans,
realizations net of liquidation expenses on defaulted Mortgage Loans that are
Junior Loans may also be smaller as a percentage of the principal amount of such
Mortgage Loans than would be the case if such mortgage loans were secured by
first mortgages.
Risks Associated with Acquiring Additional Mortgage Loans. If a Pooling
and Servicing Agreement or Indenture provides for a Prefunding Account and the
principal balance of additional Mortgage Loans delivered by the related
Transferor during the related Funding Period is less than the Prefunding Amount,
the holders of the Securities of the related Series may receive a prepayment of
principal as and to the extent described in the related Prospectus Supplement.
In addition, if so specified in the Prospectus Supplement relating to a Series
of Certificates, an Amortization Period may result from the failure of the
related Transferor to assign additional Mortgage Loans to the related Trust
during the Revolving Period, thereby resulting in a prepayment of the related
Certificates. Any such principal prepayment may adversely affect the yield to
maturity of the related Securities. Because prevailing interest rates are
subject to fluctuation, there can be no assurance that investors will be able to
reinvest such a prepayment at yields equaling or exceeding the yields on the
related Securities. It is possible that the yield on any such reinvestment will
be lower, and may be significantly lower, than the yield on the related
Securities.
Each additional Mortgage Loan must satisfy the eligibility criteria
specified in the related Prospectus Supplement and related Pooling and Servicing
Agreement or Indenture, as applicable. Such eligibility criteria will be
determined in consultation with each Rating Agency (and/or any credit
enhancement provider for the related Series) prior to the issuance of such
Series and are designed to ensure that if such additional Mortgage Loans were
included as part of the initial Mortgage Loans, the credit quality thereof would
be consistent with the initial rating of the Securities of such Series. At the
time additional Mortgage Loans are transferred for inclusion in the related
Mortgage Pool, the related Transferor will certify that all conditions precedent
to the transfer of such additional Mortgage Loans, including the satisfaction of
specific eligibility criteria, have been satisfied. It is a condition to the
transfer of any additional Mortgage Loans by the related Transferor for
inclusion in the related Mortgage Pool that each Rating Agency, after receiving
prior notice of any such proposed transfer, shall not have advised the related
Transferor or the Trustee or any credit enhancement provider for the related
Series that the conveyance of such additional Mortgage Loans will result in a
qualification, modification or withdrawal of its then current rating of the
Securities of such Series. Following the transfer of additional Mortgage Loans
for inclusion in the related Mortgage Pool, the aggregate characteristics of the
Mortgage Loans then held in the related Trust or Trust Estate, as applicable,
may vary from those included in the original Mortgage Pool. As a result, the
additional Mortgage Loans may adversely
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affect the performance of the related Securities. See "The Trusts and Trust
Estates -- Forward Commitments; Prefunding Accounts; Capitalized Interest
Accounts" herein.
The ability of any Trust or Trust Estate, as applicable, to invest in
additional Mortgage Loans during the related Funding Period and, in the case of
a Series of Certificates, any Revolving Period, will be dependent upon the
ability of the related Transferor to acquire Mortgage Loans that satisfy the
prerequisites to transfer for inclusion in the related Mortgage Pool specified
in the related Prospectus Supplement. The ability of the related Transferor to
acquire such Mortgage Loans will be affected by a variety of social and economic
factors, including the prevailing level of market interest rates, unemployment
levels and consumer perceptions of general economic conditions.
Environmental Concerns. Under environmental legislation and case law
applicable in various states, a secured party that takes a deed in lieu of
foreclosure, acquires a Mortgaged Property at a foreclosure sale or, prior to
foreclosure, has been involved in decisions or actions affecting day-to-day
operations at a Mortgaged Property may be liable for the costs of cleaning up
any contamination found at such Mortgaged Property. These costs, which could be
substantial, could be a liability of the Trust or Trust Estate, as applicable,
and any such liability may ultimately be borne by the Securityholders of the
related Series of Securities. This potential exposure will be minimized to some
extent because under the terms of the related Pooling and Servicing Agreement,
Indenture or Servicing Agreement, as applicable, the related Trustee and
Servicer will not be authorized to take any action that may be deemed
participation in the management of a contaminated Mortgaged Property. See
"Certain Legal Aspects of the Mortgage Loans and Related
Matters -- Environmental Considerations" herein.
Risks Associated with Non-Owner Occupied Properties. Certain of the
Mortgaged Properties relating to Mortgage Loans may not be owner occupied. It is
possible that the rates of delinquencies, foreclosures and losses on Mortgage
Loans secured by non-owner occupied properties could be higher than such rates
on Mortgage Loans secured by the primary residence of the borrower.
LEGAL CONSIDERATIONS
State and Federal Regulations. Applicable state laws generally regulate
interest rates and other charges, require certain disclosures and require
licensing of the Originators, the Servicer and any Sub-Servicer. In addition,
most states have other laws, public policies and general principles of equity
relating to the protection of consumers, unfair and deceptive practices and
practices which may apply to the origination, servicing and collection of the
Mortgage Loans. 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 the Mortgage
Loans and Related Matters" herein.
The Mortgage Loans may also be subject to federal laws, including: (i) the
Truth in Lending Act and Regulation Z promulgated thereunder, which require
certain disclosures to the borrowers regarding the terms of the Mortgage Loans;
(ii) the Equal Credit Opportunity Act and Regulation B promulgated thereunder,
which prohibit discrimination on the basis of age, race, color, sex, religion,
marital status, national origin, receipt of public assistance or the exercise of
any right under the Consumer Credit Protection Act, in the extension of credit;
(iii) the Real Estate Settlement Procedures Act and Regulation X promulgated
thereunder, which require certain disclosures to borrowers regarding the
settlement and servicing of the Mortgage Loans; (iv) the Fair Credit Reporting
Act, which regulates the use and reporting of information related to the
borrower's credit experience; and (v) the Federal Trade Commission Preservation
of Consumer's Claims and Defenses Rule, 16 C.F.R. Part 433, regarding the
preservation of a consumer's rights.
The federal Soldiers' and Sailors' Civil Relief Act of 1940, as amended
(the "Relief Act"), may affect the ability of the Servicer to collect full
amounts of interest on certain Mortgage Loans and could interfere with the
ability of the Servicer to foreclose on certain properties. See "Certain Legal
Aspects of the Mortgage Loans and Related Matters -- Soldiers' and Sailors'
Civil Relief Act" herein.
It is possible that some of the 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
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Equity Protection Act of 1994. The Riegle Act amended the Truth in Lending Act,
which in turn led to certain additional provisions being added to Regulation Z,
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 mortgage loans with high interest rates or high up-front fees
and charges. In general, mortgage 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 mortgage loans originated on or after October
1, 1995. The 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 mortgage loan.
Depending on the provisions of the applicable law and the specific facts
and circumstances involved, violations of these laws, policies and principles
may limit the ability of the Servicer, or any Sub-Servicer, to collect all or
part of the principal of or interest on the Mortgage Loans, may entitle the
borrower to a refund of amounts previously paid and, in addition, could subject
the Servicer, or any Sub-Servicer, to damages and administrative sanctions. If
the Servicer, or any Sub-Servicer, is unable to collect all or part of the
principal or interest on any Mortgage Loans because of a violation of the
aforementioned laws, public policies or general principles of equity,
distributions or payments to Securityholders of realized proceeds of the assets
in the related Trust or Trust Estate, as applicable, may be delayed, or such
proceeds may not be sufficient 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 have a material impact upon
the financial ability of the Servicer to continue to act in such capacity or the
ability of a Transferor to withdraw or replace Mortgage Loans if such violation
breaches a representation or warranty contained in the related Pooling and
Servicing Agreement or Indenture, as applicable.
YIELD, MATURITY AND PREPAYMENT CONSIDERATIONS
The yield to maturity of the Securities of any Series will be affected by
the amount and timing of principal payments on the related Mortgage Loans, the
manner of allocation of available funds and/or losses to such Securities, the
interest rates or amounts of interest payable on such Securities and the
purchase price paid for such Securities. In the case of a Series of Certificates
issued in Classes, the interaction of the foregoing factors may have different
effects on, and create different risks for, such Classes, and the effects and/or
risks for any one Class may vary over the life of such Class. The related
Prospectus Supplement may include additional prepayment considerations with
respect to the Securities of the related Series. Investors should carefully
consider the different consequences of such risks as may be described in the
related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, the
Mortgage Loans may be prepaid in full or in part at any time; however, a
prepayment penalty or premium may still be imposed in connection therewith. The
rate of prepayments of the Mortgage Loans cannot be predicted and may be
affected by a wide variety of economic, social and other factors, including
prevailing interest rates, the availability of alternative financing and
homeowner mobility. Therefore, no assurance can be given as to the level of
prepayments that may be experienced on Mortgage Loans included in any Mortgage
Pool.
Although published statistical data regarding the effects of interest rates
on prepayment rates for Mortgage Loans of the type typically made or acquired by
the Originators is limited, a number of factors suggest that the prepayment
behavior of a pool including Mortgage Loans may be significantly different from
that of a pool composed entirely of conforming, non-conforming, "jumbo" or
government-insured (i.e., "traditional") first mortgage loans with equivalent
interest rates and maturities. One such factor is the smaller average principal
balance of Mortgage Loans that may result in a higher prepayment rate than that
of a traditional first mortgage loan with a larger average balance, regardless
of the interest rate environment. A small principal balance, however, also may
make refinancing Mortgage Loans at a lower interest rate less attractive to the
borrower relative to refinancing a larger balance first mortgage loan, as the
perceived impact to the borrower of lower interest rates on the amount of the
monthly payment for a Mortgage Loan may be
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less than for a traditional first mortgage loan with a larger balance. Other
factors that might be expected to affect the prepayment rate of a pool of
Mortgage Loans include the amounts of, and interest rates on, the underlying
Senior Liens, if any, and the use of first mortgage loans as long-term financing
for home purchase and home equity loans as shorter-term financing for a variety
of purposes, including home improvement, education expenses and purchases of
consumer durables such as automobiles. Accordingly, Mortgage Loans may
experience a higher rate of prepayments than traditional first mortgage loans.
In addition, any future limitations on the deductibility of interest payments on
the Mortgage Loans for federal income tax purposes may further increase the rate
of prepayments on the Mortgage Loans.
In addition, certain of the Mortgage Loans comprising the Mortgage Pool may
have adjustable Mortgage Interest Rates ("ARM Loans"). As is the case with
conventional fixed-rate mortgage loans, ARM Loans may be subject to a greater
rate of principal prepayments in a declining interest rate environment. For
example, if prevailing interest rates fall appreciably, ARM 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 ARM Loans to "lock
in" a lower fixed interest rate. Conversely, if prevailing interest rates rise
appreciably, ARM Loans may prepay at lower rates than if prevailing interest
rates remain at or below those in effect at the time such ARM Loans were
originated. There can be no certainty as to the rate of prepayments on the ARM
Loans in stable or changing interest rate environments. See "Maturity,
Prepayment and Yield Considerations" herein.
Prepayments may result from voluntary early payments by borrowers
(including payments in connection with refinancings of any related Senior
Liens), 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, withdrawals
or reacquisitions of Mortgage Loans from a Trust or Trust Estate, as applicable,
required to be made under the related Pooling and Servicing Agreement or
Indenture will have the same effect on the Securityholders as a prepayment of
such Mortgage Loans. Unless otherwise specified in the related Prospectus
Supplement, all of the Mortgage Loans contain due-on-sale provisions, and the
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.
Additionally, should any Originator solicit refinancings from existing
borrowers, the rate of prepayments on the Mortgage Loans may increase due to any
resulting refinancings.
Prepayments on the Mortgage Loans for a Series generally will result in a
faster rate of distributions or payments, as applicable, of principal on the
Securities. Thus, the prepayment experience of the Mortgage Loans will affect
the average life and yield to investors and the extent to which the Securities
of any Series are paid prior to the final scheduled Distribution Date or Payment
Date, as applicable, therefor. A Series of Certificates may include Classes
which pay "interest only" or are entitled to receive a disproportionately high
level of interest distributions compared to the amount of principal to which
such Classes are entitled (each, an "Interest Weighted Class") or Classes which
pay "principal only" or are entitled to receive a disproportionately high level
of principal distributions compared to the amount of interest to which such
Classes are entitled (each, a "Principal Weighted Class"). A Series of
Certificates may include an Interest Weighted Class offered at a significant
premium or a Principal Weighted Class offered at a substantial discount. Yields
on such Classes will be extremely sensitive to prepayments on the Mortgage Loans
for such Series. In general if the Securities of any Series, including
Certificates that represent an Interest Weighted Class, are purchased at a
premium and principal payments on the Mortgage Loans occur at a rate faster than
anticipated at the time of purchase, the investor's actual yield to maturity
could be significantly lower than that assumed at the time of purchase. Where
the amount of interest allocated with respect to an Interest Weighted Class of
Certificates is extremely disproportionate to principal, the related
Certificateholder could, under some such prepayment scenarios, fail to recoup
its original investment. Conversely, if the Securities of any Series, including
Certificates that represent a Principal Weighted Class, are purchased at a
discount and principal payments on the Mortgage Loans occur at a rate slower
than assumed at the time of purchase, the investor's actual yield to
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maturity could be significantly lower than that originally anticipated. See
"Maturity, Prepayment and Yield Considerations" herein.
Any rating assigned to the Securities by a Rating Agency will reflect only
such Rating Agency's assessment of the likelihood that timely distributions or
payments, as applicable, will be made with respect to such Securities in
accordance with the related Pooling and Servicing Agreement or Indenture, as
applicable. Such rating will not constitute an assessment of the likelihood that
principal prepayments on the Mortgage Loans will be made by Mortgagors or of the
degree to which the rate of such prepayments might differ from that originally
anticipated. As a result, such rating will not address the possibility that
prepayment rates higher or lower than anticipated by an investor may cause such
investor to experience a lower than anticipated yield, or that an investor
purchasing an Interest Weighted Class of Certificates at a significant premium
might fail to recoup its initial investment.
Collections on the Mortgage Loans may vary due to the level of incidence of
delinquent payments and of prepayments. Collections on the Mortgage Loans may
also vary due to seasonal purchasing and payment habits of Mortgagors.
LIMITATIONS ON INTEREST PAYMENTS AND FORECLOSURES
Generally, under the terms of the Relief Act or similar state legislation,
a mortgagor who enters military service after the origination of the related
mortgage loan (including a mortgagor who is a member of the National Guard or is
in reserve status at the time of the origination of the mortgage loan and is
later called to active duty) may not be charged interest (including fees and
charges) above an annual rate of 6% during the period of such mortgagor's active
duty status, unless a court orders otherwise upon application of the lender. It
is possible that such action could affect, for an indeterminate period of time,
the ability of the Servicer to collect full amounts of interest on certain of
the Mortgage Loans. In addition, the Relief Act imposes limitations which would
impair the ability of the Servicer to foreclose on an affected Mortgage Loan
during the Mortgagor's 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
Depending on the structure of the related transaction, the ratings assigned
to the Securities of a given Series the credit of which is enhanced through
external means, such as a letter of credit, Financial Guaranty Insurance Policy,
Mortgage Pool Insurance Policy, Special Hazard Insurance Policy or Bankruptcy
Bond, may depend primarily on the creditworthiness of the provider of such
external credit enhancement device. Any reduction or withdrawal of the rating
assigned to the claims-paying ability of the credit enhancement provider below
the rating initially given to such Securities would likely result in a reduction
in the rating of such Securities and, in such event, the market price of such
Securities could be adversely affected. See "Rating" herein.
BOOK-ENTRY REGISTRATION
Effect on Liquidity. If so specified in the related Prospectus Supplement,
the Securities may initially be registered in book-entry form. Issuance of the
Securities in book-entry form may reduce the liquidity of such Securities in the
secondary market because investors may be unwilling to purchase Securities for
which they cannot obtain physical certificates.
Difficulty in Pledging. Because transactions in Securities, in most cases,
will be able to be effected only through Participants, 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 to take
actions in respect of such Securities, may be impaired because physical
certificates representing the Securities will not generally be available.
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Potential Delays in Receipt of Distributions or Payments. Securityholders
may experience some delay in their receipt of distributions or payments, as
applicable, of interest on and principal of the Securities because distributions
may be required to be forwarded by the related Trustee to DTC and, in such a
case, DTC will be required to credit such distributions or payments, as
applicable, to the accounts of its Participants which thereafter will be
required to credit them to the accounts of the applicable Securityholders either
directly or indirectly through Indirect Participants. See "Description of the
Securities -- Form of Securities -- Book-Entry Registration" herein.
FUNDS AVAILABLE FOR REDEMPTIONS AT THE REQUEST OF BONDHOLDERS
With respect to any Series of Bonds for which the related Prospectus
Supplement provides for redemptions of such Bonds at the request of Bondholders,
there can be no assurance that amounts available for such redemptions for such
Bonds will be sufficient to permit such Bonds to be redeemed within a reasonable
time after redemption is requested, for reasons including the following:
(i) Scheduled principal payments on the related Mortgage Loans
generally will be minimal in the early years and will increase in the later
years of such Mortgage Loans. As a result, funds available to be applied to
redemptions at the request of Bondholders, may be expected to be limited in
the early years and to increase during the later years of each Series.
Accordingly, the availability of funds for redemptions of Bonds of any
Series at the request of Bondholders will depend largely upon the rates of
prepayment of the related Mortgage Loans.
(ii) Prepayments of principal on Mortgage Loans are less likely to
occur during periods of higher interest rates when it is more likely that
requests for redemption by Bondholders will be made. During periods in
which prevailing interest rates are higher than the interest rate paid on
Bonds that may be redeemed at the request of Bondholders, greater numbers
of such Bonds are expected to be tendered for redemption in order to take
advantage of the higher interest rates payable on other investments then
available. During such periods, there will likely also be a reduction in
the rate of prepayments on the related Mortgage Loans, thus limiting the
funds available to satisfy requested redemption by Bondholders.
(iii) As specified in the related Prospectus Supplement, certain
Bondholders, such as personal representatives of deceased Bondholders, may
have certain priorities as to redemption at the request of Bondholders.
THE TRUSTS AND TRUST ESTATES
The Trust or Trust Estate, as applicable, for any Series of Securities will
include a Mortgage Pool that may consist of Mortgage Loans together with
payments in respect thereof and certain other accounts, obligations or
agreements, in each case as specified in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, the sole
source of distributions or payments, as applicable, in respect of the Securities
will be the assets included in the related Trust or Trust Estate, as applicable.
The Securities will not be entitled to payments in respect of any other assets
included in any other Trust or Trust Estate established by the related
Transferor or any of its affiliates.
The following is a brief description of the Mortgage Loans expected to be
included in the Trust or Trust Estate, as applicable, relating to a given Series
of Securities. The related Prospectus Supplement will set forth detailed
information respecting the Mortgage Loans proposed to be included in the related
Mortgage Pool. Information regarding the actual composition of the Mortgage
Loans in the related Mortgage Pool will be set forth in a report on Form 8-K to
be filed with the Commission within 15 days after such Mortgage Pool is complete
(the "Detailed Description"). A schedule of the Mortgage Loans relating to such
Series will be attached to the related Pooling and Servicing Agreement or
Indenture, as applicable, delivered in connection with the issuance of the
Securities.
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If so specified in the Prospectus Supplement relating to a Series of
Certificates, the Mortgage Pool may be divided into two or more groups based on
certain characteristics of the related Mortgage Loans (such as type or amount of
Mortgage Rate, remaining term to maturity or type of Mortgaged Property) and
amounts received, collected or recovered in respect of any such group will be
the primary source from which distributions on certain Classes of Certificates
will be derived.
THE MORTGAGE LOANS -- GENERAL
The real properties (including condominiums and townhouses) which secure
repayment of the Mortgage Loans (the "Mortgaged Properties") may be located in
any one of the fifty states or the District of Columbia. Unless otherwise
specified in the related Prospectus Supplement, all of the Mortgage Loans will
be covered by standard hazard insurance policies ("Standard Hazard Insurance
Policies"). The existence and extent of any such coverage will be described in
the related Prospectus Supplement. Unless otherwise specified in the related
Prospectus Supplement, the Mortgage Loans will not be insured or guaranteed by
any governmental agency or covered wholly or partially by primary mortgage
insurance policies.
Unless otherwise specified in the related Prospectus Supplement, all of the
Mortgage Loans in a Mortgage Pool will provide for payments to be made monthly
on due dates occurring throughout the month.
The Mortgage Loans to be included in any Mortgage Pool will be described in
the related Prospectus Supplement. The Mortgage Loans will have interest payable
thereon at (i) fixed rates specified in the related Prospectus Supplement, (ii)
adjustable rates computed as specified in the related Prospectus Supplement or
(iii) graduated or other variable rates described in the related Prospectus
Supplement. Unless otherwise specified in the related Prospectus Supplement,
each Mortgage Loan will require monthly payment of principal and interest.
Scheduled payments of principal on any Mortgage Loan may be computed (i) on a
level debt service basis that will result in full amortization over the stated
term of such Mortgage Loan, (ii) in the case of a Balloon Loan, on the basis of
an assumed amortization schedule that is significantly longer than the original
term to maturity of such Mortgage Loan and will require payment of a substantial
amount of principal at the stated maturity specified in the related Mortgage
Note or (iii) on such other basis as is specified in the related Prospectus
Supplement.
Certain of the Mortgage Loans may have been originated pursuant to
underwriting standards that rely primarily on the value and adequacy of the
Mortgaged Property as collateral and, to a much lesser extent, on the
creditworthiness of the related Mortgagor. Accordingly, the rates of
delinquencies, foreclosures and losses on such Mortgage Loans, particularly in
periods during which the value of the related Mortgaged Properties has declined,
may be higher than those historically experienced by the mortgage lending
industry in general. See "The Originators -- Underwriting Guidelines" herein.
Prepayments of principal may be subject to a prepayment fee, which may be
fixed for the life of the Mortgage Loan or may decline over time, and may be
prohibited for the life of the Mortgage Loan or for certain periods ("lockout
periods"). Certain Mortgage Loans may permit prepayments after expiration of the
applicable lockout period and may require the payment of a prepayment fee in
connection with any such subsequent prepayment. Other Mortgage Loans may permit
prepayments without payment of a fee unless the prepayment occurs during
specified time periods. The Mortgage Loans may include due-on-sale clauses which
permit the mortgagee to demand payment of the entire Mortgage Loan in connection
with the sale or certain transfers of the related Mortgaged Property. Other
Mortgage Loans may be assumable by persons meeting the then applicable
underwriting standards of the applicable Originator.
The Prospectus Supplement for each Series of Securities will contain
information, as of the date of such Prospectus Supplement and to the extent then
specifically known to the related Transferor, with respect to the Mortgage Loans
contained in the related Mortgage Pool, including (i) the aggregate outstanding
principal balance and the average outstanding principal balance of the Mortgage
Loans as of the applicable Cut-off Date, (ii) the largest principal balance and
the smallest principal balance of any of the Mortgage Loans, (iii) the types of
Mortgaged Properties securing the Mortgage Loans, (iv) the original terms to
maturity of the Mortgage Loans, (v) the weighted average term to maturity of the
Mortgage Loans as of the related Cut-off Date and the range of the terms to
maturity, (vi) the ranges of Combined Loan-to-Value Ratios at
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origination, (vii) the weighted average Mortgage Rate and ranges of Mortgage
Rates borne by the Mortgage Loans and (viii) the geographical distribution of
the Mortgaged Properties on a state-by-state basis. If specific information
respecting the Mortgaged Loans is not known to the related Transferor at the
time the related Securities are initially offered, more general information of
the nature described above will be provided in the related Prospectus Supplement
and specific information will be set forth in the Detailed Description.
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 current principal
balance of any Senior Lien on the related Mortgaged Property, by (y) the
Appraised Value of such Mortgaged Property. "Appraised Value" is the appraised
value of a Mortgaged Property based upon the lesser of (i) the appraisal or
valuation made either at the time of the origination of the related Mortgaged
Loan or, in certain cases with respect to Mortgage Loans acquired directly or
indirectly by the related Transferor from an Unaffiliated Originator, at or
immediately prior to the date of acquisition of the related Mortgage Loan, and
(ii) in the case where there is no Senior Lien to the Mortgage Loan and such
Mortgage represents a purchase money instrument, the sales price of the related
Mortgaged Property at the time of the origination of the related Mortgage Loan.
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
secured by the same Mortgaged Properties) in a particular Mortgage Pool become
equal to or greater than the value of such Mortgaged Properties or if the
general condition of a Mortgaged Property declines, the actual rates of
delinquencies, foreclosures and losses on the related Mortgage Loans could be
higher than those now generally experienced in the mortgage lending industry.
Any overall decline in the market value of residential real estate, the general
condition of the Mortgaged Properties or other factors could adversely affect
the values of the Mortgaged Properties such that the outstanding principal
balance of such Mortgage Loans, together with any additional liens on the
Mortgaged Properties, equal or exceed the value of such Mortgaged Properties and
give rise to the consequences discussed in the preceding sentence.
Each Series of Bonds will be secured by the assets included in the related
Trust Estate that will have been pledged to the related Trustee by the related
Bond Issuer, and each Series of Certificates will represent a beneficial
interest in the assets included in the related Trust that will have been
transferred to the related Trustee by the related Transferor. The Servicer will
service the Mortgage Loans either directly, or through the Sub-Servicers,
pursuant to the related Pooling and Servicing Agreement or Servicing Agreement,
as applicable, and will receive a fee for such services. See "The Pooling and
Servicing Agreement -- General Servicing Procedures" herein. 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
or Servicing Agreement, as applicable, as if the Servicer alone were servicing
such Mortgage Loans.
The obligations of the Servicer with respect to the Mortgage Loans will
consist principally of its contractual servicing obligations, including its
obligations to make Servicing Advances and to enforce the obligations of the
Sub-Servicers, under the related Agreement, and its obligation to make certain
Monthly Advances in the event of delinquencies in payments on or with respect to
the Mortgage Loans in the amounts described under "The Pooling and Servicing
Agreement -- Monthly Advances and Compensating Interest" herein. The obligations
of the Servicer to make Monthly Advances may be subject to limitations, to the
extent provided herein and in the related Prospectus Supplement.
FORWARD COMMITMENTS; PREFUNDING ACCOUNTS; CAPITALIZED INTEREST ACCOUNTS
If so specified in the related Prospectus Supplement, the related Pooling
and Servicing Agreement or Indenture, as applicable, may contain provisions
pursuant to which the related Transferor will agree to transfer additional
Mortgage Loans into the related Mortgage Pool during a specified period of time
(the "Funding Period") following the date on which the related Securities are
issued (such provisions being referred to herein as a "Forward Commitment"). The
Forward Commitment may permit the transfer to the related
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Trust or Trust Estate, as applicable, of additional Mortgage Loans that have not
completed the origination process by the date on which the Securities are to be
delivered to the Securityholders (the "Closing Date") or were otherwise not
available to be delivered by the related Transferor on such Closing Date. If a
Forward Commitment is to be utilized, unless otherwise specified in the related
Prospectus Supplement, a deposit will be made to a segregated account (each, a
"Prefunding Account") in an amount equal to all or a portion of the proceeds
received in connection with the sale of the Securities of the related Series
(such amount, the "Prefunding Amount"). Subsequently, additional Mortgage Loans
will be conveyed by the related Transferor for inclusion in the related Mortgage
Pool in exchange for cash from the related Prefunding Account in one or more
transfers. The related Pooling and Servicing Agreement or Indenture, as
applicable, will require that, if any portion of the Prefunding Amount is not
applied to acquire additional Mortgage Loans by the end of the Funding Period,
any amounts remaining will be released from the Prefunding Account and
distributed or paid, as applicable, in reduction of the principal balance of the
related Securities as specified in the related Prospectus Supplement.
Each additional Mortgage Loan must satisfy the eligibility criteria
specified in the related Prospectus Supplement and related Pooling and Servicing
Agreement or Indenture, as applicable. Such eligibility criteria will be
determined in consultation with each Rating Agency (and/or any credit
enhancement provider for the related Series) prior to the issuance of such
Series and are designed to ensure that if such additional Mortgage Loans were
included as part of the initial Mortgage Pool, the credit quality thereof would
be consistent with the initial rating of the Securities of such Series. At the
time additional Mortgage Loans are transferred for inclusion in the related
Mortgage Pool, the related Transferor will certify that all conditions precedent
to the transfer of such additional Mortgage Loans, including the satisfaction of
specific eligibility criteria, have been satisfied. It is a condition to the
transfer of any additional Mortgage Loans by the related Transferor for
inclusion in the related Mortgage Pool that each Rating Agency, after receiving
prior notice of such proposed transfer, shall not have advised the related
Transferor or the Trustee or any credit enhancement provider for the related
Series that the conveyance of such additional Mortgage Loans will result in a
qualification, modification or withdrawal of its then current rating of any
Securities of such Series. Following the transfer of additional Mortgage Loans
to the related Trust or Trust Estate, as applicable, the aggregate
characteristics of the Mortgage Loans then held in such Trust or Trust Estate
may vary from those included in the original Mortgage Pool. As a result, the
additional Mortgage Loans may adversely affect the performance of the related
Securities.
If a Prefunding Account is established, a segregated account (each, a
"Capitalized Interest Account") may also be established for the related Series.
On the Closing Date for such Series, all or a portion of the proceeds received
by the related Transferor in connection with the sale of the Securities of the
related Series may be deposited in the Capitalized Interest Account and used to
fund the excess, if any, of the sum of (i) the amount of interest accrued on the
Securities of such Series specified in the related Prospectus Supplement and
(ii) if specified in the related Prospectus Supplement, certain fees or expenses
during the Funding Period such as Trustee fees and credit enhancement fees, over
the amount of interest available therefor from the Mortgage Loans in the related
Mortgage Pool. If so specified in the related Prospectus Supplement, amounts on
deposit in the Capitalized Interest Account may be released to the related
Transferor prior to the end of the Funding Period subject to the satisfaction of
certain tests specified in the related Prospectus Supplement. Any amounts on
deposit in the Capitalized Interest Account at the end of the Funding Period
that are not necessary for such purposes will be distributed to the person
specified in the related Prospectus Supplement.
USE OF PROCEEDS
Each Transferor intends to use the net proceeds to be received from the
sale of the Securities of each Series to acquire the Mortgage Loans to be
deposited in the related Mortgage Pool, to establish any Reserve Account,
Prefunding Account or Capitalized Interest Account and to pay other expenses
connected with the pooling of Mortgage Loans and the issuance of Securities. Any
amounts remaining after such payments may be used for general corporate
purposes. The timing and amount of offerings of Securities by each Transferor
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will be influenced by a number of factors, including volume of Mortgage Loans
acquired by such Transferor from time to time, prevailing interest rates,
availability of funds and general market conditions.
AAMES CAPITAL CORPORATION
Aames Capital Corporation ("ACC") was incorporated in the State of
California on August 13, 1993 and is a wholly owned subsidiary of AFC. ACC is
primarily engaged in acquiring, owning, transferring and servicing Mortgage
Loans. ACC maintains its principal offices at 3731 Wilshire Boulevard, Los
Angeles, California 90010 and its telephone number is (800) 829-2929. ACC will
only act as Transferor in connection with the issuance of Certificates and will
not act in such capacity in connection with the issuance of any Series of Bonds.
Neither ACC nor any of its affiliates will insure or guarantee distributions on
the Securities of any Series.
AAMES CAPITAL ACCEPTANCE CORP.
Aames Capital Acceptance Corp. ("ACAC") was incorporated under the laws of
the State of Delaware on February 4, 1997, and is a wholly owned limited purpose
finance subsidiary of Aames Financial Corporation ("AFC"). ACAC's principal
office is located at 3731 Wilshire Boulevard, Los Angeles, California 90010 and
its telephone number is (213) 351-6100. ACAC was organized for the sole purpose
of facilitating transactions of the type described herein and in connection
therewith purchasing, holding, owning and transferring all right, title and
interest in Mortgage Loans and any activities incidental to and necessary or
convenient for the accomplishment of such purpose. ACAC does not have, and is
not expected in the future to have, any significant assets.
ACAC may act as the Bond Issuer or may sell or assign its beneficial
ownership interest in any Mortgage Pool, in whole or in part, to another entity
formed by ACAC solely for the purpose of acting as the Bond Issuer for a given
Series of Bonds at or prior to the time of the issuance of such Bonds. Each
Series of Bonds will be non-recourse obligations of the related Bond Issuer.
ACAC's Certificate of Incorporation places substantial restrictions on the
operations and management of ACAC such that a voluntary or involuntary
application with respect thereto for relief under the United States Bankruptcy
Code or similar state laws is unlikely. Neither ACAC nor any of its affiliates
will insure or guarantee distributions on the Securities of any Series.
THE SERVICER
GENERAL
ACC will act as servicer (in such capacity, the "Servicer") with respect to
the Mortgage Loans included in the Mortgage Pool for any Series of Securities.
MORTGAGE LOAN DELINQUENCY AND FORECLOSURE EXPERIENCE
The following table sets forth delinquency and foreclosure experience of
home equity loans originated or purchased by the Servicer or Affiliated
Originators and included in the servicing portfolio of the Servicer or its
affiliates for the periods indicated, except that the information with respect
to losses on foreclosed loans does
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not include any mortgage loans not sold by the Servicer in connection with a
securitization even if serviced and foreclosed upon during the indicated period.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------
1994 1995 1996
------- ------ -------
<S> <C> <C> <C>
Percentage of dollar amount of delinquent loans to loans
serviced
(period end)(1)(2)
One Month................................................. 3.78% 3.88% 4.86%
Two Months................................................ 1.61% 1.56% 1.79%
Three or More Months:
Not foreclosed(3)....................................... 6.71% 5.00% 8.05%
Foreclosed(4)........................................... 3.58% 1.47% 1.04%
------- ------ -------
Total................................................... 15.68% 11.91% 15.74%
======= ====== =======
Percentage of dollar amount of loans foreclosed to loans
serviced
(period end)(2).............................................. 3.02% 1.17% 1.17%
Number of loans foreclosed..................................... 215 159 221
Principal amount at time of foreclosure of foreclosed loans (in
thousands)................................................... $11,528 $6,675 $14,349
Losses on foreclosed loans included in pools of loans
securitized (in thousands)................................... $ 40 $ 322 $ 1,342
</TABLE>
- -------------------------
(1) Delinquent loans are loans for which more than one payment is due.
(2) The delinquency and foreclosure percentages are calculated on the basis of
the total dollar amount of mortgage loans originated or purchased by the
Servicer and, in each case, serviced by the Servicer as of the end of the
periods indicated. The total outstanding principal balance of such loans
serviced by the Servicer as of the end of any indicated period includes many
loans that will not have been outstanding long enough to give rise to some
or all of the indicated periods of delinquency.
(3) Represents loans that are in foreclosure but as to which foreclosure
proceedings have not concluded.
(4) Represents properties acquired by the Servicer following foreclosure sale
and still serviced by the Servicer at period end.
The loss information included in the table above reflects only loss
experience with respect to foreclosed properties for which affiliates of the
Servicer were retained to manage such properties during such periods. The loss
information excludes any gains realized on foreclosed properties.
The Servicer's servicing portfolio has grown over the periods presented.
However, because foreclosures and losses typically occur months or years after a
loan is originated, data relating to delinquencies, foreclosures and losses as a
percentage of the current portfolio can understate the risk of future
delinquencies, losses or foreclosures. No information is available to the
Servicer with respect to delinquencies, foreclosures or losses on loans
originated by affiliates of the Servicer if the related loans or properties were
not serviced or managed, as applicable, by the Servicer or such affiliates. In
addition, no information is available to the Servicer with respect to
delinquency, foreclosure or loss experience with respect to loans originated by
any Unaffiliated Originators if the related loans or properties were not
serviced or managed, as applicable, by the Servicer.
Losses realized on properties managed by affiliates of the Servicer and
acquired upon foreclosure of loans generally increased over the three-year
period ended June 30, 1996. However, the amount of such losses is relatively low
in comparison to the volume of home equity mortgage loans originated by
affiliates of the Servicer during such period, and the Servicer believes such
losses were limited as a direct result of loan origination standards, similar to
the Aames Guidelines, that have historically required a low initial Combined
Loan-to-Value Ratio. See "The Originators -- Underwriting Guidelines" and "Risk
Factors -- Nature of the Security for Mortgage Loans" herein.
There is no assurance that the delinquency, foreclosure and loss experience
with respect to any of the Mortgage Loans or with respect to any Mortgage Pool
will be comparable to the experience reflected above for home equity mortgage
loans originated or purchased and serviced by affiliates of the Servicer.
Because certain Mortgage Loans may have been underwritten pursuant to standards
that rely primarily on the value of the
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related Mortgaged Properties rather than the creditworthiness of the related
Mortgagors, the actual rates of delinquencies, foreclosures and losses on such
Mortgage Loans, particularly in periods during which the value of the related
Mortgaged Properties has declined, could be higher than those historically
experienced by the mortgage lending industry in general. To the extent the Aames
Guidelines applicable in the future permit higher initial Combined Loan-to-Value
Ratios than those that have been required historically, or to the extent
Mortgage Pools contain a larger percentage of higher credit grade loans than
have historically been the case, losses realized on foreclosures of the related
Mortgaged Properties may be higher than the experience reflected above for home
equity mortgage loans originated or purchased and serviced by affiliates of the
Servicer. In addition, the rate of delinquencies, foreclosures and losses with
respect to the Mortgage Loans will also be affected by, among other things,
interest rate fluctuations and general and regional economic conditions. See
"Risk Factors -- Nature of the Security for Mortgage Loans" herein.
THE ORIGINATORS
Each Transferor may acquire Mortgage Loans originated by one or more
subsidiaries of AFC ("Affiliated Originators"). In addition, each Transferor may
directly, or indirectly through one of the Affiliated Originators, acquire
Mortgage Loans originated by entities unaffiliated with AFC ("Unaffiliated
Originators") (together with Affiliated Originators, the "Originators").
UNDERWRITING GUIDELINES
All Mortgage Loans originated by Affiliated Originators will be
underwritten in accordance with standard guidelines (the "Aames Guidelines")
developed by the Servicer and the related Affiliated Originator for customary
application in the Affiliated Originator's loan origination activities, as
described below. Unless otherwise specified in the related Prospectus
Supplement, Mortgage Loans originated by Unaffiliated Originators are
reunderwritten in accordance with the applicable Aames Guidelines. In connection
with certain purchases of Mortgage Loans from Unaffiliated Originators, ACC may
decide, after evaluating a number of factors, including ACC's previous
experiences with a particular seller, the size of the loan portfolio and other
relevant information to complete such purchase without re-underwriting the
entire loan portfolio. In such cases, ACC will re-underwrite a statistically
significant sample of the loans in that portfolio to confirm compliance with the
Aames Guidelines.
The Aames Guidelines generally are applied to evaluate the value and
adequacy of the Mortgaged Property as collateral and to evaluate the Mortgagor's
credit standing and repayment ability. In determining the adequacy of the
Mortgaged Property as collateral, the related Originator obtains an appraisal of
each property considered for financing. The appraiser is required to inspect the
property and verify that it is in acceptable condition and that construction, if
new, has been completed. The appraisal is based on the market value of
comparable homes and is conducted substantially in accordance with mortgage
banking industry appraisal standards. Appraisers utilized by Affiliated
Originators are generally employees of the related Affiliated Originator. In
connection with the related Transferor's reunderwriting of the Mortgage Loans
originated by Unaffiliated Originators, such Transferor will have reviewed the
appraisal values for all of the Mortgaged Properties securing such Mortgage
Loans; however, such Transferor generally will not reappraise any such Mortgage
Loans. There can be no assurance that if such Mortgage Loans were reappraised by
the related Transferor in accordance with the applicable Aames' Guidelines that
the appraised value of such Mortgaged Properties would not be lower than the
appraised value determined at origination by or on behalf of the related
Unaffiliated Originators.
In general, a prospective borrower applying for a Mortgage Loan is required
to fill out a detailed application designed to provide the Originator pertinent
information. As part of the description of the borrower's financial condition,
the borrower generally is required to provide a current list of assets and
liabilities and a statement of income and expenses, as well as an authorization
to apply for a credit report that summarizes the borrower's credit history. The
Originator obtains credit information from credit reporting agencies. In many
cases, the credit information obtained will include major derogatory credit
items such as credit write-offs, outstanding judgments and prior bankruptcies.
The Originator generally verifies the borrower's employment but in many cases
does not verify the borrower's income.
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Once all the signed loan documents, including the promissory note and a
security instrument (i.e., mortgage, deed of trust or security deed), and all
applicable employment, credit and property information are received, a
determination is made as to whether to make the loan. The primary (but not the
only) factor considered by the Originator in making this determination is the
Combined Loan-to-Value Ratio of the related Mortgaged Property, taking into
account any existing Senior Liens and the principal amount of the loan made with
respect to the related Mortgaged Property. Generally, a Mortgaged Property with
a lower Combined Loan-to-Value Ratio provides greater Security than a Mortgaged
Property with a higher Combined Loan-to-Value Ratio.
After expiration of any three business day rescission period that is
required by the federal Truth in Lending Act and the security instrument is
ready for recordation, the loan is fully funded. Repayment of principal and
interest is generally scheduled to begin approximately one month after funding
and, in many cases, the Originator, solely at the direction of the related
borrower, will withhold out of the related loan proceeds at origination the
first monthly payment to become due on such loan. The Aames Guidelines generally
require title insurance coverage issued at origination by an approved title
insurance company issuing an a standard form title insurance policy. Such title
policy is required to be in an amount at least equal to the original principal
amount of the related Mortgage Loan.
Notwithstanding the foregoing, in circumstances deemed appropriate by the
Servicer and/or ACC, certain of the Aames Guidelines may be modified or waived
with respect to some or all of the Mortgage Loans included in the Mortgage Pool
for a Series of Securities.
REPRESENTATIONS BY ORIGINATORS AND THE TRANSFERORS
Generally, an Unaffiliated Originator will make certain representations and
warranties with respect to the Mortgage Loans, as specified below, when the
Mortgage Loans are sold by such Unaffiliated Originator to the related
Transferor or an affiliate thereof. The related Transferor will make comparable
representations and warranties with respect to the Mortgage Loans being
transferred pursuant to the related Pooling and Servicing Agreement or
Indenture, as applicable.
Such representations and warranties generally include, among other things,
that (A) at the time of the sale by the Originator of each Mortgage Loan and,
(B) at the time of the conveyance by such Transferor of each Mortgage Loan into
the related Mortgage Pool: (i) the information with respect to each Mortgage
Loan set forth in the Loan Schedule and delivered upon conveyance of the
Mortgage Loan is true and correct as of the related Cut-off Date; (ii) the
proceeds of each Mortgage Loan have been fully disbursed and there are no
obligations to make further disbursements with respect to any Mortgage Loan;
(iii) each Mortgaged Property is improved by a single (one- to four-) family
residential dwelling, which may include a condominium, townhouse or manufactured
home which is permanently affixed to and treated as real property under local
law; (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 Loan Schedule and 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, subject to certain
limitations.
Unless otherwise described in the related Prospectus Supplement, all of the
representations and warranties of an Unaffiliated Originator in respect of a
Mortgage Loan will be made as of the date on which such Unaffiliated Originator
sells the Mortgage Loan, and all of the representations and warranties of the
related Transferor in respect of a Mortgage Loan will be made as of the date
such Transferor conveys such Mortgage Loan into the related Mortgage Pool. 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 the Securities. A
substantial period of time may elapse between the date as of which the
representations and warranties are made and the date the related Series of
Securities is issued. However, the related Transferor will not include any
Mortgage Loan in the Mortgage Pool for any Series of Securities if anything has
come to such Transferor's attention that would cause it to believe that such
representations and warranties will not be accurate and complete in all
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material respects in respect of such Mortgage Loan as of the date of initial
issuance of the related Series of Securities.
Upon a breach of a representation and/or warranty with respect to a
Mortgage Loan made by the related Transferor under the related Pooling and
Servicing Agreement or Indenture, as applicable, which occurs after conveyance
of the related Mortgage Loan to a Mortgage Pool, such Transferor may be required
to withdraw such Mortgage Loan from such Mortgage Pool or remove such Mortgage
Loan from the Mortgage Pool and convey a substantially similar mortgage loan to
the Mortgage Pool in substitution therefor.
DESCRIPTION OF THE SECURITIES
Each Series of Certificates will be issued in one or more classes (each, a
"Class") pursuant to an agreement (each, a "Pooling and Servicing Agreement")
dated as of the related Cut-off Date among the related Transferor, the Servicer
and the Trustee for the benefit of the holders of the Certificates
("Certificateholders") of such Series. Each Series of Bonds will be issued in a
single class pursuant to an indenture (each, an "Indenture") dated as of the
related Cut-off Date between the related Bond Issuer and the Trustee for the
benefit of the holders of the Bonds ("Bondholders" and, together with
Certificateholders, "Securityholders") of such Series. The provisions of each
Pooling and Servicing Agreement or Indenture, as applicable, will vary depending
upon the nature of the Securities to be issued thereunder and the nature of the
related Trust or Trust Estate, as applicable. A representative form of Pooling
and Servicing Agreement and Indenture has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part. The following
summaries describe the material provisions relating to the Securities which may
appear in any related Pooling and Servicing Agreement or Indenture, as
applicable. The Prospectus Supplement for a Series of Securities will describe
any material provision of the related Pooling and Servicing Agreement or
Indenture, as applicable, relating to such Series that materially differs from
the description thereof contained in this Prospectus. The summaries do not
purport to be complete and are subject to, and are qualified in their entirety
by reference to, all of the provisions of the definitive Pooling and Servicing
Agreement or Indenture, as applicable, for each Series of Securities and the
applicable Prospectus Supplement. A copy of the definitive Pooling and Servicing
Agreement or Indenture, as applicable (each without exhibits), relating to any
Series of Securities will be provided to Securityholders, without charge, upon
written request to the related Transferor addressed to it at: 3731 Wilshire
Boulevard, Los Angeles, California 90010, Attention: Corporate Secretary.
GENERAL
The Certificates of a given Series will evidence undivided beneficial
interests in the assets of the related Trust specified in the related Prospectus
Supplement. The Bonds of a given Series will represent non-recourse obligations
of the related Bond Issuer, secured by the assets in the related Trust Estate,
and the proceeds of such assets will be the sole source of payments on such
Bonds. The Securities of a given Series may be covered by or entitled to the
benefits of a Financial Guaranty Insurance Policy, a Mortgage Pool Insurance
Policy, a Special Hazard Insurance Policy, a Bankruptcy Bond or other insurance
policies, cash accounts, letters of credit, limited guaranty insurance policies,
third party guarantees or other forms of credit enhancement, in each case as
described herein and in the related Prospectus Supplement. A Series of
Certificates may include one or more Classes of senior certificates that receive
certain preferential treatment (collectively, "Senior Certificates") with
respect to one or more subordinated Classes (collectively, "Subordinated
Classes") of Certificates of such Series. Distributions on one or more Classes
of a Series of Certificates may be made: (a) prior to one or more other Classes,
(b) after the occurrence of specified events, (c) in accordance with a schedule
or formula, (d) on the basis of collections from designated portions of the
Mortgage Loans in the related Trust or (e) on a different basis, in each case as
specified in the related Prospectus Supplement. The timing and amounts of such
distributions may vary among such Classes or over time as specified in the
related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement,
distributions or payments, as applicable, on Securities will be made only from
the assets of the related Trust or Trust Estate, as applicable, and the
Securities will not represent interests in or obligations of the related
Transferor, the Servicer, the Trustee, any Originator or any other person. The
assets of each Trust or Trust Estate, as applicable, will consist of one or
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more of the following, to the extent set forth in the related Prospectus
Supplement: (a) the Mortgage Loans that from time to time are subject to the
related Pooling and Servicing Agreement or Indenture, as applicable; (b) the
assets of the Trust or the Trust Estate that from time to time are required by
the Pooling and Servicing Agreement or Indenture, as applicable, to be deposited
in the Certificate Account or Bond Account, as applicable, the Collection
Account and any other accounts (collectively, the "Accounts") established
pursuant to the related Pooling and Servicing Agreement or Indenture, as
applicable, or to be invested in Permitted Investments; (c) property and any
proceeds thereof acquired by foreclosure, deed in lieu of foreclosure or a
comparable conversion of the Mortgage Loans in the related Mortgage Pool; (d)
any Financial Guaranty Insurance Policy; (e) any Mortgage Pool Insurance Policy;
(f) any Special Hazard Insurance Policy; (g) any Bankruptcy Bond; (h) any funds
on deposit from time to time in any Reserve Account; and (i) all rights under
any other insurance policies, guarantees, surety bonds, letters of credit or
other credit enhancement covering any Securities, any Mortgage Loan in the
related Mortgage Pool or any related Mortgaged Property required pursuant to the
related Pooling and Servicing Agreement or Indenture, as applicable.
FORM OF SECURITIES
General. Unless otherwise specified in the Prospectus Supplement, the
Securities of each Series will be issued as physical certificates ("Definitive
Securities") in fully registered form only in the denominations specified in the
related Prospectus Supplement. Definitive Securities, if issued, will be
transferable and exchangeable at the corporate trust office of the Trustee or,
at the election of the Trustee, the office of a registrar for the Securities
appointed by the Trustee, in either case as named in the related Prospectus
Supplement. No service charge will be incurred for any registration of exchange
or transfer, but the Trustee may require payment of a sum sufficient to cover
any tax or other governmental charge. If provided in the related Pooling and
Servicing Agreement or Indenture, as applicable, a certificate administrator may
perform certain duties in connection with the administration of the Securities.
Book-Entry Registration. If so specified in the related Prospectus
Supplement, the Securities may initially be registered in the name of Cede & Co.
("Cede"), the nominee of The Depository Trust Company ("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 and a "clearing agency" registered
pursuant to the provisions of Section 17A of the Exchange Act. 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 or payments, as applicable, 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 Distribution Date or Payment Date, as applicable, 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 them to Indirect Participants or Securityholders.
Under a book-entry format, 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 related Pooling
and Servicing Agreement or Indenture, as applicable. The beneficial holders of
such Securities will only be permitted to exercise the rights of Securityholders
under the related Pooling and Servicing Agreement or Indenture, as applicable,
indirectly through DTC and its Participants who in turn will exercise their
rights through DTC.
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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 the Securities similarly are required to make book-entry
transfers and receive and transmit such payments on behalf of such
Securityholders. Accordingly, although Securityholders will not possess physical
securities, such rules, regulations and procedures provide a mechanism by which
Securityholders will receive distributions or payments, as applicable, and will
be able to transfer their interests.
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 or Indenture, as
applicable only at the direction of one or more Participants to whose account
the 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 form as Definitive Securities to
Securityholders or their nominees, rather than to DTC or its nominee only under
the events specified in the related Pooling and Servicing Agreement or
Indenture, as applicable, as described in the related Prospectus Supplement.
Upon the occurrence of any of the events specified in the related Pooling and
Servicing Agreement and Prospectus Supplement, DTC will be required to notify
all Participants of the availability through DTC of Definitive Securities. Upon
surrender by DTC of the physical securities representing the Securities and
instruction for re-registration, the Trustee will issue the Securities in the
form of Definitive Securities, and thereafter the Trustee will recognize the
holders of such Definitive Securities 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 related Pooling and Servicing Agreement or Indenture, as applicable.
The final distribution or payment, as applicable, of any Security (whether
Definitive Securities or Securities registered in the name of Cede), however,
will be made only upon presentation and surrender of such Securities on the
final Distribution Date or Payment Date, as applicable, at such office or agency
as is specified in the notice of final payment to Securityholders.
DISTRIBUTIONS AND PAYMENTS ON SECURITIES
General. Unless otherwise specified in the related Prospectus Supplement,
distributions of principal and interest (or, if applicable, of principal only or
interest only) on the related Certificates, or payments of principal and
interest on the related Bonds, as applicable, will be made by the Trustee on
each Distribution Date specified in the related Prospectus Supplement (each, a
"Distribution Date") or Payment Date specified in the related Prospectus
Supplement (each, a "Payment Date"), respectively, in the amounts specified in
the related Prospectus Supplement. Distributions or payments, as applicable,
will be made to the persons in whose names the Securities are registered at the
close of business on the record dates specified in the Prospectus Supplement.
Distributions or payments, as applicable, will be made by check mailed to the
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persons entitled thereto at the address appearing in the register maintained for
Securityholders (the "Security Register") or, to the extent described in the
related Prospectus Supplement, by wire transfer or by such other means as are
described therein, except that the final distribution or payment, as applicable,
in retirement of the Securities will be made only upon presentation and
surrender of the Securities at the office or agency of the Trustee or other
person specified in the final distribution notice to Securityholders.
With respect to a given Series of Certificates, each Class of Certificates
within such Series will evidence the interests specified in the related
Prospectus Supplement, which may include, among other things, (i) the right to
receive distributions allocable only to principal, only to interest or to any
combination thereof; (ii) the right to receive distributions only of prepayments
of principal throughout the lives of the Certificates or during specified
periods; (iii) interests that are subordinated in their right to receive
distributions of scheduled payments of principal, prepayments of principal,
interest or any combination thereof to one or more other Classes of Certificates
of such Series throughout the lives of the Certificates or during specified
periods or interests that are subordinated with respect to certain losses or
delinquencies; (iv) the right to receive distributions only after the occurrence
of events specified in the related Prospectus Supplement; (v) the right to
receive distributions in accordance with a schedule or formula or on the basis
of collections from designated portions of the assets in the related Trust; (vi)
as to Certificates entitled to distributions allocable to interest, the right to
receive interest at a fixed rate or an adjustable rate; (vii) as to Certificates
entitled to distributions allocable to interest, the right to such distributions
allocable to interest only after the occurrence of events specified in the
related Prospectus Supplement; and (viii) as to Certificates entitled to
distributions allocable to interest only after the occurrence of certain events,
the accrual but deferment of payment of interest until such events occur, in
each case as specified in such Prospectus Supplement.
In general, the method of determining the amount of distributions or
payments, as applicable, on a particular Series of Securities will depend on the
type of credit support, if any, that is used with respect to such Series. See
"Credit Enhancement" herein. Set forth below is a general description of certain
methods that may be used to determine the amount of distributions or payments,
as applicable, on the Securities of a particular Series. The Prospectus
Supplement for each Series of Securities will describe the method to be used in
determining the amount of distributions or payments, as applicable, on the
Securities of such Series.
Distributions or payments, as applicable, allocable to principal and
interest on the Securities of a Series will be made by the Trustee out of, and
only to the extent of, funds in a segregated account established and maintained
by the Trustee for the deposits of such amounts (the "Certificate Account," with
respect to Certificates, and the "Bond Account," with respect to Bonds). The
Certificate Account or Bond Account, as applicable, may include funds
transferred from any Reserve Account, any Prefunding Account and funds received
as a result of any other form of credit enhancement. As between Certificates of
different Classes and as between distributions of interest and principal and, if
applicable, between distributions of prepayments of principal and scheduled
payments of principal, distributions made on any Distribution Date will be
applied as specified in the related Prospectus Supplement. Unless otherwise
specified in the Prospectus Supplement relating to a given Series of
Certificates, distributions or payments, as applicable, on the Certificates of
any Class of a Series will be made pro rata to all related Certificateholders of
that Class.
Available Funds. All distributions or payments, as applicable, on the
Securities of each Series on any Distribution Date or Payment Date, as
applicable, will be made from the funds available for distribution or payment,
as applicable, on such Distribution Date or Payment Date, as applicable, as
described below ("Available Funds"), in accordance with the terms described in
the related Prospectus Supplement. Unless otherwise specified in the related
Prospectus Supplement, Available Funds for each Distribution Date or Payment
Date, as applicable, will equal the sum of the following amounts:
(i) the aggregate of all previously undistributed payments on account
of principal (including principal prepayments, if any, and prepayment
penalties, if so provided in the related Prospectus
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Supplement) and interest on the Mortgage Loans in the related Mortgage
Pool, received by the Servicer during the related collection period (the
"Collection Period") except:
(a) all payments which were due before the Cut-off Date;
(b) amounts received on particular Mortgage Loans as late payments
of principal or interest and, unless otherwise specified in the related
Prospectus Supplement, other amounts required to be paid by the
Mortgagors which are to be retained by the Servicer (including any
Sub-Servicer) as additional compensation;
(c) amounts representing reimbursement, to the extent permitted as
described under "The Pooling and Servicing Agreement -- Monthly Advances
and Compensating Interest" and "-- Servicing and Other Compensation and
Payment of Expenses," for advances made by the Servicer or any
Sub-Servicers that were deposited into the Certificate Account or Bond
Account, as applicable, and amounts representing reimbursement for
certain other losses and expenses incurred by the Servicer or any
Sub-Servicer as permitted under the related Pooling and Servicing
Agreement or Servicing Agreement, as applicable;
(d) that portion of each collection of interest on a particular
Mortgage Loan in such Mortgage Pool representing servicing compensation
payable to the Servicer that is to be retained from such collection or
is permitted to be retained from related Insurance Proceeds, Liquidation
Proceeds or proceeds of Mortgage Loans withdrawn from the Mortgage Pool
pursuant to the related Pooling and Servicing Agreement or Servicing
Agreement, as applicable; and
(e) Trustee fees and other expenses or fees payable out of the
related Trust or Trust Estate, as applicable, as specified in the
related Prospectus Supplement;
(ii) all amounts received and retained, if any, in connection with the
liquidation of defaulted Mortgage Loans ("Liquidation Proceeds"), net of
unreimbursed liquidation expenses and insured expenses incurred and
unreimbursed advances made by the Servicer or any Sub-Servicer ("Net
Liquidation Proceeds"), including all proceeds (net of unreimbursed
Servicing Advances) of title insurance, hazard insurance and primary
mortgage insurance, if any ("Insurance Proceeds"), all Principal
Prepayments, all proceeds received in connection with the condemnation of a
Mortgaged Property or the release of part of a Mortgaged Property and all
proceeds of any Mortgage Loan acquired by the related Transferor or any
other entity pursuant to the Pooling and Servicing Agreement, the Indenture
or the Servicing Agreement;
(iii) the amount of any Monthly Advance or Compensating Interest
Payment made by the Servicer or any Sub-Servicer, as deposited by such in
the Certificate Account or Bond Account, as applicable; and
(iv) if applicable, amounts withdrawn from a Reserve Account or a
Prefunding Account or received in connection with other credit enhancement.
Distributions and Payments of Interest. Unless otherwise specified in the
Prospectus Supplement relating to a given Series of Certificates, each Class of
Certificates may bear interest at a different rate, which may be fixed or
adjustable (the "Certificate Rate"). All of the Bonds of a given Series will
bear interest at the same rate, which may be fixed or adjustable (the "Bond
Rate"). Interest will accrue on the Security Principal Balance (or, in the case
of a Class of Certificates entitled only to distributions allocable to interest,
the aggregate notional principal balance) of Securities entitled to interest, at
the Certificate Rate or Bond Rate, as applicable, and for the periods specified
in the Prospectus Supplement. To the extent funds are available therefor,
interest accrued during each such specified period on Securities entitled to
interest (other than a Class of Certificates that provides for interest that
accrues, but is not currently payable, referred to hereafter as "Accrual
Certificates") will be distributable or payable on the Distribution Dates or
Payment Dates, as applicable, specified in the Prospectus Supplement until the
aggregate Security Principal Balance of the related Securities has been
distributed or paid in full or, in the case of a Class of Certificates entitled
only to distributions allocable to interest, until the aggregate notional
principal balance of such Certificates is reduced to zero or for the period of
time designated in the Prospectus Supplement.
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Unless otherwise specified in the Prospectus Supplement relating to a given
Series of Certificates, distributions allocable to interest on each Certificate
of such Series that is not entitled to distributions allocable to principal will
be calculated based on the notional principal balance of such Certificate. The
notional principal balance of a Certificate will not evidence an interest in or
entitlement to distributions allocable to principal but will be used solely for
convenience in expressing the calculation of interest and for certain other
purposes.
With respect to any Class of Accrual Certificates, if specified in the
Prospectus Supplement relating to a given Series of Certificates, any interest
that has accrued but is not paid on a given Distribution Date will be added to
the aggregate Security Principal Balance of such Class of Certificates on that
Distribution Date. Unless otherwise specified in the related Prospectus
Supplement, distributions of interest on each Class of Accrual Certificates will
commence only after the occurrence of the events specified in such Prospectus
Supplement. Prior to such time, the beneficial interest of such Class of Accrual
Certificates in the Trust, as reflected in the aggregate Security Principal
Balance of such Class of Accrual Certificates, will increase on each
Distribution Date by the amount of interest that accrued on such Class during
the preceding interest accrual period but that was not required to be
distributed to such Class on such Distribution Date. Any such Class of Accrual
Certificates will thereafter accrue interest on its outstanding Security
Principal Balance as so adjusted.
Distributions and Payments of Principal. Unless otherwise specified in the
Prospectus Supplement relating to a given Series of Certificates, the aggregate
principal balance amount of any Class of Certificates entitled to distributions
of principal will be the aggregate original Security Principal Balance of such
Class of Certificates specified in the related Prospectus Supplement, less all
amounts previously distributed to such Certificates as allocable to principal.
The aggregate principal balance amount of the Bonds of any Series will be the
aggregate original Security Principal Balance of such Bonds specified in the
related Prospectus Supplement, less all amounts previously paid on such Bonds as
allocable to principal. In the case of Accrual Certificates, unless otherwise
specified in the Prospectus Supplement relating to a given Series of
Certificates, the original Security Principal Balance will be increased by all
interest accrued but not then distributable on such Accrual Certificates. The
Prospectus Supplement relating to a given Series of Certificates will specify
the method by which the amount of principal payments on the Certificates will be
calculated and the manner in which such amount will be allocated among the
Classes of Certificates entitled to distributions of principal. As used herein,
the term "Security Principal Balance" at any time means the principal balance of
the related Securities determined as described above.
The Prospectus Supplement relating to a given Series of Certificates may
provide that one or more Classes of Senior Certificates will be entitled to
receive all or a disproportionate percentage of any principal payments made by a
Mortgagor which are received in advance of their scheduled due dates and are not
accompanied by amounts representing scheduled interest due after the month of
such payments ("Principal Prepayments") in the percentages and under the
circumstances or for the periods specified in the Prospectus Supplement. Any
such allocation of Principal Prepayments to such Class or Classes of
Certificates will have the effect of accelerating the amortization of such
Senior Certificates while increasing the interests evidenced by Subordinated
Certificates in the Trust. Increasing the interests of Subordinated Certificates
relative to that of the Senior Certificates is intended to preserve the
availability of the subordination provided by the Subordinated Certificates. See
"Credit Enhancement -- Subordination" herein. The timing and amounts of
distributions allocable to interest and principal and, if applicable, Principal
Prepayments and scheduled payments of principal, to be made on any Distribution
Date may vary among Classes over time, or otherwise, as specified in the
Prospectus Supplement.
REVOLVING PERIOD AND AMORTIZATION PERIOD; TRANSFEROR INTEREST
If the Prospectus Supplement relating to a given Series of Certificates so
provides, there may be a period commencing on the date of issuance of a Class or
Classes of Certificates of a Series and ending on the date set forth in the
related Prospectus Supplement (the "Revolving Period") during which no principal
payments will be made to one or more Classes of Certificates of the related
Series as are identified in such Prospectus Supplement. All collections of
principal otherwise allocated to such Class or Classes of Certificates may be
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(i) utilized by the Trust during such period to acquire additional Mortgage
Loans that satisfy the criteria described in the related Prospectus Supplement,
(ii) held in an account and invested in Eligible Investments for later
distribution to Certificateholders, (iii) applied to those Class or Classes of
Certificates, if any, of the same Series as specified in the related Prospectus
Supplement as then are in amortization or (iv) otherwise applied as specified in
the related Prospectus Supplement.
An "Amortization Period" is the period, if any, specified as such in the
related Prospectus Supplement during which an amount of principal is payable to
holders of one or more Classes of a Series of Certificates. If so specified in
the related Prospectus Supplement, during an Amortization Period all or a
portion of principal collections on the Mortgage Loans may be applied as
specified above for a Revolving Period and, to the extent not so applied, will
be distributed to the Class or Classes of Certificates of the same or different
Series as specified in the related Prospectus Supplement as then being entitled
to payments of principal. In addition, if so specified in the related Prospectus
Supplement, amounts deposited in certain accounts for the benefit of one or more
Classes of Certificates may be released from time to time or on a specified date
and applied as a payment of principal on such Classes of Certificates. The
related Prospectus Supplement will set forth the circumstances that will result
in the commencement of an Amortization Period.
Each Trust that has a Revolving Period may also issue to the related
Transferor a certificate evidencing a Transferor Interest in the Trust not
represented by the other Certificates issued by such Trust. As further described
in the related Prospectus Supplement, the value of such Transferor Interest will
fluctuate as the amount of the assets of the Trust fluctuates and the
outstanding amount of the Certificates of the related Series of Certificates is
reduced.
REPORTS TO SECURITYHOLDERS
Except as otherwise set forth in the related Prospectus Supplement, on or
before each Distribution Date or Payment Date, as applicable, each
Securityholder of record of the related Series of Securities will be entitled to
receive a statement setting forth, to the extent applicable to such Series, the
following information with respect to the distribution for such Distribution
Date or Payment Date, as applicable.
(i) the amount of such distribution or payment, as applicable,
allocable to principal, separately identifying the aggregate amount of any
Principal Prepayments and, if so specified in the related Prospectus
Supplement, any prepayment penalties included therein;
(ii) the amount of such distribution or payment, as applicable,
allocable to interest;
(iii) the amounts of (a) any overdue accrued interest included in such
distribution or payment, as applicable, (b) any remaining overdue accrued
interest with respect to such Securities or (c) any current shortfall in
amounts to be distributed or paid, as applicable, as accrued interest to
holders of such Securities;
(iv) the amounts of (a) any overdue payments of scheduled principal
included in such distribution, (b) any remaining overdue principal amounts
with respect to such Securities, (c) any current shortfall in receipt of
scheduled principal payments on the related Mortgage Loans or (d) any
realized losses or Liquidation Proceeds to be allocated as reductions in
the outstanding principal balances of such Securities;
(v) if applicable with respect to a given Series of Certificates, the
aggregate amount (a) otherwise allocable to the Subordinated
Certificateholders on such Distribution Date and (b) withdrawn from a
Reserve Account, if any, that is included in the amounts distributed with
respect to Senior Certificates;
(vi) the total amount of the Insured Amount included in the amount
distributed on such Distribution Date or Payment Date, as applicable;
(vii) the Pool Balance and the Pool Factor of the Mortgage Loans after
giving effect to the distribution or payment, as applicable, on the
Distribution Date or Payment Date, as applicable;
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(viii) if applicable with respect to a given Series of Certificates,
the percentage of principal payments on the Mortgage Loans, if any, which
each Class will be entitled to receive on the following Distribution Date;
(ix) unless the Certificate Rate or Bond Rate, as applicable, is a
fixed rate, the related Certificate Rate or Bond Rate applicable to the
distribution on the Distribution Date or Payment Date, as applicable;
(x) the number and aggregate principal balance of Mortgage Loans in
the related Mortgage Pool contractually delinquent (a) one month, (b) two
months and (c) three or more months as of the end of the related Collection
Period;
(xi) the number and aggregate principal balance of all Mortgage Loans
in foreclosure or other similar proceedings, and the book value of any real
estate acquired through foreclosure or grant of a deed in lieu of
foreclosure;
(xii) if applicable, the amount remaining in any Reserve Account or
the amount remaining of any other credit support, after giving effect to
the distribution or payment, as applicable, on the Distribution Date or
Payment Date, as applicable;
(xiii) if applicable, during the Funding Period, the remaining
Prefunding Amount and the portion of the Prefunding Amount used to acquire
additional Mortgage Loans since the preceding Distribution Date or Payment
Date as applicable;
(xiv) if applicable, during the Funding Period, the amount remaining
in the Capitalized Interest Account; and
(xv) the amount of Monthly Advances, Servicing Advances and/or
Compensating Interest Payments, if any, made since the preceding
Distribution Date or Payment Date, as applicable.
Where applicable, any amount set forth above may be expressed as a dollar
amount of the related Securities having the denomination or interest specified
either in the related Prospectus Supplement or in the report to Securityholders.
The report to Securityholders for any Series of Securities may include
additional or other information of a similar nature to that specified above.
The "Pool Balance" means the aggregate outstanding principal balance of the
Mortgage Loans as of the related Distribution Date or Payment Date, as
applicable, and the "Pool Factor" is the percentage obtained by dividing the
Pool Balance as of such Distribution Date or Payment Date, as applicable, by the
Cut-off Date Pool Balance.
In addition, within a reasonable period of time after the end of each
calendar year, the Servicer or the Trustee will mail to each person who was a
Securityholder of record at any time during such calendar year (a) a report as
to the aggregate of amounts reported pursuant to (i) and (ii) above for such
calendar year or, in the event such person was a Securityholder of record during
a portion of such calendar year, for the applicable portion of such year and (b)
such other customary information as may be deemed necessary or desirable for
Securityholders to prepare their tax returns.
CREDIT ENHANCEMENT
Credit enhancement may be provided with respect to a Series of Securities
or with respect to the Mortgage Loans included in the related Trust or Trust
Estate, as applicable. Credit enhancement may be in the form of (i) in the case
of a given Series of Certificates, the subordination of one or more Classes of
the Certificates of such Series, (ii) the use of a Financial Guaranty Insurance
Policy, a Mortgage Pool Insurance Policy, a Special Hazard Insurance Policy, a
Bankruptcy Bond, a Reserve Account or other insurance policies, cash accounts,
letters of credit, limited guaranty insurance policies, third party guarantees
or other forms of credit enhancement described in the related Prospectus
Supplement, or in the case of a given Series of Certificates, the use of a
cross-support feature, or (iii) any combination of the foregoing. The protection
against losses afforded by any credit enhancement will be limited and will not
guarantee repayment of the entire principal balance of the Securities and
interest thereon. If losses occur that exceed the maximum
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amount covered by the credit enhancement or that are not covered by the credit
enhancement, Securityholders will bear their allocable share of such deficiency.
If a form of credit enhancement applies to several Classes of Certificates of a
given Series, and if principal payments of certain Classes will be distributed
prior to such distributions to other Classes, the Classes which receive
distributions at a later time are more likely to bear any losses which exceed
the amount covered by credit enhancement.
Unless otherwise specified in the Prospectus Supplement, coverage under any
credit enhancement may be canceled or reduced by the related Transferor without
the consent of Securityholders, if such cancellation or reduction would not
adversely affect the rating or ratings of the related Securities.
SUBORDINATION
If so specified in a Prospectus Supplement relating to a given Series of
Certificates, scheduled principal, Principal Prepayments, interest or any
combination thereof that otherwise would have been distributable to one or more
Classes of Subordinated Certificates of such Series will instead be distributed
to holders of one or more Classes of Senior Certificates, under the
circumstances and to the extent specified in such Prospectus Supplement. If
specified in the related Prospectus Supplement, the holders of Senior
Certificates will receive the amounts of principal and interest due to them on
each Distribution Date out of the funds available for distribution on such date
in the related Certificate Account prior to any such distribution being made to
holders of the related Subordinated Certificates, in each case under the
circumstances and subject to the limitations specified in such Prospectus
Supplement. The protection afforded to the holders of Senior Certificates
through subordination also may be accomplished by first allocating certain types
of losses or delinquencies to the related Subordinated Certificates, to the
extent described in the related Prospectus Supplement. If aggregate losses and
delinquencies in respect of such Mortgage Loans were to exceed the total amounts
otherwise available for distribution to holders of Subordinated Certificates or,
if applicable, were to exceed the specified maximum amount, holders of Senior
Certificates would experience losses on such Certificates.
If so specified in the Prospectus Supplement relating to a given Series of
Certificates, the same Class of Certificates may be Senior Certificates with
respect to the right to receive certain types of payments or with respect to the
allocation of certain types of losses or delinquencies and Subordinated
Certificates with respect to the right to receive other types of payments or
with respect to the allocation of certain types of losses or delinquencies. If
specified in the Prospectus Supplement, various Classes of Senior Certificates
and Subordinated Certificates may themselves be subordinate in their right to
receive certain distributions to other Classes of Senior and Subordinated
Certificates, respectively, through a cross-support mechanism or otherwise. As
between Classes of Senior Certificates and as between Classes of Subordinated
Certificates, distributions may be allocated among such Classes (i) in the order
of their scheduled final distribution dates, (ii) in accordance with a schedule
or formula, (iii) in relation to the occurrence of certain events or (iv)
otherwise, in each case as specified in the related Prospectus Supplement.
The related Prospectus Supplement will set forth information concerning the
amount of subordination of a Class or Classes of Subordinated Certificates in a
Series, the circumstances in which such subordination will be applicable, the
manner, if any, in which the amount of subordination will decrease over time,
the manner of funding any Reserve Account and the conditions under which amounts
in any such Reserve Account will be used to make distributions to Senior
Certificateholders or released to Subordinated Certificateholders from the
related Trust.
RESERVE ACCOUNTS
If so specified in the related Prospectus Supplement, cash, U.S. Treasury
securities, instruments evidencing ownership of principal or interest payments
thereon, demand notes, certificates of deposit or a combination thereof in the
aggregate amount specified in such Prospectus Supplement may be deposited by the
related Transferor, the Servicer or the Originators, as applicable, on the date
specified in the related Prospectus Supplement in one or more reserve accounts
(each, a "Reserve Account") established as part of the related Trust or Trust
Estate, as applicable. In addition to or in lieu of the foregoing, if so
specified in a
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Prospectus Supplement relating to a given Series of Certificates, all or any
portion of amounts otherwise distributable on any Distribution Date to holders
of Subordinated Certificates may instead be deposited into a Reserve Account.
Such deposits may be made on the date specified in the related Prospectus
Supplement, which may include each Distribution Date for specified periods or
until the balance in the Reserve Account has reached a specified amount. See
"-- Subordination" above.
The cash and other assets in a Reserve Account will be used to enhance the
likelihood of timely payment of principal of, and interest on, or, if so
specified in the related Prospectus Supplement, to provide additional protection
against losses in respect of, the assets in the related Trust or Trust Estate,
as applicable, to pay the expenses of the Trust or Trust Estate, as applicable,
or for such other purposes specified in such Prospectus Supplement. Any cash in
a Reserve Account and the proceeds upon maturity or liquidation of any other
asset or instrument therein will be invested, to the extent acceptable to the
applicable Rating Agency, in Permitted Investments, including obligations of the
United States and certain agencies thereof, certificates of deposit, certain
commercial paper, time deposits and bankers acceptances sold by eligible
commercial banks, certain repurchase agreements of United States government
securities with eligible commercial banks and certain other instruments
acceptable to the applicable Rating Agency. Unless otherwise specified in the
related Prospectus Supplement, any asset or instrument deposited in any Reserve
Account will name the Trustee, in its capacity as trustee for the
Securityholders, as beneficiary and will be issued by an entity acceptable to
the applicable Rating Agency.
Any amounts on deposit in a Reserve Account will be available for
withdrawal from such Reserve Account for distribution or payment, as applicable,
to holders of Securities or release to holders of Securities, the related
Transferor, the Servicer, the Originators or another entity for the purposes, in
the manner and at the times specified in the related Prospectus Supplement.
FINANCIAL GUARANTY INSURANCE POLICIES
If so specified in the related Prospectus Supplement, a financial guaranty
insurance policy or policies (each, a "Financial Guaranty Insurance Policy") may
be obtained and maintained for the Securities of a given Series. The provider of
any Financial Guaranty Insurance Policy (a "Securities Insurer") will be
described in the related Prospectus Supplement. A copy of any such Financial
Guaranty Insurance Policy will be attached as an exhibit to the related Pooling
and Servicing Agreement or Indenture, as applicable.
Unless otherwise specified in the related Prospectus Supplement, a
Financial Guaranty Insurance Policy will unconditionally and irrevocably
guarantee to Securityholders that a certain amount will be available for
distribution or payment, as applicable, to Securityholders on a related
Distribution Date or Payment Date, as applicable (the "Insured Amount"). The
Insured Amount will equal the full amount of principal and interest
distributable as of any Distribution Date or due and payable as of any Payment
Date, as applicable, to Securityholders under the related Pooling and Servicing
Agreement or Indenture, as applicable, plus any other amounts specified therein
or in the related Prospectus Supplement.
The specific terms of any Financial Guaranty Insurance Policy will be
described in the related Prospectus Supplement.
Subject to the terms of the related Pooling and Servicing Agreement or
Indenture, as applicable, a Securities Insurer may be subrogated to the rights
of Securityholders to receive payments under the Securities to the extent of any
payments by such Securities Insurer under the related Financial Guaranty
Insurance Policy that were not previously reimbursed. However, any such
subrogation rights of a Securities Insurer may not result in a reduction of the
amount otherwise distributable on any Distribution Date or due and payable on
any Payment Date, as applicable, to holders of the Securities covered by such
Financial Guaranty Insurance Policy.
MORTGAGE POOL INSURANCE POLICIES
If so specified in the related Prospectus Supplement, a mortgage pool
insurance policy or policies (each, a "Mortgage Pool Insurance Policy") issued
by the insurer (the "Mortgage Pool Insurer") named in such
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Prospectus Supplement will be obtained and maintained for all or certain of the
Mortgage Loans. A Mortgage Pool Insurance Policy will, subject to the
limitations described below, cover losses on the related Mortgage Loans up to a
maximum amount specified in the related Prospectus Supplement. A Mortgage Pool
Insurance Policy, however, is not a blanket policy against loss, as claims
thereunder may be made only respecting losses on certain Mortgage Loans and only
upon satisfaction of certain conditions precedent described below. Unless
otherwise specified in a related Prospectus Supplement, a Mortgage Pool
Insurance Policy will not cover losses due to a failure to pay or denial of a
claim under a primary mortgage insurance policy.
A Mortgage Pool Insurance Policy generally will not insure (and many
primary mortgage insurance policies do not insure) against loss sustained by
reason of a default arising from, among other things, (i) fraud or negligence in
the origination or servicing of a Mortgage Loan, including misrepresentation by
the Mortgagor, the Originator or persons involved in the origination thereof, or
(ii) failure to construct a Mortgaged Property in accordance with plans and
specifications. If so specified in the related Prospectus Supplement, an
endorsement to a Mortgage Pool Insurance Policy, a bond or other credit support
may cover fraud in connection with the origination of Mortgage Loans. If so
specified in the related Prospectus Supplement, a failure of coverage
attributable to an event specified in clause (i) or (ii) above might result in a
breach of the related Transferor's representations and, in such event, might
give rise to an obligation on the part of the related Transferor to withdraw the
defaulted Mortgage Loan from the Mortgage Pool if the breach cannot be cured by
the such Transferor. No Mortgage Pool Insurance Policy will cover losses in
respect of a defaulted Mortgage Loan occurring when the Servicer of such
Mortgage Loan, at the time of default or thereafter, was not approved by the
applicable Mortgage Pool Insurer.
The original amount of coverage under a Mortgage Pool Insurance Policy will
be reduced over the life of the related Securities by the aggregate dollar
amount of claims paid by the Servicer less the aggregate of the net amounts
realized by the Mortgage Pool Insurer upon disposition of all foreclosed
properties. The amount of claims paid will include certain expenses incurred by
the Servicer, as well as accrued interest on delinquent Mortgage Loans to the
date of payment of the claim. Accordingly, if aggregate net claims paid under a
Mortgage Pool Insurance Policy reach the maximum amount, coverage under the
Mortgage Pool Insurance Policy will be exhausted and any further losses will be
borne by the related Securityholders.
The terms of any Mortgage Pool Insurance Policy will be described in the
related Prospectus Supplement.
SPECIAL HAZARD INSURANCE POLICIES
If so specified in the related Prospectus Supplement, a special hazard
insurance policy or policies (each, a "Special Hazard Insurance Policy") will be
obtained for the related Mortgage Pool and will be issued by the insurer (the
"Special Hazard Insurer") named in such Prospectus Supplement. Each Special
Hazard Insurance Policy, subject to limitations described below, will protect
the related Securityholders from (i) loss by reason of damage to Mortgaged
Properties caused by certain hazards (including earthquakes and, to a limited
extent, tidal waves and related water damage) not insured against under the
standard form of hazard insurance policy for the respective states in which the
Mortgaged Properties are located or under a flood insurance policy if the
Mortgaged Property is not located in a federally designated flood area, and (ii)
loss caused by reason of the application of the coinsurance clause contained in
a hazard insurance policy. See "The Pooling and Servicing
Agreement -- Maintenance of Hazard Insurance" herein. A Special Hazard Insurance
Policy will not cover losses occasioned by war, civil insurrection, certain
governmental action, errors in design, faulty workmanship or materials (except
under certain circumstances), nuclear reaction, flood (if the Mortgaged Property
is located in a federally designated flood area), chemical contamination and
certain other risks. The amount of coverage under any Special Hazard Insurance
Policy will be specified in the related Prospectus Supplement. A Special Hazard
Insurance Policy will provide that no claim may be paid unless hazard and, if
applicable, flood insurance on the related Mortgaged Property securing the
Mortgage Loan has been kept in force and other protection and preservation
expenses have been paid.
The terms of any Special Hazard Insurance Policy will be described in the
related Prospectus Supplement.
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Unless otherwise specified in the related Prospectus Supplement, because
each Special Hazard Insurance Policy will be designed to permit full recovery
under the Mortgage Pool Insurance Policy in circumstances in which such
recoveries would otherwise be unavailable because property has been damaged by a
cause not insured against by a standard hazard policy and thus would not be
restored, each Pooling and Servicing Agreement and Servicing Agreement will
provide that, if the related Mortgage Pool Insurance Policy shall have been
terminated or been exhausted through payment of claims, the Servicer will be
under no further obligation to maintain such Special Hazard Insurance Policy.
BANKRUPTCY BONDS
If so specified in the related Prospectus Supplement, a bankruptcy bond or
bonds (each, a "Bankruptcy Bond") for proceedings under the federal Bankruptcy
Code will be issued by an insurer named in such Prospectus Supplement. A
Bankruptcy Bond will cover certain losses resulting from a reduction by a
bankruptcy court of scheduled payments of principal and interest on a Mortgage
Loan or a reduction by such court of the principal amount of a Mortgage Loan and
will cover certain unpaid interest on the amount of such a principal reduction
from the date of the filing of a bankruptcy petition. The level of coverage and
other terms of a Bankruptcy Bond will be set forth in the related Prospectus
Supplement.
CROSS SUPPORT
If so specified in a Prospectus Supplement relating to a given Series of
Certificates, the beneficial interests of separate Trusts or separate groups of
assets in a single Trust may be evidenced by separate Classes of the
Certificates of such Series. In such case, credit support may be provided by a
cross-support feature which requires that distributions be made with respect to
Certificates evidencing a beneficial interest in other asset groups within the
same Trust. The Prospectus Supplement for a Series of Certificates which
includes a cross-support feature will describe the manner and conditions for
applying such cross-support feature.
If so specified in a Prospectus Supplement relating to a given Series of
Certificates, the coverage provided by one or more other forms of credit
enhancement, such as Financial Guaranty Insurance Policies or Reserve Accounts,
may apply concurrently to two or more separate Trusts, without priority among
such Trusts, until the credit support is exhausted. If applicable, the
Prospectus Supplement will identify the Trusts to which such credit enhancement
relates and the manner of determining the amount of the coverage provided
thereby and the application of such coverage to the identified Trusts or asset
groups.
OTHER INSURANCE, GUARANTEES AND SIMILAR INSTRUMENTS OR AGREEMENTS
If so specified in the related Prospectus Supplement, a Trust or Trust
Estate, as applicable, may include, in addition to or in lieu of some or all of
the foregoing, letters of credit, third party guarantees and other arrangements
for maintaining timely payments or providing additional protection against
losses on the assets included in such Trust or Trust Estate, as applicable,
paying administrative expenses or accomplishing such other purpose. The related
Prospectus Supplement will describe any such arrangements, including information
as to the extent of coverage and any conditions or limitations thereto. The
related Trust or Trust Estate, as applicable, 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. Any such arrangement
must be acceptable to each Rating Agency named in the related Prospectus
Supplement.
MAINTENANCE OF CREDIT ENHANCEMENT
To the extent that the related Prospectus Supplement expressly provides for
credit enhancement and maintenance arrangements, the following paragraphs shall
apply.
If a form of credit enhancement has been obtained for a Series of
Securities, the related Transferor or the Servicer will be obligated to exercise
its reasonable efforts to keep or cause to be kept such form of credit support
in full force and effect throughout the term of the related Pooling and
Servicing Agreement, Indenture or Servicing Agreement, as applicable, unless
coverage thereunder has been exhausted through payment of claims or otherwise,
or substitution therefor is made as described below.
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In lieu of the obligation to maintain a particular form of credit
enhancement, the related Transferor or the Servicer may obtain a substitute or
alternate form of credit enhancement. If the related Transferor obtains such a
substitute form of credit enhancement, such form of credit enhancement will be
maintained and kept in full force and effect as provided herein. Prior to its
obtaining any substitute or alternate form of credit enhancement, the related
Transferor or the Servicer will obtain written confirmation from each applicable
Rating Agency 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 each applicable Rating Agency.
The Servicer will provide the Trustee information required for the Trustee
to draw under a Financial Guaranty Insurance Policy or any letter of credit,
will present claims to any Mortgage Pool Insurer, any Special Hazard Insurer and
to any provider of a Bankruptcy Bond, and will take such reasonable steps as are
necessary to permit recovery under such Financial Guaranty Insurance Policy,
letter of credit, Bankruptcy Bond, Special Hazard Insurance Policy, Mortgage
Pool Insurance Policy or other applicable forms of credit enhancement.
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
obligations to withdraw Mortgage Loans from the related Mortgage Pool pursuant
to the terms of the related Agreement or Indenture, as applicable. All
collections by the Servicer under 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 Collection
Account and ultimately in the Certificate Account or Bond Account, as
applicable, subject to withdrawal. Unless otherwise specified in the related
Prospectus Supplement, all draws under any Financial Guaranty Insurance Policy
or letter of credit will be deposited directly in the Certificate Account or
Bond Account, as applicable.
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 Insurance Policy 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 Securityholders on liquidation of the Mortgage Loan after
reimbursement to the Servicer for its expenses and (ii) that such expenses will
be recoverable out of related 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 or 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.
MATURITY, PREPAYMENT AND YIELD CONSIDERATIONS
The yields to maturity of the Securities will be affected by the amount and
timing of principal payments on or in respect of the Mortgage Loans included in
the related Mortgage Pools, the allocation of available funds to the Securities,
the Certificate Rate for various Classes of a Series of Certificates or the Bond
Rate for various Series of Bonds, as applicable, and the purchase price paid for
the Securities.
The original terms to maturity of the Mortgage Loans in a given Mortgage
Pool will vary depending upon the type of Mortgage Loans included therein. Each
Prospectus Supplement will contain information with respect to the type and
maturities of the Mortgage Loans in the related Mortgage Pool. Unless otherwise
specified in the related Prospectus Supplement, Mortgage Loans may be prepaid
without penalty in full or in part at any time, although a prepayment fee or
penalty may be imposed in connection therewith.
The rate of prepayments with respect to mortgage loans has fluctuated
significantly in recent years. In general, if prevailing rates fall appreciably
below the Mortgage Rates borne by the Mortgage Loans, such Mortgage Loans are
likely to be subject to higher prepayment rates than if prevailing interest
rates remain at or above such Mortgage Rates. Conversely, if prevailing interest
rates rise appreciably above the Mortgage
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Rates borne by the Mortgage Loans, such Mortgage Loans are likely to experience
a lower prepayment rate than if prevailing rates remain at or below such
Mortgage Rates. However, there can be no assurance that such will be the case.
Prepayments are influenced by a variety of economic, geographical, social,
tax, legal and additional factors. The rate of prepayments on Mortgage Loans may
be affected by changes in a Mortgagor's housing needs, job transfers,
unemployment, Mortgagor's net equity in the related Mortgaged Property, the
enforcement of due-on-sale clauses and other servicing decisions. Adjustable
rate mortgage loans, bi-weekly mortgage loans, graduated payment mortgage loans,
growing equity mortgage loans, reverse mortgage loans, buy-down mortgage loans
and mortgage loans with other characteristics may experience a rate of principal
prepayments which is different from that of fixed rate, monthly pay, fully
amortizing mortgage loans.
Generally, mortgage loans secured by junior liens have smaller average
principal balances than senior or first mortgage loans and are not viewed by
borrowers as permanent financing. Accordingly, such mortgage loans may
experience a higher rate of prepayment than mortgage loans which represent first
liens. In addition, any future limitations on the right of borrowers to deduct
interest payments on second mortgage loans for federal income tax purposes may
result in a higher rate of prepayment of such mortgage loans. The obligation of
the Servicer to enforce due-on-sale provisions of the mortgage loans may also
increase prepayments. The prepayment experience of the Mortgage Pools may be
affected by a wide variety of factors, including general and local economic
conditions, mortgage market interest rates, the availability of alternative
financing and homeowner mobility. The Transferors are unaware of any reliable
studies that would accurately project the prepayment risks associated with the
mortgage loans.
Unless otherwise provided in the related Prospectus Supplement, all of the
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 otherwise provided in
the related Prospectus Supplement, the Servicer generally will enforce any
due-on-sale or due-on-encumbrance clause, to the extent it has knowledge of the
conveyance or further encumbrance or the proposed conveyance or proposed further
encumbrance of the Mortgaged Property and reasonably believes that it is
entitled to do so under applicable law; provided, however, that the Servicer
will not take any enforcement action that would materially increase the risk of
default or delinquency on, or materially decrease the security for, such
Mortgage Loan. See "The Pooling and Servicing Agreement -- Enforcement of
Due-on-Sale Clauses" herein.
The weighted average lives of Securities will also be affected by the
amount and timing of delinquencies and defaults on the Mortgage Loans and the
liquidations of defaulted Mortgage Loans. Delinquencies and defaults will
generally slow the rate of payment of principal to the Securityholders. However,
this effect will be offset to the extent that lump sum recoveries on defaulted
Mortgage Loans and foreclosed Mortgaged Properties result in principal payments
on the Mortgage Loans that are faster than otherwise scheduled.
When a full prepayment occurs on a Mortgage Loan, the Mortgagor will be
charged interest on the principal amount of the Mortgage Loan so prepaid only
for the number of days in the month actually elapsed up to the date of the
prepayment rather than for a full month. Interest shortfalls also could result
from the application of the Relief Act, as described under "Certain Legal
Aspects of the Mortgage Loans and Related Matters -- Soldiers' and Sailors'
Civil Relief Act" herein. Unless otherwise specified in the related Prospectus
Supplement, in the event that less than 30 days' interest is collected on a
Mortgage Loan during a Collection Period, the Servicer or any Sub- Servicer, if
applicable, will be obligated to make a Compensating Interest Payment with
respect thereto, but only to the extent of the aggregate Servicing Fee for the
related Distribution Date or Payment Date, as applicable. To the extent such
shortfalls exceed the amount of the Compensating Interest Payment that the
Servicer or any Sub-Servicer is obligated to pay, the yield on the Securities
could be adversely affected. Partial prepayments in a given month may be applied
to the outstanding principal balances of the Mortgage Loans so prepaid on the
first day of the month of receipt or the month following receipt. In the latter
case, partial prepayments will not reduce the amount of interest passed through
in such month.
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Under certain circumstances, the related Transferor, the Servicer or
certain other entities specified in the Prospectus Supplement relating to a
Series of Certificates may have the option to acquire the Mortgage Loans and
other assets of a Trust, thereby effecting early retirement of the related
Series of Certificates, subject to the principal balance of the related Mortgage
Loans 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 the related Series. Typically, the related Transferor, the
Servicer or such other entity will cause the retirement of a Series of
Certificates at the point at which servicing of the remaining relatively small
pool of Mortgage Loans becomes inefficient. See "The Pooling and Servicing
Agreement -- Termination; Optional Termination" herein. Under certain
circumstances, a Series of Bonds may be (i) redeemed at the request of holders
of such Bonds; (ii) redeemed at the option of the related Bond Issuer or another
party specified in the Prospectus Supplement relating to such Series of Bonds;
or (iii) subject to special redemption under certain circumstances. The
circumstances and terms under which the Bonds of a Series may be redeemed will
be described in the related Prospectus Supplement. See "The
Indenture -- Redemption of Bonds" herein.
Unless otherwise specified in the related Prospectus Supplement, the
effective yield to Securityholders will be slightly lower than the yield
otherwise produced by the applicable Certificate Rate or Bond Rate and purchase
price, because while interest generally will accrue on the Securities from the
first day of each month, the distribution or payment, as applicable, of such
interest will not be made earlier than a specified date in the month following
the month of accrual.
The timing of payments on the Mortgage Loans may significantly affect an
investor's yield. In general, the earlier a prepayment of principal on the
Mortgage Loans, the greater will be the effect on an investor's yield to
maturity. As a result, the effect on an investor's yield of principal
prepayments occurring at a rate faster (or slower) than the rate anticipated by
the investor during the period immediately following the issuance of the
Securities will not be offset by a subsequent like reduction (or increase) in
the rate of principal payments.
The Prospectus Supplement relating to a Series of Securities may discuss in
greater detail the effect of the rate and timing of principal payments
(including prepayments) on the yield, weighted average lives and maturities of
such Securities, including the effect of prepayments and allocation of realized
losses on the Mortgage Loans as they relate to specific Classes of Certificates.
Factors other than those identified herein and in the related Prospectus
Supplement could significantly affect principal prepayments at any time and over
the lives of the Securities. The relative combination of the various factors
affecting prepayment may also vary from time to time. There can be no assurance
as to the rate of payment of principal of the Mortgage Loans at any time or over
the lives of the Securities.
THE POOLING AND SERVICING AGREEMENT
Set forth below is a summary of the material provisions of each Pooling and
Servicing Agreement that are not described elsewhere in this Prospectus. The
summary does not purport to describe all provisions of each Pooling and
Servicing Agreement, and is subject to, and qualified in its entirety by
reference to, the provisions of each Pooling and Servicing Agreement. Where
provisions or terms used in a particular Pooling and Servicing Agreement are
different than as described herein, a description of such provisions or terms
will be included in the related Prospectus Supplement.
The Mortgage Loans to be included in a Mortgage Pool for a Series of Bonds
will be assigned to the Trustee pursuant to provisions included in the related
Indenture that are substantially the same as, and the obligations of ACAC, as
Transferor (or the related Bond Issuer, if a different entity, to the extent
described in the related Prospectus Supplement), and the Trustee with respect to
the Mortgage Loans so conveyed will be substantially similar to, those described
under "-- Assignment of Mortgage Loans" below. In addition, the Mortgage Loans
included in a Mortgage Pool for a Series of Bonds will be serviced pursuant to
the terms of a Servicing Agreement and any such Servicing Agreement will contain
provisions governing the servicing of such Mortgage Loans that are substantially
similar to the provisions included in each Pooling and Servicing Agreement
relating to servicing and collection procedures with respect to the related
Mortgage Loans as described below. See "The Indenture -- General" herein.
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ASSIGNMENT OF MORTGAGE LOANS
Assignment of the Mortgage Loans. At the Closing Date for a Series of
Certificates, the related Transferor will cause the Mortgage Loans that will
comprise the related Trust to be assigned to the Trustee, without recourse,
together with all principal and interest received by or on behalf of the related
Transferor on or with respect to such Mortgage Loans on or after the Cut-off
Date, other than principal and interest due before the Cut-off Date. The Trustee
will, concurrently with such assignment, deliver the Certificates to the related
Transferor in exchange for the Mortgage Loans.
Each Mortgage Loan assigned to the Trustee will be identified in a schedule
appearing as an exhibit to the related Pooling and Servicing Agreement (a "Loan
Schedule"). The Loan Schedule will include information as to the outstanding
principal balance of each Mortgage Loan after application of payments due on the
Cut-off Date, as well as information regarding the Mortgage Rate, the maturity
date of the Mortgage Loan, the Combined Loan-to-Value Ratio at origination and
certain other information.
In connection with the assignment, the related Transferor will be required
to deliver or cause to be delivered to the Trustee certain specified items
(collectively, with respect to each Mortgage Loan, the "Mortgage File"). Unless
otherwise specified in the related Prospectus Supplement each Mortgage File will
be required to include:
(a) the original Mortgage Note, with all intervening endorsements
sufficient to show a complete chain of endorsement to the related
Transferor, endorsed by the related Transferor, without recourse, to the
order of the Trustee;
(b) the original Mortgage with evidence of recording indicated
thereon;
(c) the original executed assignment of the Mortgage in recordable
form;
(d) originals of all assumption, modification and substitution
agreements, if any, in those instances where the terms or provisions of a
Mortgage or Mortgage Note have been modified or such Mortgage or Mortgage
Note has been assumed;
(e) originals of all intervening mortgage assignments with evidence of
recording indicated thereon sufficient to show a complete chain of
assignment from the originator of the Mortgage Loan to the related
Transferor; and
(f) the original lender's title insurance policy issued on the date of
the origination of such Mortgage Loan.
Unless otherwise specified in the related Prospectus Supplement, the
related Transferor will promptly cause the assignments of the related Mortgage
Loans to be recorded in the appropriate public office for real property records,
except in states in which, in the opinion of counsel acceptable to the Trustee,
such recording is not required to protect the trustee's interest in such loans
against the claim of any subsequent transferee or any successor to or creditor
of the related Transferor or the Originator of such Mortgage Loans.
If the related Transferor cannot deliver the original Mortgage or mortgage
assignment with evidence of recording thereon on the Closing Date solely because
of a delay caused by the public recording office where such original Mortgage or
mortgage assignment has been delivered for recordation, such Transferor shall
deliver to the Trustee an Officer's Certificate, with a photocopy of such
Mortgage attached thereto, stating that such original Mortgage or mortgage
assignment has been delivered to the appropriate public recording official for
recordation. The related Transferor shall promptly deliver to the Trustee such
original Mortgage or mortgage assignment with evidence of recording indicated
thereon upon receipt thereof from the public recording official. If the related
Transferor within six months from the Closing Date shall not have received such
original Mortgage or mortgage assignment from the public recording official, it
shall obtain, and deliver to the Trustee within eight months from the Closing
Date, a copy of such original Mortgage or mortgage assignment certified by such
public recording official to be a true and complete copy of such original
Mortgage or mortgage assignment as recorded by such public recording office.
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The Trustee will be authorized to appoint a custodian pursuant to a
custodial agreement to maintain possession of and, if applicable, to review the
documents relating to the Mortgage Loans as agent of the Trustee.
Review of the Mortgage File. The Trustee will agree, for the benefit of
the Certificateholders, to review each Mortgage File and the specified items
delivered by or on behalf of the related Transferor within 45 days after the
Closing Date, to determine if the documents described in clauses (a) through (f)
above have been executed and received, and that such documents relate to the
Mortgage Loans in the Loan Schedule. The Trustee is under no duty or obligation
to inspect, review or examine any such documents, instruments, certificates or
other papers to determine that they are genuine, enforceable or appropriate for
the represented purpose or that they are other than what they purport to be on
their face, nor is the Trustee under any duty to determine independently whether
there are any intervening assignments or assumption or modification agreements
with respect to any Mortgage Loan.
If within such 45-day period the Trustee finds that any document
constituting a part of a Mortgage File is not properly executed, has not been
received or is unrelated to the Mortgage Loans identified in the related Loan
Schedule, or that any Mortgage Loan does not conform in a material respect to
the description thereof as set forth in the related Loan Schedule, the Trustee
will be required to promptly notify the related Transferor of any defect. Such
Transferor will use reasonable efforts to remedy a material defect in a document
constituting part of a Mortgage File within 60 days after the Trustee's notice.
Thereafter, the Trustee shall also certify that it has received all of the
documents referred to in clauses (a) through (f) and that all corrections or
curative actions required to be taken by the related Transferor within the
60-day period have been completed or effected, or that the related Mortgage
Loans will be withdrawn or substituted, as specified below.
Withdrawal or Substitution of Mortgage Loans. Unless otherwise specified
in the related Prospectus Supplement, if, within 60 days after the Trustee's
notice of defect, the related Transferor has not remedied the defect and the
defect materially and adversely affects the interest of the Certificateholders
in the related Mortgage Loan, such Transferor will be required to, prior to the
next Distribution Date, at its option, (i) substitute in lieu of such Mortgage
Loan another Mortgage Loan of like kind (a "Qualified Replacement Mortgage
Loan") or (ii) withdraw such Mortgage Loan from the related Mortgage Property by
paying an amount equal to its Principal Balance together with one month's
interest at the Mortgage Rate, less any payments received during the related
Collection Period ("Loan Withdrawal Amount").
If as provided above, the related Transferor, rather than withdrawing the
Mortgage Loan, removes a Mortgage Loan (a "Deleted Mortgage Loan") from the
related Trust and substitutes in its place a Qualified Replacement Mortgage
Loan, such substitution must be effected within 90 days of the date of the
initial issuance of the Certificates of a Series with respect to which no REMIC
election is made. With respect to a Trust for which a REMIC election is to be
made, except as otherwise provided in the related Prospectus Supplement, such
substitution of a defective Mortgage Loan must be effected within two years of
the date of the initial issuance of the Certificates, 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 Loan 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 and not substantially less than the outstanding principal balance
of the Deleted Mortgage Loan (the amount of any shortfall to be paid by or at
the direction of the related Transferor to the related Trust in the month of
substitution for distribution to the Certificateholders as a reduction of
principal), (ii) have a Mortgage Rate neither one percentage point or more less
than nor one percentage point or more greater 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 or more earlier than nor one year or more
later 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 provisions relating to meeting the foregoing
requirements on an aggregate basis where a number of substitutions occur
contemporaneously.
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Additionally, unless otherwise specified in the related Prospectus
Supplement, the related Transferor will have made representations and warranties
in respect of the Mortgage Loans assigned by such Transferor and evidenced by a
Series of Certificates. Such representations and warranties generally include,
among other things: (i) that title insurance (or in the case of Mortgaged
Properties located in areas where such policies are generally not available, an
attorney's certificate of title) was in effect on the Closing Date; (ii) that
such Transferor had title to each such Mortgage Loan and such Mortgage Loan was
subject to no offsets, defenses or counterclaims; (iii) that each Mortgage Loan
constituted a valid first or junior lien on the Mortgaged Property (subject only
to permissible title insurance exceptions, if applicable, and certain other
exceptions described in the Pooling and Servicing Agreement) and that the
Mortgaged Property was free from damage and was in acceptable condition; (iv)
that there were no delinquent tax or assessment liens against the Mortgaged
Property; (v) that no required payment on a Mortgage Loan was more than thirty
days delinquent as of the related Cut-off Date; and (vi) that each Mortgage Loan
was made in compliance with, and, subject to certain limitations, is enforceable
under, all applicable state and federal laws and regulations in all material
respects. Upon the discovery by the related Transferor or the Trustee that the
representations in the applicable Pooling and Servicing Agreement are untrue in
any material respect as of the dates specified therein, with the result that the
interests of the Certificateholders in the related Mortgage Loan are materially
and adversely affected, the party discovering such breach is required to give
prompt written notice to the other parties. Upon the earliest to occur of the
related Transferor's discovery, its receipt of notice of breach from any of the
other parties or such time as a situation resulting from a representation which
is untrue and materially and adversely affects the interests of the
Certificateholders, such Transferor is required promptly to cure such breach in
all material respects or such Transferor will (or will cause the applicable
Originator to) on the Distribution Date next succeeding such discovery, receipt
of notice or such other time, withdraw, or provide a Qualified Replacement
Mortgage Loan, as set forth above. The obligation of the related Transferor so
to cure, substitute or withdraw any Mortgage Loan as to which breach has not
been remedied constitutes the sole remedy available to the Certificateholders or
the Trustee respecting such breach.
Any agreements pursuant to which the related Transferor acquires certain
Mortgage Loans to be deposited in a Trust will contain representations and
obligations of the related Originators that are similar to those described in
the preceding paragraph. The related Transferor may enforce any obligations of
the related Originators in connection with its efforts to cure any breach of a
representation pursuant to the related Pooling and Servicing Agreement. See "The
Originators -- Representations by Originators and the Transferors" herein.
PAYMENTS ON THE MORTGAGE LOANS
Unless otherwise specified in the related Prospectus Supplement, the
Pooling and Servicing Agreement will require the Servicer to establish and
maintain one or more accounts (each, a "Collection Account") at one or more
institutions meeting the requirements set forth in the related Pooling and
Servicing Agreement. Pursuant to the related Pooling and Servicing Agreement,
the Servicer will be required to deposit all collections (other than amounts
escrowed for taxes and insurance) related to the Mortgage Loans into the
Collection Account no later than the second business day after receipt. All
funds in the Collection Accounts will be required to be invested in instruments
designated as Permitted Investments. Any investment earnings on funds held in
the Collection Accounts are for the benefit of the Servicer.
The Servicer may make withdrawals from the Collection Account only for the
following purposes: (a) to make deposits into the Certificate Account as set
forth below; (b) to pay itself any monthly Servicing Fees; (c) to make any
Servicing Advance or to reimburse itself for any Servicing Advance or Monthly
Advance previously made; (d) to withdraw amounts that have been deposited to the
Collection Account in error; and (e) to clear and terminate the Collection
Account.
Unless otherwise specified in the related Prospectus Supplement, not later
than the third day prior to any Distribution Date (the "Deposit Date"), the
Servicer will be required to wire transfer to the Trustee for deposit in the
Certificate Account the sum (without duplication) of all amounts on deposit in
the Collection Account that constitute any portion of Available Funds for the
related Distribution Date. See "Description of Securities -- Distributions and
Payments on Securities -- Available Funds" herein.
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INVESTMENT OF ACCOUNTS
Unless otherwise specified in the related Prospectus Supplement, all or a
portion of any Account, including the Collection Account, may be invested and
reinvested in one or more Permitted Investments bearing interest or sold at a
discount. The Trustee or any affiliate thereof may be the obligor on any
investment in any Account which otherwise qualifies as a Permitted Investment.
No investment in the Collection Account may mature later than the Deposit Date
next succeeding the date of investment.
The Trustee will not in any way be held liable by reason of any
insufficiency in any Account resulting from any loss on any Permitted Investment
included therein.
Unless otherwise specified in the related Prospectus Supplement, all income
or other gain from investments in any Account will be held in such Account for
the benefit of the Servicer and will be subject to withdrawal from time to time
as permitted by the related Pooling and Servicing Agreement. Any loss resulting
from such investments will be for the account of the Servicer. The Servicer will
be required to deposit the amount of any such loss immediately upon the
realization of such loss to the extent such loss is not offset by other income
or gain from investments in such Account and then available for such
application.
PERMITTED INVESTMENTS
Unless otherwise specified in the related Prospectus Supplement, each
Pooling and Servicing Agreement will define "Permitted Investments" generally as
follows:
(a) Direct general obligations of the United States or the obligations
of any agency or instrumentality of the United States, the timely payment
or the guarantee of which constitutes a full faith and credit obligation of
the United States.
(b) Federal Housing Administration debentures, but excluding any such
securities whose terms do not provide for payment of a fixed dollar amount
upon maturity or call for redemption.
(c) Federal Home Loan Mortgage Corporation senior debt obligations,
but excluding any such securities whose terms do not provide for payment of
a fixed dollar amount upon maturity or call for redemption.
(d) Federal National Mortgage Association senior debt obligations, but
excluding any such securities whose terms do not provide for payment of a
fixed dollar amount upon maturity or call for redemption.
(e) Federal funds, certificates of deposit, time and demand deposits,
and bankers' acceptances (having original maturities of not more than 365
days) of any domestic bank or trust company, the short-term debt
obligations of which have been assigned a minimum rating specified in the
related Pooling and Servicing Agreement by the applicable Rating Agency.
(f) Deposits of any bank or savings and loan association which has
combined capital, surplus and undivided profits of at least $50,000,000
which deposits are not in excess of the applicable limits insured by the
Bank Insurance Fund or the Savings Association Insurance Fund of the
Federal Deposit Insurance Corporation, provided that the long-term deposits
of such bank or savings and loan association are assigned a minimum rating
specified in the related Pooling and Servicing Agreement by the applicable
Rating Agency.
(g) Commercial paper (having original maturities of not more than 180
days) assigned a minimum rating specified in the related Pooling and
Servicing Agreement by the applicable Rating Agency.
(h) Investments in money market funds assigned a minimum rating
specified in the related Pooling and Servicing Agreement by the applicable
Rating Agency.
(i) Other investments acceptable to the applicable Rating Agency.
No instrument described above is permitted to evidence either the right to
receive (a) only interest with respect to obligations underlying such instrument
or (b) both principal and interest payments derived from
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obligations underlying such instrument and the interest and principal payments
with respect to such instrument provided a yield to maturity at par greater than
120% of the yield to maturity at par of the underlying obligations, and no
instrument described above may be purchased at a price greater than par if such
instrument may be prepaid or called at a price less than its purchase price
prior to stated maturity.
MONTHLY ADVANCES AND COMPENSATING INTEREST
In order to maintain a regular flow of scheduled interest to
Certificateholders (rather than to guarantee or insure against losses), unless
otherwise provided in the related Prospectus Supplement, each Pooling and
Servicing Agreement will require that, on each Distribution Date, the Servicer
or any Sub-Servicer deposit in the Collection Account an amount of its own funds
(a "Monthly Advance"). Unless otherwise specified in the related Prospectus
Supplement, a "Monthly Advance" will be equal to the sum of the interest
portions of the aggregate amount of monthly payments (net of the Servicing Fee)
due on the Mortgage Loans during the related Collection Period, but delinquent
as of the close of business on the last day of the related Collection Period,
plus, with respect to each Mortgaged Property which was acquired in foreclosure
or similar action (each, an "REO Property") during or prior to the related
Collection Period and as to which final sale did not occur during the related
Collection Period, an amount equal to the excess, if any, of interest on the
outstanding principal balance of the Mortgage Loan relating to such REO Property
for the related Collection Period at the related Mortgage Rate (net of the
Servicing Fee) over the net income from the REO Property transferred to the
Certificate Account for such Distribution Date.
The Servicer or any Sub-Servicer, if applicable, may recover Monthly
Advances, if not recovered from the Mortgagor on whose behalf such Monthly
Advance was made, from late collections on the related Mortgage Loans, including
Liquidation Proceeds, insurance proceeds and such other amounts as may be
collected by the Servicer from the Mortgagor or otherwise relating to the
Mortgage Loan. To the extent the Servicer, in its good faith business judgment,
determines that any Monthly Advance will not be ultimately recoverable from late
collections, insurance proceeds, Liquidation Proceeds on the related Mortgage
Loans or otherwise, the Servicer may reimburse itself or a Sub-Servicer, if
applicable, on the next Distribution Date from Available Funds remaining in the
Certificate Account after making required payments on such Distribution Date.
With respect to each Mortgage Loan as to which a prepayment is received,
that becomes a Liquidated Mortgage Loan or is otherwise charged-off during the
Collection Period related to a Distribution Date, unless otherwise specified in
the related Prospectus Supplement, the Servicer will be required with respect to
such Distribution Date to remit to the Trustee, from amounts otherwise payable
to the Servicer as the Servicing Fee, an amount generally representing the
excess of interest on the principal balance of such Mortgage Loan prior to such
prepayment, liquidation or charge-off over the amount of interest actually
received on the related Mortgage Loan during the applicable Collection Period
(each such amount, a "Compensating Interest Payment"). The Servicer will not be
entitled to be reimbursed from collections on the Mortgage Loans or any assets
of the Trust for any Compensating Interest Payments made. If the Servicing Fee
in respect of such Collection Period is insufficient to make the entire required
Compensating Interest Payment, the resulting shortfall will reduce the amount of
interest payable to the Certificateholders on such Distribution Date and such
reduction will not be recoverable thereafter.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
Unless otherwise specified in the related Prospectus Supplement, the
Servicer is required to foreclose upon or otherwise comparably effect the
ownership in the name of the Servicer, on behalf of the Trustee, of Mortgaged
Properties relating to defaulted Mortgage Loans as to which no satisfactory
arrangements can be made for collection of delinquent payments and which the
related Transferor or the Servicer has not reacquired pursuant to the option
described below, unless the Servicer reasonably believes that Liquidation
Proceeds with respect to such Mortgage Loan would not be increased as a result
of such foreclosure or other action, in which case the Mortgage Loan will be
charged off and will be liquidated (a "Liquidated Mortgage Loan"). In connection
with such foreclosure or other conversion, the Servicer is required to exercise
or use foreclosure procedures with the same degree of care and skill as it would
ordinarily exercise or use under the
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circumstances in the conduct of its own affairs. Any amounts advanced in
connection with such foreclosure or other action will constitute Servicing
Advances.
Unless otherwise specified in the related Prospectus Supplement, if a REMIC
election has been made, the Servicer will be required to sell REO Property
within two years of its acquisition by the Trustee, unless an opinion of counsel
experienced in federal income tax matters, addressed to the Trustee, the related
Transferor and the Servicer is obtained to the effect that the holding by the
Trust of such REO Property for a greater specified period will not result in the
imposition of taxes on "prohibited transactions" of the Trust as defined in
Section 860F of the Code or cause the Trust to fail to qualify as a REMIC.
In servicing the Mortgage Loans, the Servicer is required to determine,
with respect to each defaulted Mortgage Loan, when it has recovered, whether
through trustee's sale, foreclosure sale or otherwise, all amounts, if any, it
expects to recover from or on account of such defaulted Mortgage Loan, whereupon
such Mortgage Loan shall become a Liquidated Mortgage Loan.
Unless otherwise specified in the related Prospectus Supplement, the
related Transferor or the Servicer may have the right and the option under the
related Pooling and Servicing Agreement, but not the obligation, to reacquire
for its own account any Mortgage Loan which becomes delinquent, in whole or in
part, as to three consecutive monthly installments or any Mortgage Loan as to
which enforcement proceedings have been brought by the Servicer. Any such
Mortgage Loan so reacquired will be withdrawn from the related Mortgage Pool on
a Deposit Date at the Loan Withdrawal Amount thereof.
GENERAL SERVICING PROCEDURES
The Servicer will service the Mortgage Loans, either directly or through
Sub-Servicers, in accordance with the provisions of each related Pooling and
Servicing Agreement and the policies and procedures customarily employed by the
Servicer in servicing other comparable mortgage loans. Servicing includes, but
is not limited to, post-origination loan processing, customer service,
remittance handling, collections and liquidations.
The Servicer, in its own name or in the name of any Sub-Servicer, will be
authorized and empowered pursuant to the related Pooling and Servicing Agreement
(i) to execute and deliver any and all instruments of satisfaction or
cancellation or of partial or full release or discharge and all other comparable
instruments with respect to the Mortgage Loans and with respect to the Mortgaged
Properties, (ii) to institute foreclosure proceedings or obtain a deed in lieu
of foreclosure so as to effect ownership of any Mortgaged Property in its own
name on behalf of the Trustee and (iii) to hold title in its own name to any
Mortgaged Property upon such foreclosure or deed in lieu of foreclosure on
behalf of the Trustee.
During a foreclosure, any expenses incurred by the Servicer are added to
the amount owed by the Mortgagor, as permitted by applicable law. Upon
completion of the foreclosure, the property is sold to an outside bidder, or
passes to the mortgagee, in which case the Servicer will proceed to liquidate
the asset. Servicing and charge-off policies and collection practices may change
over time in accordance with the Servicer's business judgment, changes in its
real estate loan portfolio and applicable laws and regulations.
SUB-SERVICERS
The Servicer will be permitted under the related Pooling and Servicing
Agreement to enter into sub-servicing arrangements with certain mortgage
servicing institutions meeting the requirements of such Pooling and Servicing
Agreement (each, a "Sub-Servicer") to service the Mortgage Loans in a Mortgage
Pool. Any such sub-servicing arrangements will not relieve the Servicer of any
liability associated with servicing the Mortgage Loans. Compensation for the
services of the Sub-Servicer with respect to the Mortgage Loans will be paid by
the Servicer. See "-- Servicing and Other Compensation and Payment of Expenses"
below.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
Unless otherwise specified in the related Prospectus Supplement, as
compensation for its servicing activities under a Pooling and Servicing
Agreement, the Servicer will be entitled to retain the amount of the
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Servicing Fee (as defined in the related Pooling and Servicing Agreement) with
respect to each Mortgage Loan. Additional servicing compensation in the form of
prepayment charges, release fees, bad check charges, assumption fees, extension
fees, late payment charges and any other servicing-related fees, Net Liquidation
Proceeds not required to be deposited in the Collection Account and similar
items may, to the extent collected from Mortgagors, be retained by the Servicer.
The Servicer will be required to pay all reasonable and customary
"out-of-pocket" costs and expenses incurred in the performance of its servicing
obligations, including, but not limited to, the cost of (i) the preservation,
restoration and protection of the Mortgaged Properties, (ii) any enforcement or
judicial proceedings, including foreclosures and (iii) the management and
liquidation of Mortgaged Properties acquired in satisfaction of the related
Mortgage Loans. Such expenditures (each, a "Servicing Advance") may include
costs of collection efforts, reappraisals, forced placement of hazard insurance
if a borrower allows his hazard policy to lapse, legal fees in connection with
foreclosure actions, advancing payments due under any Senior Lien, if any,
advancing delinquent property taxes, and upkeep and maintenance of the Mortgaged
Property if it is acquired through foreclosure and similar types of expenses.
The Servicer will be obligated to make the Servicing Advances incurred in the
performance of its servicing obligations. Unless otherwise specified in the
related Prospectus Supplement, the Servicer will be entitled to recover
Servicing Advances, if not theretofore recovered from the Mortgagor on whose
behalf such Servicing Advance was made, from late collections on the related
Mortgage Loans, including Liquidation Proceeds, insurance proceeds and such
other amounts. Servicing Advances will be reimbursable to the Servicer from the
sources described above out of the funds on deposit in the Collection Account.
The Servicer is not required to make any Servicing Advance that it determines
would be nonrecoverable.
In addition, a 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 for such expenditures under the related 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.
MAINTENANCE OF HAZARD INSURANCE
Unless otherwise specified in the related Prospectus Supplement, the
Servicer will be required to cause to be maintained fire and hazard insurance
with extended coverage customary in the area where each Mortgaged Property is
located in an amount which is at least equal to the least of (i) the outstanding
principal balance owing on the Mortgage Loan and the related Senior Lien, if
any, (ii) the full insurable value of the related Mortgaged Property and (iii)
the minimum amount required to compensate for damage or loss on a replacement
cost basis. Unless otherwise specified in the related Prospectus Supplement, if
the Mortgaged Property is in an area identified in the Federal Register by the
Flood Emergency Management Agency as having special flood hazards, the Servicer
will be required to cause to be purchased a flood insurance policy with a
generally acceptable insurance carrier, in an amount representing coverage not
less than the least of (a) the outstanding principal balance of the Mortgage
Loan and the Senior Lien, if any, (b) the minimum amount required to compensate
for damages or loss on a replacement cost basis or (c) the maximum amount of
insurance available under the National Flood Protection Act of 1973, as amended,
provided that such flood insurance is available. The Servicer will also be
required to maintain fire, hazard and, if applicable, flood insurance on each
REO Property in the respective amounts described above, as well as liability
insurance, in each case to the extent such insurance is available. Any amounts
collected by the Servicer under any such policies (other than amounts to be
applied to the restoration or repair of the Mortgaged Property, or to be
released to the Mortgagor in accordance with customary mortgage servicing
procedures) are required to be deposited by the Servicer in the Collection
Account.
In the event that the Servicer obtains and maintains a blanket policy
insuring against fire and hazards of extended coverage on all of the Mortgage
Loans, then, to the extent such policy names the Trustee as loss payee and
provides coverage in an amount equal to the aggregate unpaid principal balances
of the Mortgage
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Loans without co-insurance, and otherwise complies with the requirements of the
preceding paragraph, the Servicer will be deemed conclusively to have satisfied
its obligations with respect to fire and hazard insurance coverage. If such
blanket policy contains a deductible clause, the Servicer will be required to
pay to the Trustee the difference between the amount that would have been
payable under a policy described in the preceding paragraph and the amount paid
under the blanket policy.
ENFORCEMENT OF DUE-ON-SALE CLAUSES
Unless otherwise specified in the related Prospectus Supplement, when a
Mortgaged Property has been or is about to be voluntarily conveyed by the
Mortgagor, the Servicer, on behalf of the Trustee, in performing its servicing
functions, to the extent it has knowledge of such conveyance or prospective
conveyance, will be required to enforce the rights of the Trustee as the
mortgagee of record to accelerate the maturity of the related Mortgage Loan
under any due-on-sale clause contained in the related Mortgage or Mortgage Note;
provided, however, that the Servicer will not be required to exercise any such
right if the due-on-sale clause, in the reasonable belief of the Servicer, is
not enforceable under applicable law or if such enforcement would materially
increase the risk of default or delinquency on, or materially decrease the
security for, such Mortgage Loan. In such event, the Servicer will attempt to
enter into an assumption and modification agreement with the person to whom such
property has been or is about to be conveyed, pursuant to which such person
becomes liable under the Mortgage Note and, to the extent permitted by
applicable law or the mortgage documents, the Mortgagor remains liable thereon.
The Servicer also 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 Servicer will not enter into an assumption
agreement unless permitted by applicable law and unless such assumption
agreement would not materially increase the risk of default or delinquency on,
or materially decrease the security for, such Mortgage Loan.
VOTING
Unless otherwise specified in the related Pooling and Servicing Agreement,
with respect to any provisions of the Pooling and Servicing Agreement providing
for the action, consent or approval of the holders of all Certificates
evidencing specified "Voting Interests" in the Trust, the holders of any Class
of Certificates will collectively be entitled to the then-applicable percentage
of such Class of Certificates of the aggregate Voting Interests represented by
all Certificates. Each Certificateholder of a Class will have a Voting Interest
equal to the product of the Voting Interest to which such Class is collectively
entitled and the Certificateholder's Percentage Interest (as such term is
defined in the related Pooling and Servicing Agreement) in such Class. With
respect to any provisions of the Pooling and Servicing Agreement providing for
action, consent or approval of a specified Class or Classes of Certificates,
each Certificateholder of such specified Class will have a Voting Interest in
such Class equal to such Certificateholder's Percentage Interest in such Class.
Any Certificate registered in the name of the related Transferor or any
affiliate thereof will be deemed not to be outstanding and the Percentage
Interest evidenced thereby shall not be taken into account in determining
whether the requisite amount of Percentage Interests necessary to take any such
action, or effect any such consent, has been obtained.
AMENDMENTS
Unless otherwise specified in the related Prospectus Supplement, at any
time and from time to time, without the consent of the Certificateholders, the
Trustee, the related Transferor and the Servicer may amend the related Pooling
and Servicing Agreement for the purposes of (a) curing any ambiguity or
correcting or supplementing any provision of such agreement that may be
inconsistent with any other provision of such agreement, (b) if a REMIC election
has been made and if accompanied by an approving opinion of counsel experienced
in federal income tax matters, removing the restriction against the transfer of
a Residual Certificate to a Disqualified Organization (as such term is defined
in the Code) or (c) complying with the requirements of the Code; provided,
however, that such action shall not, as evidenced by an opinion of counsel
delivered to the Trustee, materially and adversely affect the interests of any
Certificateholder.
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Unless otherwise specified in the related Prospectus Supplement, the
related Pooling and Servicing Agreement may also be amended by the Trustee, the
related Transferor and the Servicer, at any time and from time to time, with the
prior written approval of not less than a majority of the Percentage Interests
represented by each affected Class of Certificates then outstanding, for the
purpose of adding any provisions or changing in any manner or eliminating any of
the provisions thereof or of modifying in any manner the rights of the
Certificateholders 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 Certificateholder without the consent of
such Certificateholder or (b) change the aforesaid percentages of Percentage
Interests which are required to consent to any such amendments, without the
consent of the Certificateholders of all Certificates of the Class or Classes
affected then outstanding. If a REMIC election has been made with respect to the
related Trust, any such amendment must be accompanied by an opinion of tax
counsel as to REMIC matters.
The Trustee will be required to furnish a copy of any such amendment to
each Certificateholder in the manner set forth in the related Pooling and
Servicing Agreement.
CERTIFICATE EVENTS OF DEFAULT
Unless otherwise specified in the related Prospectus Supplement, events of
default with respect to Certificates (each, a "Certificate Event of Default")
under a Pooling and Servicing Agreement will consist of (a) any failure by the
Servicer to make a Monthly Advance as required; (b) any failure by the Servicer
to deposit in the Collection Account or Certificate Account any amount (other
than an amount representing a Monthly Advance) required to be so deposited under
the related Pooling and Servicing Agreement, which failure continues unremedied
for one Business Day after the giving of written notice of such failure to the
Servicer by the Trustee or to the Servicer and the Trustee by Certificateholders
evidencing Voting Interests represented by all Certificates aggregating not less
than 51%; (c) any failure by the Servicer to duly observe or perform in any
material respect any other of its covenants or agreements in the Pooling and
Servicing Agreement which materially and adversely affects the rights of
Certificateholders and continues unremedied for 30 days after the giving of
written notice of such failure to the Servicer by the Trustee or the
Certificateholders evidencing Voting Interests represented by all Certificates
aggregating not less than 51%; (d) certain events of insolvency, readjustment of
debt, marshaling 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; (e) the occurrence of delinquencies and/or
losses in respect of the Mortgage Loans in excess of a level, and for a period
of time, as specified in the Pooling and Servicing Agreement; and (f) if the
related Transferor and the Servicer are the same entity (i.e., ACC), any failure
of the Transferor to duly observe or perform in any material respect any of its
covenants or agreements in the related Pooling and Servicing Agreement that
materially and adversely affects the rights of Certificateholders and continues
unremedied for 30 days after the giving of a written notice of such failure to
such Transferor by the Trustee or to the Servicer and the Trustee by
Certificateholders evidencing Voting Interests represented by all Certificates
aggregating not less than 51%.
RIGHTS UPON CERTIFICATE EVENTS OF DEFAULT
Unless otherwise specified in the related Prospectus Supplement, upon the
occurrence of a Certificate Event of Default, Certificateholders evidencing
Voting Interests represented by all Certificates aggregating not less than 51%
or the Trustee may terminate all of the rights and obligations of the Servicer
under the related Pooling and Servicing Agreement, whereupon the Trustee will
succeed to all the responsibilities, duties and liabilities of the Servicer
under the related Pooling and Servicing Agreement and will be entitled to such
compensation as the Servicer would have been entitled to thereunder. In the
event that the Trustee would be obligated to succeed the Servicer but is
unwilling or legally unable to act, it may appoint, or petition a court of
competent jurisdiction for the appointment of, any established housing and home
finance institution or any institution that regularly services home equity loans
that is currently servicing a home equity loan portfolio that has all licenses,
permits and approvals required by applicable law and a net worth of at least
$10,000,000 to act as successor to the Servicer under the related Pooling and
Servicing Agreement, provided that the
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appointment of any such successor Servicer will not result in the qualification,
reduction or withdrawal of the rating assigned to the Certificates by any
applicable Rating Agency. Pending appointment of a successor Servicer, unless
the Trustee is prohibited by law from so acting, the Trustee shall be obligated
to act as Servicer. The Trustee and such successor Servicer may agree upon the
servicing compensation to be paid, which in no event may be greater than the
compensation described above.
Unless otherwise specified in the related Prospectus Supplement, no
Certificateholder, solely by virtue of its status as a Certificateholder, will
have any right under the related Pooling and Servicing Agreement to institute
any action, suit or proceeding with respect to the related Pooling and Servicing
Agreement unless such Certificateholder previously has given to the Trustee
written notice of default and unless Certificateholders evidencing Voting
Interests represented by all Certificates aggregating not less than 51% have
made written request upon the Trustee to institute such action, suit or
proceeding in its own name as Trustee thereunder and have offered to the Trustee
reasonable indemnity for costs, expenses and liabilities to be incurred, and the
Trustee for 60 days has neglected or refused to institute any such action, suit
or proceeding. However, the Trustee will be under no obligation to exercise any
of the rights or powers vested in it by the related Pooling and Servicing
Agreement or to institute, conduct or defend any litigation thereunder or in
relation thereto at the request, order or direction of any of the
Certificateholders, unless such Certificateholders have offered to the Trustee
reasonable security or indemnity against the costs, expenses and liabilities
which may be incurred therein or thereby.
TERMINATION; OPTIONAL TERMINATION
Unless otherwise specified in the related Pooling and Servicing Agreement,
the obligations created by each Pooling and Servicing Agreement for each Series
of Certificates will terminate upon the payment to the related
Certificateholders of all amounts held in any Accounts or by the Servicer, and
required to be paid to them pursuant to such Pooling and Servicing Agreement
following the later of (i) the final payment or other liquidation of the last of
the Mortgage Loans subject thereto or the disposition of all property acquired
upon foreclosure or deed in lieu of foreclosure of any such Mortgage Loans
remaining in the Trust and (ii) the acquiring by the related Transferor, the
Servicer or other entity specified in the related Prospectus Supplement
including, if REMIC treatment has been elected, the holder of the residual
interest in the REMIC (see "Certain Federal Income Tax Consequences" below),
from the related Trust of all of the remaining Mortgage Loans and all property
acquired in respect of such Mortgage Loans. Unless otherwise specified in the
related Prospectus Supplement, any such acquisition of Mortgage Loans and
property acquired in respect of Mortgage Loans evidenced by a Series of
Certificates will be made at the option of the related Transferor, the Servicer
or other entity at a price, and in accordance with the procedures, specified in
the Prospectus Supplement. The exercise of such right will effect early
retirement of the Certificates of that Series, but the right of the related
Transferor, the Servicer or other entity to so acquire is subject to the
principal balance of the related Mortgage Loans being less than the percentage
specified in the related Prospectus Supplement of the aggregate principal
balance of such Mortgage Loans at the Cut-off Date for the Series. The foregoing
is subject to the provisions that if a REMIC election is made with respect to a
Trust, any reacquisition pursuant to clause (ii) above will be made only in
connection with a "qualified liquidation" of the REMIC within the meaning of
Section 860F(g)(4) of the Code.
EVIDENCE AS TO COMPLIANCE
Unless otherwise specified in the related Prospectus Supplement, each
Pooling and Servicing Agreement will provide that on or before a specified date
in each year, a firm of independent public accountants will furnish a statement
to the Trustee to the effect that on the basis of certain procedures
substantially in conformance with the Uniform Single Audit Program for Mortgage
Bankers (to the extent the procedures are applicable to the servicing
obligations set forth in the Pooling and Servicing Agreement), the servicing by
or on behalf of the Servicer of the related Mortgage Loans, under agreements
substantially similar to each other (including the related Pooling and Servicing
Agreement) was conducted in compliance with such agreements and such procedures
have disclosed no exceptions or errors in records relating to the Mortgage Loans
subject to the related Pooling and Servicing Agreement which, in the opinion of
such firm, are material, except for
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such exceptions as will be referred to in the report. Unless otherwise specified
in the related Prospectus Supplement, each Pooling and Servicing Agreement will
provide that the Servicer will be required to deliver to the Trustee, on or
before a specified date in each year, an annual statement signed by an officer
of the Servicer to the effect that the Servicer has fulfilled its material
obligations under the related Pooling and Servicing Agreement throughout the
preceding year.
INDEMNIFICATION OF OFFICERS AND DIRECTORS OF THE TRANSFERORS
The related Pooling and Servicing Agreement will provide that neither the
related Transferor nor any of its directors, officers, employees or agents shall
have any liability to the related Trust created thereunder or to any of the
Certificateholders, except with respect to liabilities resulting from willful
malfeasance, bad faith or gross negligence or from the reckless disregard of
obligations or duties arising under the related Pooling and Servicing Agreement.
The related Pooling and Servicing Agreement will further provide that, with the
exceptions stated above, the related Transferor and its directors, officers,
employees and agents are entitled to be indemnified and held harmless by the
related Trust against any loss, liability or expense incurred in connection with
legal actions relating to such Pooling and Servicing Agreement or the
Certificates.
THE TRUSTEE
Each Prospectus Supplement will name the Trustee under the related Pooling
and Servicing Agreement. The Pooling and Servicing Agreement will provide that
the Trustee may resign at any time, upon notice to the related Transferor, the
Servicer and any Rating Agency, in which event such Transferor will be obligated
to appoint a successor Trustee. The related Transferor may 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. Any resignation or
removal of the Trustee and appointment of a successor Trustee will not become
effective until acceptance of the appointment by the successor Trustee. Each
Pooling and Servicing Agreement will provide that the Trustee is under no
obligation to exercise any of the rights or powers vested in it by the Pooling
and Servicing Agreement at the request or direction of any of the
Certificateholders, unless such Certificateholders shall have offered to the
Trustee reasonable security or indemnity against the costs, expenses and
liabilities which might be incurred by it in compliance with such request or
direction. The Trustee may execute any of the rights or powers granted by the
Pooling and Servicing Agreement or perform any duties thereunder either directly
or by or through agents or attorneys, and the Trustee is responsible for any
misconduct or negligence on the part of any agent or attorney appointed and
supervised with due care by it thereunder. Pursuant to the Pooling and Servicing
Agreement, the Trustee is not liable for any action it takes or omits to take in
good faith which it reasonably believes to be authorized by an authorized
officer of any person or within its rights or powers under the Pooling and
Servicing Agreement. The Trustee and any director, officer, employee or agent of
the Trustee may rely and will be protected in acting or refraining from acting
in good faith in reliance on any certificate, notice or other document of any
kind prima facie properly executed and submitted by the authorized officer of
any person respecting any matters arising under the Pooling and Servicing
Agreement.
THE INDENTURE
GENERAL
Each Series of Bonds will be issued pursuant to an Indenture to be entered
into between the related Bond Issuer and the related Trustee. The Mortgage Loans
to be included in the related Mortgage Pool will be assigned to the Trustee
pursuant to provisions included in the related Indenture that are substantially
the same as, and the obligations of ACAC, as Transferor (or the related Bond
Issuer, if a different entity, to the extent described in the related Prospectus
Supplement), and the Trustee with respect to the Mortgage Loans so conveyed will
be substantially similar to, those described under "The Pooling and Servicing
Agreement -- Assignment of Mortgage Loans" herein. In addition, the Mortgage
Loans included in the Mortgage Pool for any Series of Bonds will be serviced by
the Servicer pursuant to the terms of a Servicing Agreement to be entered into
among the Bond Issuer, ACC, as Servicer, and the related Trustee, which will
contain provisions
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substantially similar to the servicing and collection provisions included in
each Pooling and Servicing Agreement and described under "The Pooling and
Servicing Agreement" herein. Where provisions or terms used in a particular
Indenture or Servicing Agreement differ from those provided herein, a
description of such provisions or terms will be included in the related
Prospectus Supplement.
The following summaries describe certain provisions of the Indenture not
described elsewhere in this Prospectus. Where particular provisions or terms
used in the Indenture are referred to, the actual provisions (including
definitions of terms) are incorporated by reference as part of such summaries.
The description set forth below is subject to modification in the Prospectus
Supplement for a Series of Bonds to describe the terms and provisions of the
particular Indenture relating to such Series of Bonds.
MODIFICATION OF INDENTURE
With the consent of the holders of not less than 51% of the then aggregate
principal amount of the outstanding Bonds of any Series issued under an
Indenture, the related Trustee and the related Bond Issuer may execute a
supplemental indenture to add provisions to, or change in any manner or
eliminate any provisions of, the Indenture with respect to such Series or modify
(except as provided below) in any manner the rights of the holders of such
Bonds.
Without the consent of the holder of each outstanding Bond of such Series
affected thereby, however, no supplemental indenture shall (a) change the final
Payment Date of the principal of, or any installment of interest on, any Bond of
such Series or reduce the principal amount thereof, the Bond Rate specified
thereon (except as provided in the related Indenture with respect to Bonds that
have an adjustable Bond Rate), the redemption price with respect thereto or the
earliest date on which any Bonds of such Series may be redeemed at the option of
the related Bond Issuer, or change any place of payment where, or the coin or
currency in which, any Bond of such Series or any interest thereon is payable,
or impair the right to institute suit for the enforcement of certain provisions
of the Indenture regarding payment, (b) reduce the percentage of the aggregate
principal amount of the outstanding Bonds of such Series, the consent of the
holders of which is required for any such supplemental indenture, or the consent
of the holders of which is required for any waiver of compliance with certain
provisions of the Indenture or of certain defaults thereunder and their
consequences as provided for in the Indenture, (c) modify the provisions of the
Indenture specifying the circumstances under which such a supplemental indenture
may not change the provisions of the Indenture without the consent of the
holders of each outstanding Bond of such Series affected thereby, or the
provisions of the Indenture with respect to certain remedies available in a Bond
Event of Default (as described below), except to increase any percentage
specified therein or to provide that certain other provisions of the Indenture
cannot be modified or waived without the consent of the holder of each
outstanding Bond affected thereby, (d) modify or alter the provisions of the
Indenture regarding the voting of Bonds held by the related Bond Issuer or an
affiliate of the related Bond Issuer, (e) permit the creation of any lien
ranking prior to or on the parity with the lien of the Indenture with respect to
any part of the property subject to a lien under the Indenture or terminate the
lien of the Indenture on any property at any time subject thereto or deprive the
holder of any Bond of such Series of the security afforded by the lien of the
Indenture, or (f) modify any of the provisions of the Indenture in such manner
as to affect the rights of the holders of Bonds of such Series to the benefits
of any provisions for the redemption at the request of holders of Bonds of such
Series contained therein.
The related Bond Issuer and the respective Trustee may also enter into
supplemental indentures, without obtaining the consent of Bondholders of such
Series, to cure ambiguities or make minor corrections, to provide for the
issuance of Bonds in bearer or registered form or for the conversion of any
outstanding Bonds to or from bearer form and to do such other things as would
not adversely affect the interests of the Bondholders of such Series.
BOND EVENTS OF DEFAULT
Unless otherwise specified in the Prospectus Supplement relating to a given
Series of Bonds, a "Bond Event of Default" with respect to any Series of Bonds
will be defined in the respective Indenture under which
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such Bonds are issued as: (a) unless otherwise specified in the Prospectus
Supplement for such Series, a default in the payment of interest on any Bond of
such Series when and as due and such failure continues for a period of two days;
(b) a failure to pay the Bonds of such Series in full on or before the date
specified as the Final Maturity Date in the related Prospectus Supplement; (c) a
default in the observance of certain negative covenants in the Indenture or in
the observance of certain covenants relating to redemptions of Bonds of such
Series; (d) a default in the observance of any other covenant of the Indenture,
and the continuation of any such default for a specified period after notice to
the related Bond Issuer by the Trustee or to the related Bond Issuer and the
Trustee by the holders of at least 25% in principal amount of the Bonds of such
Series then outstanding; (e) any representation or warranty made by the related
Bond Issuer in the Indenture or in any certificate delivered pursuant thereto
having been incorrect in a material respect as of the time made, and the
circumstance in respect of which such representation or warranty is incorrect
not having been cured within a specified period after notice thereof is given to
the related Bond Issuer by the Trustee or by the holders of at least 25% in
principal amount of the Bonds of such Series then outstanding; or (f) certain
events of bankruptcy, insolvency, receivership or reorganization of the related
Bond Issuer.
RIGHTS UPON BOND EVENTS OF DEFAULT
Unless otherwise specified in the Prospectus Supplement relating to a given
Series of Bonds, in case a Bond Event of Default should occur and be continuing
with respect to a Series of Bonds, the Trustee may, and on request of holders of
not less than 51% in principal amount of the Bonds of such Series then
outstanding shall, declare the principal of such Series of Bonds to be due and
payable. Such declaration may under certain circumstances be rescinded by the
holders of a majority in principal amount of the Bonds of such Series then
outstanding.
If, following a Bond Event of Default, a Series of Bonds has been declared
to be due and payable, the Trustee may, in its discretion (provided that the
holders of the Bonds of such Series have not directed the Trustee to sell the
assets included in the related Trust Estate), refrain from selling such assets
and continue to apply all amounts received on such assets to payments due on the
Bonds of such Series in accordance with their terms, notwithstanding the
acceleration of the maturity of such Bonds. The Trustee, however, must sell the
assets included in the related Trust Estate for such Series if collections in
respect of such assets are determined to be insufficient to make all scheduled
payments on Bonds of such Series, in which case payments will be made on the
Bonds in the same manner as described in the next sentence with regard to
instances in which such assets are sold. In addition, upon a Bond Event of
Default the Trustee may, in its discretion (provided that, unless the Bond Event
of Default relates to a default in payment of principal or interest, the Trustee
must receive the consent of the holders of all outstanding Bonds of such Series,
and certain other conditions must be met), sell the assets included in the
related Trust Estate for such Series, in which event the Bonds of such Series
will be payable pro rata out of the collections on, or the proceeds from the
sale of, such assets and any overdue installments of interest on the Bonds will,
to the extent permitted by applicable law, bear interest at the highest stated
interest rate borne by any Bond of such Series.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case a Bond Event of Default shall occur and be continuing, the
Trustee shall be under no obligation to exercise any of the rights and powers
under the Indenture at the request or direction of any of the Bondholders,
unless such Bondholders have offered to the Trustee reasonable security or
indemnity satisfactory to it against the costs, expenses and liabilities which
might be incurred by it in compliance with such request or direction. Subject to
such provisions for indemnification and certain limitations contained in the
Indenture, the holders of a majority in principal amount of the outstanding
Bonds of a Series shall have the right to direct the time, method, and place of
conducting any proceeding or any remedy available to the Trustee or exercising
any trust or power conferred on the Trustee with respect to the Bonds of such
Series; and the holders of a majority in principal amount of the Bonds of a
Series then outstanding may, in certain cases, waive any default with respect
thereto, except a default in the payment of principal or interest or a default
in respect of a covenant or provision of the Indenture that cannot be modified
without the waiver or consent of the holder of each outstanding Bond affected
thereby.
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LIST OF BONDHOLDERS
Unless otherwise specified in the Prospectus Supplement relating to a given
Series of Bonds, three or more holders of the Bonds of any Series (each of whom
has owned a Bond of such Series for at least six months) may, by written request
to the Trustee, obtain access to the list of all Bondholders of such Series
maintained by the Trustee for the purpose of communicating with other such
Bondholders with respect to their rights under the Indenture. The Trustee may
elect not to afford the requesting Bondholders access to the list of Bondholders
if it agrees to mail the desired communication or proxy, on behalf of the
requesting Bondholders, to all Bondholders.
ANNUAL COMPLIANCE STATEMENT
The related Bond Issuer will be required to file annually with the Trustee
a written statement as to the fulfillment of its obligations under the
Indenture.
TRUSTEE'S ANNUAL REPORT
The Trustee will be required to mail each year to all Bondholders a brief
report relating to its eligibility and qualifications to continue as the Trustee
under the Indenture, any amounts advanced by it under the Indenture, the amount,
interest rate and maturity date of certain indebtedness owing by the related
Bond Issuer to it in the Trustee's individual capacity, the property and funds
physically held by the Trustee as such, any release, or release and
substitution, of property subject to the lien of the Indenture that has not been
previously reported, any additional Series of Bonds not previously reported and
any action taken by it which materially affects the Bonds and which has not been
previously reported.
SATISFACTION AND DISCHARGE OF INDENTURE
The Indenture will be discharged with respect to the assets securing the
Bonds of a Series upon the delivery to the Trustee for cancellation of all of
the Bonds of such Series or, with certain limitations, upon deposit with the
Trustee of funds sufficient for the payment in full of all of the Bonds of such
Series.
REDEMPTION OF BONDS
To the extent provided in the related Prospectus Supplement, the Bonds of
any Series may be (i) redeemed at the request of holders of such Bonds; (ii)
redeemed at the option of the related Bond Issuer or another party specified in
the related Prospectus Supplement; or (iii) subject to special redemption under
certain circumstances. The circumstances and terms under which the Bonds of a
Series may be redeemed will be described in the related Prospectus Supplement.
REPORTS BY TRUSTEE TO BONDHOLDERS
On each Payment Date, the Trustee will send a report to each Bondholder
setting forth, among other things, the amount of such payment representing
interest, the amount thereof, if any, representing principal and the outstanding
principal amount of an individual Bond after giving effect to the payments made
on such Payment Date.
LIMITATION ON SUITS
Unless otherwise specified in the Prospectus Supplement relating to a given
Series of Bonds, no Bondholder of any Series will have any right to institute
any proceedings with respect to the Indenture unless (1) such holder has
previously given written notice to the Trustee of a continuing Bond Event of
Default with respect to such Series; (2) the holders of at least 25% in
principal amount of the Bonds of such Series then outstanding have made written
request to the Trustee to institute proceedings in respect of such Bond Event of
Default in its own name as Trustee; (3) such holders have offered to the Trustee
reasonable indemnity satisfactory to it against the costs, expenses and
liabilities to be incurred in compliance with such request; (4) for a specified
period after its receipt of such notice, request and offer of indemnity the
Trustee has failed
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to institute any such proceedings; and (5) no direction inconsistent with such
written request has been given to the Trustee during such period by the holders
of not less than 51% in principal amount of the Bonds of such Series then
outstanding.
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS AND RELATED MATTERS
The following discussion contains summaries, which are general in nature,
of material legal matters relating to the Mortgage Loans. Because such legal
aspects are governed primarily by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete or to encompass the
laws of all states in which Mortgaged Properties are situated. The summaries are
qualified in their entirety by reference to the appropriate laws of the states
in which Mortgage Loans may be originated.
NATURE OF THE MORTGAGE LOANS
The Mortgage Loans will be secured by mortgages, deeds of trust, security
deeds or deeds to secure debt, depending upon the prevailing practice in the
state in which the Mortgaged Property is located. In California, for example,
Mortgage Loans are secured by deeds of trust. In other states, a mortgage
creates a lien upon the real property encumbered by the mortgage, which lien is
generally not prior to the lien for real estate taxes and assessments and other
charges under governmental police powers. Priority between mortgages depends on
their terms and generally on the order of recording in the appropriate state or
county office. There are two parties to a mortgage: the mortgagor, who is the
borrower and owner of the mortgaged property, and the mortgagee, who is the
lender. The mortgagor delivers to the mortgagee a note or bond and the mortgage.
Although a deed of trust is similar to a mortgage, a deed of trust has three
parties: the borrower property owner called the trustor (similar to a
mortgagor), the 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 borrower's
obligation to the lender. A security deed and a deed to secure debt are special
types of deeds that indicate on their face that they are granted to secure an
underlying debt. By executing a security deed or deed to secure debt, the
grantor conveys title to, as opposed to merely creating a lien upon, the subject
property to the grantee until such time as the underlying debt is repaid. The
mortgagee's authority under a mortgage, the trustee's authority under a deed of
trust and the grantee's authority under a security deed or deed to secure debt
are governed by law and, with respect to some deeds of trust, the directions of
the beneficiary.
Certain of the Mortgage Loans may be loans secured by condominium units.
The condominium building may be a multi-unit building or buildings, or a group
of buildings whether or not attached to each other, located on property subject
to condominium ownership. Condominium ownership is a form of ownership of a real
property wherein each owner is entitled to the exclusive ownership and
possession of his or her individual condominium unit and also owns a
proportionate undivided interest in all parts of the condominium building (other
than the individual condominium units) and all areas or facilities, if any, for
the common use of the condominium units. The condominium unit owners appoint or
elect the condominium association to govern the affairs of the condominium.
FORECLOSURE/REPOSSESSION
Foreclosure of a deed of trust is generally accomplished by a non-judicial
sale under a specific provision in the deed of trust which authorizes the
trustee to sell the property at public auction upon any default by the borrower
under the terms of the note or deed of trust. In addition to this 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 send a copy to the borrower-trustor, to any
person who has recorded a request for a copy of any notice of default and notice
of sale, to any successor-in-interest to the borrower-trustor, to the
beneficiary of any junior deed of trust and to certain other persons. Before
such non-judicial sale takes place, typically a notice of sale must be posted in
a public place and published during a
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specific period of time in one or more newspapers, posted on the property and
sent to parties having an interest of record in the property.
Foreclosure of a mortgage is generally accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest in the real property. Delays in completion of the
foreclosure may occasionally result from difficulties in locating necessary
parties. When the mortgagee's right to foreclosure is contested, the legal
proceedings necessary to resolve the issue can be time-consuming. After the
completion of a judicial foreclosure proceeding, the court generally issues a
judgment of foreclosure and appoints a referee or other court officer to conduct
the sale of the property.
In some states, the borrower under a mortgage or a deed of trust will have
the right to reinstate the loan at any time following default until shortly
before the foreclosure sale. In such states, the borrower, or any other person
having a junior encumbrance on the real estate, may, during a statutorily
prescribed reinstatement period, cure a monetary default by paying the entire
amount in arrears plus other designated costs and expenses incurred in enforcing
the obligation. Generally, state law controls the amount of foreclosure expenses
and costs, including attorney's fees, which may be recovered by a lender. After
the reinstatement period has expired without the default having been cured, the
borrower or junior lienholder no longer has the right to reinstate the loan and
must pay the loan in full to prevent the scheduled foreclosure sale. If the
mortgage or deed of trust is not reinstated, a notice of sale must be posted in
a public place and, in most states, published for a specific period of time in
one or more newspapers. In addition, some state laws require that a copy of the
notice of sale be posted on the property and sent to all parties having an
interest in the real property.
Although foreclosure sales are typically public sales, frequently no
third-party purchaser bids in excess of the lender's lien because of the
difficulty of determining the exact status of title to the property, the
possible deterioration of the property during the foreclosure proceedings and a
requirement that the purchaser pay for the property in cash or by cashier's
check. Thus, the foreclosing lender often purchases the property from the
trustee or referee for an amount equal to the principal amount outstanding under
the loan, accrued and unpaid interest and the expenses of foreclosure.
Thereafter, the lender will assume the burden of ownership, including obtaining
hazard insurance and making such repairs at its own expense as are necessary to
render the property suitable for sale. The lender will commonly obtain the
services of a real estate broker and pay the broker's commission in connection
with the sale of the property. Depending upon market conditions, the ultimate
proceeds of the sale of the property may not equal the lender's investment in
the property, in which event the lender may be entitled to a deficiency judgment
in certain states. Any loss may be reduced by the receipt of any mortgage
insurance proceeds.
Courts have imposed general equitable principles upon foreclosure, which
are generally designed to mitigate the legal consequences to the borrower of the
borrower's defaults under the loan documents. Some courts have been faced with
the issue of whether federal or state constitutional provisions reflecting due
process concerns for fair notice require that borrowers under deeds of trust
receive notice earlier than that prescribed by statute. For the most part, these
cases have upheld the notice provisions as being reasonable or have found that
the sale by a trustee under a deed of trust does not involve sufficient state
action to afford constitutional protection to the borrower.
RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the borrower and foreclosed junior lienholders are given a statutory
period in which to redeem the property from the foreclosure sale. In some
states, redemption may occur only upon payment of the entire principal balance
of the loan, accrued interest and expenses of foreclosure. In other states,
redemption may be authorized if the former borrower pays only a portion of the
sums due. The effect of a statutory right of redemption would defeat the title
of any purchaser from the lender subsequent to foreclosure or sale under a deed
of trust. Consequently, the practical effect of the redemption right is to force
the lender to retain the property and pay the expenses of ownership until the
redemption period has run. In some states, such as California, there is no right
to reclaim property after a trustee's sale under a deed of trust.
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CERTAIN PROVISIONS OF CALIFORNIA DEEDS OF TRUST
Most institutional lenders in California, including the Affiliated
Originators originating loans secured by real property in California, use a form
of deed of trust that confers on the beneficiary the right both to receive all
proceeds collected under any hazard insurance policy and all awards made in
connection with any condemnation proceedings, and to apply such proceeds and
awards made in connection with any condemnation proceedings to any indebtedness
secured by the deed of trust, in such order as the beneficiary may determine;
provided, however, that the beneficiary is prohibited (under California law)
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 may
apply any award received in respect of such damages or in connection with such
condemnation 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 are senior to the deed of
trust, to provide and maintain fire and hazard 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.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states, including California, have adopted statutory prohibitions
restricting the right of the beneficiary or mortgagee to obtain a deficiency
judgment against borrowers financing the purchase of their residence or
following sale under a deed of trust or certain other foreclosure proceedings. A
deficiency judgment is a personal judgment against the borrower equal in most
cases to the difference between the amount due to the lender and the net amount
received by the lender at the foreclosure sale. As a result of these
prohibitions, it is anticipated that in many instances the Servicer will not
seek deficiency judgments against defaulting Mortgagors.
In addition to laws limiting or prohibiting deficiency judgements, 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 the 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
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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's failure to adequately maintain the property or the borrower's
execution of a second deed of trust affecting the property.
Federal and local real estate tax laws provide priority to certain tax
liens over the lien of a mortgage or secured party. Numerous federal and state
consumer protection laws impose substantive requirements upon mortgage lenders
in connection with the origination, servicing and enforcement of such loans.
These laws include the federal Truth in Lending Act, Real Estate Settlement
Procedures Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair
Credit Reporting Act and related statutes and regulations. These federal and
state laws impose specific statutory liabilities upon lenders who fail to comply
with the provisions of the law. In some cases, this liability may affect
assignees of the loans.
It is possible that some of the 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, the
implementing regulation of the Truth-in-Lending Act. These provisions impose
additional disclosure and other requirements on creditors with respect to
nonpurchase money mortgage loans with high interest rates or high up-front fees
and charges. In general, mortgage 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 mortgage loans originated on or after October
1, 1995. The 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 mortgage loan.
ENFORCEABILITY OF DUE-ON-SALE CLAUSES
Unless otherwise provided in the related Prospectus Supplement, each
Mortgage Loan will contain a due-on-sale clause which will generally provide
that if the Mortgagor sells, or voluntarily transfers or conveys the Mortgaged
Property, the Mortgage Loan may be accelerated by the mortgagee. The Garn-St.
Germain Depository Institutions Act of 1982 (the "Garn-St. Germain Act"),
subject to certain exceptions, preempts state constitutional, statutory and case
law prohibiting the enforcement of due-on-sale clauses. As to loans secured by
an owner-occupied residence, the Garn-St. Germain Act sets forth nine specific
instances in which a mortgagee covered by such Act may not exercise its rights
under a due-on-sale clause, notwithstanding the fact that a transfer of the
property may have occurred. The inability to enforce a due-on-sale clause may
result in transfer of the related Mortgaged Property to an uncreditworthy
person, which could increase the likelihood of default.
PREPAYMENT CHARGES
Under certain state laws, prepayment charges may not be imposed at all or
after a certain period of time following origination of the mortgage loans with
respect to prepayments on mortgage loans secured by liens encumbering
owner-occupied residential properties. Because many of the Mortgaged Properties
will be owner-occupied, it is anticipated that prepayment charges may not be
imposed with respect to many of the
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Mortgage Loans. The absence of such a restraint on prepayment may increase the
likelihood of refinancing or other early retirement of such Mortgage Loans.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ("Title V"), provides that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. The Office of Thrift
Supervision, as successor to the Federal Home Loan Bank Board, is authorized to
issue rules and regulations and to publish interpretations governing
implementation of Title V. The statute authorized the states to reimpose
interest rate limits by adopting, before April 1, 1983, a law or constitutional
provision which expressly rejects an application of the federal law. In
addition, even where Title V is not so rejected, any state is authorized by the
law to adopt a provision limiting discount points or other charges on mortgage
loans covered by Title V. Certain states have taken action to reimpose interest
rate limits and/or to limit discount points or other charges.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
Generally, under the terms of the Relief Act, a Mortgagor who enters
military service after the origination of the related Mortgage Loan (including a
Mortgagor who is a member of the National Guard or is in reserve status at the
time of the origination of the Mortgage Loan and is later called to active duty)
may not be charged interest above an annual rate of 6% during the period of such
borrower's active duty status, unless a court orders otherwise upon application
of the lender. It is possible that such interest rate limitation could have an
effect, for an indeterminate period of time, on the ability of the Servicer to
collect full amounts of interest on certain of the Mortgage Loans. Unless
otherwise provided in the applicable Prospectus Supplement, any shortfall in
interest collections resulting from the application of the Relief Act could
result in losses to Securityholders. In addition, the Relief Act imposes
limitations which would impair the ability of the Servicer to foreclose on an
affected Mortgage Loan during the Mortgagor's period of active duty status.
Thus, in the event that such a Mortgage Loan goes into default, there may be
delays and losses occasioned by the inability to realize upon the Mortgaged
Property in a timely fashion.
ENVIRONMENTAL CONSIDERATIONS
Real property pledged as security to a lender may be subject to unforeseen
environmental risks. Under the laws of certain states, contamination of a
property may give rise to a lien on the property to assure the payment of the
costs of clean-up. In several states such a lien has priority over the lien of
an existing mortgage against such property. In addition, under the federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA"), the United States Environmental Protection Agency (the "EPA") may
impose a lien on property where the EPA has incurred cleanup costs. However, a
CERCLA lien is subordinate to pre-existing, perfected security interests.
Under the laws of some states, and under CERCLA, it is conceivable that a
lender may be held liable, as an "owner" or "operator," for costs of addressing
releases or threatened releases of hazardous substances at a Mortgaged Property,
regardless of whether or not the environmental damage or threat was caused by a
prior owner or operator. CERCLA imposes liability on any and all "responsible
parties" (which term includes, among others, the property owner and operator)
for the cost of clean-up of releases of hazardous substances. However, CERCLA
excludes from the definition of "owner or operator" secured creditors who hold
indicia of ownership for the purpose of protecting their security interest, but
"without participating in the management of the facility."
Court decisions, such as United States v. Fleet Factors, 901 F.2d 1550
(11th Cir. 1990), cert. denied, 498 US 1049 (1991) (CERCLA liability may be
imposed on a secured lender if it has the ability to participate in management),
and Kelley v. EPA, 15 F.3d 1100 (DC Cir. 1994) cert. denied sub nom, Kelley v.
Am. Bankers Ass'n., 115 S. Ct. 900 (1995) (invalidated the Lender Liability Rule
issued by the EPA in 1992) created considerable uncertainty about the scope and
availability of the secured lender's exemption from
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liability. In September 1996, however, Congress passed the Asset Conservation,
Lender Liability, and Deposit Insurance Protection Act of 1996 to address this
uncertainty in federal law. This statute adopted EPA's Lender Liability Rule
into law and, among other things, clarified the exemption by defining more
clearly the circumstances under which a lender will be deemed to have
participated in management. Similar legislation has been enacted in some states.
In the jurisdictions in which such enactments are in effect, the environmental
liability risks associated with protecting a security interest in property have
been reduced, although not completely eliminated.
The costs associated with environmental clean-up may be substantial. If the
related Trustee or Servicer is deemed to have participated in management of a
contaminated property that is part of the Trust or Trust Estate, as applicable,
it is likely that remedial costs would become a liability of that Trust or Trust
Estate, as applicable, and in certain circumstances, of the Trustee. Such an
occurrence could occasion a loss to Securityholders. If a lender is or becomes
liable, it can bring an action for contribution against any other "responsible
parties," including a previous owner or operator, who created the environmental
hazard, but those persons or entities may be bankrupt or otherwise judgment
proof.
Unless otherwise specified in the related Prospectus Supplement, at the
time the Mortgage Loans were originated, no environmental assessment or a very
limited environmental assessment of the Mortgaged Properties was conducted.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary of certain of the anticipated material federal income
tax consequences of the purchase, ownership and disposition of Securities is
based on the advice of Andrews & Kurth L.L.P., counsel to the Transferors. This
summary is based on laws, regulations, including the real estate mortgage
investment conduit ("REMIC") regulations promulgated by the Treasury Department
on December 23, 1992 (the "REMIC Regulations"), rulings and decisions now in
effect or (with respect to regulations) proposed, all of which are subject to
change either prospectively or retroactively. This summary does not address the
federal income tax consequences of an investment in Securities applicable to all
categories of investors, some of which (for example, banks and insurance
companies) may be subject to special rules. Prospective investors should consult
their tax advisors regarding the federal, state, local and any other tax
consequences to them of the purchase, ownership and disposition of Securities.
I. TAXATION OF CERTIFICATES
A. GENERAL
The federal income tax consequences to Certificateholders will vary
depending on whether (i) the Certificates of a Series are classified as
indebtedness for federal income tax purposes; (ii) an election is made to treat
the Trust (or certain assets of the Trust) relating to a particular Series of
Certificates as a REMIC under the Internal Revenue Code of 1986 (the "Code");
(iii) the Certificates represent an ownership interest for federal income tax
purposes in some or all of the assets included in the Trust for a Series; or
(iv) for federal income tax purposes the Trust relating to a particular Series
of Certificates is classified as a partnership. The Prospectus Supplement for
each Series of Certificates will specify how the Certificates will be treated
for federal income tax purposes and will specify whether a REMIC election will
be made with respect to such Series.
B. TAXATION OF DEBT CERTIFICATES (INCLUDING REGULAR CERTIFICATES)
Interest and Acquisition Discount. Certificates representing regular
interests in a REMIC ("Regular Certificates") are generally taxable to holders
in the same manner as evidences of indebtedness issued by the REMIC. Stated
interest on the Regular Certificates will be taxable as ordinary income and
taken into account using the accrual method of accounting, regardless of the
holder's normal accounting method. Interest (other than original issue discount)
on Certificates (other than Regular Certificates) that are characterized as
indebtedness for federal income tax purposes will be includible in income by
holders thereof
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in accordance with their usual methods of accounting. Non-REMIC Certificates
characterized as debt for federal income tax purposes and Regular Certificates
will be referred to hereinafter collectively as "Debt Certificates." For
non-REMIC Certificates treated as debt for federal income tax purposes, see also
"Certain Certificates Treated as Indebtedness" herein.
Debt Certificates that are Accrual Certificates will, and certain of the
other Debt Certificates may, be issued with "original issue discount" ("OID").
The following discussion is based in part on the rules governing OID that are
set forth in Sections 1271-1275 of the Code and the Treasury Department
regulations issued thereunder on January 27, 1994, as amended on June 11, 1996
(the "OID Regulations"). A Certificateholder should be aware, however, that the
OID Regulations do not adequately address certain issues relevant to prepayable
securities, such as the Debt Certificates.
In general, OID, if any, will equal the excess of the stated redemption
price at maturity of a Debt Certificate over its issue price. A holder of a Debt
Certificate must include such OID in gross income as ordinary interest income as
it accrues under a prescribed method which takes into account an economic
accrual of the discount. In general, OID must be included in income in advance
of the receipt of the cash representing that income. The amount of OID on a Debt
Certificate will be considered to be zero if it is less than a de minimis amount
as determined under the Code.
The issue price of a Debt Certificate is the first price at which a
substantial amount of Debt Certificates of that class are sold to the public
(excluding bond houses, brokers, underwriters or wholesalers). If less than a
substantial amount of a particular class of Debt Certificates is sold for cash
on or prior to the Closing Date, the issue price for such class will be treated
as the fair market value of such class on the Closing Date. The stated
redemption price at maturity of a Debt Certificate includes the original
principal amount of the Debt Certificate, but generally will not include
distributions of interest if such distributions constitute "qualified stated
interest."
Under the OID Regulations, interest payments will not be qualified stated
interest unless the interest payments are "unconditionally payable." The OID
Regulations state that interest is unconditionally payable if late payment of
interest (other than late payment that occurs within a reasonable grace period)
or nonpayment of interest is expected to be penalized or reasonable remedies
exist to compel payment. The meaning of "penalized" under the OID regulations is
unclear particularly in the case of obligations based on other debt obligations.
Interest payments on Debt Certificates that do not have reasonable remedies to
compel timely payment of interest may not be qualified stated interest, and such
Debt Certificates may have OID.
Certain Debt Certificates will provide for distributions of interest based
on a period that is the same length as the interval between Distribution Dates
but ends prior to each Distribution Date. Any interest that accrues prior to the
Closing Date may be treated under the OID Regulations either (i) as part of the
issue price and the stated redemption price at maturity of the Debt Certificates
or (ii) as not included in the issue price or stated redemption price. The OID
Regulations provide a special application of the de minimis rule for debt
instruments with long first accrual periods where the interest payable for the
first period is at a rate which is effectively less than that which applies in
all other periods. In such cases, for the sole purpose of determining whether
original issue discount is de minimis, the OID Regulations provide that the
stated redemption price is equal to the instrument's issue price plus the
greater of the amount of foregone interest or the excess (if any) of the
instrument's stated principal amount over its issue price.
Under the de minimis rule, OID on a Debt Certificate will be considered to
be zero if such OID is less than 0.25% of the stated redemption price at
maturity of the Debt Certificate multiplied by the weighted average maturity of
the Debt Certificate. For this purpose, the weighted average maturity of the
Debt Certificate is computed as the sum of the amounts determined by multiplying
the number of full years (i.e., rounding down partial years) from the issue date
until each distribution in reduction of stated redemption price at maturity is
scheduled to be made by a fraction, the numerator of which is the amount of each
distribution included in the stated redemption price at maturity of the Debt
Certificate and the denominator of which is the stated redemption price at
maturity of the Debt Certificate. Holders generally must report de minimis OID
pro rata as principal payments are received, and such income will be capital
gain if the Debt Certificate is held as a capital asset. However, holders may
elect to accrue all de minimis OID as well as
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market discount under a constant interest method. See "-- Election to Treat All
Interest as Original Issue Discount" herein.
The holder of a Debt Certificate issued with OID must include in gross
income, for all days during its taxable year on which it holds such Debt
Certificate, the sum of the "daily portions" of such OID. The amount of OID
includible in income by a holder will be computed by allocating to each day
during a taxable year a pro rata portion of the OID that accrued during the
relevant accrual period. In the case of a Debt Certificate that is not a Regular
Certificate and the principal payments on which are not subject to acceleration
resulting from prepayments on the Mortgage Loans, the amount of OID includible
in income of a holder for an accrual period (generally the period over which
interest accrues on the debt instrument) will equal the product of the yield to
maturity of the Debt Certificate and the adjusted issue price of the Debt
Certificate, reduced by any payments of qualified stated interest. The adjusted
issue price is the sum of its issue price plus prior accruals of OID, reduced by
the total payments made with respect to such Debt Certificate in all prior
periods, other than qualified stated interest payments.
The amount of OID to be included in income by a holder of a debt
instrument, such as certain Classes of the Debt Certificates, that is subject to
acceleration due to prepayments on other debt obligations securing such
instruments (a "Pay-Through Certificate") is computed by taking into account the
anticipated rate of prepayments assumed in pricing the debt instrument (the
"Prepayment Assumption"). The amount of OID that will accrue during an accrual
period on a Pay-Through Certificate is the excess (if any) of the sum of (a) the
present value of all payments remaining to be made on the Pay-Through
Certificate as of the close of the accrual period and (b) the payments during
the accrual period of amounts included in the stated redemption price of the
Pay-Through Certificate, over the adjusted issue price of the Pay-Through
Certificate at the beginning of the accrual period. The present value of the
remaining payments is to be determined on the basis of three factors: (i) the
original yield to maturity of the Pay-Through Certificate (determined on the
basis of compounding at the end of each accrual period and properly adjusted for
the length of the accrual period), (ii) events which have occurred before the
end of the accrual period and (iii) the assumption that the remaining payments
will be made in accordance with the original Prepayment Assumption. The effect
of this method is to increase the portions of OID required to be included in
income by a holder of a Pay-Through Certificate to take into account prepayments
with respect to the Mortgage Loans at a rate that exceeds the Prepayment
Assumption, and to decrease (but not below zero for any period) the portions of
OID required to be included in income by a holder of a Pay-Through Certificate
to take into account prepayments with respect to the Mortgage Loans at a rate
that is slower than the Prepayment Assumption. Although OID will be reported to
holders of Pay-Through Certificates based on the Prepayment Assumption, no
representation is made to such holders that Mortgage Loans will be prepaid at
that rate or at any other rate.
The related Transferor may adjust the accrual of OID on a Class of Regular
Certificates (or other regular interests in a REMIC) in a manner that it
believes to be appropriate to take account of realized losses on the Mortgage
Loans, although the OID Regulations do not provide for such adjustments. If the
Internal Revenue Service (the "IRS") were to require that OID be accrued without
such adjustments or if the related Transferor determines not to make such
adjustments, the rate of accrual of OID for a Class of Regular Certificates
could increase.
Certain classes of Regular Certificates may represent more than one class
of REMIC regular interests. Unless the applicable Prospectus Supplement
specifies otherwise, the Trustee intends, based on the OID Regulations, to
calculate OID on such Certificates as if, solely for the purposes of computing
OID, the separate regular interests were a single debt instrument.
A subsequent holder of a Debt Certificate will also be required to include
OID in gross income, but such a holder who purchases such Debt Certificate for
an amount that exceeds its adjusted issue price will be entitled (as will an
initial holder who pays more than a Debt Certificate's issue price) to offset
such OID by comparable economic accruals of portions of such excess.
Effects of Defaults and Delinquencies. Holders will be required to report
income with respect to the related Certificates under an accrual method without
giving effect to delays and reductions in distributions attributable to a
default or delinquency on the Mortgage Loans, except possibly to the extent that
it can be
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established that such amounts are uncollectible. As a result, the amount of
income (including OID) reported by a holder of such a Certificate in any period
could significantly exceed the amount of cash distributed to such holder in that
period. The holder will eventually be allowed a loss (or will be allowed to
report a lesser amount of income) to the extent that the aggregate amount of
distributions on the Certificates is reduced as a result of a Mortgage Loan
default. However, the timing and character of such losses or reductions in
income are uncertain and, accordingly, holders should consult their own tax
advisors on this point.
Interest-Only Debt Certificates. The Trust intends to report income from
interest-only classes of Debt Certificates to the IRS and to holders of
interest-only Debt Certificates based on the assumption that the stated
redemption price at maturity is equal to the sum of all payments determined
under the applicable prepayment assumption. As a result, such interest-only Debt
Certificates will be treated as having original issue discount.
Variable Rate Debt Certificates. Under the OID Regulations, Debt
Certificates paying interest at a variable rate (a "Variable Rate Debt
Certificate") are subject to special rules. A Variable Rate Debt Certificate
will qualify as a "variable rate debt instrument" if (i) its issue price does
not exceed the total noncontingent principal payments due under the Variable
Rate Debt Certificate by more than a specified de minimis amount, (ii) it
provides for stated interest, paid or compounded at least annually, at (a) one
or more qualified floating rates, (b) a single fixed rate and one or more
qualified floating rates, (c) a single objective rate or (d) a single fixed rate
and a single objective rate that is a qualified inverse floating rate, and (iii)
it provides that each qualified floating or objective rate is set at a current
value of that rate (one occurring in the interval beginning three months before
and ending one year after the rate is first in effect on the Variable Rate Debt
Certificate).
A "qualified floating rate" is any variable rate where variations in the
value of such rate can reasonably be expected to measure contemporaneous
variations in the cost of newly borrowed funds in the currency in which the
Variable Rate Debt Certificate is denominated. A multiple of a qualified
floating rate will generally not itself constitute a qualified floating rate for
purposes of the OID Regulations. However, a variable rate equal to (i) the
product of a qualified floating rate and a fixed multiple that is greater than
zero but not more than 1.35 or (ii) the product of a qualified floating rate and
a fixed multiple that is greater than zero but not more than 1.35, increased or
decreased by a fixed rate will constitute a qualified floating rate for purposes
of the OID Regulations. In addition, under the OID Regulations, two or more
qualified floating rates that can reasonably be expected to have approximately
the same values throughout the term of the Variable Rate Debt Certificate will
be treated as a single qualified floating rate (a "Presumed Single Qualified
Floating Rate"). Two or more qualified floating rates with values within 25
basis points of each other as determined on the Variable Rate Debt Certificate's
issue date will be conclusively presumed to be a Presumed Single Qualified
Floating Rate. Notwithstanding the foregoing, a variable rate that would
otherwise constitute a qualified floating rate but which is subject to one or
more restrictions such as a cap or floor will not be a qualified floating rate
for purposes of the OID Regulations unless the restriction is fixed throughout
the term of the Variable Rate Debt Certificate or the restriction will not
significantly affect the yield of the Variable Rate Debt Certificate.
An "objective rate" is a rate that is not itself a qualified floating rate
but that is determined using a single fixed formula and which is based upon (i)
one or more qualified floating rates, (ii) one or more rates where each rate
would be a qualified floating rate for a debt instrument denominated in a
currency other than the currency in which the Variable Rate Debt Certificate is
denominated, (iii) either the yield or changes in the price of one or more items
of actively traded personal property or (iv) a combination of rates described in
(i), (ii) and (iii). The OID Regulations also provide that other variable rates
may be treated as objective rates if so designated by the IRS in the future.
Despite the foregoing, a variable rate of interest on a Variable Rate Debt
Certificate will not constitute an objective rate if it is reasonably expected
that the average value of such rate during the first half of the Variable Rate
Debt Certificate's term will be either significantly less than or significantly
greater than the average value of the rate during the final half of the Variable
Rate Debt Certificate's term. An objective rate will qualify as a "qualified
inverse floating rate" if such rate is equal to a fixed rate minus a qualified
floating rate, and variations in the rate can reasonably be expected to reflect
inversely contemporaneous variations in the cost of newly borrowed funds. The
OID Regulations also provide
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that if a Variable Rate Debt Certificate provides for stated interest at a fixed
rate for an initial period of less than one year followed by a variable rate
that is either a qualified floating rate or an objective rate and if the
variable rate on the Variable Rate Debt Certificate's issue date is intended to
approximate the fixed rate, then the fixed rate and the variable rate together
will constitute either a single qualified floating rate or objective rate, as
the case may be (a "Presumed Single Variable Rate"). If the value of the
variable rate and the initial fixed rate are within 25 basis points of each
other as determined on the Variable Rate Debt Certificate's issue date, the
variable rate will be conclusively presumed to approximate the fixed rate.
For Variable Rate Debt Certificates that qualify as a "variable rate debt
instrument" under the OID Regulations and provide for interest at either a
single qualified floating rate, a single objective rate, a Presumed Single
Qualified Floating Rate or a Presumed Single Variable Rate throughout the term
(a "Single Variable Rate Debt Certificate"), original issue discount is computed
as described above based on the following: (i) stated interest on the Single
Variable Rate Debt Certificate which is unconditionally payable in cash or
property (other than debt instruments of the issuer) at least annually will
constitute qualified stated interest and (ii) by assuming that the variable rate
on the Single Variable Debt Certificate is a fixed rate equal to: (a) in the
case of a Single Variable Rate Debt Certificate with a qualified floating rate
or a qualified inverse floating rate, the value of, as of the issue date, the
qualified floating rate or the qualified inverse floating rate or (b) in the
case of a Single Variable Rate Debt Certificate with an objective rate (other
than a qualified inverse floating rate), a fixed rate which reflects the
reasonably expected yield for such Single Variable Debt Certificate.
In general, any Variable Rate Debt Certificate other than a Single Variable
Rate Debt Certificate (a "Multiple Variable Rate Debt Certificate") that
qualifies as a "variable rate debt instrument" will be converted into an
"equivalent" fixed rate debt instrument for purposes of determining the amount
and accrual of original issue discount and qualified stated interest on the
Multiple Variable Rate Debt Certificate. The OID Regulations generally require
that such a Multiple Variable Rate Debt Certificate be converted into an
"equivalent" fixed rate debt instrument by substituting any qualified floating
rate or qualified inverse floating rate provided for under the terms of the
Multiple Variable Rate Debt Certificate with a fixed rate equal to the value of
the qualified floating rate or qualified inverse floating rate, as the case may
be, as of the Multiple Variable Rate Debt Certificate's issue date. Any
objective rate (other than a qualified inverse floating rate) provided for under
the terms of the Multiple Variable Rate Debt Certificate is converted into a
fixed rate that reflects the yield that is reasonably expected for the Multiple
Variable Rate Debt Certificate. In the case of a Multiple Variable Rate Debt
Certificate that qualifies as a "variable rate debt instrument" and provides for
stated interest at a fixed rate in addition to either one or more qualified
floating rates or a qualified inverse floating rate, the fixed rate is initially
converted into a qualified floating rate (or a qualified inverse floating rate,
if the Multiple Variable Rate Debt Certificate provides for a qualified inverse
floating rate). Under such circumstances, the qualified floating rate or
qualified inverse floating rate that replaces the fixed rate must be such that
the fair market value of the Multiple Variable Rate Debt Certificate as of the
Multiple Variable Rate Debt Certificate's issue date is approximately the same
as the fair market value of an otherwise identical debt instrument that provides
for either the qualified floating rate or qualified inverse floating rate rather
than the fixed rate. Subsequent to converting the fixed rate into either a
qualified floating rate or a qualified inverse floating rate, the Multiple
Variable Rate Debt Certificate is then converted into an "equivalent" fixed rate
debt instrument in the manner described above.
Once the Multiple Variable Rate Debt Certificate is converted into an
"equivalent" fixed rate debt instrument pursuant to the foregoing rules, the
amount of original issue discount and qualified stated interest, if any, are
determined for the "equivalent" fixed rate debt instrument by applying the
original issue discount rules to the "equivalent" fixed rate debt instrument in
the manner described above. A holder of the Multiple Variable Rate Debt
Certificate will account for such original issue discount and qualified stated
interest as if the holder held the "equivalent" fixed rate debt instrument. Each
accrual period appropriate adjustments will be made to the amount of qualified
stated interest or original issue discount assumed to have been accrued or paid
with respect to the "equivalent" fixed rate debt instrument in the event that
such amounts differ from the accrual amount of interest accrued or paid on the
Multiple Variable Rate Debt Certificate during the accrual period.
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The OID Regulations do not clearly address the treatment of a Variable Rate
Debt Certificate that is based on a weighted average of the interest rates on
underlying Mortgage Loans. Under the OID Regulations, interest payments on such
a Variable Rate Debt Certificate may be characterized as qualified stated
interest which is includible in income in a manner similar to that described in
the previous paragraph. However, it is also possible that interest payments on
such a Variable Rate Debt Certificate would be treated as contingent interest
(possibly includible in income when the payments become fixed) or in some other
manner.
If a Variable Rate Debt Certificate does not qualify as a "variable rate
debt instrument" under the OID Regulations, then the Variable Rate Debt
Certificate would be treated as a contingent payment debt obligation. It is not
clear under current law how a Variable Rate Debt Certificate would be taxed if
such Debt Certificate were treated as a contingent payment debt obligation.
Market Discount. A purchaser of a Certificate may be subject to the market
discount rules of Sections 1276-1278 of the Code. A holder that acquires a Debt
Certificate with more than a prescribed de minimis amount of "market discount"
(generally, the excess of the principal amount of the Debt Certificate over the
purchaser's purchase price) will be required to include accrued market discount
in income as ordinary income in each month, but limited to an amount not
exceeding the principal payments on the Debt Certificate received in that month
and, if the Certificates are sold, the gain realized. Such market discount would
accrue in a manner to be provided in Treasury Department regulations but, until
such regulations are issued, such market discount would in general accrue either
(i) on the basis of a constant yield (in the case of a Pay-Through Certificate,
taking into account a prepayment assumption) or (ii) in the ratio of (a) in the
case of Certificates (or in the case of a Pass-Through Certificate, as set forth
below, the Mortgage Loans underlying such Certificate) not originally issued
with original issue discount, stated interest payable in the relevant period to
total stated interest remaining to be paid at the beginning of the period or (b)
in the case of Certificates (or, in the case of a Pass-Through Certificate, as
described below, the Mortgage Loans underlying such Certificate) originally
issued at a discount, OID in the relevant period to total OID remaining to be
paid.
Section 1277 of the Code provides that, regardless of the origination date
of the Debt Certificate (or, in the case of a Pass-Through Certificate, the
Mortgage Loans), the excess of interest paid or accrued to purchase or carry a
Certificate (or, in the case of a Pass-Through Certificate, as described below,
the underlying Mortgage Loans) with market discount over interest received on
such Certificate is allowed as a current deduction only to the extent such
excess is greater than the market discount that accrued during the taxable year
in which such interest expense was incurred. In general, the deferred portion of
any interest expense will be deductible when such market discount is included in
income, including upon the sale, disposition, or repayment of the Certificate
(or in the case of a Pass-Through Certificate, an underlying Mortgage Loan). A
holder may elect to include market discount in income currently as it accrues,
on all market discount obligations acquired by such holder during the taxable
year such election is made and thereafter, in which case the interest deferral
rule will not apply.
Premium. A holder who purchases a Debt Certificate at a cost greater than
its stated redemption price at maturity generally will be considered to have
purchased the Certificate at a premium, which it may elect to amortize as an
offset to interest income on such Certificate (and not as a separate deduction
item) on a constant yield method. Although no regulations addressing the
computation of premium accrual on securities similar to the Certificates have
been issued, the legislative history of the Tax Reform Act of 1986 (the "1986
Act") indicates that premium is to be accrued in the same manner as market
discount. Accordingly, it appears that the accrual of premium on a Class of
Pay-Through Certificates will be calculated using the prepayment assumption used
in pricing such Class. If a holder makes an election to amortize premium on a
Debt Certificate, such election will apply to all taxable debt instruments
(including all REMIC regular interests and all pass-through certificates
representing ownership interests in a trust holding debt obligations) held by
the holder at the beginning of the taxable year in which the election is made,
and to all taxable debt instruments acquired thereafter by such holder, and will
be irrevocable without the consent of the IRS. Purchasers who pay a premium for
the Certificates should consult their tax advisors regarding the election to
amortize premium and the method to be employed.
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Election to Treat All Interest as Original Issue Discount. The OID
Regulations permit a holder of a Debt Certificate to elect to accrue all
interest, discount (including de minimis market or OID) and premium in income as
interest, based on a constant yield method for Debt Certificates acquired on or
after April 4, 1994. If such an election were to be made with respect to a Debt
Certificate with market discount, the holder of the Debt Certificate would be
deemed to have made an election to include in income currently market discount
with respect to all other debt instruments having market discount that such
holder of the Debt Certificate acquires during the year of the election or
thereafter. Similarly, a holder of a Debt Certificate that makes this election
for a Debt Certificate that is acquired at a premium will be deemed to have made
an election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that such holder owns or acquires. The election to
accrue interest, discount and premium on a constant yield method with respect to
a Debt Certificate is irrevocable except with the approval of the IRS.
Sale or Exchange. A holder's adjusted tax basis in its Debt Certificate is
the price such holder pays for a Debt Certificate, plus amounts of OID or market
discount included in income and reduced by any payments received (other than
qualified stated interest payments) and any amortized premium. Except as
described in "-- Interest and Acquisition Discount" and "-- Market Discount,"
gain or loss recognized on a sale, exchange, or redemption of a Debt
Certificate, measured by the difference between the amount realized and the Debt
Certificate's basis as so adjusted, will generally be capital gain or loss,
assuming that the Debt Certificate is held as a capital asset. In the case of a
Debt Certificate held by a bank, thrift or similar institution described in
Section 582 of the Code, however, gain or loss realized on the sale or exchange
of a Debt Certificate will be taxable as ordinary income or loss. Gain from the
disposition of a Debt Certificate that might otherwise be capital gain will be
treated as ordinary income (i) if a Debt Certificate is held as part of a
"conversion transaction" as defined in Code Section 1258(c), up to the amount of
interest that would have accrued on the Debt Certificateholder's net investment
in the conversion transaction at 120% of the appropriate applicable Federal rate
under Code Section 1274(d) in effect at the time the taxpayer entered into the
transaction minus any amount previously treated as ordinary income with respect
to any prior disposition of property that was held as part of such transaction,
(ii) in the case of a non-corporate taxpayer, to the extent such taxpayer has
made an election under Code Section 163(d)(4) to have net capital gains taxed as
investment income at ordinary income rates, or (iii) in the case of a Regular
Certificate to the extent that such gain does not exceed the excess, if any, of
(a) the amount that would have been includible in the gross income of the holder
if his yield on such Regular Certificate were 110% of the applicable Federal
rate under Code Section 1274(d) as of the date of purchase, over (b) the amount
of income actually includible in the gross income of such holder with respect to
the Regular Certificate. Although the legislative history to the 1986 Act
indicates that the portion of the gain from disposition of a Regular Certificate
that will be recharacterized as ordinary income under clause (iii) is limited to
the amount of OID (if any) on the Regular Certificate that was not previously
includible in income, the applicable Code provision contains no such limitation.
C. TAXATION OF CERTIFICATES AS TO WHICH A REMIC ELECTION HAS BEEN MADE
1. TAXATION OF THE REMIC AND ITS HOLDERS
General. In the opinion of Andrews & Kurth L.L.P., if a REMIC election is
made with respect to a Series of Certificates, then the arrangement by which the
Certificates of that Series are issued will be treated as a REMIC as long as all
of the provisions of the applicable Pooling and Servicing Agreement are complied
with and the statutory and regulatory requirements are satisfied. Certificates
will be designated as "Regular Interests" or "Residual Interests" in a REMIC, as
specified in the related Prospectus Supplement.
Status of Regular Certificates as Real Property Loans. Regular
Certificates and Certificates representing a residual interest in a REMIC (both
types of securities collectively referred to as "REMIC Certificates") will be
"qualifying real property loans" within the meaning of Section 593(d) of the
Code, "real estate assets" for purposes of Section 856(c)(5)(A) of the Code and
assets described in Section 7701(a)(19)(C) of the Code (assets qualifying under
one or more of those sections, applying each section separately, "qualifying
assets") to the extent that the REMIC's assets are qualifying assets. However,
if at least 95% of the REMIC's assets are qualifying assets, then 100% of the
REMIC Certificates will be qualifying assets. Similarly, income on the REMIC
Certificates will be treated as "interest on obligations secured by mortgages
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on real property" within the meaning of Section 856(c)(3)(B) of the Code,
subject to the limitations of the preceding two sentences. In addition to
Mortgage Loans, the REMIC's assets will include payments on Mortgage Loans held
pending distribution to holders of REMIC Certificates, amounts in reserve
accounts (if any), other credit enhancements (if any) and possibly buydown funds
("Buydown Funds"). The Mortgage Loans generally will be qualifying assets under
all three of the foregoing sections of the Code. However, Mortgage Loans that
are not secured by residential real property or real property used primarily for
church purposes may not constitute qualifying assets under Section
7701(a)(19)(C)(v) of the Code, and Mortgage Loans that are not secured by
improved real property or real property which is to be improved using Mortgage
Loan proceeds will not constitute qualifying assets under Section 593(d) of the
Code. In addition, to the extent that the principal amount of a Mortgage Loan
exceeds the value of the property securing the Mortgage Loan, it is unclear and
Andrews & Kurth L.L.P. is unable to opine whether the Mortgage Loans will be
qualifying assets. The REMIC Regulations treat credit enhancements as part of
the mortgage or pool of mortgages to which they relate, and therefore credit
enhancements generally should be qualifying assets. Regulations issued in
conjunction with the REMIC Regulations provide that amounts paid on Mortgage
Loans and held pending distribution to holders of Regular Certificates ("cash
flow investments") will be treated as qualifying assets. It is unclear whether
reserve funds or Buydown Funds would also constitute qualifying assets under any
of those provisions.
2. REMIC EXPENSES; SINGLE CLASS REMICS
As a general rule, all of the expenses of a REMIC will be taken into
account by holders of the Residual Certificates. In the case of a "single class
REMIC," however, the expenses will be allocated, under Treasury Department
regulations, among the holders of the Regular Certificates and the holders of
the Residual Certificates on a daily basis in proportion to the relative amounts
of income accruing to each holder on that day. In the case of a holder of a
Regular Certificate who is an individual or a "pass-through interest holder"
(including certain pass-through entities but not including real estate
investment trusts), such expenses will be deductible only to the extent that
such expenses, plus other "miscellaneous itemized deductions" of the holder,
exceed 2% of such holder's adjusted gross income and such holder may not be able
to deduct such fees and expenses to any extent in computing such holder's
alternative minimum tax liability. In addition, the amount of itemized
deductions otherwise allowable for the taxable year for an individual whose
adjusted gross income exceeds the applicable amount (for 1996, such amount is
$117,950 for all taxpayers except married taxpayers filling separately, for whom
such amount is $58,975) will be reduced by the lesser of (i) 3% of the excess of
adjusted gross income over the applicable amount, or (ii) 80% of the amount of
itemized deductions otherwise allowable for such taxable year. The reduction or
disallowance of this deduction may have a significant impact on the yield of the
Regular Certificate to such a holder. In general terms, a single class REMIC is
one that either (i) would qualify, under existing Treasury Department
regulations, as a grantor trust if it were not a REMIC (treating all interests
as ownership interests, even if they would be classified as debt for federal
income tax purposes) or (ii) is similar to such a trust and which is structured
with the principal purpose of avoiding the single class REMIC rules. Unless
otherwise stated in the applicable Prospectus Supplement, the expenses of the
REMIC will be allocated to holders of the related Residual Certificates.
3. TAXATION OF THE REMIC
General. Although a REMIC is a separate entity for federal income tax
purposes, a REMIC is not generally subject to entity-level tax. Rather, the
taxable income or net loss of a REMIC is taken into account by the holders of
residual interests. As described above, the regular interests are generally
taxable as debt of the REMIC.
Tiered REMIC Structures. For certain Series of Certificates, two or more
separate elections may be made to treat designated portions of the related Trust
as REMICs ("Tiered REMICs") for federal income tax purposes. Upon the issuance
of any such Series of Certificates, counsel to the Transferors will deliver its
opinion generally to the effect that, assuming compliance with all provisions of
the related Pooling and Servicing Agreement, the Tiered REMICs will each qualify
as a REMIC and the REMIC Certificates issued
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by the Tiered REMICs, respectively, will be considered to evidence ownership of
Regular Certificates or Residual Certificates in the related REMIC within the
meaning of the REMIC Provisions.
Solely for purposes of determining whether the REMIC Certificates will be
"qualifying real property loans" under Section 593(d) of the Code, "real estate
assets" within the meaning of Section 856(c)(5)(A) of the Code, and "loans
secured by an interest in real property" under Section 7701(a)(19)(C) of the
Code, and whether the income on such Certificates is interest described in
Section 856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one
REMIC.
Calculation of REMIC Income. The taxable income or net loss of a REMIC is
determined under an accrual method of accounting and in the same manner as in
the case of an individual, with certain adjustments. In general, the taxable
income or net loss will be the difference between (i) the gross income produced
by the REMIC's assets, including stated interest and any original issue discount
or market discount on loans and other assets, and (ii) deductions, including
stated interest and original issue discount accrued on Regular Interest
Certificates, amortization of any premium with respect to Mortgage Loans, and
servicing fees and other expenses of the REMIC. A holder of a Residual Interest
Certificate that is an individual or a "pass-through interest holder" (including
certain pass-through entities, but not including real estate investment trusts)
will be unable to deduct servicing fees payable on the Mortgage Loans or other
administrative expenses of the REMIC for a given taxable year, to the extent
that such expenses, when aggregated with such holder's other miscellaneous
itemized deductions for that year, do not exceed 2% of such holder's adjusted
gross income and such holder may not be able to deduct such fees and expenses to
any extent in computing such holder's alternative minimum tax liability.
For purposes of computing its taxable income or net loss, the REMIC should
have an initial aggregate tax basis in its assets equal to the aggregate fair
market value of the regular interests and the residual interests on the "Startup
Day" (generally, the day that the interests are issued). Such aggregate basis
will be allocated among the assets of the REMIC in proportion to their
respective fair market values.
The OID provisions of the Code apply to loans of individuals originated on
or after March 2, 1984, and the market discount provisions apply to loans.
Subject to possible application of the de minimis rules, the method of accrual
by the REMIC of OID income on such loans will be equivalent to the method under
which holders of Pay-Through Certificates accrue original issue discount (i.e.,
under the constant yield method taking into account the Prepayment Assumption).
The REMIC will deduct OID on the Regular Certificates in the same manner that
the holders of the Regular Certificates include such discount in income, but
without regard to the de minimis rules. See "-- Taxation of Debt Certificates
(Including Regular Certificates)" above. However, a REMIC that acquires loans at
a market discount must include such market discount in income currently, as it
accrues, on a constant interest basis.
To the extent that the REMIC's basis allocable to loans that it holds
exceeds their principal amounts, the resulting premium, if attributable to
mortgages originated after September 27, 1985, will be amortized over the life
of the loans (presumably taking into account the Prepayment Assumption) on a
constant yield method. Although the law is somewhat unclear regarding recovery
of premium attributable to loans originated on or before such date, it is
possible that such premium may be recovered in proportion to payments of loan
principal.
Prohibited Transactions and Contributions Tax. The REMIC will be subject
to a 100% tax on any net income derived from a "prohibited transaction." For
this purpose, net income will be calculated without taking into account any
losses from prohibited transactions or any deductions attributable to any
prohibited transaction that resulted in a loss. In general, prohibited
transactions include: (i) subject to limited exceptions, the sale or other
disposition of any qualified mortgage transferred to the REMIC; (ii) subject to
a limited exception, the sale or other disposition of a cash flow investment;
(iii) the receipt of any income from assets not permitted to be held by the
REMIC pursuant to the Code; or (iv) the receipt of any fees or other
compensation for services rendered by the REMIC. It is anticipated that a REMIC
will not engage in any prohibited transactions in which it would recognize a
material amount of net income. In addition, subject to a number of exceptions, a
tax is imposed at the rate of 100% on amounts contributed to a REMIC after the
Startup Day. The holders of Residual Certificates will generally be responsible
for the payment of any such
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taxes imposed on the REMIC. To the extent not paid by such holders or otherwise,
however, such taxes will be paid out of the Trust and will be allocated pro rata
to all outstanding Classes of Certificates of such REMIC.
4. TAXATION OF HOLDERS OF RESIDUAL CERTIFICATES
The holder of a Certificate representing a residual interest (a "Residual
Interest Certificate") will take into account the "daily portion" of the taxable
income or net loss of the REMIC for each day during the taxable year on which
such holder held the Residual Interest Certificate. The daily portion is
determined by allocating to each day in any calendar quarter its ratable portion
of the taxable income or net loss of the REMIC for such quarter, and by
allocating that amount among the holders (on such day) of the Residual
Certificates in proportion to their respective holdings on such day.
The holder of a Residual Interest Certificate must report its proportionate
share of the taxable income of the REMIC whether or not it receives cash
distributions from the REMIC attributable to such income or loss. The reporting
of taxable income without corresponding distributions could occur, for example,
in certain REMIC issues in which the Mortgage Loans held by the REMIC were
issued or acquired at a discount, since mortgage prepayments cause recognition
of discount income, while the corresponding portion of the prepayment could be
used in whole or in part to make principal payments on REMIC Regular Interests
issued without any discount or at an insubstantial discount. (If this occurs, it
is likely that cash distributions will exceed taxable income in later years.)
Taxable income may also be greater in earlier years of certain REMIC issues as a
result of the fact that interest expense deductions, as a percentage of
outstanding principal on REMIC Regular Certificates, will typically increase
over time as lower yielding Certificates are paid, whereas interest income with
respect to loans will generally remain constant over time as a percentage of
loan principal.
In any event, because the holder of a residual interest is taxed on the net
income of the REMIC, the taxable income derived from a Residual Interest
Certificate in a given taxable year will not be equal to the taxable income
associated with investment in a corporate bond or stripped instrument having
similar cash flow characteristics and pretax yield. Therefore, the after-tax
yield on the Residual Interest Certificate may be less than that of such a bond
or instrument.
Limitation on Losses. The amount of the REMIC's net loss that a holder may
take into account currently is limited to the holder's adjusted basis at the end
of the calendar quarter in which such loss arises. A holder's basis in a
Residual Interest Certificate will initially equal such holder's purchase price,
and will subsequently be increased by the amount of the REMIC's taxable income
allocated to the holder, and decreased (but not below zero) by the amount of
distributions made and the amount of the REMIC's net loss allocated to the
holder. Any disallowed loss may be carried forward indefinitely, but may be used
only to offset income of the REMIC generated by the same REMIC. The ability of
holders of Residual Certificates to deduct net losses may be subject to
additional limitations under the Code, as to which such holders should consult
their tax advisors.
Distributions. Distributions on a Residual Interest Certificate (whether
at their scheduled times or as a result of prepayments) will generally not
result in any additional taxable income or loss to a holder of a Residual
Interest Certificate. If the amount of such payment exceeds a holder's adjusted
basis in the Residual Interest Certificate, however, the holder will recognize
gain (treated as gain from the sale of the Residual Interest Certificate) to the
extent of such excess.
Sale or Exchange. A holder of a Residual Interest Certificate will
recognize gain or loss on the sale or exchange of a Residual Interest
Certificate equal to the difference, if any, between the amount realized and
such holder's adjusted basis in the Residual Interest Certificate at the time of
such sale or exchange. Except to the extent provided in regulations, which have
not yet been issued, any loss upon disposition of a Residual Interest
Certificate will be disallowed if the selling holder acquires any residual
interest in a REMIC or similar mortgage pool within six months before or after
such disposition.
Excess Inclusions. The portion of the REMIC taxable income of a holder of
a Residual Interest Certificate consisting of "excess inclusion" income may not
be offset by other deductions or losses, including
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net operating losses, on such holder's federal income tax return. Further, if
the holder of a Residual Interest Certificate is an organization subject to the
tax on unrelated business income imposed by Code Section 511, such holder's
excess inclusion income will be treated as unrelated business taxable income of
such holder. In addition, under Treasury Department regulations yet to be
issued, if a real estate investment trust, a regulated investment company, a
common trust fund, or certain cooperatives were to own a Residual Interest
Certificate, a portion of dividends (or other distributions) paid by the real
estate investment trust (or other entity) would be treated as excess inclusion
income. If a Residual Interest Certificate is owned by a foreign person, excess
inclusion income is subject to tax at a rate of 30% which may not be reduced by
treaty, is not eligible for treatment as "portfolio interest" and is subject to
certain additional limitations. See "Tax Treatment of Foreign Investors" herein.
The excess inclusion portion of a REMIC's income is generally equal to the
excess, if any, of REMIC taxable income for the quarterly period allocable to a
Residual Interest Certificate, over the daily accruals for such quarterly period
of (i) 120% of the long-term applicable federal rate on the Startup Day
multiplied by (ii) the adjusted issue price of such Residual Interest
Certificate at the beginning of such quarterly period. The adjusted issue price
of a Residual Interest Certificate at the beginning of each calendar quarter
will equal its issue price (calculated in a manner analogous to the
determination of the issue price of a Regular Certificate), increased by the
aggregate of the daily accruals for prior calendar quarters, and decreased (but
not below zero) by the amount of loss allocated to a holder and the amount of
distributions made on the Residual Interest Certificate before the beginning of
the quarter. The long-term federal rate, which is announced monthly by the
Treasury Department, is an interest rate that is based on the average market
yield of outstanding marketable obligations of the United States government
having remaining maturities in excess of nine years.
The Small Business Job Protection Act ("SBJPA") of 1996 has eliminated the
special rule permitting Section 593 institutions ("thrift institutions") to use
net operating losses and other allowable deductions to offset their excess
inclusion income from Residual Interest Certificates that have "significant
value" within the meaning of the REMIC Regulations, effective for taxable years
beginning after December 31, 1995, except with respect to Residual Interest
Certificates continuously held by thrift institutions since November 1, 1995.
In addition, the SBJPA of 1996 provides three rules for determining the
effect of excess inclusions on the alternative minimum taxable income of a
holder of a Residual Interest Certificate. First, alternative minimum taxable
income cannot be less than excess inclusions. Second, the alternative minimum
taxable income of a holder of a Residual Interest Certificate for a taxable year
cannot be less than the excess inclusions for the year. Third, the amount of any
alternative minimum tax net operating loss deduction must be computed without
regard to any excess inclusions. These rules are effective for taxable years
beginning after December 31, 1986, unless a holder of a Residual Interest
Certificate elects to have such rules apply only to taxable years beginning
after August 20, 1996.
Under the REMIC Regulations, in certain circumstances, transfers of
Residual Certificates may be disregarded. See "-- Restrictions on Ownership and
Transfer of Residual Certificates" and "-- Tax Treatment of Foreign Investors"
below.
Restrictions on Ownership and Transfer of Residual Interest
Certificates. As a condition to qualification as a REMIC, reasonable
arrangements must be made to prevent the ownership of a REMIC residual interest
by any "Disqualified Organization." Disqualified Organizations include the
United States, any State or political subdivision thereof, any foreign
government, any international organization, or any agency or instrumentality of
any of the foregoing, a rural electric or telephone cooperative described in
Section 1381(a)(2)(C) of the Code, or any entity exempt from the tax imposed by
Sections 1-1399 of the Code, if such entity is not subject to tax on its
unrelated business income. Accordingly, the applicable Pooling and Servicing
Agreement will prohibit Disqualified Organizations from owning a Residual
Interest Certificate. In addition, no transfer of a Residual Interest
Certificate will be permitted unless the proposed transferee shall have
furnished to the Trustee an affidavit representing and warranting that it is
neither a Disqualified Organization nor an agent or nominee acting on behalf of
a Disqualified Organization.
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If a Residual Interest Certificate is transferred to a Disqualified
Organization (in violation of the restrictions set forth above), a substantial
tax will be imposed on the transferor of such Residual Interest Certificate at
the time of the transfer. In addition, if a Disqualified Organization holds an
interest in a pass-through entity (including, among others, a partnership,
trust, real estate investment trust, regulated investment company, or any person
holding as nominee an interest in a pass-through entity) that owns a Residual
Interest Certificate, the pass-through entity will be required to pay an annual
tax on its allocable share of the excess inclusion income of the REMIC.
The REMIC Regulations provide that a transfer of a "noneconomic residual
interest" will be disregarded for all federal income tax purposes unless
impeding the assessment or collection of tax was not a significant purpose of
the transfer. A residual interest will be treated as a "noneconomic residual
interest" unless, at the time of the transfer (i) the present value of the
expected future distributions on the residual interest at least equals the
product of (x) the present value of all anticipated excess inclusions with
respect to the residual interest and (y) the highest corporate tax rate,
currently 35%, and (ii) the transferor reasonably expects that for each
anticipated excess inclusion, the transferee will receive distributions from the
REMIC, at or after the time at which taxes on such excess inclusion accrue,
sufficient to pay the taxes thereon. A significant purpose to impede the
assessment or collection of tax exists if the transferor, at the time of the
transfer, either knew or should have known (had "improper knowledge") that the
transferee would be unwilling or unable to pay taxes due on its share of the
taxable income of the REMIC. A transferor will be presumed not to have improper
knowledge if (i) the transferor conducts, at the time of the transfer, a
reasonable investigation of the financial condition of the transferee and, as a
result of the investigation, the transferor finds that the transferee has
historically paid its debts as they came due and finds no significant evidence
to indicate that the transferee will not continue to pay its debts as they come
due in the future, and (ii) the transferee represents to the transferor that (a)
the transferee understands that it might incur tax liabilities in excess of any
cash received with respect to the residual interest and (b) the transferee
intends to pay the taxes associated with owning the residual interest as they
come due. A different formulation of this rule applies to transfers of Residual
Interest Certificate by or to foreign transferees. See "Tax Treatment to Foreign
Investors" herein.
Mark to Market Rules. Any REMIC Residual Interest acquired after January
3, 1995 cannot be marked to market by securities dealers, regardless of the
value of such REMIC residual interest.
5. ADMINISTRATIVE MATTERS
The REMIC's books must be maintained on a calendar year basis and the REMIC
must file an annual federal income tax return. The REMIC will also be subject to
the procedural and administrative rules of the Code applicable to partnerships,
including the determination of any adjustments to, among other things, items of
REMIC income, gain, loss, deduction or credit, by the IRS in a unified
administrative proceeding.
D. TAX STATUS AS A GRANTOR TRUST
General. As specified in the related Prospectus Supplement, if a REMIC or
partnership election is not made and the Certificates are not treated as debt
for federal income tax purposes, an opinion of Andrews & Kurth L.L.P. will be
obtained that the Trust relating to a Series of Certificates will be classified
for federal income tax purposes as a grantor trust under Subpart E, Part I of
Subchapter J of Chapter 1 of Subtitle A of the Code and not as an association
taxable as a corporation (the Certificates of such Series, "Pass-Through
Certificates"). Accordingly, each holder of a Pass-Through Certificate is
treated for federal income tax purposes as the owner of an undivided interest in
the Mortgage Loans included in the Trust. As further described below, each
holder of a Pass-Through Certificate therefore must report on its federal income
tax return the gross income from the portion of the Mortgage Loans that is
allocable to such Pass-Through Certificate and may deduct the portion of the
expenses incurred or accrued by the Trust that is allocable to such Pass-Through
Certificate, at the same time and to the same extent as such items would be
reported by such holder if it had purchased and held directly such interest in
the Mortgage Loans and received or accrued directly its share of the payments on
the Mortgage Loans and incurred or accrued directly its share of expenses
incurred or accrued by the Trust when those amounts are received, incurred or
accrued by the Trust.
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A holder of a Pass-Through Certificate that is an individual, estate, or
trust will be allowed deductions for such expenses only to the extent that the
sum of those expenses and the holder's other miscellaneous itemized deductions
exceeds 2% of such holder's adjusted gross income. Moreover, a holder of a
Pass-Through Certificate that is not a corporation cannot deduct such expenses
for purposes of the alternative minimum tax (if applicable). Such deductions
will include servicing, guarantee and administrative fees paid to the servicer
of the Mortgage Loans. As a result, the Trust will report additional taxable
income to holders of Pass-Through Certificates in an amount equal to their
allocable share of such deductions, and individuals, estates, or trusts holding
Pass-Through Certificates may have taxable income in excess of the cash
received.
Status of the Pass-Through Certificates as Real Property Loans. The
Pass-Through Certificates will be "qualifying real property loans" within the
meaning of Section 593(d) of the Code, "real estate assets" for purposes of
Section 856(c)(5)(A) of the Code and "loans . . . secured by an interest in real
property" within the meaning of Section 7701(a)(19)(C)(v) of the Code (assets
qualifying under one or more of those sections, applying each section
separately, "qualifying assets") to the extent that the Trust's assets are
qualifying assets. The Pass-Through Certificates may not be qualifying assets
under any of the foregoing sections of the Code to the extent that the Trust's
assets include Buydown Funds, reserve funds, or payments on mortgages held
pending distribution to Certificateholders. Further, the Pass-Through
Certificates may not be "qualifying real property loans" to the extent Mortgage
Loans held by the Trust are not secured by improved real property or real
property which is to be improved using the Mortgage Loan proceeds, may not be
"real estate assets" to the extent Mortgage Loans held by the trust are not
secured by real property, and may not be "loans . . . secured by an interest in
real property" to the extent Mortgage Loans held by the trust are not secured by
residential real property or real property used primarily for church purposes.
In addition, to the extent that the principal amount of a Mortgage Loan exceeds
the value of the property securing the Mortgage Loan, it is unclear and Andrews
& Kurth L.L.P. is unable to opine whether the Mortgage Loans will be qualifying
assets.
Taxation of Pass-Through Certificates Under Stripped Bond Rules. The
federal income tax treatment of the Pass-Through Certificates will depend on
whether they are subject to the rules of Section 1286 of the Code (the "stripped
bond rules"). The Pass-Through Certificates will be subject to those rules if
stripped interest-only Certificates are issued. In addition, whether or not
stripped interest-only Certificates are issued, the IRS may contend that the
stripped bond rules apply on the ground that the Servicer's servicing fee, or
other amounts, if any, paid to (or retained by) the Servicer or its affiliates,
as specified in the applicable Prospectus Supplement, represent greater than an
arm's length consideration for servicing the Mortgage Loans and should be
characterized for federal income tax purposes as an ownership interest in the
Mortgage Loans. The IRS has concluded in Revenue Ruling 91-46 that a retained
interest in excess of reasonable compensation for servicing is treated as a
"stripped coupon" under the rules of Code Section 1286.
If interest retained for the Servicer's servicing fee or other interest is
treated as a "stripped coupon," the Pass-Through Certificates will be subject to
the OID rules and/or the market discount rules. A holder of a Pass-Through
Certificate generally will account for any discount on the Pass-Through
Certificate that is attributable to a Mortgage Loan that is secured by real
property as market discount rather than OID if either (i) the amount of OID
attributable to such Mortgage Loan was treated as zero under the OID de minimis
rule when such Mortgage Loan was stripped or (ii) no more than 100 basis points
(including any amount of servicing in excess of reasonable servicing) is
stripped off from such Mortgage Loan. If neither of the above exceptions
applies, the OID rules will apply to such discount. Discount attributable to an
unsecured Mortgage Loan will not be eligible for treatment as market discount,
and it is unclear whether discount attributable to a stripped Mortgage Loan the
principal amount of which exceeds the value of real property securing the
Mortgage Loan will be eligible for treatment as market discount.
If the OID rules apply, the holder of a Pass-Through Certificate (whether a
cash or accrual method taxpayer) will be required to report interest income from
the Pass-Through Certificate in each taxable year equal to the income that
accrues on the Pass-Through Certificate in that year calculated under a constant
yield method based on the yield of the Pass-Through Certificate (or, possibly,
the yield of each Mortgage Loan underlying such Pass-Through Certificate) to
such holder. Such yield would be computed at the rate (assuming monthly
compounding) that, if used in discounting the holder's share of the payments on
the
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Mortgage Loans, would cause the present value of those payments to equal the
price at which the holder purchased the Pass-Through Certificate. With respect
to certain categories, of debt instruments, Section 1272(a)(6) of the Code
requires that OID be accrued based on a prepayment assumption determined in a
manner prescribed by forthcoming regulations. It is unclear whether such
regulations would apply this rule to the Pass-Through Certificates, whether
Section 1272(a)(6) might apply to the Pass-Through Certificates in the absence
of such regulations, or whether the IRS could require use of a reasonable
prepayment assumption based on other tax law principles, and Andrews & Kurth
L.L.P. is unable to opine with respect to this issue. If required to report
interest income on the Pass-Through Certificates to the IRS under the stripped
bond rules, it is anticipated that the Trustee will calculate the yield of the
Pass-Through Certificates based on a representative initial offering price of
the Pass-Through Certificates and a reasonable assumed rate of prepayment of the
Mortgage Loans (although such yield may differ from the yield to any particular
holder that would be used in calculating the interest income of such holder).
The Prospectus Supplement for each series of Pass-Through Certificates will
describe the prepayment assumption that will be used for this purpose, but no
representation is made that the Mortgage Loans will prepay at that rate or at
any other rate.
Assuming that holders are not taxed as directly owning the Mortgage Loans,
in the case of a Pass-Through Certificate acquired at a price equal to the
principal amount of the Mortgage Loans allocable to the Pass-Through
Certificate, the use of a reasonable prepayment assumption would not have any
significant effect on the yield used in calculating accruals of interest income.
In the case, however, of a Pass-Through Certificate acquired at a discount or
premium (that is, at a price less than or greater than such principal amount,
respectively), the use of a reasonable prepayment assumption would increase or
decrease such yield, and thus accelerate or decelerate the reporting of interest
income, respectively.
If a Mortgage Loan is prepaid in full, the holder of a Pass-Through
Certificate acquired at a discount or premium generally will recognize ordinary
income or loss equal to the difference between the portion of the prepaid
principal amount of the Mortgage Loan that is allocable to the Pass-Through
Certificate and the portion of the adjusted basis of the Pass-Through
Certificate (see "Sales of Pass-Through Certificates" below) that is allocable
to the Mortgage Loan. The method of allocating such basis among the Mortgage
Loans may differ depending on whether a reasonable prepayment assumption is used
in calculating the yield of the Pass-Through Certificates for purposes of
accruing OID. It is not clear whether any other adjustments would be required to
reflect differences between the prepayment rate that was assumed in calculating
yield and the actual rate of prepayments.
Pass-Through Certificates of certain series ("Variable Rate Pass-Through
Certificates") may provide for a Pass-Through Rate based on the weighted average
of the interest rates of the Mortgage Loans held by the Trust, which interest
rates may be fixed or variable. In the case of a Variable Rate Pass-Through
Certificate that is subject to the OID rules, the daily portions of OID
generally will be calculated under the principles discussed in "-- Taxation of
Debt Certificates (Including Regular Certificates) -- Variable Rate Debt
Certificates" herein.
Taxation of Pass-Through Certificates If Stripped Bond Rules Do Not
Apply. If the stripped bond rules do not apply to a Pass-Through Certificate,
then the holder will be required to include in income its share of the interest
payments on the Mortgage Loans in accordance with its tax accounting method. In
addition, if the holder purchased the Pass-Through Certificate at a discount or
premium, the holder will be required to account for such discount or premium in
the manner described below. The treatment of any discount will depend on whether
the discount is OID as defined in the Code and, in the case of discount other
than OID, whether such other discount exceeds a de minimis amount. In the case
of OID, the holder (whether a cash or accrual method taxpayer) will be required
to report as additional interest income in each month the portion of such
discount that accrues in that month, calculated based on a constant yield
method. In general it is not anticipated that the amount of OID) to be accrued
in each month, if any, will be significant relative to the interest paid
currently on the Mortgage Loans. However, OID could arise with respect to a
Mortgage Loan that provides for interest at a rate equal to the sum of an index
of market interest rates and a fixed number ("ARM"). The OID for ARMs generally
will be determined under the principles discussed in "-- Taxation of Debt
Certificates (Including Regular Certificates) -- Variable Rate Debt
Certificates" herein.
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If discount other than OID exceeds a de minimis amount (described below),
the holder will also generally be required to include in income in each month
the amount of such discount accrued through such month and not previously
included in income, but limited, with respect to the portion of such discount
allocable to any Mortgage Loan, to the amount of principal on such Mortgage Loan
received by the Trust in that month. Because the Mortgage Loans will provide for
monthly principal payments, such discount may be required to be included in
income at a rate that is not significantly slower than the rate at which such
discount accrues (and therefore at a rate not significantly slower than the rate
at which such discount would be included in income if it were OID). The holder
may elect to accrue such discount under a constant yield method based on the
yield of the Pass-Through Certificate to such holder (or possibly based on the
yields of each Mortgage Loan). In the absence of such an election, it may be
necessary to accrue such discount under a more rapid straight-line method. Under
the de minimis rule, market discount with respect to a Pass-Through Certificate
will be considered to be zero if it is less than the product of (i) 0.25% of the
principal amount of the Mortgage Loans allocable to the Pass-Through Certificate
and (ii) the weighted average life (in complete years) of the Mortgage Loans
remaining at the time of purchase of the Pass-Through Certificate.
If a holder purchases a Pass-Through Certificate at a premium, such holder
may elect under Section 171 of the Code to amortize the portion of such premium
that is allocable to a Mortgage Loan under a constant yield method based on the
yield of the Mortgage Loan to such holder, provided that such Mortgage Loan was
originated after September 27, 1985. Premium allocable to a Mortgage Loan
originated on or before that date should be allocated among the principal
payments on the Mortgage Loan and allowed as an ordinary deduction as principal
payments are made or, perhaps, upon termination.
It is not clear whether the foregoing adjustments for discount or premium
would be made based on the scheduled payments on the Mortgage Loans or taking
account of a reasonable prepayment assumption, and Andrews & Kurth L.L.P. is
unable to opine on this issue.
If a Mortgage Loan is prepaid in full, the holder of a Pass-Through
Certificate acquired at a discount or premium will recognize ordinary income or
loss equal to the difference between the portion of the prepaid principal amount
of the Mortgage Loan that is allocable to the Pass-Through Certificate and the
portion of the adjusted basis of the Pass-Through Certificate (see "-- Tax
Characterization of the Trust as a Partnership; Tax Consequences To Holders of
the Certificates Issued by a Partnership -- Disposition of Certificates" below)
that is allocable to the Mortgage Loan. The method of allocating such basis
among the Mortgage Loans may differ depending on whether a reasonable prepayment
assumption is used in calculating the yield of the Pass-Through Certificates for
purposes of accruing OID. Other adjustments might be required to reflect
differences between the prepayment rate that was assumed in accounting for
discount or premium and the actual rate of prepayments.
E. TAX CHARACTERIZATION OF THE TRUST AS A PARTNERSHIP; TAX CONSEQUENCES TO
HOLDERS OF THE CERTIFICATES ISSUED BY A PARTNERSHIP
Tax Characterization of the Trust as a Partnership. Andrews & Kurth L.L.P.
will deliver its opinion that a Trust which is intended to be a partnership for
federal income tax purposes will not be an association (or publicly traded
partnership) taxable as a corporation for federal income tax purposes. This
opinion will be based on the assumption that the terms of the Pooling and
Servicing Agreement and related documents will be complied with, and on
counsel's conclusions that (i) the Trust will not have certain characteristics
necessary for a business trust to be classified as an association taxable as a
corporation and (ii) the nature of the income of the Trust will exempt it from
the rule that certain publicly traded partnerships are taxable as corporations
or the issuance of the Certificates has been structured as a private placement
under an IRS safe harbor, so that the Trust will not be characterized as a
publicly traded partnership taxable as a corporation.
If the Trust were taxable as a corporation for federal income tax purposes,
the Trust would be subject to corporate income tax on its taxable income. The
Trust's taxable income would include all its income. Any such corporate income
tax could materially reduce cash available to make distributions on the
Certificates, and Certificateholders could be liable for any such tax that is
unpaid by the Trust. In additions, a distributions to the Certificateholders
would be taxable as dividends.
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Treatment of the Trust as a Partnership. In the case of a Trust intended
to qualify as a partnership for federal income tax purposes, the Trust and the
related Transferor will agree, and the Certificateholders will agree by their
purchase of Certificates, to treat the Trust as a partnership for purposes of
federal and state income tax, franchise tax and any other tax measured in whole
or in part by income, with the assets of the partnership being the assets held
by the Trust and the partners of the partnership being the Certificateholders.
However, the proper characterization of the arrangement involving the Trust, the
Certificates and the Servicer is not clear because there is no authority on
transactions closely comparable to that contemplated herein.
A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the Trust. Any such characterization
would not result in materially adverse tax consequences to Certificateholders as
compared to the consequences from treatment of the Certificates as equity in a
partnership, described below. The following discussion assumes that the
Certificates represent equity interests in a partnership.
Indexed Certificates, etc. The following discussion assumes that all
payments on the Certificates are denominated in U.S. dollars, none of the
Certificates have interest rates which would qualify as contingent interest
under the OID regulations, and that a Series of Certificates includes a single
Class of Certificates. If these conditions are not satisfied with respect to any
given Series of Certificates, additional tax considerations with respect to such
Certificates will be disclosed in the applicable Prospectus Supplement.
Partnership Taxation. As a partnership, the Trust will not be subject to
federal income tax. Rather, each Certificateholder will be required to
separately take into account such Certificateholder's allocated share of income,
gains, losses, deductions and credits of the Trust. The Trust's income will
consist primarily of interest and finance charges earned on the Mortgage Loans
(including appropriate adjustments for market discount, OID and bond premium)
and any gain upon collection or disposition of Mortgage Loans. The Trust's
deductions will consist primarily of servicing and other fees, and losses or
deductions upon collection or disposition of Mortgage Loans.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury Department regulations and the partnership agreement
(here, the Pooling and Servicing Agreement and related documents). The Pooling
and Servicing Agreement will provide, in general, that the Certificateholders
will be allocated taxable income of the Trust for each month equal to the sum of
(i) the interest that accrues on the Certificates in accordance with their terms
for such month, including interest accruing at the Pass Through Rate for such
month and interest on amounts previously due on the Certificates but not yet
distributed; (ii) any Trust income attributable to discount on the Mortgage
Loans that corresponds to any excess of the principal amount of the Certificates
over their initial issue price; (iii) prepayment premium payable to the
Certificateholders for such month; and (iv) any other amounts of income payable
to the Certificateholders for such month. Such allocation will be reduced by any
amortization by the Trust of premium on Mortgage Loans that corresponds to any
excess of the issue price of Certificates over their principal amount. All
remaining taxable income of the Trust will be allocated to the related
Transferor. Based on the economic arrangement of the parties, this approach for
allocating Trust income should be permissible under applicable Treasury
Department regulations, although no assurance can be given that the IRS would
not require a greater amount of income to be allocated to Certificateholders.
Moreover, even under the foregoing method of allocation, Certificateholders may
be allocated income equal to the entire Pass-Through Rate plus the other items
described above even though the Trust might not have sufficient cash to make
current cash distributions of such amount. Thus, cash basis holders will in
effect be required to report income from the Certificates on the accrual basis
and Certificateholders may become liable for taxes on Trust income even if they
have not received cash from the Trust to pay such taxes. In addition, because
tax allocations and tax reporting will be done on a uniform basis for all
Certificateholders but Certificateholders may be purchasing Certificates at
different times and at different prices, Certificateholders may be required to
report on their tax returns taxable income that is greater or less than the
amount reported to them by the Trust.
An individual taxpayer's share of expenses of the Trust (including fees to
the Servicer but not interest expense) would be miscellaneous itemized
deductions. Such deductions might be disallowed to the individual
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in whole or in part and might result in such holder being taxed on an amount of
income that exceeds the amount of cash actually distributed to such holder over
the life of the Trust.
The Trust intends to make all tax calculations relating to income and
allocations to Certificateholders on an aggregate basis. If the IRS were to
require that such calculations be made separately for each Mortgage Loan, the
Trust might be required to incur additional expense, but it is believed that
there would not be a material adverse effect on Certificateholders.
Discount and Premium. It is believed that the Mortgage Loans were not
issued with OID and, therefore, the Trust should not have OID income. However,
the purchase price paid by the Trust for the Mortgage Loans may be greater or
less than the remaining principal balance of the Mortgage Loans at the time of
purchase. If so, the Mortgage Loan will have been acquired at a premium or
discount, as the case may be. (As indicated above, the Trust will make this
calculation on an aggregate basis, but might be required to recompute it on a
Mortgage Loan by Mortgage Loan basis.)
If the Trust acquires the Mortgage Loans at a market discount or premium,
the Trust will elect to include any such discount in income currently as it
accrues over the life of the Mortgage Loans or to offset any such premium
against interest income on the Mortgage Loans. As indicated above, a portion of
such market discount income or premium deduction may be allocated to
Certificateholders.
Section 708 Termination. Under Section 708 of the Code, the Trust will be
deemed to terminate for federal income tax purposes if 50% or more of the
capital and profits interests in the Trust are sold or exchanged within a
12-month period. If such a termination occurs, the Trust will be considered to
distribute its assets to the partners, who would then be treated as
recontributing those assets to the Trust as a new partnership. The Trust will
not comply with certain technical requirements that might apply when such a
constructive termination occurs. As a result, the Trust may be subject to
certain tax penalties and may incur additional expenses if it is required to
comply with those requirements. Furthermore, the Trust might not be able to
comply due to lack of data.
Disposition of Certificates. Generally, capital gain or loss will be
recognized on a sale of Certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the Certificates sold.
A Certificateholder's adjusted tax basis in a Certificate will generally equal
the Certificateholder's cost increased by the Certificateholder's share of Trust
income (includible in income) and decreased by any distributions received with
respect to such Certificate. In addition, both the adjusted tax basis in the
Certificates and the amount realized on a sale of a Certificate would include
the Certificateholder's share of liabilities of the Trust. A holder acquiring
Certificates at different prices may be required to maintain a single aggregate
adjusted tax basis in such Certificates, and, upon sale or other disposition of
some of the Certificates, allocate a portion of such aggregate adjusted tax
basis to the Certificates sold (rather than maintaining a separate adjusted tax
basis in each Certificate for purposes of computing gain or loss on a sale of
that Certificate).
Any gain on the sale of a Certificate attributable to the holder's share of
unrecognized accrued market discount on the Mortgage Loans would generally be
treated as ordinary income to the holder and would give rise to special tax
reporting requirements. The Trust does not expect to have any other assets that
would give rise to such special reporting requirements. Thus, to avoid those
special reporting requirements, the Trust will elect to include market discount
in income as it accrues.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise to
a capital loss upon the retirement of the Certificates.
Allocations Between Transferors and Transferees. In general, the Trust's
taxable income and losses will be determined monthly and the tax items for a
particular calendar month will be apportioned among the Certificateholders in
proportion to the principal amount of Certificates owned by them as of the close
of the last day of such month. As a result, a holder purchasing Certificates may
be allocated tax items (which will affect its tax liability and tax basis)
attributable to periods before the actual transaction.
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The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Trust might be reallocated among the Certificateholders. The Trust's
method of allocation between transferors and transferees may be revised to
conform to a method permitted by future regulations.
Section 754 Election. In the event that a Certificateholder sells its
Certificates at a profit (loss), the purchasing Certificateholder will have a
higher (lower) basis in the Certificates than the selling Certificateholder had.
The tax basis of the Trust's assets would not be adjusted to reflect that higher
(or lower) basis unless the Trust were to file an election under Section 754 of
the Code. In order to avoid the administrative complexities that would be
involved in keeping accurate accounting records, as well as potentially onerous
information reporting requirements, the Trust currently does not intend to make
such election. As a result, Certificateholders might be allocated a greater or
lesser amount of Trust income than would be appropriate based on their own
purchase price for Certificates.
Administrative Matters. The Trustee is required to keep or have kept
complete and accurate books of the Trust. Such books will be maintained for
financial reporting and tax purposes on an accrual basis and the fiscal year of
the Trust will be the calendar year. The Trustee will file a partnership
information return (IRS Form 1065) with the IRS for each taxable year of the
Trust and will report each Certificateholder's allocable share of items of Trust
income and expense to Certificateholders and the IRS on Schedule K-1. The Trust
will provide the Schedule K-I information to nominees that fail to provide the
Trust with the information statement described below and such nominees will be
required to forward such information to the beneficial owners of the
Certificates. Generally, holders must file tax returns that are consistent with
the information return filed by the Trust or be subject to penalties unless the
holder notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust with
a statement containing certain information on the nominee, the beneficial owners
and the Certificates so held. Such information includes (i) the name, address
and taxpayer identification number of the nominee and (ii) as to each beneficial
owner (x) the name, address and identification number of such person, (y)
whether such person is a United States person, a tax-exempt entity or a foreign
government, an international organization, or any wholly owned agency or
instrumentality of either of the foregoing, and (z) certain information on
Certificates that were held, bought or sold on behalf of such person throughout
the year. In addition, brokers and financial institutions that hold Certificates
through a nominee are required to furnish directly to the Trust information as
to themselves and their ownership of Certificates. A clearing agency registered
under Section 17A of the Exchange Act is not required to furnish any such
information statement to the Trust. The information referred to above for any
calendar year must be furnished to the Trust on or before the following January
31. Nominees, brokers and financial institutions that fail to provide the Trust
with the information described above may be subject to penalties.
The related Transferor will be designated as the tax matters partner in the
related Pooling and Servicing Agreement and, as such, will be responsible for
representing the Certificateholders in any dispute with the IRS. The Code
provides for administrative examination of a partnership as if the partnership
were a separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Trust by the appropriate taxing authorities could
result in an adjustment of the returns of the Certificateholders, and, under
certain circumstances, a Certificateholder may be precluded from separately
litigating a proposed adjustment to the items of the Trust. An adjustment could
also result in an audit of a Certificateholder's returns and adjustments of
items not related to the income and losses of the Trust.
Tax Consequences to Foreign Certificateholders. It is not clear whether
the Trust would be considered to be engaged in a trade or business in the United
States for purposes of federal withholding taxes with respect to non-U.S.
persons because them is no clear authority dealing with that issue under facts
substantially similar to those described herein. Although it is not expected
that the Trust would be engaged in a trade or business in the United States for
such purposes, the Trust will withhold as if it were so engaged In order to
protect the Trust from possible adverse consequences of a failure to withhold.
The Trust expects to withhold on the
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portion of its taxable income that is allocable to foreign Certificateholders
pursuant to Section 1446 of the Code, as if such income were effectively
connected to a U.S. trade or business, at a rate of 35% for foreign holders that
are taxable as corporations and 39.6% for all other foreign holders. Subsequent
adoption of Treasury Department regulations or the issuance of other
administrative pronouncements may require the Trust to change its withholding
procedures.
Each foreign holder might be required to file a U.S. individual or
corporate income tax return (including, in the case of a corporation, the branch
profits tax) on its share of the Trust's income. Each foreign holder must obtain
a taxpayer identification number from the IRS and submit that number to the
Trust on Form W-8 in order to assure appropriate crediting of the taxes
withheld. A foreign holder generally would be entitled to file with the IRS a
claim for refund with respect to taxes withheld by the Trust taking the position
that no taxes were due because the Trust was not engaged in a U.S. trade or
business. However, interest payments made (or accrued) to a Certificateholder
who is a foreign person generally will be considered guaranteed payments to the
extent such payments are determined without regard to the income of the Trust.
If these interest payments are properly characterized as guaranteed payments,
then the interest probably will not be considered "portfolio interest." As a
result, Certificateholders will be subject to United States federal income tax
and withholding tax at a rate of 30%, unless reduced or eliminated pursuant to
an applicable treaty. In such case, a foreign holder would only be entitled to
claim a refund for that portion of the taxes, if any, in excess of the taxes
that should be withheld with respect to the guaranteed payments.
Backup Withholding. Distributions made on the Certificates and proceeds
from the sale of the Certificates will be subject to a "backup" withholding tax
of 31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code.
F. CERTAIN CERTIFICATES TREATED AS INDEBTEDNESS
Upon the issuance of Certificates which are intended to be treated as
indebtedness for federal income tax purposes, Andrews & Kurth L.L.P. will opine
that based upon its analysis of the factors discussed below, the Certificates
will be characterized as indebtedness for federal income tax purposes of the
related Transferor that is secured by the Mortgage Loans. Opinions of counsel
are not binding on the IRS, however, and there can be no assurance that the IRS
could not successfully challenge this conclusion.
The related Transferor will express in the Pooling and Servicing Agreement
its intent that the Certificates be indebtedness secured by the Mortgage Loans
for federal, state and local income or franchise tax purposes. The related
Transferor, by entering into the Pooling and Servicing Agreement, has agreed and
each Certificateholder, by the acceptance of a Certificate, will agree to treat
the Certificates as indebtedness for federal, state and local income or
franchise tax purposes. However, because different criteria are used to
determine the non-tax accounting characterization of the transactions
contemplated by the Pooling and Servicing Agreements, the Transferors expects to
treat such transactions, for financial accounting purposes, as a transfer of an
ownership interest in the Mortgage Loans and not as a debt obligation.
A basic premise of federal income tax law is that the economic substance of
a transaction generally determines the tax consequences. The form of a
transaction, while a relevant factor, is not conclusive evidence of its economic
substance. In appropriate circumstances, the courts have allowed taxpayers, as
well as the IRS, to treat a transaction in accordance with its economic
substance, as determined under federal income tax law, notwithstanding that the
participants characterize the transaction differently for non-tax purposes. In
some instances, however, courts have held that a taxpayer is bound by the
particular form it has chosen for a transaction, even if the substance of the
transaction does not accord with its form. Andrews & Kurth L.L.P. believes that
the rationale of those cases will not apply to the issuance of the Certificates.
The determination of whether the economic substance of a transfer of an
interest in property is a sale or a loan secured by the transferred property
depends on numerous factors that indicate whether the transferor has
relinquished (and the transferee has obtained) substantial incidents of
ownership in the property. Among the primary factors considered are whether the
transferee has obtained the opportunity for gain if the property increases in
value and has assumed the risk of loss if the property decreases in value. Based
upon its analysis
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of such factors, Andrews & Kurth L.L.P. will conclude that the
Certificateholders do not own or have an equity interest in the Mortgage Loans
for federal income tax purposes. As a result, Andrews & Kurth L.L.P. will opine
that the Certificates will properly be characterized for federal income tax
purposes as indebtedness. Contrary characterizations that could be asserted by
the IRS are described under "-- Possible Characterization of the Transaction as
a Partnership or as an Association Taxable as a Corporation" below. In this
regard, it should be noted that the IRS has recently issued a notice stating
that, upon examination, it will scrutinize instruments treated as debt for
federal income tax purposes but as equity for regulatory, rating agency or
financial accounting purposes to determine if their purported status as debt for
federal income tax purposes is appropriate.
Certificateholders as the holders of debt instruments for federal tax
purposes will be taxed in the manner described above in "-- Taxation of Debt
Certificates (Including Regular Certificates)" for Debt Certificates that are
not Regular Certificates.
Possible Characterization of the Transaction as a Partnership or as
Association Taxable as a Corporation. As stated above, the opinion of Andrews &
Kurth L.L.P. with respect to the Certificates will not be binding on the courts
or the IRS, and no assurance can be given that the characterization of the
Certificates as debt would prevail. It is possible that the IRS would assert
that, for purposes of the Code, the transaction described herein constitutes a
transfer of the Mortgage Loans (or an interest therein) to the
Certificateholders and that the proper classification of the legal relationship
between the related Transferor and the Certificateholders resulting from the
transaction is that of a partnership, a publicly traded partnership taxed as a
corporation, or an association taxable as a corporation. Because it is
anticipated that Andrews & Kurth L.L.P. will advise that the Certificates will
be treated as indebtedness for federal income tax purposes, the Transferors
generally will not attempt to comply with the federal income tax reporting
requirements that would apply if Certificates were treated as interests in a
partnership, a publicly traded partnership or a corporation.
If a partnership were deemed to be created between the related Transferor
and the Certificateholders, the partnership itself would not be subject to
federal income tax (unless it were to be characterized as a publicly traded
partnership taxable as a corporation); rather, the partners of such partnership,
including the Certificateholders, would be taxed individually on their
respective distributive shares of the partnership's income, gain, loss,
deductions and credits. The amount and timing of items of income and deduction
of a Certificateholder could differ if the Certificates were held to constitute
partnership interests, rather than indebtedness. Moreover, an individual's share
of expenses of the partnership would be miscellaneous itemized deductions that,
in the aggregate, are allowed as deductions only to the extent they exceed 2% of
the individual's adjusted gross income, and would be subject to reduction under
Section 68 of the Code if the individual's adjusted gross income exceeded
certain limits. As a result, the individual might be taxed on a greater amount
of income than would be the case if the Certificates were treated as a debt
instrument.
If it were determined that the transaction created an entity classified as
an association or as a publicly traded partnership taxable as a corporation, the
Trust would be subject to federal income tax at corporate income tax rates on
the income it derives from the Mortgage Loans, which would reduce the amounts
available for distribution to the Certificateholders. Such classification may
also have adverse state and local tax consequences that would reduce amounts
available for distribution to Certificateholders. Moreover, distributions on the
Certificates would most likely not be deductible in computing the entity's
taxable income, and cash distributions to the Certificateholders generally would
be treated as dividends for tax purposes to the extent of such entity's earnings
and profits.
Foreign Investors. If the IRS were to contend successfully that the
Certificates are interests in a partnership and if such partnership were
considered to be engaged in a trade or business in the United States, the
partnership would be subject to a withholding tax on distributions to (or, at
its election, income allocable to) a foreign investor, and such holder would be
credited for his or her share of the withholding tax paid by the Partnership. In
such case, the holder generally would be subject to United States federal income
tax at regular federal income tax rates, and possibly a branch profits tax in
the case of a corporate holder.
Alternatively, although there may be arguments to the contrary, if such a
partnership is not considered to be engaged in a trade or business within the
United States and if income with respect to the Certificates is not
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otherwise effectively connected with the conduct of a trade or business in the
United States by the foreign investor, the foreign investor would be subject to
United States federal income tax and withholding at a rate of 30% (unless
reduced by an applicable tax treaty) on the holder's distributive share of the
partnership's interest income.
If the Trust were taxable as a corporation, distributions to foreign
investors, to the extent treated as dividends, would generally be subject to
withholding at the rate of 30%, unless such rate were reduced or eliminated by
an applicable income tax treaty.
II. TAXATION OF BONDS
With respect to each Series of Bonds, no regulations, published rulings, or
judicial decisions exist that discuss the characterization for federal income
tax purposes of securities with terms substantially the same as the Bonds.
However, Andrews & Kurth L.L.P., counsel to the Transferors, will deliver their
opinion that the Bonds will be treated for federal income tax purposes as
indebtedness, and not as an ownership interest in the Mortgage Loans, or as an
equity interest in the related Bond Issuer or in a separate association taxable
as a corporation. The following summary of the anticipated federal income tax
consequences of the purchase, ownership and disposition of Bonds, to the extent
it relates to matters of law or legal conclusions with respect thereto, is based
on such opinion. Such statements do not purport to furnish information in the
level of detail or with the attention to an investor's specific tax
circumstances that would be provided by an investor's own tax advisor.
Accordingly, each investor is advised to consult its own tax advisors with
regard to the tax consequences to it of investing in Bonds.
For federal income tax purposes, (i) Bonds held by a thrift institution
taxed as a "mutual savings bank" or "domestic building and loan association"
will not represent interests in "qualifying real property loans" within the
meaning of Code Section 593(d)(1); (ii) Bonds held by a thrift institution taxed
as a domestic building and loan association will not constitute
"loans . . . secured by an interest in real property" within the meaning of Code
Section 7701(a)(19)(C)(v); (iii) interest on Bonds held by a real estate
investment trust will not be treated as "interest on obligations secured by
mortgages on real property or on interests in real property" within the meaning
of Code Section 856(c)(3)(B); (iv) Bonds held by a real estate investment trust
will not constitute "real estate assets" or "Government securities" within the
meaning of Code Section 856(c)(5)(A); and (v) Bonds held by a regulated
investment company will not constitute "Government securities" within the
meaning of Code Section 851(b)(4)(A)(i).
Bonds will be subject to the same rules of taxation as Debt Certificates,
as described above under the heading "Certain Federal Income Tax
Consequences -- Taxation of Certificates -- Taxation of Debt Certificates
(Including Regular Certificates)," except that income reportable on Bonds is not
required to be reported under the accrual method unless the Bondholder otherwise
uses the accrual method.
In the case of a Bond subject to the request of a holder for redemption (a
"Retail Bond"), the yield to maturity of such Bond will be determined base upon
the anticipated payment characteristics of the Bonds under the related
Prepayment Assumption. In general, the OID accruing on each Retail Bond in a
full accrual period would be its allocable share of the OID with respect to the
entire Series, determined as described in "-- Taxation of
Certificates -- Taxation of Debt Certificates (Including Regular
Certificates) -- Interest and Acquisition Discount" herein. However, in the case
of a payment of the entire principal amount of any Retail Bond (or portion
thereof), (a) the remaining unaccrued OID allocable to such Bond (or to such
portion) will accrue at the time of such payment and (b) the accrual of OID
allocable to each remaining Bond of such Series (or the remaining principal
amount of a Retail Bond after a payment in reduction of a portion of its
principal amount has been received) will be adjusted by reducing the present
value of the remaining payments on such Series and the adjusted issue price of
such Series to the extent attributable to the portion of the principal amount
thereof that was paid.
III. MISCELLANEOUS TAX ASPECTS
Backup Withholding. A holder, other than a holder of a Residual Interest
Certificate, may, under certain circumstances, be subject to "backup
withholding" at a rate of 31% with respect to distributions or the
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proceeds of a sale of Securities to or through brokers that represent interest
or original issue discount on the Securities. This withholding generally applies
if the holder of a Security (i) fails to furnish the Trustee with its taxpayer
identification number ("TIN"); (ii) furnishes the Trustee an incorrect TIN;
(iii) fails to report properly interest, dividends or other "reportable
payments" as defined in the Code; or (iv) under certain circumstances, fails to
provide the Trustee or such holder's securities broker with a certified
statement, signed under penalty of perjury, that the TIN provided is its correct
number and that the holder is not subject to backup withholding. Backup
withholding will not apply, however, with respect to certain payments made to
holders, including payments to certain exempt recipients (such as exempt
organizations) and to certain Foreign Investors. Holders should consult their
tax advisors as to their qualification for exemption from backup withholding and
the procedure for obtaining the exemption.
The Trustee will report to the holders and to the Servicer for each
calendar year the amount of any "reportable payments" during such year and the
amount of tax withheld, if any, with respect to payments on the Securities.
IV. TAX TREATMENT OF FOREIGN INVESTORS
Subject to the discussion below with respect to Trusts that are treated as
partnerships for federal income tax purposes and with respect to Certificates
treated as debt for federal income tax purposes, unless interest (including OID)
paid on a Security (other than a Residual Interest Certificate) is considered to
be "effectively connected" with a trade or business conducted in the United
States by a nonresident alien individual, foreign partnership, foreign
corporation or other non-United States person ("Foreign Investors"), such
interest will normally qualify as portfolio interest (except where (i) the
recipient is a holder, directly or by attribution, of 10% or more of the capital
or profits interest in the issuer, or (ii) the recipient is a controlled foreign
corporation to which the issuer is a related person) and will be exempt from
federal income tax. See "-- Tax Consequences to Holders of the Certificates
Issued by a Partnership -- Tax Consequences to Foreign Certificateholders" and
"-- Certain Certificates Treated as Indebtedness -- Foreign Investors" herein.
Upon receipt of appropriate ownership statements, the issuer normally will be
relieved of obligations to withhold tax from such interest payments. These
provisions supersede the generally applicable provisions of United States law
that would otherwise require the issuer to withhold at a 30% rate (unless such
rate were reduced or eliminated by an applicable tax treaty) on, among other
things, interest and other fixed or determinable, annual or periodic income paid
to Foreign Investors. Holders of Pass-Through Certificates however, may be
subject to withholding to the extent that the Mortgage Loans were originated on
or before July 18, 1984.
Interest and OID of holders who are foreign persons are not subject to
withholding if they are effectively connected with a United States business
conducted by the holder and timely provide an IRS Form 4224. They will, however,
generally be subject to the regular United States income tax.
Payments to holders of Residual Certificates who are foreign persons will
generally be treated as interest for purposes of the 30% (or lower treaty rate)
United States withholding tax. Holders should assume that such income does not
qualify for exemption from United States withholding tax as "portfolio
interest." It is clear that, to the extent that a payment represents a portion
of REMIC taxable income that constitutes excess inclusion income, a holder of a
Residual Interest Certificate will not be entitled to an exemption from or
reduction of the 30% (or lower treaty rate) withholding tax rule. If the
payments are subject to United States withholding tax, they generally will be
taken into account for withholding tax purposes only when paid or distributed
(or when the Residual Interest Certificate is disposed of). The Treasury
Department has statutory authority, however, to promulgate regulations which
would require such amounts to be taken into account at an earlier time in order
to prevent the avoidance of tax. Such regulations could, for example, require
withholding prior to the distribution of cash in the case of Residual
Certificates that do not have significant value. Under the REMIC Regulations, if
a Residual Interest Certificate has tax avoidance potential, a transfer of a
Residual Interest Certificate to a Foreign Investor will be disregarded for all
federal tax purposes. A Residual Interest Certificate has tax avoidance
potential unless, at the time of the transfer, the transferor reasonably expects
that the REMIC will distribute to the transferee residual interest holder
amounts that will equal at least 30% of each excess inclusion, and that such
amounts will be distributed at or after the time at which the excess inclusions
accrue and not later than the calendar year following the calendar year of
accrual.
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If a Foreign Investor transfers a Residual Interest Certificate to a United
States person, and if the transfer has the effect of allowing the transferor to
avoid tax on accrued excess inclusions, then the transfer is disregarded and the
transferor continues to be treated as the owner of the Residual Interest
Certificate for purposes of the withholding tax provisions of the Code. See
"Taxation of Holders of Residual Interest Securities -- Excess Inclusions"
herein.
Subject to the discussion in the previous paragraph, any capital gain
realized on the sale, redemption, retirement or other taxable disposition of a
Security by a foreign person will be exempt from United States federal income
and withholding tax, provided that (i) such gain is not effectively connected
with the conduct of a trade or business in the United States by the foreign
person and (ii) in the case of an individual foreign person, the foreign person
is not present in the United States for 183 days or more in the taxable year.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described herein under
"Certain Federal Income Tax Consequences," potential investors should consider
the state income tax consequences of the acquisition, ownership, and disposition
of the Securities. State and local income tax law may differ substantially from
the corresponding federal law, and this discussion does not purport to describe
any aspect of the income tax laws of any state or locality. Therefore, potential
investors should consult their own tax advisors with respect to the various tax
consequences of investments in the Securities.
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"). ERISA
Plans and Tax-Favored Plans are collectively referred to herein as "Plans."
Certain employee benefit plans, such as governmental plans (as defined in
Section 3(32) of ERISA) and certain church plans (as defined in Section 3(33) of
ERISA), are not subject to 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 502(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 the
investments of ERISA Plans be made in accordance with the documents governing
the ERISA Plan. In addition, Section 406 of ERISA and Section 4975 of the Code
prohibit a broad range of transactions involving Plan assets and persons
("Parties in Interest" under ERISA or "Disqualified Persons" under the Code) who
have certain specified relations 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 the 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), 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 Certificate) 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
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assets included in a Trust or Trust Estate, as applicable, or a Transferor (or a
Bond Issuer, if applicable) or may be deemed merely to include its interest in
the Securities. Bonds treated as indebtedness under applicable local law and
that have no substantial equity features do not constitute equity interests.
The prohibited transaction provisions of Section 406 of ERISA and Section
4975 of the Code may apply to a Trust or a Transferor (or a Bond Issuer, if
applicable) and cause the related Transferor (or a Bond Issuer, if applicable),
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. 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 related
Transferor (or a Bond Issuer, if applicable), 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 than 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 or a Transferor (or a Bond Issuer, if applicable) issuing Bonds, 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, under certain conditions, exempts
from the application of the prohibited transaction provisions of ERISA and
Section 4975 of the Code transactions involving a Plan in connection with the
operation of a "mortgage pool" and the purchase, sale and holding of "mortgage
pool pass-through certificates." A "mortgage pool" is defined as an investment
pool, consisting solely of interest bearing obligations secured by first or
second mortgages or deeds of trust on single family residential property,
property acquired in foreclosure and undistributed cash. A "mortgage pool
pass-through certificate" is defined as a certificate which represents a
beneficial undivided interest in a mortgage pool which entitles the holder to
pass-through payments of principal and interest from the mortgage loans.
For the exemption to apply, PTCE 83-1 requires that (i) the related
Transferor and the Trustee maintain a system of insurance or other protection
for the Mortgage Loans and the property securing such Mortgage Loans, and for
indemnifying holders of Certificates against reductions in pass-through payments
due to defaults in loan payments or property damage in an amount at least equal
to the greater of 1% of the aggregate principal balance of the Mortgage Loans,
or 1% of the principal balance of the largest covered pooled Mortgage Loan, (ii)
the Trustee may not be an affiliate of the related Transferor; and (iii) the
payments made to and retained by the related Transferor in connection with the
Trust, together with all funds inuring to its benefit for administering the
Trust, represent no more than "adequate consideration" for assigning the
Mortgage Loans, plus reasonable compensation for services provided to the Trust.
In addition, PTCE 83-1 exempts the initial sale of Certificates to a Plan
with respect to which the related Transferor, the Servicer, the Trustee or the
Securities Insurer, if any, is a party in interest if the Plan does not pay more
than fair market value for such Certificates and the rights and interests
evidenced by such Certificates are not subordinated to the rights and interests
evidenced by other Certificates of the same pool.
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PTCE 83-1 also exempts from the prohibited transaction rules and transactions in
connection with the servicing and operation of the Mortgage Pool, provided that
any payments made to the related Transferor in connection with the servicing of
the Trust are made in accordance with a binding agreement, copies of which must
be made available to prospective investors.
In the case of any Plan with respect to which the Servicer, the related
Transferor, the Trustee or a Securities Insurer, if any, is a fiduciary, PTCE
83-1 will only apply if, in addition to the other requirements: (i) the initial
sale, exchange or transfer of Certificates is expressly approved by an
independent fiduciary who has authority to manage and control those plan assets
being invested in Certificates; (ii) the Plan pays no more for the Certificates
than would be paid in an arm's length transaction; (iii) no investment
management, advisory or underwriting fee, sale commission, or similar
compensation is paid to the Servicer with regard to the sale, exchange or
transfer of Certificates to the Plan; (iv) the total value of the Certificates
purchased by such Plan does not exceed 25% of the amount issued; and (v) at
least 50% of the aggregate amount of Certificates is acquired by persons
independent of the related Transferor, the Trustee, the Servicer, and the
Securities Insurer, if any.
Before purchasing Certificates, a fiduciary of a Plan should confirm that
the Trust is a "mortgage pool," that the Certificates constitute "mortgage pool
pass-through certificates," and that the conditions set forth in PTCE 83-1 would
be satisfied. In addition to making its own determination as to the availability
of the exemptive relief provided in PTCE 83-1, the Plan fiduciary should
consider the availability of any other prohibited transaction exemptions. The
Plan fiduciary also should consider its general fiduciary obligations under
ERISA in determining whether to purchase any Certificates on behalf of a Plan.
In addition, the DOL has granted to certain underwriters and/or placement
agents individual prohibited transaction exemptions which may be applicable to
avoid certain of the prohibited transaction rules of ERISA with respect to the
initial purchase, the holding and the subsequent resale in the secondary market
by Plans of pass-through certificates representing a beneficial undivided
interest in the assets of a trust that consist of certain receivables, loans and
other obligations that meet the conditions and requirements of the exemption
which may be applicable to the Certificates.
One or more other prohibited transaction exemptions issued by the DOL may
be available to a Plan investing in Securities, depending in part upon the type
of Plan fiduciary making the decision to acquire Securities and the
circumstances under which such decision is made, including but not limited to
PTCE 90-1, regarding investments by insurance company pooled separate account,
and PTCE 91-38, regarding investments by bank collective investment funds.
However, even if the conditions specified in the exemption or one or more of
these other exemptions are met, the scope of the relief provided might or might
not cover all acts which might be construed as prohibited transactions.
Any Plan fiduciary considering the purchase of a Security should consult
with its counsel with respect to the potential applicability of ERISA and the
Code to such investment. Moreover, each Plan fiduciary should determine whether,
under the general fiduciary standards of investment prudence and
diversification, an investment in the Securities is appropriate for the Plan,
taking into account the overall investment policy of the Plan and the
composition of the Plan's investment portfolio. Special caution should be
exercised before a Plan purchases a Security in such circumstances.
LEGAL INVESTMENT CONSIDERATIONS
SMMEA
Unless otherwise specified in the related Prospectus Supplement, the
Securities will not constitute "mortgage related securities" for purposes of
SMMEA. Accordingly, many institutions with legal authority to invest in
comparably rated securities based on first mortgage loans or deeds of trust may
not be legally authorized to invest in the Securities. No representation is made
herein as to whether the Securities will constitute legal investments for any
entity under any applicable statute, law, rule, regulation or order.
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Prospective purchasers are urged to consult with their counsel concerning the
status of the Securities as legal investments for such purchasers prior to
investing in any Securities of a given Series.
FFIEC POLICY STATEMENT
The Board of Governors of the Federal Reserve System, the Federal Deposit
Insurance Corporation, the Comptroller of the Currency and the Office of Thrift
Supervision have adopted the Federal Financial Institutions Examination
Council's Supervisory Policy Statement on Certificates Activities (the "Policy
Statement"). Although the National Credit Union Administration has not yet
adopted the Policy Statement, it has adopted other regulations affecting
mortgage-backed securities and is expected to consider adoption of the Policy
Statement. The Policy Statement, among other things, places responsibility on a
depository institution to develop and monitor appropriate policies and
strategies regarding the investment, sale and trading of securities and
restricts an institution's ability to engage in certain types of transactions.
The Policy Statement provides that a depository institution must ascertain
and document prior to purchase and no less frequently than annually thereafter
that a non-high-risk mortgage security held for investment remains outside the
high-risk category. If an institution is unable to make these determinations
through internal analysis, it must use information derived from a source that is
independent of the party from whom the product is being purchased. The
institution is responsible for ensuring that the assumptions underlying the
analysis and resulting calculations are reasonable. Reliance on analyses and
documentation from a securities dealer or other outside party without internal
analyses by the institution is unacceptable.
A "high-risk mortgage security" is not suitable as an investment portfolio
holding for a depository institution. A high-risk mortgage security must be
reported in the trading account at market value or as an asset held for sale at
the lower of cost or market value and generally may only be acquired to reduce
an institution's interest rate risk. However, an institution with strong capital
and earnings and adequate liquidity that has a closely supervised trading
department is not precluded from acquiring high-risk mortgage securities for
trading purposes.
The Policy Statement and any applicable modifications or supplements
thereto should be reviewed prior to the purchase of any Securities by a
depository institution. The summary of the Policy Statement contained herein
does not purport to be complete and should not be relied upon for purposes of
making any regulatory determinations. In addition, any regulator may adopt
modifications or supplements to the Policy Statement or additional restrictions
on the purchase of mortgage-backed or other securities. Investors are urged to
consult their own legal advisors prior to making any determinations with respect
to the Policy Statement or other regulatory requirements.
GENERAL
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Securities, to purchase
Securities representing more than a specified percentage of the investor's
assets, or to purchase certain types of Certificates, such as residual interests
or stripped mortgage-backed securities. Investors should consult their own legal
advisors in determining whether and to what extent the Securities of a given
Series constitute legal investments for such investors and comply with any other
applicable requirements.
METHOD OF DISTRIBUTION
The Securities offered hereby and by the Prospectus Supplement will be
offered in Series, either directly by the related Transferor or through one or
more underwriters or underwriting syndicates ("Underwriters"). The Prospectus
Supplement for each Series will set forth the terms of the offering of the
Securities of such Series, including the name or names of the Underwriters, the
proceeds to the related Transferor (in the case of a Series of Certificates) or
to the related Bond Issuer (in the case of a Series of Bonds), and either the
initial public offering price, the discounts and commissions to the Underwriters
and any discounts or concessions
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allowed or reallowed to certain dealers, or the method by which the price at
which the Underwriters will sell the Securities will be determined.
The Securities may be acquired by Underwriters for their own account and
may be resold from time to time in one or more transactions, including
negotiated transactions, at a fixed public offering price or at varying prices
determined at the time of sale. It is anticipated that the underwriting
agreement pertaining to the sale of any Series of Securities will provide that
the obligations of any Underwriters will be subject to certain conditions
precedent, and such Underwriters will be severally obligated to purchase all of
a Series of Securities described in the related Prospectus Supplement, if they
are purchased and that in limited circumstances the related Transferor will
indemnify any Underwriters against certain civil liabilities, including
liabilities under the Securities Act of 1933, or will contribute to payments any
Underwriters may be required to make in respect thereof.
If Securities of a Series are offered other than through Underwriters, the
related Prospectus Supplement will contain information regarding the nature of
such offering and any agreements to be entered into between the seller and
purchasers of Securities of such Series.
The Transferors anticipate that the Securities will be sold primarily to
institutional investors. Purchasers of Securities, including dealers, may,
depending on the facts and circumstances of such purchases, be deemed to be
"underwriters" within the meaning of the Securities Act of 1933 in connection
with reoffers and sales by them of Securities. Securityholders should consult
with their legal advisors in this regard prior to any such reoffer or sale.
LEGAL MATTERS
Certain legal matters relating to the issuance of the Securities of each
Series, including certain federal income tax consequences with respect thereto,
will be passed upon by Andrews & Kurth L.L.P., Washington, D.C.
FINANCIAL INFORMATION
The Transferors have determined that their financial statements are not
material to the offering made hereby.
A new Trust will be formed to hold the Mortgage Loans in connection with
each Series of Certificates. Each such Trust will have no assets or obligations
prior to the issuance of the Certificates and will not engage in any activities
other than those described herein. Accordingly, no financial statements with
respect to such Trusts will be included in this Prospectus or any Prospectus
Supplement.
Although the Bonds of any Series will represent obligations of the related
Bond Issuer, such obligations will be non-recourse and the proceeds of the
assets included in the related Trust Estate will be the sole source of payments
on the Bonds of such Series. The Bond Issuer for any Series of Bonds (whether it
is ACAC or a trust, partnership, limited liability company or corporation formed
by ACAC solely for the purpose of issuing the Bonds of such Series) will not
have, nor be expected in the future to have, any significant assets available
for payments on such Series of Bonds other than the assets included in the
related Trust Estate. Accordingly, the investment characteristics of a Series of
Bonds will be determined by the assets included in the related Trust Estate and
will not be affected by the identity of the obligor with respect to such Series
of Bonds. Accordingly, no capitalization information or any historical or pro
forma ratio of earnings to fixed charges or any other financial information with
respect to ACAC or any trust, partnership, limited liability company or
corporation formed for the purpose of issuing a Series of Bonds has been or will
be included herein or in the related Prospectus Supplement.
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RATING
Unless otherwise specified in the related Prospectus Supplement, it is a
condition to the issuance of the Securities of each Series offered hereby that
they shall have been rated in one of the four highest rating categories by the
nationally recognized statistical rating agency or agencies specified in the
related Prospectus Supplement (each, a "Rating Agency").
Ratings on asset-backed securities address the likelihood of receipt by the
related securityholders of all distributions on the underlying mortgage loans.
These ratings address the structural, legal and issuer-related aspects
associated with such securities, the nature of the underlying mortgage loans and
the credit quality of the guarantor, if any. Ratings on asset-backed securities
do not represent any assessment of the likelihood of principal prepayments by
mortgagors or of the degree by which such prepayments might differ from those
originally anticipated. As a result, the related the related securityholders
might suffer a lower than anticipated yield, and, in addition, holders of
stripped securities in extreme cases might fail to recoup their underlying
investments.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating.
96
<PAGE> 173
INDEX OF PRINCIPAL TERMS
Unless the context indicates otherwise, the following capitalized terms
shall have the meanings set forth on the pages indicated below:
<TABLE>
<S> <C>
1933 Act.......................................................................... 3
1986 Act.......................................................................... 74
Aames Guidelines.................................................................. 33
ACAC.............................................................................. 1, 6, 31
ACC............................................................................... 1, 6, 31
Accounts.......................................................................... 36
Accrual Certificates.............................................................. 39
AFC............................................................................... 6, 31
Affiliated Originators............................................................ 33
Amortization Period............................................................... 10, 41
Appraised Value................................................................... 29
ARM............................................................................... 82
ARM Loans......................................................................... 25
Available Funds................................................................... 38
Balloon Loans..................................................................... 21
Balloon payment................................................................... 21
Bankruptcy Bond................................................................... 14, 46
Bond Account...................................................................... 38
Bond Event of Default............................................................. 61
Bondholders....................................................................... 7, 35
Bond Issuer....................................................................... 1, 7
Bond Rate......................................................................... 3, 39
Bonds............................................................................. 1, 6
Buydown Funds..................................................................... 76
Capitalized Interest Account...................................................... 11, 30
Cede.............................................................................. 19, 36
CERCLA............................................................................ 68
Certificate Account............................................................... 38
Certificate Event of Default...................................................... 58
Certificate Rate.................................................................. 3, 39
Certificateholders................................................................ 6, 35
Certificates...................................................................... 1, 6
Class............................................................................. 2, 6, 35
Closing Date...................................................................... 30
Code.............................................................................. 16, 69
Collection Account................................................................ 52
Collection Period................................................................. 39
Combined Loan-to-Value Ratio...................................................... 29
Commission........................................................................ 3
Compensating Interest Payments.................................................... 54
Cut-off Date...................................................................... 9
Debt Certificates................................................................. 70
Definitive Securities............................................................. 19, 36
Deleted Mortgage Loan............................................................. 51
Deposit Date...................................................................... 52
Detailed Description.............................................................. 27
Disqualified Organization......................................................... 79
Disqualified Persons.............................................................. 91
</TABLE>
97
<PAGE> 174
<TABLE>
<S> <C>
Distribution Date................................................................. 2, 37
DOL............................................................................... 91
DOL Regulations................................................................... 91
DTC............................................................................... 19, 36
EPA............................................................................... 68
ERISA............................................................................. 18, 91
ERISA Plans....................................................................... 91
Exchange Act...................................................................... 3
Financial Guaranty Insurance Policy............................................... 13, 44
Foreign Investors................................................................. 90
Forward Commitment................................................................ 11, 29
Funding Period.................................................................... 11, 29
Garn-St. Germain Act.............................................................. 67
Indenture......................................................................... 7, 35
Indirect Participant.............................................................. 36
Insurance Proceeds................................................................ 39
Insured Amount.................................................................... 13
Interest Weighted Class........................................................... 25, 44
IRAs.............................................................................. 91
IRS............................................................................... 71
Junior Loan....................................................................... 21
Liquidated Mortgage Loan.......................................................... 54
Liquidation Proceeds.............................................................. 39
Loan Schedule..................................................................... 50
Loan Withdrawal Amount............................................................ 51
Lockout periods................................................................... 28
Monthly Advance................................................................... 54
Mortgage File..................................................................... 50
Mortgage Loans.................................................................... 2, 8
Mortgage Note..................................................................... 8
Mortgage Pool..................................................................... 2, 8
Mortgage Pool Insurance Policy.................................................... 14, 44
Mortgage Pool Insurer............................................................. 44
Mortgaged Property................................................................ 9, 28
Mortgagor......................................................................... 13, 20
Multiple Variable Rate Debt Certificate........................................... 73
Net Liquidation Proceeds.......................................................... 39
OID............................................................................... 70
OID Regulations................................................................... 70
Originators....................................................................... 2, 33
Participants...................................................................... 36
Parties in Interest............................................................... 91
Pass-Through Certificates......................................................... 80
Payment Date...................................................................... 2, 37
Pay-Through Certificate........................................................... 71
Permitted Investments............................................................. 53
Plan Asset Regulations............................................................ 18
Plan(s)........................................................................... 18, 91
Policy Statement.................................................................. 94
Pool Balance...................................................................... 42
Pool Factor....................................................................... 42
Pooling and Servicing Agreement................................................... 1, 6, 35
</TABLE>
98
<PAGE> 175
<TABLE>
<S> <C>
Prefunding Account................................................................ 11, 30
Prefunding Amount................................................................. 11, 30
Prepayment Assumption............................................................. 71
Presumed Single Qualified Floating Rate........................................... 72
Presumed Single Variable Rate..................................................... 73
Principal Prepayments............................................................. 40
Principal Weighted Class.......................................................... 25
PTCE 83-1......................................................................... 92
Qualified Replacement Mortgage Loan............................................... 51
Qualified Retirement Plans........................................................ 91
Rating Agency..................................................................... 15, 96
Regular Certificates.............................................................. 16, 69
Relief Act........................................................................ 23
REMIC............................................................................. 2, 69
REMIC Certificates................................................................ 75
REMIC Regulations................................................................. 69
REO Property...................................................................... 54
Reserve Account................................................................... 13, 43
Residual Certificates............................................................. 16
Residual Interest Certificate..................................................... 78
Retail Bond....................................................................... 89
Revolving Period.................................................................. 10, 40
Riegle Act........................................................................ 23, 67
SBJPA............................................................................. 79
Securities........................................................................ 1, 6
Securities Insurer................................................................ 44
Security Register................................................................. 38
Securityholders................................................................... 2, 7, 30
Security Principal Balance........................................................ 40
Senior Certificates............................................................... 6, 35
Senior Lien....................................................................... 21
Series............................................................................ 1, 6
Servicer.......................................................................... 6, 31
Servicing Advance................................................................. 56
Servicing Agreement............................................................... 2
Single Variable Rate Debt Certificate............................................. 73
SMMEA............................................................................. 18, 20
Special Hazard Insurance Policy................................................... 14, 45
Special Hazard Insurer............................................................ 45
Standard Hazard Insurance Policies................................................ 28
Startup Day....................................................................... 77
Sub-Servicer...................................................................... 6, 55
Subordinated Classes.............................................................. 35
Subordinated Certificates......................................................... 6, 35
Tax-Favored Plans................................................................. 91
Thrift Institutions............................................................... 79
Tiered REMICS..................................................................... 76
TIN............................................................................... 90
Title V........................................................................... 68
Transferor(s)..................................................................... 1, 6
Transferor Interest............................................................... 10
</TABLE>
99
<PAGE> 176
<TABLE>
<S> <C>
Trust............................................................................. 1, 6
Trust Estate...................................................................... 1, 7
Trustee........................................................................... 1, 6
Unaffiliated Originators.......................................................... 33
Underwriters...................................................................... 94
Variable Rate Debt Certificate.................................................... 72
Variable Rate Pass-Through Certificates........................................... 82
Voting Interests.................................................................. 57
</TABLE>
100
<PAGE> 177
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN
THE CLASS A CERTIFICATES OFFERED HEREBY NOR AN OFFER OF THE CLASS A CERTIFICATES
TO ANY PERSON IN ANY STATE OR OTHER JURISDICTION IN WHICH SUCH OFFER WOULD BE
UNLAWFUL. THE DELIVERY OF THE PROSPECTUS AND THIS PROSPECTUS SUPPLEMENT AT ANY
TIME DOES NOT IMPLY THAT INFORMATION THEREIN OR HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF; HOWEVER, IF ANY MATERIAL CHANGE OCCURS WHILE THIS
PROSPECTUS SUPPLEMENT OR PROSPECTUS IS REQUIRED BY LAW TO BE DELIVERED, THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS WILL BE AMENDED OR SUPPLEMENTED
ACCORDINGLY.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
Reports to Certificateholders................... S-3
Available Information........................... S-3
Incorporation of Certain Documents by
Reference..................................... S-3
Summary of Terms................................ S-5
Risk Factors.................................... S-18
Description of the Certificates................. S-23
The Mortgage Loans.............................. S-43
Prepayment and Yield Considerations............. S-45
Origination and Servicing of the Mortgage
Loans......................................... S-49
The Certificate Insurance Policy and the
Certificate Insurer........................... S-55
Certain Federal Income Tax Consequences......... S-58
ERISA Considerations............................ S-58
Use of Proceeds................................. S-60
Legal Investment Considerations................. S-60
Underwriting.................................... S-60
Report of Experts............................... S-61
Legal Matters................................... S-61
Rating of the Class A Certificates.............. S-61
Index of Principal Terms........................ S-63
ANNEX A: Description of the Mortgage Pool....... A-1
ANNEX B: Global Clearance, Settlement and Tax
Documentation Procedures............... B-1
PROSPECTUS
Prospectus Supplement........................... 3
Available Information........................... 3
Incorporation of Certain Documents by
Reference..................................... 3
Reports to Securityholders...................... 4
Summary......................................... 6
Risk Factors.................................... 20
The Trusts and Trust Estates.................... 27
Use of Proceeds................................. 30
Aames Capital Corporation....................... 31
Aames Capital Acceptance Corporation............ 31
The Servicer.................................... 31
The Originators................................. 33
Description of the Securities................... 35
Credit Enhancement.............................. 42
Maturity, Prepayment and Yield Considerations... 47
The Pooling and Servicing Agreement............. 49
The Indenture................................... 60
Certain Legal Aspects of the Mortgage Loans and
Related Matters............................... 64
Certain Federal Income Tax Consequences......... 69
State Tax Considerations........................ 91
ERISA Considerations............................ 91
Legal Investment Considerations................. 93
Method of Distribution.......................... 94
Legal Matters................................... 95
Financial Information........................... 95
Rating.......................................... 96
Index of Principal Terms........................ 97
</TABLE>
AAMES MORTGAGE TRUST
1997-A
$215,000,000
MORTGAGE PASS-THROUGH CERTIFICATES,
SERIES 1997-A
$81,000,000 6.47% CLASS A-1 CERTIFICATES
$71,500,000 6.88% CLASS A-2 CERTIFICATES
$14,500,000 7.22% CLASS A-3 CERTIFICATES
$23,000,000 7.61% CLASS A-4 CERTIFICATES
$25,000,000 7.18% CLASS A-5 CERTIFICATES
AAMES CAPITAL CORPORATION
Sponsor and Servicer
-----------------------------------
PROSPECTUS SUPPLEMENT
-----------------------------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
CREDIT SUISSE FIRST BOSTON
MORGAN STANLEY & CO.
INCORPORATED
PRUDENTIAL SECURITIES INCORPORATED
MARCH 18, 1997
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