<PAGE> 1
This filing is made pursuant
to Rule 424(b)5 under the
Securities Act of 1933 in
connection with Registration No.
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED SEPTEMBER 18, 1998)
AAMES MORTGAGE TRUST 1998-C
$650,000,000
MORTGAGE PASS-THROUGH CERTIFICATES,
SERIES 1998-C
$118,400,000 6.239% CLASS A-1F CERTIFICATES
$80,300,000 6.037% CLASS A-2F CERTIFICATES
$39,900,000 6.091% CLASS A-3F CERTIFICATES
$72,100,000 6.268% CLASS A-4F CERTIFICATES
$40,300,000 6.633% CLASS A-5F CERTIFICATES
$39,000,000 6.133% CLASS A-6F CERTIFICATES
$195,000,000 CLASS A-1A ADJUSTABLE RATE CERTIFICATES
$65,000,000 5.912% CLASS A-2A CERTIFICATES
AAMES CAPITAL CORPORATION
Sponsor and Servicer
The Mortgage Pass-Through Certificates, Series 1998-C, will consist of the
Class A-1F Certificates, the Class A-2F Certificates, the Class A-3F
Certificates, the Class A-4F Certificates, the Class A-5F Certificates and the
Class A-6F Certificates (collectively, the "Fixed Rate Group Certificates"), the
Class A-1A Certificates and the Class A-2A Certificates (together, the
"Adjustable Rate Group Certificates"), the Class C Certificates and certificates
representing the residual class with respect to each REMIC held by the Trust
(the "Class R Certificates"). Only the Fixed Rate Group Certificates and the
Adjustable Rate Group Certificates (collectively, the "Offered Certificates")
are offered hereby. The Fixed Rate Group Certificates and the Adjustable Rate
Group Certificates are sometimes each referred to herein as a "Certificate
Group."
(continued on next page)
(LOGO)
The Offered Certificates will be unconditionally and irrevocably guaranteed
as to payment of interest due thereon on each Distribution Date (excluding
Interest Shortfalls as defined herein) and as to ultimate collection of the
related Certificate Principal Balances, in each case pursuant to the terms of
the Certificate Insurance Policy (the "Certificate Insurance Policy") issued by
MBIA Insurance Corporation (the "Certificate Insurer").
SEE "RISK FACTORS" STARTING ON PAGE S-22 HEREOF AND ON PAGE 19 OF THE
PROSPECTUS FOR A DESCRIPTION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY
PROSPECTIVE INVESTORS IN THE OFFERED CERTIFICATES.
------------------------
THE OFFERED 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 OFFERED 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 Offered 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 Offered Certificates are
anticipated to be approximately $650,247,799 plus, with respect to the Fixed
Rate Group Certificates and Class A-2A Certificates, accrued interest from
September 1, 1998, before deducting expenses payable by the Sponsor, estimated
to be $300,000. The Offered 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 Offered
Certificates will be made in book-entry form only through the Same-Day Funds
Settlement System of The Depository Trust Company in the United States, and
Cedel Bank, societe anonyme and the Euroclear System in Europe on or about
September 25, 1998.
NationsBanc Montgomery Securities LLC
Bear, Stearns & Co. Inc.
First Union Capital Markets
Prudential Securities Incorporated
Donaldson, Lufkin & Jenrette
Securities Corporation
September 18, 1998
<PAGE> 2
(continued from cover)
The Certificates will represent undivided beneficial ownership interests in
Aames Mortgage Trust 1998-C (the "Trust") established by Aames Capital
Corporation (the "Sponsor") pursuant to a Pooling and Servicing Agreement to be
dated as of September 1, 1998 (the "Pooling and Servicing Agreement") between
the Sponsor, in its capacities as Sponsor and Servicer, and the trustee
specified herein (the "Trustee").
Initially, the assets of the Trust will consist primarily of a pool (the
"Mortgage Pool") of mortgage loans (the "Mortgage Loans") 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 will be 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.
The Mortgage Pool will be divided into two groups (each, a "Mortgage Loan
Group"). Distributions on the Fixed Rate Group Certificates will be derived
primarily from amounts received, collected or recovered in respect of the
Mortgage Loan Group comprised entirely of Mortgage Loans bearing fixed rates of
interest (the "Fixed Rate Group"). Distributions on the Adjustable Rate Group
Certificates will be derived primarily from amounts received, collected or
recovered in respect of the Mortgage Loan Group comprised entirely of Mortgage
Loans bearing interest at rates that are subject to periodic adjustment (the
"Adjustable Rate Group").
As described herein, the yield on the Offered Certificates will be affected
by the rate of prepayments of the Mortgage Loans in the related Mortgage Loan
Group and the timing of receipt of such payments. Because a portion of the
Mortgage Loans in the Fixed Rate Group are secured by junior liens, the rate of
prepayments experienced on the related Mortgage Loans may be higher or lower
than would be the case if such Mortgage Loan Group consisted only of first lien
Mortgage Loans. The yield on the Offered Certificates will also be affected by
Excess Cash that is applied in reduction of the Certificate Principal Balances
of the Offered Certificates on any Distribution Date, as described herein. See
"Risk Factors" herein.
As described herein, one or more elections will be made to treat the Trust
(other than the Prefunding Account and the Capitalized Interest Account) as
"real estate mortgage investment conduits" ("REMICs") pursuant to the Internal
Revenue Code of 1986, as amended (the "Code"). The Offered Certificates will be
"regular interests" in a REMIC. See "Certain Federal Income Tax Consequences"
herein and in the Prospectus.
There is currently no secondary market for the Offered Certificates. The
Underwriters intend to make a secondary market for the Offered Certificates, but
have no obligation to do so. There can be no assurance that a secondary market
for any of the Offered 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 Offered Certificates offered hereby. See "The Pooling and
Servicing Agreement -- Termination; Optional Termination" in the Prospectus.
THE OFFERED CERTIFICATES OFFERED BY THIS PROSPECTUS SUPPLEMENT CONSTITUTE A
SEPARATE SERIES OF CERTIFICATES BEING OFFERED BY THE SPONSOR PURSUANT TO ITS
PROSPECTUS DATED SEPTEMBER 18, 1998, 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 OFFERED 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 OFFERED 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 OFFERED 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
1997.
S-2
<PAGE> 3
REPORTS TO CERTIFICATEHOLDERS
Monthly and annual reports concerning the Offered Certificates and the
Trust will be sent by the Trustee to all Certificateholders. So long as any
Offered 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 Offered Certificates pursuant to the Pooling and
Servicing Agreement described herein. DTC will supply such reports to all
persons acquiring beneficial ownership interests in the Offered Certificates.
See "Description of the Certificates -- Book-Entry Registration of Offered
Certificates" herein.
AVAILABLE INFORMATION
The Sponsor has filed a Registration Statement under the Securities Act of
1933, as amended, with the Securities and Exchange Commission (the "Commission")
with respect to the Offered 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, 350 S. Grand Avenue, Los Angeles, California 90071, Attention:
Corporate Secretary, (213) 210-5000.
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-22
Risk of Limitations on Adjustments
of Pass-Through Rate on Class
A-1A Certificates................ S-22
Risks Associated with Underwriting
Standards........................ S-22
Risks Associated with Geographic
Concentration of Mortgaged
Properties....................... S-23
Risks Associated with Damaged
Mortgaged Properties............. S-23
Risks Associated with Junior
Loans............................ S-24
Risks Associated with Prepayment of
the Mortgage Loans............... S-25
The Subsequent Mortgage Loans and
the Prefunding Account........... S-26
Environmental Statutes Affecting
Security Interests............... S-26
Risks Associated with Certain
Origination Fees................. S-27
Year 2000 Compliance and Technology
Enhancements..................... S-27
Risks Associated with Strategic
Alternatives..................... S-27
DESCRIPTION OF THE
CERTIFICATES.......................... S-27
General............................. S-27
Distributions on the Certificates... S-28
Calculation of LIBOR................ S-30
Prefunding Account.................. S-31
Capitalized Interest Account........ S-32
Reports to Certificateholders....... S-32
Book-Entry Registration of Offered
Certificates..................... S-33
Termination; Retirement of the
Certificates..................... S-37
The Trustee......................... S-38
CREDIT ENHANCEMENTS..................... S-38
Treatment of Realized Losses........ S-38
Overcollateralization and
Application of Monthly Excess
Cashflow Amounts................. S-39
Overcollateralization and the
Certificate Insurance Policy..... S-41
The Certificate Insurance Policy.... S-41
The Certificate Insurer Premium..... S-42
THE MORTGAGE LOANS...................... S-43
General............................. S-43
</TABLE>
<TABLE>
<CAPTION>
CAPTION PAGE
------- ----
<S> <C>
Fixed Rate Group.................... S-44
Adjustable Rate Group............... S-44
Conveyance of Subsequent Mortgage
Loans............................ S-45
Assignment of Mortgage Loans........ S-46
Payments on Mortgage Loans and
Deposits to the Collection
Account.......................... S-48
PREPAYMENT AND YIELD CONSIDERATIONS..... S-48
Projected Prepayments and Yields for
the Offered Certificates......... S-50
ORIGINATION AND SERVICING OF THE
MORTGAGE LOANS........................ S-58
The Originators..................... S-58
Underwriting of Mortgage Loans...... S-58
Mortgage Loan Delinquency and
Foreclosure Experience........... S-58
Servicing of Mortgage Loans......... S-60
Sub-Servicing....................... S-61
Realization upon Defaulted Mortgage
Loans............................ S-62
Hazard Insurance.................... S-62
Servicing and Other Compensation;
Payment of Expenses.............. S-63
Monthly Advances; Servicing
Advances; Compensating Interest
and Interest Shortfalls.......... S-64
Certain Matters Regarding Servicer's
Servicing Obligations............ S-65
THE CERTIFICATE INSURANCE POLICY AND THE
CERTIFICATE INSURER................... S-66
The Certificate Insurance Policy.... S-66
The Certificate Insurer............. S-68
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES.......................... S-69
Class A-1A Certificates............. S-70
ERISA CONSIDERATIONS.................... S-70
USE OF PROCEEDS......................... S-72
LEGAL INVESTMENT CONSIDERATIONS......... S-72
UNDERWRITING............................ S-73
REPORT OF EXPERTS....................... S-74
LEGAL MATTERS........................... S-74
RATING OF THE OFFERED CERTIFICATES...... S-74
INDEX OF PRINCIPAL TERMS................ S-76
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 1998-C (the "Trust").
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
("AFC"). 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, to initially 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............... September 1, 1998.
Closing Date............... On or about September 25, 1998.
Offered Certificates....... Mortgage Pass-Through Certificates, Series 1998-C,
to be issued pursuant to the Pooling and
Servicing Agreement to be dated as of September
1, 1998, between the Sponsor, the Servicer and
the Trustee, in the following Classes (each, a
"Class") and Initial Certificate Principal
Balances:
<TABLE>
<CAPTION>
INITIAL CERTIFICATE PASS-THROUGH
PRINCIPAL BALANCE RATE CLASS
------------------- ------------ -----
<C> <C> <C> <S>
$118,400,000 6.239% Class A-1F Certificates
$ 80,300,000 6.037% Class A-2F Certificates
$ 39,900,000 6.091% Class A-3F Certificates
$ 72,100,000 6.268% Class A-4F Certificates
$ 40,300,000 6.633%(1) Class A-5F Certificates
$ 39,000,000 6.133% Class A-6F Certificates
$195,000,000 (2)(3) Class A-1A Certificates
$ 65,000,000 5.912% Class A-2A Certificates
</TABLE>
(1) The Class A-5F Pass-Through Rate with respect
to each Interest Period ending prior to the
Clean-up Call Date will be 6.633% per annum.
The Class A-5F Pass-Through Rate for each
Interest Period thereafter will be 7.133% per
annum.
(2) The Class A-1A Pass-Through Rate with respect
to each Interest Period will be equal to the
lesser of (x) with respect to each Interest
Period ending prior to the Clean-up Call Date,
the London Interbank Offered Rate for one-month
United States dollar deposits as of the second
business day preceding the first day of such
Interest Period (calculated as described under
"Description of the
Certificates -- Distributions on the
Certificates") ("LIBOR") plus
S-5
<PAGE> 6
0.26% per annum and for any Interest Period
thereafter, LIBOR plus 0.52% per annum (the
"Formula Pass-Through Rate") and (y) the Class
A-1A Available Funds Cap.
(3) The Pass-Through Rate for the Class A-1A
Certificates generally will be limited to the
Class A-1A Available Funds Cap. The "Class A-1A
Available Funds Cap" will be, with respect to
any Distribution Date, the per annum rate equal
to the percentage obtained by (I) dividing (x)
the amount of interest that accrued on the
Mortgage Loans in the Adjustable Rate Group in
respect of the related Interest Period at the
related Mortgage Interest Rates applicable to
Monthly Payments due on such Mortgage Loans
during such Interest Period, reduced by (i) the
Servicing Fee for the Mortgage Loans in the
Adjustable Rate Group for such Interest Period,
(ii) the Certificate Insurer Premium
attributable to the Adjustable Rate Group for
the related Distribution Date, (iii) Accrued
Certificate Interest with respect to the Class
A-2A Certificates for the related Distribution
Date and (iv) on and after the Distribution
Date occurring in October 1999, one-twelfth of
0.50% of the Adjustable Rate Group Balance as
of the first day of the related Collection
Period by (y) the product of (i) the Class A-1A
Certificate Principal Balance as of the first
day of such Interest Period, (ii) the actual
number of days elapsed during such Interest
Period divided by 360 and (II) multiplying the
result by 100.
With respect to the Class A-1A Certificates on any
Distribution Date, the positive excess, if any,
of the amount of interest that would have accrued
thereon during the related Interest Period at the
related Formula Pass-Through Rate over the amount
of interest that did accrue thereon at the Class
A-1A Available Funds Cap (and in the case of any
such excess remaining unpaid from a prior
Distribution Date, interest thereon at the
related Formula Pass-Through Rate to the extent
lawful) is the related "Supplemental Interest
Amount." The Class C Certificates will absorb any
related Supplemental Interest Amount on the
Distribution Date on which it arises or on a
subsequent Distribution Date from and to the
extent of amounts otherwise distributable to the
Class C Certificateholders. However, Supplemental
Interest Amounts will not be paid after the date
on which the Trust is terminated as described
below under "Optional Termination" or otherwise.
The Certificate Insurer does not guarantee the
payment of, and the ratings assigned to the Class
A-1A Certificates do not address the likelihood
of the payment of, any Supplemental Interest
Amounts.
On any date after the Closing Date, the "Aggregate
Certificate Principal Balance" is the sum of the
Certificate Principal Balances of all Classes of
Certificates. The Aggregate Certificate Principal
Balance for a particular Mortgage Loan Group is
the sum of the Certificate Principal Balances of
all Classes of Certificates relating to such
Mortgage Loan Group.
Retained Certificates...... The Class C Certificates and the Class R
Certificates.
S-6
<PAGE> 7
Final Scheduled
Distribution
Date..................... The "Final Scheduled Distribution Dates" for each
of the indicated Classes of Certificates is as
follows, although it is anticipated that the
actual final Distribution Date for each Class
will occur earlier than the indicated related
Final Scheduled Distribution Date. See
"Prepayment and Yield Considerations" herein.
<TABLE>
<CAPTION>
FINAL SCHEDULED
CLASS DISTRIBUTION DATE
----- -----------------
<S> <C> <C>
Class A-1F Certificates: July 15, 2012
Class A-2F Certificates: June 15, 2020
Class A-3F Certificates: May 15, 2023
Class A-4F Certificates: January 15, 2027
Class A-5F Certificates: September 15, 2028
Class A-6F Certificates: September 15, 2028
Class A-1A Certificates: September 15, 2028
Class A-2A Certificates: September 15, 2028
</TABLE>
Distributions on the
Offered Certificates
A. General....................................................................
On the 15th day of each month or, if such day is
not a Business Day, on the next succeeding
Business Day, commencing October 15, 1998 (each
such day, a "Distribution Date"), the Trustee
will be required, pursuant to the cashflow
priorities hereinafter described and subject to
the availability of amounts therefor, to
distribute to the Fixed Rate Group
Certificateholders of record as of the last day
of the calendar month immediately preceding the
calendar month in which such Distribution Date
occurs (such date, the "Record Date") and to the
Adjustable Rate Group Certificateholders of
record as of the related Record Date,
respectively, to the extent and in the priorities
described below the sum of (i) the Accrued
Certificate Interest for such Class, (ii) the
related Interest Carry Forward Amount for such
Class and (iii) the related Principal
Distribution Amount for such Class (each as
defined below and to the extent set forth
herein).
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.
1. Interest
Distributions...... For each Distribution Date, interest due with
respect to the Fixed Rate Group Certificates and
the Class A-2A Certificates will be an amount
equal to interest which has accrued on the
related Certificate Principal Balance at the
applicable Pass-Through Rate during the calendar
month immediately preceding the month in which
such Distribution Date occurs. For each
Distribution Date, the interest due with respect
to the Class A-1A Certificates will be an amount
equal to interest which has accrued on the
related Certificate Principal Balance at the
applicable Pass-Through Rate from the preceding
Distribution Date (or from the Closing Date in
the case of the first Distribution Date) to and
including the day prior to such Distribution
Date. Each such interest accrual period is
referred to herein as the "Interest Period" for
the related Class of Certificates.
On any Distribution Date, the "Accrued Certificate
Interest" for any Class of Certificates is the
amount of interest due thereon in respect of
S-7
<PAGE> 8
any Interest Period at the applicable
Pass-Through Rate, less the related pro rata
share of Interest Shortfalls (but in the case of
the Class A-1A Certificates, without
consideration of the Supplemental Interest
Amounts). All calculations of interest on the
Fixed Rate Group Certificates and the Class A-2A
Certificates will be made on the basis of a
360-day year assumed to consist of twelve 30-day
months, and all calculations of interest on the
Class A-1A Certificates will be made on the basis
of the actual number of days elapsed in the
related Interest Period and a year of 360 days.
On each Distribution Date Monthly Interest for each
Mortgage Loan Group and certain other amounts
will be applied in the following order of
priority:
First, if the Certificate Insurer has not
defaulted on its obligations under the
Certificate Insurance Policy or any such
default is not continuing, to the Certificate
Insurer the amount of any unreimbursed Insured
Payments (together with interest accrued on any
unreimbursed Insured Payments with respect to
any prior Distribution Date) and any accrued
and unpaid Certificate Insurer Premium, and
Second, to the Fixed Rate Group
Certificateholders and Adjustable Rate Group
Certificateholders, on a pro rata basis based
on the aggregate amount of Accrued Certificate
Interest to the holders of the Certificates of
each such Class within the Fixed Rate Group
Certificates or Adjustable Rate Group
Certificates, as applicable, up to the amount
of Accrued Certificate Interest with respect to
such Class plus the Interest Carry Forward
Amount for such Distribution Date with respect
to such Class.
Any Monthly Interest remaining after making the
distributions described above on such
Distribution Date will be available for
distribution as part of the Monthly Excess
Cashflow Amount (as defined below) for such
Distribution Date.
"Monthly Interest" with respect to each Mortgage
Loan Group and any Collection Period, generally
means the sum, without duplication, of (i) all
interest accrued during the related Collection
Period on the Mortgage Loans in such Mortgage
Loan Group (less the related Servicing Fee), (ii)
all Compensating Interest paid by the Servicer on
the related Deposit Date with respect to such
Mortgage Loan Group, (iii) with respect to the
first Collection Period, the portion of the
amount deposited in the Collection Account from
the Capitalized Interest Account with respect to
such Mortgage Loan Group and (iv) the interest
portion of any amounts payable by the Servicer in
connection with the repurchase or substitution of
any Mortgage Loans in such Mortgage Loan Group
during such Collection Period. See "Description
of the Certificates -- Distributions on the
Certificates."
The "Interest Carry Forward Amount" with respect to
any Class of Certificates on any Distribution
Date is the amount, if any, by which (i) the
Accrued Certificate Interest on such Class for
the preceding Distribution Date plus any
outstanding Interest Carry Forward Amount with
respect to such Class from the second preceding
Distribution Date (together with interest on such
outstanding Interest
S-8
<PAGE> 9
Carry Forward Amount at the related Pass-Through
Rate for the related Interest Period to the
extent lawful) exceeds (ii) the amount of Monthly
Interest actually distributed to the holders of
such Certificates on such preceding Distribution
Date.
2. Principal
Distributions...... General. The Fixed Rate Group Certificates and the
Adjustable Rate Group Certificates will generally
receive principal distributions on each
Distribution Date which are based on principal
collections and recoveries with respect to the
related Mortgage Loan Group. In addition, the
overcollateralization feature of the Trust
results in accelerated payments of principal with
respect to each Mortgage Loan Group to achieve,
and thereafter maintain a specified level of
overcollateralization with respect to such
Mortgage Loan Group. Such accelerated principal
will generally be funded from excess interest
with respect to the related Mortgage Loan Group.
Fixed Rate Group. On each Distribution Date, the
Fixed Rate Group Certificateholders will be
entitled to receive 100% of the Fixed Rate Group
Principal Distribution Amount for such
Distribution Date as follows: first, to the Class
A-6F Certificateholders, the Class A-6F Lockout
Distribution Amount, and then to all Fixed Rate
Group Certificateholders, by Class in sequential
order (i.e., first to the Class A-1F
Certificates, then to the Class A-2F
Certificates, then to the Class A-3F Certificates
and so forth) until the Certificate Principal
Balance of each such Class has been reduced to
zero. See "Description of the
Certificates -- Distributions on the
Certificates -- Principal" herein.
The Class A-6F Certificateholders are entitled to
receive payments of the Class A-6F Lockout
Distribution Amount specified herein prior to the
payment of any principal on any other Class of
Fixed Rate Group Certificates; provided that if
on any Distribution Date the Class A-5F
Certificate Principal Balance is zero, the Class
A-6F Certificateholders will be entitled to
receive 100% of the Fixed Rate Group Principal
Distribution Amount for such Distribution Date.
The "Class A-6F Lockout Distribution Amount" for
any Distribution Date will be the product of (i)
the applicable Class A-6F Lockout Percentage for
such Distribution Date and (ii) the Class A-6F
Lockout Pro Rata Distribution Amount for such
Distribution Date, not to exceed the Fixed Rate
Group Principal Distribution Amount.
The "Class A-6F Lockout Percentage" for each
Distribution Date shall be as follows:
<TABLE>
<CAPTION>
DISTRIBUTION DATES LOCKOUT PERCENTAGE
------------------ ------------------
<S> <C>
October 1998 - September 2001 0%
October 2001 - September 2003 45%
October 2003 - September 2004 80%
October 2004 - September 2005 100%
October 2005 and thereafter 300%
</TABLE>
The "Class A-6F Lockout Pro Rata Distribution
Amount" for any Distribution Date will be an
amount equal to the product of (x) a fraction,
the numerator of which is the Certificate
Principal Balance of the Class A-6F Certificates
immediately prior to such Distribution
S-9
<PAGE> 10
Date and the denominator of which is the
Aggregate Certificate Principal Balance of the
Fixed Rate Group Certificates immediately prior
to such Distribution Date and (y) the Fixed Rate
Group Principal Distribution Amount for such
Distribution Date.
Any Fixed Rate Group Principal Distribution Amount
remaining after the foregoing distributions shall
be distributed as part of the Monthly Excess
Cashflow Amount with respect to the Fixed Rate
Group as described below under "-- Credit
Enhancement -- Overcollateralization and
Application of Monthly Excess Cashflow Amounts."
Adjustable Rate Group. On each Distribution Date,
the Adjustable Rate Group Certificateholders will
be entitled to receive payment of 100% of the
Adjustable Rate Group Principal Distribution
Amount for such Distribution Date as follows:
first, to the Class A-2A Certificateholders, the
Class A-2A Lockout Distribution Amount and then
to the Class A-1A Certificateholders until the
Certificate Principal Balance of such Class has
been reduced to zero. See "Description of the
Certificates -- Distributions on the
Certificates -- Principal" herein.
The Class A-2A Certificateholders are entitled to
receive payments of the Class A-2A Lockout
Distribution Amount specified herein prior to the
payment of any principal on the Class A-1A
Certificates; provided that if on any
Distribution Date the Class A-1A Certificate
Principal Balance is zero, the Class A-2A
Certificateholders will be entitled to receive
100% of the Adjustable Rate Group Principal
Distribution Amount for such Distribution Date.
The "Class A-2A Lockout Distribution Amount" for
any Distribution Date will be the product of (i)
the applicable Class A-2A Lockout Percentage for
such Distribution Date and (ii) the Class A-2A
Lockout Pro Rata Distribution Amount for such
Distribution Date, not to exceed the Adjustable
Rate Group Principal Distribution Amount. On each
Distribution Date occurring on or after the
Distribution Date in October 2002, the Class A-2A
Certificateholders will be entitled to receive
100% of the Adjustable Rate Group Principal
Distribution Amount.
The "Class A-2A Lockout Percentage" for each
Distribution Date shall be as follows:
<TABLE>
<CAPTION>
DISTRIBUTION DATES LOCKOUT PERCENTAGE
------------------ -------------------
<S> <C>
October 1998 - March 2000 0%
April 2000 - September 2002 500%
</TABLE>
The "Class A-2A Lockout Pro Rata Distribution
Amount" for any Distribution Date will be an
amount equal to the product of (x) a fraction,
the numerator of which is the Certificate
Principal Balance of the Class A-2A Certificates
immediately prior to such Distribution Date and
the denominator of which is the Aggregate
Certificate Principal Balance of the Adjustable
Rate Group Certificates immediately prior to such
Distribution Date and (y) the related Adjustable
Rate Group Principal Distribution Amount for such
Distribution Date.
Any Adjustable Rate Group Principal Distribution
Amount remaining after the foregoing
distributions shall be distributed as part of the
Monthly Excess Cashflow Amount with respect to
the Adjustable
S-10
<PAGE> 11
Rate Group as described below under "-- Credit
Enhancement -- Overcollateralization and
Application of Monthly Excess Cashflow Amounts."
The "Collection Period" with respect to any
Distribution Date is the calendar month
immediately preceding such Distribution Date.
A "Deposit Date" is any date on which funds on
deposit in the Collection Account are remitted to
the Certificate Account which, with respect to
any Distribution Date, will be a day not less
than three Business Days prior to such
Distribution Date.
"Fixed Rate Group Principal Distribution Amount",
with respect to any Distribution Date, generally
means (A) the sum, without duplication, of (i)
the principal actually collected by the Servicer
with respect to Mortgage Loans in the Fixed Rate
Group, (ii) the outstanding principal balance of
each such Mortgage Loan that was repurchased from
the Trust, (iii) all amounts payable in respect
of principal on any Mortgage Loan in the Fixed
Rate Group in connection with a substitution of a
Qualified Replacement Mortgage Loan therefor,
(iv) the principal portion of all Net Liquidation
Proceeds or Insurance Proceeds received with
respect to the Mortgage Loans in the Fixed Rate
Group during the related Collection Period, (v)
with respect to the Distribution Date in October
1998, any portion of the Prefunding Account
Deposit allocated to the purchase of Subsequent
Mortgage Loans with respect to the Fixed Rate
Group remaining on deposit in the Prefunding
Account at the end of the Funding Period, and
(vi) the principal portion of any Insured Payment
(i.e., the portion of any Insured Payment that is
made in respect of a Coverage Deficit for the
Fixed Rate Group) with respect to the related
Collection Period, less (B) the
Overcollateralization Release Amount and any
amounts used to pay Accrued Certificate Interest
and Interest Carry Forward Amounts on the Fixed
Rate Group Certificates.
"Adjustable Rate Group Principal Distribution
Amount" has the same meaning appropriately
modified to relate to the Adjustable Rate Group.
See "Description of the Offered
Certificates -- Distribution on the
Certificates."
"Offered Certificates Principal Distribution
Amount" means the sum of the Fixed Rate Group
Principal Distribution Amount and the Adjustable
Rate Group Principal Distribution Amount for the
related Distribution Date.
"Overcollateralization Amount" means with respect
to a Mortgage Loan Group and as of any
Distribution Date the excess of (x) the aggregate
of the outstanding Principal Balances of the
Mortgage Loans in such Mortgage Loan Group as of
the last day of the immediately preceding
Collection Period (plus, in the case of the first
Collection Period, amounts on deposit in the
Prefunding Account on such date allocable to such
Mortgage Loan Group) over (y) the Aggregate
Certificate Principal Balance of the related
Offered Certificates (after taking into account
all distributions of principal collections on
such Distribution Date).
S-11
<PAGE> 12
"Extra Principal Distribution Amount" means, for a
Mortgage Loan Group and any Distribution Date,
the lesser of (x) the related Monthly Excess
Cashflow Amount and (y) the related
Overcollateralization Deficiency.
"Coverage Deficit" means, for a Mortgage Loan Group
on any Distribution Date, the excess, if any, of
the aggregate of the Certificate Principal
Balances of the related Classes of Offered
Certificates (after taking into account all
distributions in respect of principal on such
Distribution Date other than amounts paid by the
Certificate Insurer) over the aggregate Principal
Balances of the Mortgage Loans in the related
Mortgage Loan Group as of the last day of the
related Collection Period (plus, in the case of
the first Collection Period, amounts on deposit
in the Prefunding Account allocable to such
Mortgage Loan Group).
"Overcollateralization Deficiency" means, for a
Mortgage Loan Group and a Distribution Date, the
excess, if any, of (x) the related Targeted
Overcollateralization Amount over (y) the related
Overcollateralization Amount, calculated for this
purpose after taking into account the reduction
on such Distribution Date of the Certificate
Principal Balances of all related Classes of
Certificates resulting from distributions of
principal collections, but before taking into
account any amount paid by the Certificate
Insurer in respect of principal for such
Distribution Date.
"Overcollateralization Release Amount" means, for
any Distribution Date and either Certificate
Group, the amount available for application as a
portion of the Monthly Excess Cashflow Amount for
such Certificate Group after the Targeted
Overcollateralization Amount steps down in
accordance with the terms of the Pooling and
Servicing Agreement.
"Targeted Overcollateralization Amount" means, with
respect to each Certificate Group, a specified
level of overcollateralization required by the
Certificate Insurer pursuant to the Pooling and
Servicing Agreement.
Credit Enhancement......... General. The credit enhancement provided for the
benefit of the Fixed Rate Group
Certificateholders and the Adjustable Rate Group
Certificateholders consists of the Certificate
Insurance Policy, the application of the related
Monthly Excess Cashflow Amounts and the
overcollateralization and cross-collateralization
features of the Trust.
Treatment of Realized Losses. If with respect to
any Mortgage Loan that becomes a Liquidated
Mortgage Loan during a Collection Period, the Net
Liquidation Proceeds relating thereto and
allocated to principal are less than the
Principal Balance of such Mortgage Loan, the
amount of such insufficiency shall constitute a
"Realized Loss".
To the extent that a Mortgage Loan Group
experiences Realized Losses, such Realized Losses
will reduce the aggregate of the outstanding
principal balances of the Mortgage Loans in such
Mortgage Loan Group and accordingly will reduce
the related Overcollateralization Amount. The
application of Monthly Excess Cashflow Amounts to
fund Extra Principal Distribution Amounts and
thereby reduce the
S-12
<PAGE> 13
Certificate Principal Balances of the Offered
Certificates will increase the related
Overcollateralization Amount. Realized Losses
which occur in a Mortgage Loan Group will in
effect, be absorbed first, by the related
Retained Certificates, both through the
application of the Monthly Excess Cashflow Amount
to fund such deficiency and through a reduction
in the related Overcollateralization Amount.
In the case of the Fixed Rate Group or the
Adjustable Rate Group, Realized Losses remaining
after such absorption by the Retained
Certificates and the application of the related
Monthly Excess Cashflow Amounts and through the
reduction of the related Overcollateralization
Amount (including giving effect to the cross-
collateralization feature of the Trust), to the
extent of the Coverage Deficit, will be covered
by a draw on the Certificate Insurance Policy in
the amount of such remaining Coverage Deficit.
Overcollateralization and Application of Monthly
Excess Cashflow Amounts. The weighted average net
Mortgage Interest Rate for the Mortgage Loan in
each Mortgage Loan Group is generally expected to
be higher than the weighted average of the
Pass-Through Rates on the related Certificates,
and to the extent that there is
overcollateralization, such Mortgage Loans are
expected to generate still further excess
interest relative to the Pass-Through Rates on
such Certificates. Such excess interest (together
with any related Overcollateralization Release
Amount for the related Distribution Date, the
"Monthly Excess Cashflow Amount") will be applied
to make accelerated payments of principal (the
"Extra Principal Distribution Amount") to the
Class or Classes of related Offered Certificates
then entitled to receive distributions of
principal to the extent described herein until
the related Targeted Over-
collateralization Amount is achieved. Any such
application will cause the aggregate of the
related Certificate Principal Balances to
amortize more rapidly than the Mortgage Loans in
such Mortgage Loan Group, increasing the amount
of overcollateralization.
The overcollateralization mechanics of the Trust
result in a limited acceleration of the Offered
Certificates relative to the amortization of the
Mortgage Loans in the related Mortgage Loan
Group. The accelerated amortization is achieved
by the application of the Monthly Excess Cashflow
Amounts described above and certain amounts
released from the other Mortgage Loan Group as
described below, to the payment of the
Certificate Principal Balances of the related
Offered Certificates. These features are intended
to create overcollateralization equal to the
excess of the aggregate of the Principal Balances
of the Mortgage Loans in the related Mortgage
Loan Group over the Aggregate Certificate
Principal Balance of the related Offered
Certificates. Once the Targeted
Overcollateralization Amount is reached, and
subject to the provisions described in the next
paragraph, such accelerated amortization features
will cease, unless necessary to maintain the
Targeted Overcollateralization Amount.
The Pooling and Servicing Agreement provides that,
based on the delinquency experience of each
Mortgage Loan Group, the Targeted
Overcollateralization Amount with respect to such
Mortgage Loan Group may increase or decrease over
time. In addition, the Pooling
S-13
<PAGE> 14
and Servicing Agreement provides that the
Targeted Overcollateralization Amount with
respect to each Mortgage Loan Group may be
modified, reduced or eliminated without the
consent of any Certificateholders. An increase
would result in a temporary period of accelerated
amortization of the related Offered Certificates
to increase the actual level of
overcollateralization to its Targeted
Overcollateralization Amount; a decrease would
result in a temporary period of decelerated
amortization to reduce the actual level of
overcollateralization to its Targeted
Overcollateralization Amount.
As of the Closing Date, the Overcollateralization
Amount with respect to each Mortgage Loan Group
will be approximately zero. Any Monthly Excess
Cashflow Amounts will be paid as Extra Principal
Distribution Amounts thereby increasing each
related Overcollateralization Amount until the
related Targeted Overcollateralization Amount is
achieved. On any Distribution Date on which the
related Targeted Overcollateralization Amount
steps down, the related Overcollateralization
Release Amounts will be applied as a portion of
the Monthly Excess Cashflow Amounts, as described
below, and will not be passed through as a
distribution of principal to the holders of the
related Offered Certificates on such Distribution
Date. The amortization of the related Offered
Certificates will accordingly be decelerated.
Any Monthly Excess Cashflow Amount with respect to
the Fixed Rate Group shall be applied in the
following order of priority on any Distribution
Date:
(1) to fund any outstanding Interest Carryforward
Amount, for the Fixed Rate Group
Certificates;
(2) if the Certificate Insurer has not defaulted
on its obligations under the Certificate
Insurance Policy or any such default is not
continuing, to the Certificate Insurer the
amount of any unreimbursed Insured Payments
(together with interest accrued on any
unreimbursed Insured Payments with respect to
any prior Distribution Date) and any accrued
and unpaid Certificate Insurer Premium;
(3) to fund any Extra Principal Distribution
Amount for the Fixed Rate Group Certificates
for such Distribution Date until the related
Targeted Overcollateralization Amount is
reached;
(4) to reimburse the Certificate Insurer for any
other amounts due and owing under the
Insurance Agreement to the extent not
reimbursed to the Certificate Insurer under
clause (2) above;
(5) to the holders of the Adjustable Rate Group
Certificates, any unpaid Accrued Certificate
Interest for such Distribution Date after
application of the amounts available for
distribution from the Adjustable Rate Group
on such Distribution Date, and any amounts
listed in clauses (1) through (4) below for
such Distribution Date with respect to the
Adjustable Rate Group to the extent such
amounts have not been funded in full through
the application of any Monthly Excess
Cashflow Amount with respect to the
Adjustable Rate Group on such Distribution
Date;
S-14
<PAGE> 15
(6) to the Servicer to the extent of any
unreimbursed Monthly Advances or Servicing
Advances with respect to the Fixed Rate
Group;
(7) to fund a distribution to the Class C
Certificateholders or to make a payment of
any Supplemental Interest Amount to the
extent not funded by the application of
Monthly Excess Cashflow Amounts with respect
to the Adjustable Rate Group (which shall be
made to the Class A-1A Certificates based on
the outstanding Supplemental Interest Amounts
due thereon), as the case may be; and
(8) to fund a distribution to the Class R
Certificateholders.
Any Monthly Excess Cashflow Amount with respect to
the Adjustable Rate Group shall be applied in the
following order of priority on any Distribution
Date:
(1) to fund any outstanding Interest Carry
Forward Amount for the Adjustable Rate Group
Certificates;
(2) if the Certificate Insurer has not defaulted
on its obligations under the Certificate
Insurance Policy or any such default is not
continuing, to the Certificate Insurer the
amount of any unreimbursed payments of
Insured Payments (together with interest
accrued on any unreimbursed payments of
Insured Payments with respect to any prior
Distribution Date) and any accrued and unpaid
Certificate Insurer Premium;
(3) to fund any Extra Principal Distribution
Amount for the Adjustable Rate Group
Certificates for such Distribution Date until
the related Targeted Overcollateralization
Amount is reached;
(4) to reimburse the Certificate Insurer for any
other amounts due and owing under the
Insurance Agreement to the extent not
reimbursed to the Certificate Insurer under
clause (2) above;
(5) to the holders of the Fixed Rate Group
Certificates, unpaid Accrued Certificate
Interest for such Distribution Date after
application of amounts available for
distribution from the Fixed Rate Group on
such Distribution Date and any amounts listed
in clauses (1) through (4) above for such
Distribution Date with respect to the Fixed
Rate Group, to the extent such amounts have
not been funded in full through the
application of any Monthly Excess Cashflow
Amount with respect to the Fixed Rate Group
on such Distribution Date;
(6) to the Servicer to the extent of any
unreimbursed Monthly Advances or Servicing
Advances with respect to the Adjustable Rate
Group;
(7) to fund a distribution to the Class C
Certificateholders or to make a payment of
any Supplemental Interest Amount (which shall
be made to the Class A-1A Certificates based
on the outstanding Supplemental Interest
Amounts due thereon), as the case may be; and
(8) to fund a distribution to the Class R
Certificateholders.
S-15
<PAGE> 16
Certificate Insurance
Policy..................... The Certificate Insurance Policy will be issued on
the Closing Date by the Certificate Insurer in
favor of the Trustee on behalf of the
Certificateholders. If with respect to any
Distribution Date, Monthly Interest with respect
to a Certificate Group and any Monthly Excess
Cashflow Amount with respect to a Certificate
Group available therefor are insufficient to pay
in full the aggregate Accrued Certificate
Interest plus any outstanding Interest Carry
Forward Amount on either Certificate Group or a
Coverage Deficit exists with respect to the
Certificates in a Certificate Group (after taking
into account all payments in reduction of their
respective Certificate Principal Balances on such
Distribution Date), the Trustee will make a draw
on the Certificate Insurance Policy in an amount
sufficient to pay in full such Accrued
Certificate Interest, any outstanding Interest
Carry Forward Amount or Coverage Deficit. In
addition, the Certificate Insurance Policy will
guaranty the ultimate collection of the
Certificate Principal Balance of each Class of
Offered Certificates and payment of the
outstanding Certificate Principal Balances
thereof on the related Final Scheduled
Distribution Date. See "Description of Credit
Enhancement -- The Certificate Insurance Policy"
and "The Certificate Insurance Policy and the
Certificate Insurer" herein.
The Certificate Insurance Policy does not guaranty
the payment of Interest Shortfalls or
Supplemental Interest Amounts.
Forward Commitment;
Prefunding Account....... On the Closing Date, the Sponsor will make a
deposit (the "Prefunding Account Deposit") in the
amount of $63,703,211.96 to a segregated account
(the "Prefunding Account") in the name of the
Trustee. $46,092,370.89 of the Prefunding Account
Deposit shall be allocated for the purchase of
Subsequent Mortgage Loans for inclusion in the
Fixed Rate Group, and $17,610,841.07 of the
Prefunding Account Deposit shall be allocated for
the purchase of Subsequent Mortgage Loans for
inclusion in the Adjustable Rate Group. 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) October 14, 1998, 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 October 1998, the portion of
the Prefunding Account Deposit allocated to the
Fixed Rate Group that was not applied to purchase
Subsequent Mortgage Loans during the Funding
Period will be distributed in reduction of the
Fixed Rate Group Certificate Principal Balance
and the portion of the Prefunding
S-16
<PAGE> 17
Account Deposit allocated to the Adjustable Rate
Group that was not applied to purchase Subsequent
Mortgage Loans during the Funding Period will be
distributed in reduction of the Adjustable Rate
Group 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 Certificate Principal
Balances of any of the Offered Certificates, no
assurance can be given that such a distribution
with respect to any of the Offered Certificates
will not occur on the Distribution Date in
October 1998. 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 allocated to each Mortgage Loan
Group that was not applied to purchase Subsequent
Mortgage Loans during the Funding Period will be
distributed on the October 1998 Distribution Date
in reduction of the Certificate Principal
Balances as part of the Principal Distribution
Amount for the related Mortgage Loan Group for
such Distribution Date. The Prefunding Account
will not be part of the REMIC Pool. See
"Description of the Certificates -- Prefunding
Account" herein.
Within 15 days after the expiration of the Funding
Period, the Sponsor intends to file a Current
Report on Form 8-K with the Commission which
shall include a description of all of the
Mortgage Loans included in the Trust, including
the Subsequent Mortgage Loans.
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 each
Class of Offered Certificates that may arise as a
result of the utilization of the Prefunding
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 October 1998 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 in the related Mortgage
Loan Group 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 "Origination and Servicing of the
Mortgage Loans -- Monthly Advances; Servicing
Advances; Compensating Interest and Interest
Shortfalls" herein.
S-17
<PAGE> 18
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 Mortgage Loan Group and 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 related
Offered Certificates on the applicable
Distribution Date (each such amount, a
"Compensating Interest Payment"). If the
Servicing Fee for the related Mortgage Loan Group
and 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 related Offered
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";
Relief Act Shortfalls and Prepayment Interest
Shortfalls are collectively, "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
Available Funds on each Distribution Date in
respect of the related Class of Offered
Certificates 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 Certificate Principal Balance of the
related Class of Offered Certificates for such
Distribution Date. The "Insurer Premium Rate"
will be set forth in the Pooling and Servicing
Agreement. See "Credit Enhancement -- 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 and the related Mortgage Loan
Group (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
in the related Mortgage Loan Group at the
beginning of such Collection Period. The
"Servicing Fee Rate" for each Mortgage Loan Group
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.
S-18
<PAGE> 19
The Mortgage Loans......... The statistical information presented in this
Prospectus Supplement regarding the Mortgage Pool
is based on the Initial Mortgage Loans as of
September 1, 1998. 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 regarding the Initial Mortgage
Loans and each Mortgage Loan Group as of the date
of this Prospectus Supplement may vary in certain
limited respects from comparable information
based on the actual composition of the Mortgage
Pool and each Mortgage Loan Group on the Closing
Date.
As of the Cut-off Date, the Mortgage Pool consisted
of a total of 7,605 Initial Mortgage Loans of
which 5,189 are fixed rate Mortgage Loans and
2,416 are adjustable rate Mortgage Loans. The
Initial Mortgage Loans in the Fixed Rate Group
had an Aggregate Principal Balance of
$343,907,629.11, and the Initial Mortgage Loans
in the Adjustable Rate Group had an Aggregate
Principal Balance of $242,389,158.93. The
Mortgage Loans are closed-end, home equity
mortgage loans 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 19.34% and 11.85% of the Initial
Mortgage Loans in the Fixed Rate Group (by
principal balance as of the Cut-off Date), and
approximately 16.28% and 11.83% of the Initial
Mortgage Loans in the Adjustable Rate Group (by
principal balance as of the Cut-off Date) are
secured by Mortgaged Properties located in
California and Florida, respectively. See "The
Mortgage Loans -- General," "-- Fixed Rate Group"
and "-- Adjustable Rate Group" and "ANNEX A:
Description of the Mortgage Pool" herein for
detailed information about the Initial Mortgage
Loans in each Mortgage Loan Group.
Optional Termination....... On any Distribution Date when the Aggregate
Principal Balance 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 Pool Balance as of the Cut-off Date (the
"Cut-off Date 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 Offered 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
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accrued interest on such Mortgage Loan and
certain amounts payable to the Certificate
Insurer under the Insurance 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 Cut-off Date 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 Offered
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 -- Terminating Retirement of the
Certificates" herein.
Rating..................... It is a condition to the issuance of the Offered
Certificates that each class of Offered
Certificates be rated "Aaa" by Moody's Investors
Service, Inc. ("Moody's") and "AAA" by Standard
and Poor's Rating Service, a division of The
McGraw-Hill Companies, Inc. ("S&P" and, together
with Moody's, 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
Offered Certificates" herein.
Certain Federal Income Tax
Consequences............. One or more elections will be made to treat the
assets of the Trust (other than the Prefunding
Account and the Capitalized Interest Account) as
a real estate mortgage investment conduit (each,
a "REMIC") for federal income tax purposes. The
Offered Certificates and the Class C Certificates
will represent the regular interests in a REMIC
and generally will be treated as newly originated
debt instruments for federal income tax purposes.
In addition, for federal income tax purposes, the
Class A-1A Certificates will represent an
undivided beneficial ownership interest in an
interest rate cap agreement. The Class R
Certificate will represent the residual interest
in each REMIC. Beneficial owners of the Offered
Certificates will be required to report income on
such Certificates in accordance with the accrual
method of accounting. It is anticipated that the
Offered Certificates will be issued without
original issue discount for federal income tax
purposes. However, it is possible that the
Internal Revenue Service could treat a portion of
the additional interest that would become payable
on the Class A-5F and Class A-1A Certificates
after the Clean-up Call Date as original issue
discount. Certificateholders are urged to consult
their tax advisors with respect to the tax
consequences of holding the Offered 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 Offered 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.
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<PAGE> 21
Legal Investment
Considerations........... The Offered 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
Offered Certificates, including certain yield and
prepayment risks, see "Risk Factors" herein and
in the Prospectus.
Registration and
Denominations; Form of
Offered Certificates..... The Offered 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 Offered
Certificates ("Certificate Owners") will hold
their Certificates through The Depository Trust
Company ("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 Offered 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 "Description of the
Certificates -- Book-Entry Registration of
Offered 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> 22
RISK FACTORS
Prospective investors in the Offered 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 Offered Certificates. Any
statistical information presented below is based upon the characteristics of the
Initial Mortgage Loans as of September 1, 1998. 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.
RISK OF LIMITATIONS ON ADJUSTMENTS OF PASS-THROUGH RATE ON CLASS A-1A
CERTIFICATES. The Adjustable Rate Group may contain Mortgage Loans that, after
a period of approximately six months, two years, three years or five years
following the date of origination, adjust either semi-annually based upon the
London Interbank Offered Rate for six-month United States dollar deposits (the
"six-month London Interbank Offered Rate"), in each case subject to periodic
caps on such adjustment, whereas the Formula Pass-Through Rate on the Class A-1A
Certificates adjusts monthly based upon the London Interbank Offered Rate for
one-month United States dollar deposits (the "one-month London Interbank Offered
Rate"), subject to the Class A-1A Available Funds Cap. Consequently, the
interest due on such Mortgage Loans (reduced by the sum of (i) the related
Servicing Fee, (ii) the related Certificate Insurer Premium, (iii) commencing on
and after the Distribution Date occurring in October 1999, one-twelfth of 0.50%
of the Adjustable Rate Group Balance as of the first day of the related
Collection Period, and (iv) the Accrued Certificate Interest with respect to the
Class A-2A Certificates) during any Collection Period may not equal the amount
of interest that would accrue at the applicable Formula Pass-Through Rate during
the related Interest Period. In particular, because the interest rates of the
Mortgage Loans in the Adjustable Rate Group adjust less frequently than the
Formula Pass-Through Rate on the Class A-1A Certificates, the amount of Monthly
Interest distributed thereon on any Distribution Date may be limited (as a
result of being determined on the basis of the Class A-1A Available Funds Cap)
to an amount that is less than the amount of interest that would be due thereon
at the Formula Pass-Through Rate absent the Class A-1A Available Funds Cap for
extended periods in a rising interest rate environment. In addition, because the
Class A-1A Certificates bear interest based on a different interest rate index
than the Mortgage Loans in the Adjustable Rate Group, depending on the
relationship between the six-month London Interbank Offered Rate and the
one-month London Interbank Offered Rate at any time of determination, the
Pass-Through Rate for the Class A-1A Certificates may be more or less likely to
be determined based on the Class A-1A Available Funds Cap for the related
Interest Period and the related Distribution Date.
Approximately 78.85%, 0.55% and 0.14% (by Cut-off Date Principal Balance)
of the Initial Mortgage Loans included in the Adjustable Rate Group have initial
Mortgage Interest Rates that will remain fixed for two years, three years or
five years, respectively, from the date of origination before initial
adjustment. The inclusion of such Mortgage Loans in the Adjustable Rate Group
may increase the likelihood that the Pass-Through Rate for the Class A-1A
Certificates will be determined based on the Class A-1A Available Funds Cap
rather than on the basis of LIBOR plus 0.26% if LIBOR increases appreciably
prior to the time that such Mortgage Loans have reached their respective dates
of first adjustment.
If the Pass-Through Rate for the Class A-1A Certificates is determined on
the basis of the Class A-1A Available Funds Cap, the value of the Class A-1A
Certificates may be temporarily or permanently reduced.
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
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<PAGE> 23
on the related Mortgage 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 Offered 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 Monthly Interest due to the holders of the related Class of Offered
Certificates on the related Distribution Date and the amount of any Coverage
Deficit with respect to such Class and 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
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.
There can be no assurance as to whether the delinquency and loss experience
of the Mortgage Loans will be comparable to the delinquency and loss experience
of any portfolio of Mortgage Loans previously securitized by the Sponsor, or as
to whether or not any differences in such experience may relate to changes in
the Sponsor's underwriting guidelines, the Servicer's servicing procedures or
general economic conditions. For more information with respect to the
delinquency and loss experience of the Sponsor's servicing portfolio, see
"Origination and Servicing of the Mortgage Loans -- Mortgage Loan Delinquency
and Loss Experience."
RISKS ASSOCIATED WITH GEOGRAPHIC CONCENTRATION OF MORTGAGED
PROPERTIES. Approximately 19.34% and 11.85% of the Initial Mortgage Loans in
the Fixed Rate Group (by Cut-off Date Principal Balance) and approximately
16.28% and 11.83% of the Initial Mortgage Loans in the Adjustable Rate Group (by
Cut-off Date Principal Balance) are secured by Mortgaged Properties located in
California and Florida, respectively. The California residential real estate
market has experienced a sustained decline in recent years. In general, declines
in the California or Florida 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 or
Florida (which may or may not affect real property values) may affect the timely
payment by borrowers of scheduled payments of 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). See "Origination and Servicing of the Mortgage
Loans -- Hazard Insurance" herein. Accordingly, to the extent 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
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<PAGE> 24
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 Monthly Interest due to the
holders of the related Class of Offered Certificates on the related Distribution
Date and the amount of any Coverage Deficit with respect to such Class and
Distribution Date. See "Credit Enhancement -- Overcollateralization and the
Certificate Insurance Policy" and "The Certificate Insurance Policy and the
Certificate Insurer" herein.
Certain Initial Mortgage Loans are secured, and certain Subsequent Mortgage
Loans may be secured, by Mortgaged Properties located in areas that have been
affected by natural disasters not covered by standard hazard insurance policies.
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 with respect to the related
Mortgage Loan Group and may thereby affect the yields and weighted average lives
of the related Class or Classes of Certificates.
RISKS ASSOCIATED WITH JUNIOR LOANS. Because a portion of the Mortgage
Loans in the Fixed Rate Group 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 Offered
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
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 Monthly Interest due
on the related Class of Offered Certificates on the related Distribution Date
and the amount of any Coverage Deficit with respect to such Class and
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-
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<PAGE> 25
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
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, the presence or absence of prepayment penalties, the
loan-to-value of the related mortgaged property, the borrower's credit grade,
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,
voluntary prepayments on the Mortgage Loans may occur 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 in a Mortgage Loan Group 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 related Class of Offered Certificates as a
prepayment of the related Mortgage Loans. In addition, Mortgage Loans in the
Adjustable Rate Group have initial rate adjustment caps of 1.000% to 3.000%
above the related initial Mortgage Interest Rate. As a result, in connection
with the initial rate adjustment, borrowers under Mortgage Loans with higher
initial rate adjustment caps may be more likely either to prepay voluntarily or
to default as a result of the potential for significantly higher payments
following such initial adjustment. Prepayments and such repurchases and
purchases will accelerate the receipt of distributions of Monthly Principal on
the Offered 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 Offered Certificateholders of principal amounts
that would otherwise be distributed over the remaining
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<PAGE> 26
terms of the Mortgage Loans. The extent to which the yield to maturity of an
Offered 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 Offered
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 Offered 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
Offered 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
related Class of Offered Certificates.
THE SUBSEQUENT MORTGAGE LOANS AND THE PREFUNDING ACCOUNT. During the
Funding Period, Subsequent Mortgage Loans may be purchased using the monies on
deposit in the Prefunding Account and added to the Fixed Rate Group or
Adjustable Rate Group. Each 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 any Class of Offered 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 Subsequent Cut-off Date,
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. Following the transfer of Subsequent Mortgage Loans to the Mortgage
Pool, the aggregate characteristics of the Mortgage Loans then held in the
Mortgage Pool may vary from those of the Initial Mortgage Loans included in the
Mortgage Pool. 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 allocated to the Fixed Rate
Group that is remaining at the end of the Funding Period will be distributed in
reduction of the Fixed Rate Group Certificate Principal Balance and the portion
of the Prefunding Account Deposit allocated to the Adjustable Rate Group that is
remaining at the end of the Funding Period will be distributed in reduction of
the Adjustable Rate Group 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 Offered Certificate Principal Balance of any Class,
no assurance can be given that such a distribution with respect to a Class of
Offered Certificates will not occur on the Distribution Date in October 1998. In
any event, it is unlikely that the Sponsor will be able to deliver Subsequent
Mortgage Loans with an aggregate principal balance that exactly matches the
Prefunding Account Deposit.
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 Considera-
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tions" 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 Monthly Interest due
on the related Class of Offered Certificates on the related Distribution Date
and the amount of any Coverage Deficit with respect to such Class and
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 Coverage Deficits.
In the event of such a Coverage Deficit, payments by the Certificate Insurer
would result in accelerated distributions in reduction of the related
Certificate Principal Balance.
YEAR 2000 COMPLIANCE AND TECHNOLOGY ENHANCEMENTS. The Sponsor is aware of
issues associated with the programming code in existing computer systems as the
year 2000 approaches. The "year 2000" problem is pervasive and complex, as
virtually every computer operation will be affected in some way by the rollover
of the two digit year value to 00. The issue is whether computer systems will
properly recognize date sensitive information when the year changes to 2000.
Systems that do not properly recognize such information could generate erroneous
data or fail to perform functions properly.
As part of AFC's overall systems enhancement program, AFC is utilizing both
internal and external resources to identify, correct, reprogram or replace, and
test its systems for year 2000 compliance. It is anticipated that all of AFC's
year 2000 compliance efforts will be completed on a timely basis. There can be
no assurance, however, that the systems of other companies on which AFC's
systems rely will be timely reprogrammed for year 2000 compliance.
AFC has recently committed to purchase a year 2000 compliant loan
origination system that is expected to add approximately $2 million per year to
AFC's technology costs over the next three years. Other technology enhancements
are being reviewed but, to date, the costs for such enhancements have not been
determined.
RISKS ASSOCIATED WITH STRATEGIC ALTERNATIVES. AFC has retained Donaldson,
Lufkin & Jenrette Securities Corporation ("DLJ") as a financial advisor to
develop strategic alternatives for the Company. DLJ continues to evaluate
opportunities for the Company, including possible business combinations. AFC is
in discussions with several institutions regarding various alternatives. No
assurance can be given that any such opportunities will be consummated. There
can be no assurance that any such transaction will be consummated, or if
consummated what effect such a transaction would have on the Servicer or on the
operations of the Servicer.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates will represent certain undivided beneficial ownership
interests in the Trust created pursuant to the Pooling and Servicing Agreement,
subject to the limits and priority of distributions described therein.
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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; (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 Internal Revenue Code of 1986, as amended (the "Code"), the
Offered Certificates and Class C Certificates as "regular interests," and the
Class R Certificates 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 Offered Certificates will be issued in minimum denominations of $1,000
and integral dollar multiples of $1 in excess thereof.
DISTRIBUTIONS ON THE CERTIFICATES
Distributions of principal and interest on the Offered Certificates will be
made by the Trustee (in such capacity, the "Paying Agent") on each Distribution
Date commencing in October 1998 to holders of record of the related Class of
Offered Certificates (each, a "Certificateholder") as of the related Record
Date. The Pooling and Servicing Agreement establishes the Pass-Through Rate for
each Class of Offered Certificates as set forth in the Summary of Terms herein.
On each Distribution Date, the Paying Agent will distribute Monthly Interest and
the Principal Distribution Amounts in the amounts and orders of priority set
forth below.
Interest
On each Distribution Date, Monthly Interest for each Mortgage Loan Group
and certain other amounts will be applied in the following order of priority:
First, if the Certificate Insurer has not defaulted on its obligations
under the Certificate Insurance Policy or any such default is not
continuing, to the Certificate Insurer the amount of any unreimbursed
Insured Payments (together with interest accrued on any unreimbursed
Insured Payments with respect to any prior Distribution Date) and any
accrued and unpaid Certificate Insurer Premium; and
Second, to the Fixed Rate Group Certificateholders and Adjustable Rate
Group Certificateholders, on a pro rata basis based on the aggregate amount
of Accrued Certificate Interest due to the holders of the Certificates of
each such Class within the Fixed Rate Group Certificates or Adjustable Rate
Group Certificates, as the case may be, up to the amount of Accrued
Certificate Interest with respect to such Class plus any outstanding
Interest Carry Forward Amount with respect to such Class.
Principal
Fixed Rate Group. On each Distribution Date, the Fixed Rate Group
Certificateholders will be entitled to receive 100% of the Fixed Rate Group
Principal Distribution Amount for such Distribution Date as follows: first, to
the Class A-6F Certificateholders, the Class A-6F Lockout Distribution Amount,
and then to all Fixed Rate Group Certificateholders, by Class in sequential
order until the Certificate Principal Balance of each such Class has been
reduced to zero; provided that if on any Distribution Date the Class A-5F
Certificate Principal Balance is zero, the Class A-6F Certificateholders will be
entitled to receive 100% of the Fixed Rate Group Principal Distribution Amount
for such Distribution Date.
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The Fixed Rate Group Certificates (other than the Class A-6F Certificates)
are "sequential pay" classes such that the Class A-5F Certificateholders will
receive no payments of principal until the Class A-4F Certificate Principal
Balance is reduced to zero, the Class A-4F Certificateholders will receive no
payments of principal until the Class A-3F Certificate Principal Balance is
reduced to zero, the Class A-3F Certificateholders will receive no payments of
principal until the Class A-2F Certificate Principal Balance is reduced to zero
and the Class A-2F Certificateholders will receive no payments of principal
until the Class A-1F Certificate Principal Balance has been reduced to zero. The
Class A-6F Certificateholders will receive 100% of the Fixed Rate Group
Principal Distribution Amount after the Class A-5F Certificate Principal Balance
is reduced to zero.
Adjustable Rate Group. On each Distribution Date, the Adjustable Rate Group
Certificateholders will be entitled to receive 100% of the Adjustable Rate Group
Principal Distribution Amount for such Distribution Date as follows: first, to
the Class A-2A Certificateholders, the Class A-2A Lockout Distribution Amount,
and then to the Class A-1A Certificateholders until the Certificate Principal
Balance of each such Class has been reduced to zero; provided that if on any
Distribution Date the Class A-1A Certificate Principal Balance is zero, the
Class A-2A Certificateholders will be entitled to receive 100% of the Adjustable
Rate Group Principal Distribution Amount for such Distribution Date.
The "Monthly Interest" and the "Principal Distribution Amount" with respect
to any Mortgage Loan Group and any Distribution Date will consist primarily of
the amounts described in clauses (a) through (g) below in respect of the related
Mortgage Loan Group as they comprise interest or principal collections
(including the Extra Principal Distribution Amount), respectively, less (i) with
respect only to Monthly Interest, the Servicing Fee and the Certificate Insurer
Premium in respect of such Mortgage Loan Group and the related Collection
Period, (ii) Advances previously made in respect of the related Mortgage Loan
Group 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 (A)
deposited into the Collection Account or Certificate Account attributable to the
related Mortgage Loan Group 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 the related
Monthly Interest or Principal Distribution Amount for such Mortgage Loan Group
on such Distribution Date and (B) received by the Trustee that are recoverable
and sought to be recovered from the Trustee as a voidable preference by a
trustee in bankruptcy pursuant to the United States Bankruptcy Code in
accordance with a final nonappealable order of a court of competent
jurisdiction:
(a) the total amount of interest payments on or in respect of the
Mortgage Loans in the related Mortgage Loan Group 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 Subsequent Mortgage
Loans, the related Subsequent Cut-off Dates), 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 in the
related Mortgage Loan Group;
(c) the aggregate of any proceeds from or in respect of any policy of
insurance covering a Mortgage Loan in such Mortgage Loan Group that are
received during the related Collection Period and applied by the Servicer
to reduce the principal balance of the related Mortgage Loan or losses with
respect thereto ("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);
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(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 in such Mortgage Loan
Group, 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 in such Mortgage Loan Group 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 "The
Mortgage Loans -- 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 such
Mortgage Loan Group for such Distribution Date;
(g) the aggregate of amounts deposited in the Certificate Account by
the Servicer or 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 October 1998 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 October 1998 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 October 1998 Distribution Date, amounts
deposited by the Sponsor representing 30 days of interest, computed at the
related Mortgage Interest Rate, on each Subsequent Mortgage Loan that does
not have a monthly payment due in the Collection Period relating to such
Distribution Date.
CALCULATION OF LIBOR
"LIBOR" shall mean the London Interbank Offered Rate for one-month United
States dollar deposits. LIBOR for each Interest Period shall be determined on
the second business day preceding the first day of any Interest Period (each, a
"LIBOR Determination Date"), on the basis of the offered rates of the Reference
Banks for one-month United States dollar deposits, as such rates appear on the
Dow Jones Telerate Service Page 3750 (or any replacement page on that service
for the purpose of displaying London Interbank Offered Rates of major banks), as
of 11:00 a.m. (London time) on such LIBOR Determination Date. As used in this
section, "business day" means a day on which banks are open for dealing in
foreign currency and exchange in London and New York City; and "Reference Banks"
means leading banks selected by the Trustee and engaged in transactions in
Eurodollar deposits in the international Eurocurrency market (i) with an
established place of business in London, (ii) whose quotations appear on such
page on the LIBOR Determination Date in question, (iii) which have been
designated as such by the Trustee and (iv) not controlling, controlled by or
under common control with the Sponsor or any Originator.
On each LIBOR Determination Date, LIBOR will be established by the Trustee
as follows:
(a) If on such LIBOR Determination Date two or more Reference Banks
provide such offered quotations, LIBOR shall be the arithmetic mean
(rounded upwards if necessary to the nearest whole multiple of 0.0625%) of
such offered quotations.
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(b) If on such LIBOR Determination Date fewer than two Reference Banks
provide such offered quotations, LIBOR shall be the greater of (x) LIBOR as
determined on the previous LIBOR Determination Date and (y) the Reserve
Interest Rate. The "Reserve Interest Rate" shall be the rate per annum that
the Trustee determines to be either (i) the arithmetic mean (rounded
upwards if necessary to the nearest whole multiple of 0.0625%) of the
one-month U.S. dollar lending rates which New York City banks selected by
the Trustee are quoting on the relevant LIBOR Determination Date to the
principal London offices of leading banks in the London interbank market
or, in the event that the Trustee can determine no such arithmetic mean,
(ii) the lowest one-month U.S. dollar lending rate which New York City
banks selected by the Trustee are quoting on such LIBOR Determination Date
to leading European banks.
The establishment of LIBOR on each LIBOR Determination Date by the Trustee
and the Trustee's calculation of the rate of interest applicable to the Class
A-1A Certificates for the related Interest Period shall (in the absence of
manifest error) be final and binding. Each such rate of interest may be obtained
by telephoning the Trustee at (800) 735-7777.
PREFUNDING ACCOUNT
On the Closing Date, the Sponsor will deposit cash in the aggregate amount
of $63,703,211.96 (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. $46,092,370.89 of
the Prefunding Account Deposit will be allocated for the purchase of Mortgage
Loans bearing fixed rates of interest that will be included in the Fixed Rate
Group and $17,610,841.07 of the Prefunding Account Deposit will be allocated for
the purchase of Mortgage Loans bearing adjustable rates of interest that will be
included in the Adjustable Rate Group. All Mortgage Loans purchased by the Trust
through application of amounts on deposit in the Purchase 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) October 14, 1998, 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.
On the Distribution Date in October 1998, the portion of the Prefunding
Account Deposit allocated to the Fixed Rate Group that is not applied to
purchase Subsequent Mortgage Loans during the Funding Period will be applied to
reduce the Fixed Rate Group Certificate Principal Balance and the portion of the
Prefunding Account Deposit allocated to the Adjustable Rate Group that is not
applied to purchase Subsequent Mortgage Loans during the Funding Period will be
applied to reduce the Adjustable Rate Group 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 Certificate Principal
Balance of any of the Offered Certificates, no assurance can be given that such
a distribution with respect to any of the Offered Certificates will not occur on
the Distribution Date in October 1998. 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 allocated to the related Mortgage Loan
Group remaining at the end of the Funding Period will be distributed on the
October 1998 Distribution Date in reduction of the Certificate Principal
Balances of the Offered Certificates as part of the Principal Distribution
Amount for the related Mortgage Loan Group for such Distribution Date, thereby
reducing the weighted average lives of such Certificates.
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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 October 1998 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 October 1998 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 each Class of Offered 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 October 1998 Distribution Date. In the
unlikely event that the full amount allocated to cover interest shortfalls in
respect of a Class of Offered 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 for the
related Mortgage Loan Group.
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 later than the Business Day
prior to the October 1998 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 October 1998 Distribution Date. The Capitalized Interest Account
will not be part of the REMIC Pool.
REPORTS TO CERTIFICATEHOLDERS
Concurrently with each distribution to Certificateholders, the Trustee will
mail a statement to each Certificateholder in the form required by the Pooling
and Servicing Agreement and setting forth, among other things, the following
information:
(a) the amount of the distribution with respect to each Class of
Certificates (based on a Certificate in the original principal amount of
$1,000);
(b) the amount of such distribution allocable to principal on the
related Mortgage Loans in each Mortgage Loan Group, separately identifying
the aggregate amount of any prepayment or other recoveries of principal
included therein;
(c) the amount of such distribution allocable to interest on the
related Mortgage Loans in each Mortgage Loan Group (based on a Certificate
in the original principal amount of $1,000);
(d) the Accrued Certificate Interest and the Interest Carry Forward
Amount for each Class of Certificates;
(e) the principal amount of each Class of Certificates (based on a
Certificate in the original principal amount of $1,000) which will be
outstanding after giving effect to any payment of principal on such
Distribution Date;
(f) the aggregate of the principal balances of all Mortgage Loans and
the aggregate of the principal balances of the Mortgage Loans in each
Mortgage Loan Group after giving effect to any payment of principal on such
Distribution Date and the related Group Factor;
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(g) based upon information furnished by the Sponsor such information
as may be required by Section 6049(d)(7)(C) of the Code and the regulations
promulgated thereunder to assist Certificateholders in computing their
market discount;
(h) the total of all amounts paid by the Sponsor or the Servicer
during such Collection Period in connection with purchases or repurchases
from the Trust of Mortgage Loans and substitutions for Mortgage Loans of
Qualified Replacement Mortgages with respect to each Mortgage Loan Group;
(i) the weighted average Mortgage Interest Rate of the Mortgage Loans
in each Mortgage Loan Group;
(j) whether a Trigger Event has occurred;
(k) the Overcollateralization Amount and Targeted
Overcollateralization Amount for each Mortgage Loan Group and the
Certificate Principal Balance of each Class of Certificates then
outstanding after giving effect to all payments of principal on such
Distribution Date;
(l) the amount of any draw to be made on the Certificate Insurance
Policy on the related Distribution Date, and the amounts paid and
reimbursable to the Certificate Insurer as of such Distribution Date in
respect of the Certificate Insurance Premium and any Insured Payments;
(m) with respect to each Mortgage Loan Group, the number of Mortgage
Loans in each Mortgage Loan Group and the aggregate of their principal
balances as a percentage of the Fixed Rate Group Balance or Adjustable Rate
Group Balance, as appropriate, that are (i) 30 or more days delinquent,
(ii) 60 or more days delinquent, (iii) 90 or more days delinquent, (iv) the
subject of bankruptcy proceedings (to the actual knowledge of the
Servicer), (v) in foreclosure and (vi) as to which the related Mortgaged
Property is REO Property; and
(n) the amount of any Supplemental Interest Amounts paid and remaining
unpaid as of such Distribution Date.
Certain obligations of the Trustee to provide information to the
Certificateholders are conditioned upon such information being received from the
Servicer.
As to any Distribution Date, the "Group Factor" will be the percentage
obtained (carried to eight decimal places, rounded down) by dividing the
Aggregate Principal Balance of the related Mortgage Loan Group on such
Distribution Date (after giving effect to any distribution of principal or
allocation of Realized Losses on the Certificates on such Distribution Date) by
the sum of (i) the related Cut-off Date Group Balance and (ii) the portion of
the Prefunding Account Deposit allocated to the related Mortgage Loan Group.
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 holder of record
of a Certificate the information set forth in clauses (a) through (n) above,
aggregated for such calendar year or, in the case of each person who was a
holder of record of a Certificate for a portion of such calendar year, setting
forth such information for each month thereof.
BOOK-ENTRY REGISTRATION OF OFFERED CERTIFICATES
The Offered Certificates initially will be book-entry Certificates (the
"Book-Entry Certificates"). Persons acquiring beneficial ownership interests in
the Offered 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 per Class, representing the aggregate
principal balance of each such Class of Offered Certificates, and will initially
be registered in the name of Cede & Co. ("Cede"),
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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 Offered Certificates will be Cede, as nominee of DTC. Certificate Owners
will not be Certificateholders as that term is used in the Pooling and Servicing
Agreement. Certificate Owners are 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 Offered Certificates from the Trustee through DTC and its
Participants (including Cedel and Euroclear). While the Offered 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 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 Offered 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 Offered Certificates only through Participants and
indirect participants by instructing such Participants and indirect participants
to transfer Offered Certificates, by book-entry transfer, through DTC for the
account of the purchasers of such Offered Certificates, which account is
maintained with their respective Participants. Under the Rules and in accordance
with DTC's normal procedures, transfers of ownership of Offered Certificates
will be executed through DTC and the accounts of the respective Participants at
DTC will be debited and credited. Similarly, the Participants and indirect
participants will make debits or credits, as the case may be, on their records
on behalf of the selling and purchasing 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,
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Settlement and Tax Documentation Procedures -- Certain U.S. Federal Income Tax
Documentation Requirements" herein.
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 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.
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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 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 Offered Certificates.
Definitive Offered 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
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Event of Default under the Pooling and Servicing Agreement, the Certificate
Owners representing not less than 51% of the 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 Offered Certificates to Certificate Owners, such Offered
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 Offered 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.
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
Pool Balance as of the Cut-off Date (the "Cut-off Date 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 prices 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 Cut-off Date 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
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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 Certificateholders, second, to the Class C
Certificateholders, and third, to the Offered Certificateholders; provided that
any Coverage Deficit will be covered under the terms of the Certificate
Insurance Policy. 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 Offered 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 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.
CREDIT ENHANCEMENT
The credit enhancement provided for the benefit of the Fixed Rate Group
Certificateholders and the Adjustable Rate Group Certificateholders consists of
the application of the related Monthly Excess Cashflow Amounts, the
overcollateralization and cross-collateralization features of the Trust and the
Certificate Insurance Policy.
TREATMENT OF REALIZED LOSSES
If, with respect to any Mortgage Loan that becomes a Liquidated Mortgage
Loan during a Collection Period, the Net Liquidation Proceeds relating thereto
and allocated to principal are less than the Principal Balance of such Mortgage
Loan, the amount of such insufficiency shall constitute a "Realized Loss". To
the extent that a Mortgage Loan Group experiences Realized Losses, such Realized
Losses will reduce the aggregate of the outstanding principal balances of the
Mortgage Loans in such Mortgage Loan Group and accordingly will reduce the
related Overcollateralization Amount. The application of related Monthly Excess
Cashflow Amounts to fund Extra Principal Distribution Amounts and thereby reduce
the Certificate Principal Balances of the related Offered Certificates will
increase the related Overcollateralization Amount. Realized Losses which occur
in a Mortgage Loan Group will, in effect, be absorbed first, by the related
Retained Certificates, both through the application of the Monthly Excess
Cashflow Amount to fund such deficiency and through a reduction in the related
Overcollateralization Amount.
Realized Losses remaining after such absorption by the Retained
Certificates and the application of the related Monthly Excess Cashflow Amount
and through the reduction of the related Overcollateralization Amount (including
giving effect to the cross-collateralization feature of the Trust) to the extent
of any
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Coverage Deficit will be covered by a draw on the Certificate Insurance Policy
in the amount of such remaining Realized Losses.
OVERCOLLATERALIZATION AND APPLICATION OF MONTHLY EXCESS CASHFLOW AMOUNTS
The weighted average net Mortgage Interest Rate for the Mortgage Loans in
each Mortgage Loan Group is generally expected to be higher than the weighted
average of the Pass-Through Rates on the related Offered Certificates, and to
the extent that there is overcollateralization, such Mortgage Loans will be
generating still further excess interest relative to the Pass-Through Rates on
such Certificates. Such excess interest (together with any related
Overcollateralization Release Amount for the related Distribution Date, the
"Monthly Excess Cash Flow Amount") will be applied to make accelerated payments
of principal (the "Extra Principal Distribution Amount") to the extent described
herein. Any such application will cause the aggregate of the related Certificate
Principal Balances to amortize more rapidly than the Mortgage Loans in such
Mortgage Loan Group, increasing the amount of overcollateralization.
The overcollateralization mechanics of the Trust result in a limited
acceleration of the Offered Certificates relative to the amortization of the
Mortgage Loans in the related Mortgage Loan Group. The accelerated amortization
is achieved by the application of the Monthly Excess Cashflow Amounts described
above and certain amounts released from the other Mortgage Loan Group as
described below, to the payment of the Certificate Principal Balances of the
related Offered Certificates. These features are intended to create
overcollateralization equal to the excess of the aggregate Principal Balances of
the Mortgage Loans in the related Mortgage Loan Group over the aggregate
Certificate Principal Balance of the related Offered Certificates. Once the
Targeted Overcollateralization Amount is reached, and subject to the provisions
described in the next paragraph, such accelerated amortization features will
cease, unless necessary to maintain the Targeted Overcollateralization Amount.
All Monthly Excess Cashflow Amounts will be distributed as described below. Any
Monthly Excess Cashflow Amounts or Overcollateralization Release Amounts
distributed to the Class C or Class R Certificateholders on any Distribution
Date will not be available to pay amounts due to the Offered Certificateholders
on subsequent Distribution Dates.
The Pooling and Servicing Agreement provides that, based on the delinquency
experience of each Mortgage Loan Group, the Targeted Overcollateralization
Amount with respect to such Mortgage Loan Group may increase or decrease over
time. In addition, the Pooling and Servicing Agreement provides that the
Targeted Overcollateralization Amount with respect to each Mortgage Loan Group
may be modified, reduced or eliminated without the consent of any
Certificateholders. An increase would result in a temporary period of
accelerated amortization of the related Offered Certificates to increase the
actual level of overcollateralization to the Targeted Overcollateralization
Amount; a decrease would result in a temporary period of decelerated
amortization to reduce the actual level of overcollateralization to the Targeted
Overcollateralization Amount.
As of the Closing Date, the Overcollateralization Amount with respect to
each Mortgage Loan Group is approximately zero. Absent Realized Losses, any
Monthly Excess Cashflow Amounts will be paid as Extra Principal Distribution
Amounts thereby increasing each related Overcollateralization Amount up to the
related Targeted Overcollateralization Amount. On any Distribution Date on which
the Targeted Overcollateralization Amount steps down, the related
Overcollateralization Release Amounts will not be passed through as a
distribution of principal to the holders of the related Offered Certificates on
such Distribution Date. The amortization of the Offered Certificates of the
related Certificate Group will accordingly be decelerated.
Any Monthly Excess Cashflow Amount with respect to the Fixed Rate Group and
any Distribution Date shall be applied in the following order of priority on
such Distribution Date:
(1) to fund any outstanding Interest Carry Forward Amount for the
Fixed Rate Group Certificates;
(2) if the Certificate Insurer has not defaulted on its obligations
under the Certificate Insurance Policy or any such default is not
continuing, to the Certificate Insurer the amount of any unreimbursed
Insured Payments (together with interest accrued on any unreimbursed
Insured Payments with respect to any prior Distribution Date) and any
accrued and unpaid Certificate Insurer Premium;
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(3) to fund any Extra Principal Distribution Amount for the Fixed Rate
Group Certificates for such Distribution Date until the related Targeted
Overcollateralization Amount is reached;
(4) to reimburse the Certificate Insurer for any amounts due and owing
under the Insurance Agreement to the extent not reimbursed to the
Certificate Insurer under clause (2) above;
(5) to the holders of the Adjustable Rate Group Certificates, any
unpaid Accrued Certificate Interest for such Distribution Date after
application of the amounts available for distribution from the Adjustable
Rate Group on such Distribution Date, and any amounts listed in clauses (1)
through (4) below for such Distribution Date with respect to the Adjustable
Rate Group, to the extent such amounts have not been funded in full through
the application of Monthly Excess Cashflow Amount with respect to the
Adjustable Rate Group on such Distribution Date; provided that any portion
of the Monthly Excess Cashflow Amount with respect to the Fixed Rate Group
Certificates that consist of any payment by the Certificate Insurer will be
excluded from such funding;
(6) to the Servicer to the extent of any unreimbursed Monthly Advances
or Servicing Advances with respect to the Fixed Rate Group;
(7) to fund a distribution to the Class C Certificateholders or to
make a payment of any Supplemental Interest Amount to the extent not funded
by the application of Monthly Excess Cashflow Amounts with respect to the
Adjustable Rate Group (which shall be made to the Class A-1A Certificates
based on the outstanding Supplemental Interest Amounts due thereon), as the
case may be; and
(8) to fund a distribution to the Class R Certificateholders.
Any Monthly Excess Cashflow Amount with respect to the Adjustable Rate
Group shall be applied in the following order of priority on any Distribution
Date:
(1) to fund any outstanding Interest Carry Forward Amount for the
Adjustable Rate Group;
(2) if the Certificate Insurer has not defaulted on its obligations
under the Certificate Insurance Policy or any such default is not
continuing, to the Certificate Insurer the amount of any unreimbursed
Insured Payments (together with interest accrued on any unreimbursed
Insured Payments with respect to any prior Distribution Date) and any
accrued and unpaid Certificate Insurer Premium;
(3) to fund any Extra Principal Distribution Amount for the Adjustable
Rate Group Certificates for such Distribution Date until the related
Targeted Overcollateralization Amount is reached;
(4) to reimburse the Certificate Insurer for any amounts due and owing
under the Insurance Agreement to the extent not reimbursed to the
Certificate Insurer under clause (2) above;
(5) to the holders of the Fixed Rate Group Certificates, any unpaid
Accrued Certificate Interest for such Distribution Date after application
of the amounts available for distribution from the Fixed Rate Group on such
Distribution Date, and any amounts listed in clauses (1) through (4) above
for such Distribution Date with respect to the Fixed Rate Group, to the
extent such amounts have not been funded in full through the application of
Monthly Excess Cashflow Amount with respect to the Fixed Rate Group on such
Distribution Date; provided that any portion of the Monthly Excess Cashflow
Amount with respect to the Adjustable Rate Group Certificates that consists
of any payment by the Certificate Insurer will be excluded from such
funding;
(6) to the Servicer to the extent of any unreimbursed Monthly Advances
or Servicing Advances with respect to the Adjustable Rate Group;
(7) to fund a distribution to the Class C Certificateholders or to
make a payment of any Supplemental Interest Amount (which shall be made to
the Class A-1A Certificates based on the outstanding Supplemental Interest
Amounts due thereon), as the case may be; and
(8) to fund a distribution to the Class R Certificateholders.
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The "Certificate Principal Balance" of any Class of the Offered
Certificates is the original Certificate Principal Balance of such Class as
reduced by all Principal Distribution Amounts actually distributed to the
related Certificateholders on all prior Distribution Dates.
OVERCOLLATERALIZATION AND THE CERTIFICATE INSURANCE POLICY
The Pooling and Servicing Agreement will require the Trustee to make a
claim for an Insured Payment 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 with respect to a Class of
Offered Certificates will occur for the purpose of applying the proceeds of such
Insured Payment as a payment of principal to the related Class of Offered
Certificateholders on such Distribution Date. With respect to any Distribution
Date and any Class of Offered Certificates, a "Coverage Deficit" will mean the
amount, if any, by which (x) the related Certificate Principal Balance, after
taking into account all distributions to be made on such Distribution Date in
reduction thereof, including any Monthly Excess Cashflow Amount distributions in
respect of the Mortgage Loan Group relating to the other Class of Offered
Certificates, exceeds (y) the Aggregate Principal Balance of the Mortgage Loans
in the related Mortgage Loan Group as of the end of the applicable Collection
Period. Accordingly, the Certificate Insurance Policy guarantees ultimate
collection of the full amount of the Certificate Principal Balance of each Class
of Offered Certificates, rather than current payments of the amounts of any
Realized Losses to the holders of each Class of Offered Certificates. INVESTORS
IN THE OFFERED CERTIFICATES SHOULD REALIZE THAT, UNDER CERTAIN LOSS OR
DELINQUENCY SCENARIOS APPLICABLE TO THE MORTGAGE LOAN GROUPS, THEY MAY
TEMPORARILY RECEIVE NO DISTRIBUTIONS IN REDUCTION OF THE CERTIFICATE PRINCIPAL
BALANCE OF THEIR RESPECTIVE CLASS.
THE CERTIFICATE INSURANCE POLICY
The Certificate Insurer will issue a Certificate Insurance Policy in favor
of the Trustee for the benefit of the related Offered Certificateholders. The
Certificate Insurance Policy unconditionally and irrevocably guarantees payment
of the Accrued Certificate Interest plus any outstanding Interest Carryforward
Amount and any Coverage Deficit in respect of each Class of Offered Certificates
on each Distribution Date. Insured Payments made by the Certificate Insurer
under the Certificate Insurance Policy will not cover any Interest Shortfalls or
Supplemental Interest Amounts 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.
Any Deficiency Amount distributed to the Offered Certificateholders will be
allocated first to make up any shortfall on such Distribution Date in the
Accrued Certificate Interest plus any Interest Carryforward Amount for each
Class of the Offered Certificates and second to make up any Coverage Deficit on
such Distribution Date. Any Deficiency Amount distributed in respect of any
shortfall in Accrued Certificate Interest plus any Interest Carryforward Amount
for each Class of the Offered Certificates shall be distributed pro rata to each
Class of Offered Certificates in proportion to the shortfalls in Monthly
Interest with respect to each Class. Any Deficiency Amount distributed in
respect of any Coverage Deficit relating to the Fixed Rate Group Certificates
shall be distributed first to the Class A-6F Certificateholders in respect of
the Class A-6F Lockout Distribution Amount and then sequentially to each Class
of such Certificates. Any Deficiency Amount distributed in respect of any
Coverage Deficit relating to the Adjustable Rate Group Certificates shall be
distributed first, to the Class A-2A Certificateholders in respect of the Class
A-2A Lockout Distribution Amount, if any, and then to the Class A-1A
Certificates.
The Certificate Insurer will be subrogated to the rights of holders of the
Offered Certificates to receive any payments on the Offered 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 Class of Offered Certificates will receive the
full amount of Accrued Certificate Interest plus any Interest Carry Forward
Amount for such Class on such Distribution Date and no Coverage Deficit exists.
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The Certificate Insurance Policy does not guarantee to the holders of any
Offered Certificates any specific rate of prepayments of principal of the
Mortgage Loans. Payments of principal on the Offered 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 Offered 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 Offered Certificateholder for all purposes (other than
with respect to payment on the Certificates), will be entitled to exercise all
rights of the Offered Certificateholders thereunder, without the consent of such
Certificateholders, and the Offered 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 in respect of the related Class of Offered Certificates.
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
Certificate Principal Balance of the related Class of Offered Certificates for
such Distribution Date. The "Insurer Premium Rate" will be set forth in the
Pooling and Servicing Agreement. See "-- Distributions on the Certificates"
herein.
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THE MORTGAGE LOANS
GENERAL
The following is a brief description of certain terms of the Initial
Mortgage Loans based on the Initial Mortgage Loans and each Mortgage Loan Group
as of the Cut-Off Date. Certain mortgage loans may be removed, prior to the
Closing Date, from the Mortgage Pool and each Mortgage Loan Group 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 and each
Mortgage Loan Group set forth herein may vary in certain limited respects from
comparable information based on the actual composition of the Mortgage Pool and
each Mortgage Loan Group 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 purchase 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 included in the Mortgage Loan
Group 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 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 the expiration of the Funding Period.
The term "Aggregate Principal Balance" means the aggregate of the Principal
Balances of the Mortgage Loans in the related Mortgage Loan Group or in the
Mortgage Pool, as specified. The information expressed as a percentage of the
Aggregate Principal 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 in the Trust will be assigned to the Fixed Rate Group or
the Adjustable Rate Group, based on whether such Mortgage Loans bear fixed
interest rates or adjustable interest rates. The Initial Mortgage Loans
contained in the Fixed Rate Group are secured by first and second liens with
respect to the related Mortgaged Properties. All of the Initial Mortgage Loans
contained in the Adjustable Rate Group are secured by first liens on the related
Mortgaged Properties. The Fixed Rate Group Certificates represent undivided
beneficial ownership interests in all Mortgage Loans contained in the Fixed Rate
Group, and the Adjustable Rate Group Certificates represent undivided beneficial
ownership interests in all Mortgage Loans contained in the Adjustable Rate
Group.
Each Mortgage Loan will have the interest due thereon computed on an
actuarial basis. Certain mortgage loans 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 had two or more monthly payments past due and
not more than 0.48% of the Initial Mortgage Loans (by Cut-off Date Principal
Balance) had one or more monthly payments past due. However, investors in the
Offered Certificates should be aware that only approximately 12.19% and
approximately 10.52% (by Cut-off Date Principal Balance) of the Mortgage Loans
in the Fixed Rate Group and the Adjustable Rate Group, respectively, had a first
monthly payment due before August 1, 1998 and it was not possible for any
Mortgage Loan other than such Mortgage Loans to have had two or more monthly
payments past due as of the Cut-off Date.
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FIXED RATE GROUP
As of the Cut-off Date, the Aggregate Principal Balance of the Initial
Mortgage Loans in the Fixed Rate Group was $343,907,629.11. Approximately
91.40%, 5.62% and 2.98% of the related Mortgaged Properties (by Cut-off Date
Principal Balance) were single family residences, two- to four-family residences
and units in condominium or planned unit developments, respectively, and no more
than 0.59% of the Mortgage Loans in the Fixed Rate Group (by Cut-off Date
Principal Balance) were secured by Mortgaged Properties located in any single
ZIP code. Approximately 19.34% and 11.85% of the Initial Mortgage Loans in the
Fixed Rate Group (by Cut-off Date Principal Balance) are Secured by Mortgaged
Properties located in the states of California and Florida, respectively.
The original weighted average Combined Loan-to-Value Ratio of all Initial
Mortgage Loans in the Fixed Rate Group was approximately 73.15%. The maximum and
average current balances as of the Cut-off Date were approximately $771,813.13
and $66,276.28, respectively. The average appraised value of the Mortgaged
Properties securing Mortgage Loans in the Fixed Rate Group was approximately
$109,400.14 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 interest rates borne by the Initial Mortgage Loans (each, a "Mortgage
Interest Rate") in the Fixed Rate Group as of the Cut-off Date ranged from
approximately 6.500% per annum to 19.490% per annum. As of the Cut-off Date, the
weighted average Mortgage Interest Rate of the Initial Mortgage Loans in the
Fixed Rate Group was approximately 10.002% per annum.
The weighted average remaining term to stated maturity of the Initial
Mortgage Loans in the Fixed Rate Group was approximately 308.41 months. The
weighted average original term to maturity of the Initial Mortgage Loans in the
Fixed Rate Group was approximately 308.96 months. As of the Cut-off Date, the
weighted average seasoning of the Initial Mortgage Loans in the Fixed Rate Group
was approximately 0.55 month.
Based on the Aggregate Principal Balance of the Mortgage Loans in the Fixed
Rate Group as of the Cut-off Date, approximately 98.50% of the Mortgage Loans
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
1.50% of the Mortgage Loans in the Fixed Rate Group (by Cut-off Date Principal
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 in the Fixed Rate Group have original terms to stated maturity of
up to 30 years.
ADJUSTABLE RATE GROUP
As of the Cut-off Date, the Aggregate Principal Balance of the Initial
Mortgage Loans in the Adjustable Rate Group was $242,389,158.93. Approximately
90.60%, 5.01% and 4.39% of the related Mortgaged Properties (by Cut-off Date
Principal Balance) were single family residences, two- to four-family residences
and units in condominium and planned unit developments, respectively, and no
more than 0.48% of the Mortgage Loans in the Adjustable Rate Group (by Cut-off
Date Principal Balance) were secured by Mortgaged Properties located in any
single ZIP code. Approximately 16.28% and 11.83% of the Initial Mortgage Loans
in the Adjustable Rate Group (by Cut-off Date Principal Balance) are secured by
Mortgaged Properties located in the states of California and Florida,
respectively.
The original weighted average Combined Loan-to-Value Ratio of all Initial
Mortgage Loans in the Adjustable Rate Group was approximately 79.25%. The
maximum and average current balances as of the
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Cut-off Date were approximately $500,000.00 and $100,326.64, respectively. The
average appraised value of the Mortgaged Properties securing Initial Mortgage
Loans in the Adjustable Rate Group was approximately $129,001.33 at the time of
origination of such Mortgage Loans.
The Initial Mortgage Loans in the Adjustable Rate Group bear interest rates
that, after a period of approximately six months, two years, three years or five
years following the related date of origination, adjust based on the six-month
London Interbank Offered Rate based on quotations of major banks as published in
The Wall Street Journal. The Initial Mortgage Loans in the Adjustable Rate Group
that have interest rates adjusted on the basis of the six-month London Interbank
Offered Rate have semi-annual interest rate and payment adjustment frequencies
after the first interest rate adjustment date. Approximately 79.54% (by Cut-off
Date Principal Balance) of the Initial Mortgage Loans included in the Adjustable
Rate Group have initial Mortgage Interest Rates that will remain fixed for two
years or more from the Cut-off Date before initial adjustment, approximately
0.69% (by Cut-off Date Principal Balance) of the Initial Mortgage Loans included
in the Adjustable Rate Group have initial Mortgage Interest Rates that will
remain fixed for three years or more from the Cut-off Date before initial
adjustment and approximately 0.14% (by Cut-off Date Principal Balance) of the
Initial Mortgage Loans included in the Adjustable Rate Group have initial
Mortgage Interest Rates that will remain fixed for five years from the Cut-off
Date before initial adjustment. As of the Cut-off Date, the weighted average
remaining period to the next interest rate adjustment date for the Initial
Mortgage Loans was approximately 20 months.
Each Initial Mortgage Loan in the Adjustable Rate Group that has its
interest rate adjusted on the basis of the six-month London Interbank Offered
Rate has a semi-annual rate adjustment cap of 0.50% to 2.00% above the then
current interest rate for such Initial Mortgage Loan. In addition, each Initial
Mortgage Loan in the Adjustable Rate Group that has an initial rate adjustment
date that is approximately two years, three years or five years from its date of
origination has or will have an initial rate adjustment cap of 1.00% to 3.00%
above the related initial Mortgage Interest Rate. The Mortgage Loans in the
Adjustable Rate Group have a weighted average initial periodic rate adjustment
cap as of the Cut-off Date equal to approximately 2.49%. As of the Cut-off Date,
the weighted average Mortgage Interest Rate was approximately 9.58% per annum.
The Mortgage Loans in the Adjustable Rate Group had a weighted average gross
margin as of the Cut-off Date of approximately 5.87%. The initial gross margin
for the Initial Mortgage Loans in the Adjustable Rate Group ranged from
approximately 0.59% to 11.50%. The interest rates borne by the Mortgage Loans in
the Adjustable Rate Group as of the Cut-off Date ranged from approximately
5.330% per annum to approximately 15.115% per annum. As of the Cut-off Date, the
maximum rates at which interest may accrue on the Mortgage Loans in the
Adjustable Rate Group (the "Maximum Rates") ranged from 11.250% per annum to
21.540% per annum. The Mortgage Loans in the Adjustable Rate Group had a
weighted average Maximum Rate as of the Cut-off Date of approximately 16.210%
per annum. As of the Cut-off Date, the minimum rates at which interest may
accrue on the Mortgage Loans in the Adjustable Rate Group after their respective
first interest adjustment dates (the "Minimum Rates") ranged from approximately
4.950% per annum to approximately 15.115% per annum. As of the Cut-off Date, the
weighted average Minimum Rate was approximately 9.729% per annum.
The weighted average remaining term to stated maturity of the Initial
Mortgage Loans in the Adjustable Rate Group was approximately 357.10 months. The
weighted average original term to maturity of the Initial Mortgage Loans in the
Adjustable Rate Group was approximately 357.48 months. As of the Cut-off Date,
the weighted average seasoning of the Initial Mortgage Loans in the Adjustable
Rate Group was approximately 0.37 month.
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 30 or more days
contractually delinquent as of the related Subsequent Cut-off Date, (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 6.50% if it is a fixed rate Mortgage Loan and an initial
interest rate of not less than 5.33% if it is an adjustable rate Mortgage Loan,
(iv) such
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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 in the related Mortgage Loan Group (including the
Subsequent Mortgage Loans) (a) will have a weighted average Mortgage Interest
Rate of at least 10.00% with respect to the Mortgage Loans in the Fixed Rate
Group and an initial weighted average Mortgage Interest Rate of at least 9.58%
with respect to the Mortgage Loans in the Adjustable Rate Group; (b) will each
have a principal balance not in excess of $500,000; and (c) will satisfy any
additional requirements of the Certificate Insurer set forth in the Insurance
Agreement. See "Risk Factors -- The Subsequent Mortgage 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.
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, together with its right,
title and interest in and to the proceeds of any related insurance policies
received on and after the 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, 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 (the "Cut-off Date
Principal Balance"), its interest rate as of the Cut-off Date and its monthly
payment as of the Cut-off Date.
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 October
14, 1998, subject to the availability thereof, Subsequent Mortgage Loans
consisting of closed-end fixed and adjustable 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.
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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, no Mortgage Loan had three or
more monthly payments past due, 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 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 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
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 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 Prefunding
Account Deposit. See "The Pooling and Servicing Agreement -- Realization upon
Defaulted Mortgage Loans" in the Prospectus.
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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 in
each Mortgage Loan Group 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
Offered 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 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"), funds to be distributed in respect of the Monthly Interest, Monthly
Principal and any Excess Cash in respect of each Class of Offered Certificates
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 for each
Mortgage Loan Group 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.
PREPAYMENT AND YIELD CONSIDERATIONS
The weighted average life of and, if purchased at other than par, the yield
to maturity on an Offered Certificate will be directly related to the rate of
payment of principal of the Mortgage Loans in the related Mortgage Loan Group,
including for this purpose voluntary payment in full of Mortgage Loans 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 differ between the Mortgage Loan Groups at any time
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because of specific factors relating to the Mortgage Loans in the particular
group, including, among other things, the age of the Mortgage Loans, the manner
in which the Mortgage Interest Rates on the Mortgage Loans are calculated, 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.
The timing of changes in the rate of prepayments may significantly affect
the actual yield to investors, even if the average rate of principal prepayments
is consistent with the expectations of investors. In general, the earlier the
payment of principal on 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 Offered 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 Offered 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.
Because all amounts available for distribution on each Class of
Certificates after distributions in respect of the related Monthly Interest are
applied as reductions of the related Certificate Principal Balance, the weighted
average lives of the Certificates will be influenced by the amount of excess
interest so applied. Because the overcollateralization feature is expected to
cause interest collections on the related Mortgage Loans to outpace required
distributions in respect of Accrued Certificate Interest for each class of
Certificates and such excess interest will be applied to reduce the Certificate
Principal Balance on a Distribution Date will usually be greater than the
aggregate amount of principal payments (including prepayments) on the Mortgage
Loans in the related Mortgage Loan Group distributable on such Distribution
Date. As a consequence, it is expected that this excess interest available for
distribution in reduction of the Certificate Principal Balances of related
Classes will increase in proportion to the outstanding Certificate Principal
Balances of the related Classes over time in the absence of offsetting Realized
Losses on the Mortgage Loans in the related Mortgage Loan Group. In addition,
because under certain circumstances all or a portion of the Monthly Excess
Cashflow Amount for either Mortgage Loan Group may be available for distribution
in respect of the Extra Principal Distribution Amount for the other Mortgage
Loan Group, the resulting cross-collateralization may increase the rate at which
the Targeted Overcollateralization Amount with respect to the either Mortgage
Loan Group is achieved, further accelerating the amortization of the related
Offered Certificates.
The Certificate Insurer will have the right, but not the obligation, to
fund related Realized Losses with respect to any Collection Period, which may
have the effect of increasing the rate of amortization of either such Class.
In addition, investors in the Class A-6F Certificates should be aware that
because the Class A-6F Certificates do not receive any portion of principal
payments prior to the Distribution Date occurring in October 2001 and thereafter
will receive a disproportionately small or large portion of principal payments
(unless the Certificate Principal Balances of the Class A-1F, Class A-2F, Class
A-3F, Class A-4F and Class A-5F Certificates have been reduced to zero), the
weighted average life of the Class A-6F Certificates will be longer or shorter
than would otherwise be the case, and the effect on the market value of the
Class A-6F Certificates of changes in market interest rates or market yields for
similar securities may be greater or lesser than for other classes of Offered
Certificates entitled to such distributions.
In addition, investors in the Class A-2A Certificates should be aware that
because the Class A-2A Certificates do not receive any portion of principal
payments prior to the Distribution Date occurring in April 2000 and thereafter
will receive a disproportionately small or large portion of principal payments
(unless the Certificate Principal Balances of the Class A-1A Certificates have
been reduced to zero), the weighted average life of the Class A-2A Certificates
will be longer or shorter than would otherwise be the case, and the effect on
the market value of the Class A-2A Certificates of changes in market interest
rates or market yields for similar securities may be greater or lesser than for
other classes of Offered Certificates entitled to such distributions.
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PROJECTED PREPAYMENTS AND YIELDS FOR THE OFFERED CERTIFICATES
If an Offered 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 in the related Mortgage Loan Group. If the actual rate of
payments on the Mortgage Loans in the related Mortgage Loan Group is slower than
the rate anticipated by an investor who purchases an Offered 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 in the
related Mortgage Loan Group is faster than the rate anticipated by an investor
who purchases an Offered 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.
As is the case with conventional fixed rate mortgage loans, adjustable rate
mortgage loans may be subject to a greater rate of principal prepayments in a
declining interest rate environment. For example, if prevailing interest rates
fall appreciably, adjustable rate mortgage loans are likely to be subject to a
higher prepayment rate than if prevailing interest rates remain constant because
the availability of fixed rate mortgage loans at competitive interest rates may
encourage mortgagors to refinance their adjustable rate mortgage loans to "lock
in" a lower fixed interest rate. However, no assurance can be given as to the
expected level of prepayments on the Mortgage Loans. The Sponsor does not have
representative prepayment experience that may be referred to for purposes of
estimating the future prepayment experience of the Mortgage Loans that are
adjustable rate Mortgage Loans.
In addition to the foregoing factors affecting the weighted average life of
each Class of Certificates, the overcollateralization provisions of the Trust
may result in an additional reduction of the Offered Certificates relative to
the amortization of the related Mortgage Loans in the early months of the
transaction. The accelerated amortization is achieved by the application of the
Monthly Excess Cashflow Amount to the payment of the Certificate Principal
Balance of the related Classes of Offered Certificates and by the cross-
collateralization feature by which all or a portion of the Monthly Excess
Cashflow Amount for either Mortgage Loan Group may be available for distribution
in respect of the Extra Principal Distribution Amount for the other Mortgage
Loan Group. This creates overcollateralization which results from the excess of
the aggregate Principal Balances of the Mortgage Loans over the Aggregate
Certificate Principal Balance. Once the Targeted Overcollateralization Amount is
reached, the application of the Monthly Excess Cashflow Amount to pay down
principal will cease, unless necessary to maintain the Targeted
Overcollateralization Amount.
The "Final Scheduled Distribution Dates" for each Class of Certificates are
set forth in the "Summary of Terms" herein. Such dates are the dates on which
the initial Certificate Principal Balance for the related Class would be reduced
to zero assuming that no prepayments are received on the Initial Mortgage Loans,
that scheduled monthly payments of principal of and interest on each of the
Initial Mortgage Loans are timely received. The weighted average lives of the
Offered 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 Certificate Principal Balances of the Offered Certificates, (ii)
distributions of monthly Excess Cash may occur on each Distribution Date which
will accelerate the amortization of the Offered 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
Cut-off Date Pool Balance and the Prefunding Account Deposit and (iv) the
Certificate Insurer may cause a termination of the Trust on any Distribution
Date on which Mortgage Loans
S-50
<PAGE> 51
with aggregate Cut-off Date Principal Balances that equal or exceed 25% of the
sum of the Pool Balance as of the Cut-off Date and the Prefunding Account
Deposit have become Liquidated Mortgage Loans.
The following tables have been prepared on the basis of the following
assumptions, except as set forth in the respective tables: (i) the Offered
Certificates are purchased on September 25, 1998; (ii) the Trustee on behalf of
the Trust purchases Subsequent Mortgage Loans with Aggregate Principal Balances
equal to the Prefunding Account Deposit; (iii) all Mortgage Loans in the
Adjustable Rate Group have semi-annual rate adjustment frequencies; (iv) with
respect to the initial Collection Period, the Mortgage Loans include 30 days of
interest and no deposits in respect of interest were contributed to the Trust;
(v) scheduled payments are timely received on the first day of each month
commencing in October 1998 (November 1998 with respect to the Subsequent
Mortgage Loans); (vi) distributions on the Offered Certificates are received, in
cash, on the 15th day of each month, commencing in October 1998; (vii) 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; (viii) prepayments represent payment in full of individual
Mortgage Loans and are received on the last day of each month, commencing in
September 1998 (October 1998 with respect to the Subsequent Mortgage Loans) and
include 30 days' interest thereon; (ix) the Mortgage Loans prepay according to
the indicated Prepayment Scenario as described below; (x) the six-month London
Interbank Offered Rate remains constant at 5.41406%, the one-month London
Interbank Offered Rate remains constant at 5.58594%; (xi) early termination
occurs in the manner set forth in the respective tables; (xii) the Targeted
Overcollateralization Amount is set initially as specified herein and thereafter
decreases in accordance with the provisions as specified herein; (xiii) the
initial Mortgage Loans are included in the Trust as of the Cut-off Date and the
Subsequent Mortgage Loans are delivered to the Trust on October 14, 1998; (xiv)
neither the Servicer nor the Certificate Insurer exercises its right of optional
termination; (xv) no Trigger Event occurs; and (xvi) each Mortgage Loan Group
consists of Mortgage Loans having the following characteristics:
INITIAL FIXED RATE GROUP
<TABLE>
<CAPTION>
ORIGINAL ORIGINAL
MORTGAGE TERM TO AMORTIZATION REMAINING TERM
AMORTIZATION PRINCIPAL INTEREST MATURITY TERM TO MATURITY
METHOD BALANCE RATE (MONTHS) (MONTHS) (MONTHS)
- ---------------------- --------------- -------- -------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Balloon $ 5,158,337.47 11.418% 177 359 174
Level Pay $ 9,555,271.86 10.039% 108 108 107
Level Pay $ 72,430,589.57 10.092% 180 180 179
Level Pay $ 8,600,529.58 9.938% 240 240 240
Level Pay $ 1,830,555.60 9.691% 297 297 296
Level Pay $246,332,345.03 9.949% 360 360 359
</TABLE>
SUBSEQUENT FIXED RATE GROUP
<TABLE>
<CAPTION>
ORIGINAL ORIGINAL
MORTGAGE TERM TO AMORTIZATION REMAINING TERM
AMORTIZATION PRINCIPAL INTEREST MATURITY TERM TO MATURITY
METHOD BALANCE RATE (MONTHS) (MONTHS) (MONTHS)
- ---------------------- -------------- -------- -------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Balloon $ 691,348.44 11.418% 177 359 174
Level Pay $ 1,280,649.50 10.039% 108 108 107
Level Pay $ 9,707,541.55 10.092% 180 180 179
Level Pay $ 1,152,689.75 9.938% 240 240 240
Level Pay $ 245,341.02 9.691% 297 297 296
Level Pay $33,014,800.63 9.949% 360 360 359
</TABLE>
S-51
<PAGE> 52
INITIAL ADJUSTABLE RATE GROUP
<TABLE>
<CAPTION>
ORIGINAL REMAINING MONTHS TO PERIODIC MAXIMUM
MORTGAGE TERM TO TERM NEXT INITIAL RATE MORTGAGE
PRODUCT PRINCIPAL INTEREST MATURITY TO MATURITY MORTGAGE GROSS PERIODIC RATE ADJUSTMENT INTEREST
TYPE BALANCE RATE (MONTHS) (MONTHS) RATE CHANGE MARGIN ADJUSTMENT CAP CAP RATE
-------- --------------- -------- -------- ----------- ----------- ------- -------------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
6 M ARM $ 49,596,055.41 8.898% 351 351 6 5.4895% 1.148% 1.125% 15.326%
2/28 ARM $ 3,606,436.23 10.229% 360 355 19 6.7058% 2.603% 1.168% 16.565%
2/28 ARM $187,524,809.95 9.751% 359 359 24 5.9464% 2.839% 1.337% 16.435%
3/27 ARM $ 1,325,859.99 9.147% 360 359 35 6.9586% 3.000% 1.466% 16.079%
5/25 ARM $ 335,997.35 11.062% 328 323 55 6.3316% 3.000% 1.500% 18.062%
<CAPTION>
MINIMUM
MORTGAGE
PRODUCT INTEREST
TYPE RATE
-------- --------
<S> <C>
6 M ARM 9.638%
2/28 ARM 10.096%
2/28 ARM 9.747%
3/27 ARM 9.147%
5/25 ARM 11.062%
</TABLE>
SUBSEQUENT ADJUSTABLE RATE GROUP
<TABLE>
<CAPTION>
ORIGINAL REMAINING MONTHS TO PERIODIC MAXIMUM
MORTGAGE TERM TO TERM NEXT INITIAL RATE MORTGAGE
PRODUCT PRINCIPAL INTEREST MATURITY TO MATURITY MORTGAGE GROSS PERIODIC RATE ADJUSTMENT INTEREST
TYPE BALANCE RATE (MONTHS) (MONTHS) RATE CHANGE MARGIN ADJUSTMENT CAP CAP RATE
-------- -------------- -------- -------- ----------- ----------- ------- -------------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
6 M ARM $ 3,603,413.01 8.898% 351 351 6 5.4895% 1.148% 1.125% 15.326%
2/28 ARM $ 262,026.47 10.229% 360 355 19 6.7058% 2.603% 1.168% 16.565%
2/28 ARM $13,624,658.95 9.751% 359 359 24 5.9464% 2.839% 1.337% 16.435%
3/27 ARM $ 96,330.67 9.147% 360 359 35 6.9586% 3.000% 1.466% 16.079%
5/25 ARM $ 24,411.97 11.062% 328 323 55 6.3316% 3.000% 1.500% 18.062%
<CAPTION>
MINIMUM
MORTGAGE
PRODUCT INTEREST
TYPE RATE
-------- --------
<S> <C>
6 M ARM 9.638%
2/28 ARM 10.096%
2/28 ARM 9.747%
3/27 ARM 9.147%
5/25 ARM 11.062%
</TABLE>
S-52
<PAGE> 53
"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
Offered Certificates will be influenced by the rate at which principal payments
on the Mortgage Loans in the related Mortgage Loan Group 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).
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. A common model (the "Constant Prepayment Rate" or
"CPR") represents an assumed annualized rate of prepayment relative to the then
outstanding principal balance on a pool of new mortgage loans. The prepayment
model used in this Prospectus Supplement with respect to the Adjustable Rate
Group Certificates assumes a fixed rate of CPR. The prepayment model used in
this Prospectus Supplement for the Fixed Rate Group Certificates is the Home
Equity Prepayment Assumption ("HEP"). HEP assumes that a pool of loans prepays
in the first month of the life of such loan at a constant prepayment rate that
corresponds, in CPR, to one-tenth of the specified HEP percentage and then that
such rate increases at an additional one-tenth of such HEP percentage each month
thereafter until the end of the tenth month from which time the rate of
prepayment remains constant at a CPR equal to such specified HEP percentage for
the life of such loans. For example, a 24% HEP assumes a CPR of 2.4% for the
Mortgage Loans in the Fixed Rate Group in the first month of the life of such
Mortgage Loans and an additional 2.4% CPR each month thereafter until the tenth
month. Beginning in the tenth month and in each month thereafter during the life
of such Mortgage Loans, 24% HEP assumes a CPR of 24% each month. Neither model
purports 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 with any certainty 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 SCENARIO VII
---------- ----------- ------------ ----------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Adjustable Rate Group;
CPR..................... 0% 14% 20% 27% 34% 41% 54%
Fixed Rate Group; HEP
Percentage.............. 0% 12% 18% 24% 30% 36% 48%
</TABLE>
S-53
<PAGE> 54
PERCENT OF CLASS A-1F INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
<TABLE>
<CAPTION>
PREPAYMENT SCENARIO
---------------------------------------------------------
DISTRIBUTION DATE I II III IV V VI VII
----------------- --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Balance............................................. 100% 100% 100% 100% 100% 100% 100%
September 1999.............................................. 87 60 46 32 18 4 0
September 2000.............................................. 82 20 0 0 0 0 0
September 2001.............................................. 77 0 0 0 0 0 0
September 2002.............................................. 72 0 0 0 0 0 0
September 2003.............................................. 65 0 0 0 0 0 0
September 2004.............................................. 59 0 0 0 0 0 0
September 2005.............................................. 52 0 0 0 0 0 0
September 2006.............................................. 46 0 0 0 0 0 0
September 2007.............................................. 40 0 0 0 0 0 0
September 2008.............................................. 33 0 0 0 0 0 0
September 2009.............................................. 26 0 0 0 0 0 0
September 2010.............................................. 18 0 0 0 0 0 0
September 2011.............................................. 8 0 0 0 0 0 0
September 2012.............................................. 0 0 0 0 0 0 0
September 2013.............................................. 0 0 0 0 0 0 0
September 2014.............................................. 0 0 0 0 0 0 0
September 2015.............................................. 0 0 0 0 0 0 0
September 2016.............................................. 0 0 0 0 0 0 0
September 2017.............................................. 0 0 0 0 0 0 0
September 2018.............................................. 0 0 0 0 0 0 0
September 2019.............................................. 0 0 0 0 0 0 0
September 2020.............................................. 0 0 0 0 0 0 0
September 2021.............................................. 0 0 0 0 0 0 0
September 2022.............................................. 0 0 0 0 0 0 0
September 2023.............................................. 0 0 0 0 0 0 0
September 2024.............................................. 0 0 0 0 0 0 0
September 2025.............................................. 0 0 0 0 0 0 0
September 2026.............................................. 0 0 0 0 0 0 0
September 2027.............................................. 0 0 0 0 0 0 0
September 2028.............................................. 0 0 0 0 0 0 0
--- --- --- --- --- --- ---
Weighted Average Life to Maturity (years)................... 7.2 1.3 1.0 0.8 0.7 0.6 0.5
--- --- --- --- --- --- ---
Weighted Average Life to Call* (years)...................... 7.2 1.3 1.0 0.8 0.7 0.6 0.5
=== === === === === === ===
</TABLE>
* Assuming early termination by repurchase of the related Mortgage Loans.
PERCENT OF CLASS A-2F INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
<TABLE>
<CAPTION>
PREPAYMENT SCENARIO
---------------------------------------------------------
DISTRIBUTION DATE I II III IV V VI VII
----------------- --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Balance............................................. 100% 100% 100% 100% 100% 100% 100%
September 1999.............................................. 100 100 100 100 100 100 63
September 2000.............................................. 100 100 88 47 10 0 0
September 2001.............................................. 100 79 22 0 0 0 0
September 2002.............................................. 100 37 0 0 0 0 0
September 2003.............................................. 100 1 0 0 0 0 0
September 2004.............................................. 100 0 0 0 0 0 0
September 2005.............................................. 100 0 0 0 0 0 0
September 2006.............................................. 100 0 0 0 0 0 0
September 2007.............................................. 100 0 0 0 0 0 0
September 2008.............................................. 100 0 0 0 0 0 0
September 2009.............................................. 100 0 0 0 0 0 0
September 2010.............................................. 100 0 0 0 0 0 0
September 2011.............................................. 100 0 0 0 0 0 0
September 2012.............................................. 96 0 0 0 0 0 0
September 2013.............................................. 74 0 0 0 0 0 0
September 2014.............................................. 66 0 0 0 0 0 0
September 2015.............................................. 57 0 0 0 0 0 0
September 2016.............................................. 46 0 0 0 0 0 0
September 2017.............................................. 34 0 0 0 0 0 0
September 2018.............................................. 22 0 0 0 0 0 0
September 2019.............................................. 10 0 0 0 0 0 0
September 2020.............................................. 0 0 0 0 0 0 0
September 2021.............................................. 0 0 0 0 0 0 0
September 2022.............................................. 0 0 0 0 0 0 0
September 2023.............................................. 0 0 0 0 0 0 0
September 2024.............................................. 0 0 0 0 0 0 0
September 2025.............................................. 0 0 0 0 0 0 0
September 2026.............................................. 0 0 0 0 0 0 0
September 2027.............................................. 0 0 0 0 0 0 0
September 2028.............................................. 0 0 0 0 0 0 0
--- --- --- --- --- --- ---
Weighted Average Life to Maturity (years)................... 17.6 3.7 2.6 2.0 1.6 1.4 1.1
--- --- --- --- --- --- ---
Weighted Average Life to Call* (years)...................... 17.6 3.7 2.6 2.0 1.6 1.4 1.1
=== === === === === === ===
</TABLE>
* Assuming early termination by repurchase of the related Mortgage Loans.
S-54
<PAGE> 55
PERCENT OF CLASS A-3F INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
<TABLE>
<CAPTION>
PREPAYMENT SCENARIO
---------------------------------------------------------
DISTRIBUTION DATE I II III IV V VI VII
----------------- --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Balance............................................. 100% 100% 100% 100% 100% 100% 100%
September 1999.............................................. 100 100 100 100 100 100 100
September 2000.............................................. 100 100 100 100 100 48 0
September 2001.............................................. 100 100 100 46 0 0 0
September 2002.............................................. 100 100 49 0 0 0 0
September 2003.............................................. 100 100 0 0 0 0 0
September 2004.............................................. 100 45 0 0 0 0 0
September 2005.............................................. 100 0 0 0 0 0 0
September 2006.............................................. 100 0 0 0 0 0 0
September 2007.............................................. 100 0 0 0 0 0 0
September 2008.............................................. 100 0 0 0 0 0 0
September 2009.............................................. 100 0 0 0 0 0 0
September 2010.............................................. 100 0 0 0 0 0 0
September 2011.............................................. 100 0 0 0 0 0 0
September 2012.............................................. 100 0 0 0 0 0 0
September 2013.............................................. 100 0 0 0 0 0 0
September 2014.............................................. 100 0 0 0 0 0 0
September 2015.............................................. 100 0 0 0 0 0 0
September 2016.............................................. 100 0 0 0 0 0 0
September 2017.............................................. 100 0 0 0 0 0 0
September 2018.............................................. 100 0 0 0 0 0 0
September 2019.............................................. 100 0 0 0 0 0 0
September 2020.............................................. 91 0 0 0 0 0 0
September 2021.............................................. 60 0 0 0 0 0 0
September 2022.............................................. 24 0 0 0 0 0 0
September 2023.............................................. 0 0 0 0 0 0 0
September 2024.............................................. 0 0 0 0 0 0 0
September 2025.............................................. 0 0 0 0 0 0 0
September 2026.............................................. 0 0 0 0 0 0 0
September 2027.............................................. 0 0 0 0 0 0 0
September 2028.............................................. 0 0 0 0 0 0 0
--- --- --- --- --- --- ---
Weighted Average Life to Maturity (years)................... 23.3 6.0 4.0 3.0 2.4 2.0 1.5
--- --- --- --- --- --- ---
Weighted Average Life to Call* (years)...................... 23.3 6.0 4.0 3.0 2.4 2.0 1.5
=== === === === === === ===
</TABLE>
* Assuming early termination by repurchase of the related Mortgage Loans.
PERCENT OF CLASS A-4F INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
<TABLE>
<CAPTION>
PREPAYMENT SCENARIO
---------------------------------------------------------
DISTRIBUTION DATE I II III IV V VI VII
----------------- --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Balance............................................. 100% 100% 100% 100% 100% 100% 100%
September 1999.............................................. 100 100 100 100 100 100 100
September 2000.............................................. 100 100 100 100 100 100 55
September 2001.............................................. 100 100 100 100 79 39 0
September 2002.............................................. 100 100 100 72 28 0 0
September 2003.............................................. 100 100 86 33 0 0 0
September 2004.............................................. 100 100 56 8 0 0 0
September 2005.............................................. 100 99 34 0 0 0 0
September 2006.............................................. 100 85 24 0 0 0 0
September 2007.............................................. 100 69 12 0 0 0 0
September 2008.............................................. 100 54 0 0 0 0 0
September 2009.............................................. 100 39 0 0 0 0 0
September 2010.............................................. 100 25 0 0 0 0 0
September 2011.............................................. 100 12 0 0 0 0 0
September 2012.............................................. 100 1 0 0 0 0 0
September 2013.............................................. 100 0 0 0 0 0 0
September 2014.............................................. 100 0 0 0 0 0 0
September 2015.............................................. 100 0 0 0 0 0 0
September 2016.............................................. 100 0 0 0 0 0 0
September 2017.............................................. 100 0 0 0 0 0 0
September 2018.............................................. 100 0 0 0 0 0 0
September 2019.............................................. 100 0 0 0 0 0 0
September 2020.............................................. 100 0 0 0 0 0 0
September 2021.............................................. 100 0 0 0 0 0 0
September 2022.............................................. 100 0 0 0 0 0 0
September 2023.............................................. 92 0 0 0 0 0 0
September 2024.............................................. 68 0 0 0 0 0 0
September 2025.............................................. 41 0 0 0 0 0 0
September 2026.............................................. 11 0 0 0 0 0 0
September 2027.............................................. 0 0 0 0 0 0 0
September 2028.............................................. 0 0 0 0 0 0 0
--- --- --- --- --- --- ---
Weighted Average Life to Maturity (years)................... 26.6 10.4 6.7 4.7 3.6 2.9 2.1
--- --- --- --- --- --- ---
Weighted Average Life to Call* (years)...................... 26.6 10.4 6.7 4.7 3.6 2.9 2.1
=== === === === === === ===
</TABLE>
* Assuming early termination by repurchase of the related Mortgage Loans.
S-55
<PAGE> 56
PERCENT OF CLASS A-5F INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
<TABLE>
<CAPTION>
PREPAYMENT SCENARIO
---------------------------------------------------------
DISTRIBUTION DATE I II III IV V VI VII
----------------- --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Balance............................................. 100% 100% 100% 100% 100% 100% 100%
September 1999.............................................. 100 100 100 100 100 100 100
September 2000.............................................. 100 100 100 100 100 100 100
September 2001.............................................. 100 100 100 100 100 100 58
September 2002.............................................. 100 100 100 100 100 89 6
September 2003.............................................. 100 100 100 100 90 40 0
September 2004.............................................. 100 100 100 100 57 20 0
September 2005.............................................. 100 100 100 85 38 12 0
September 2006.............................................. 100 100 100 77 36 12 0
September 2007.............................................. 100 100 100 61 27 9 0
September 2008.............................................. 100 100 99 45 17 3 0
September 2009.............................................. 100 100 79 32 9 0 0
September 2010.............................................. 100 100 61 21 4 0 0
September 2011.............................................. 100 100 46 13 0 0 0
September 2012.............................................. 100 100 34 8 0 0 0
September 2013.............................................. 100 81 24 3 0 0 0
September 2014.............................................. 100 68 18 0 0 0 0
September 2015.............................................. 100 56 12 0 0 0 0
September 2016.............................................. 100 46 8 0 0 0 0
September 2017.............................................. 100 38 5 0 0 0 0
September 2018.............................................. 100 30 2 0 0 0 0
September 2019.............................................. 100 23 0 0 0 0 0
September 2020.............................................. 100 18 0 0 0 0 0
September 2021.............................................. 100 13 0 0 0 0 0
September 2022.............................................. 100 8 0 0 0 0 0
September 2023.............................................. 100 5 0 0 0 0 0
September 2024.............................................. 100 2 0 0 0 0 0
September 2025.............................................. 100 0 0 0 0 0 0
September 2026.............................................. 100 0 0 0 0 0 0
September 2027.............................................. 57 0 0 0 0 0 0
September 2028.............................................. 0 0 0 0 0 0 0
--- --- --- --- --- --- ---
Weighted Average Life to Maturity (years)................... 29.1 18.4 13.4 10.0 7.3 5.4 3.2
--- --- --- --- --- --- ---
Weighted Average Life to Call* (years)...................... 28.7 14.5 10.4 7.6 5.8 4.6 3.1
=== === === === === === ===
</TABLE>
* Assuming early termination by repurchase of the related Mortgage Loans.
PERCENT OF CLASS A-6F INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
<TABLE>
<CAPTION>
PREPAYMENT SCENARIO
---------------------------------------------------------
DISTRIBUTION DATE I II III IV V VI VII
----------------- --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Balance............................................. 100% 100% 100% 100% 100% 100% 100%
September 1999.............................................. 100 100 100 100 100 100 100
September 2000.............................................. 100 100 100 100 100 100 100
September 2001.............................................. 100 100 100 100 100 100 100
September 2002.............................................. 99 93 90 88 85 81 73
September 2003.............................................. 98 87 82 77 71 66 37
September 2004.............................................. 96 77 69 61 52 44 15
September 2005.............................................. 94 66 55 45 35 25 4
September 2006.............................................. 85 41 27 16 10 8 0
September 2007.............................................. 77 25 13 6 2 1 0
September 2008.............................................. 69 15 6 2 0 0 0
September 2009.............................................. 61 9 3 1 0 0 0
September 2010.............................................. 53 5 1 0 0 0 0
September 2011.............................................. 45 3 1 0 0 0 0
September 2012.............................................. 38 2 0 0 0 0 0
September 2013.............................................. 28 1 0 0 0 0 0
September 2014.............................................. 26 0 0 0 0 0 0
September 2015.............................................. 23 0 0 0 0 0 0
September 2016.............................................. 20 0 0 0 0 0 0
September 2017.............................................. 17 0 0 0 0 0 0
September 2018.............................................. 14 0 0 0 0 0 0
September 2019.............................................. 11 0 0 0 0 0 0
September 2020.............................................. 9 0 0 0 0 0 0
September 2021.............................................. 7 0 0 0 0 0 0
September 2022.............................................. 5 0 0 0 0 0 0
September 2023.............................................. 3 0 0 0 0 0 0
September 2024.............................................. 2 0 0 0 0 0 0
September 2025.............................................. 1 0 0 0 0 0 0
September 2026.............................................. 0 0 0 0 0 0 0
September 2027.............................................. 0 0 0 0 0 0 0
September 2028.............................................. 0 0 0 0 0 0 0
--- --- --- --- --- --- ---
Weighted Average Life to Maturity (years)................... 13.3 7.7 7.0 6.4 6.0 5.7 4.8
--- --- --- --- --- --- ---
Weighted Average Life to Call* (years)...................... 13.3 7.7 6.9 6.2 5.4 4.6 3.4
=== === === === === === ===
</TABLE>
* Assuming early termination by repurchase of the related Mortgage Loans.
S-56
<PAGE> 57
PERCENT OF CLASS A-1A INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
<TABLE>
<CAPTION>
PREPAYMENT SCENARIO
---------------------------------------------------------
DISTRIBUTION DATE I II III IV V VI VII
----------------- --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Balance............................................. 100% 100% 100% 100% 100% 100% 100%
September 1999.............................................. 94 76 68 59 50 41 25
September 2000.............................................. 90 64 53 41 30 19 2
September 2001.............................................. 90 63 52 40 29 19 2
September 2002.............................................. 90 58 44 31 21 14 2
September 2003.............................................. 90 53 37 23 14 8 2
September 2004.............................................. 90 45 29 17 9 4 0
September 2005.............................................. 90 39 23 12 6 2 0
September 2006.............................................. 90 33 18 9 4 1 0
September 2007.............................................. 90 28 15 6 2 0 0
September 2008.............................................. 90 24 12 4 1 0 0
September 2009.............................................. 90 20 9 3 0 0 0
September 2010.............................................. 90 17 7 2 0 0 0
September 2011.............................................. 90 14 5 1 0 0 0
September 2012.............................................. 90 12 4 0 0 0 0
September 2013.............................................. 90 10 3 0 0 0 0
September 2014.............................................. 90 8 2 0 0 0 0
September 2015.............................................. 90 7 1 0 0 0 0
September 2016.............................................. 90 6 1 0 0 0 0
September 2017.............................................. 88 5 0 0 0 0 0
September 2018.............................................. 83 3 0 0 0 0 0
September 2019.............................................. 78 3 0 0 0 0 0
September 2020.............................................. 72 2 0 0 0 0 0
September 2021.............................................. 65 1 0 0 0 0 0
September 2022.............................................. 57 1 0 0 0 0 0
September 2023.............................................. 50 0 0 0 0 0 0
September 2024.............................................. 42 0 0 0 0 0 0
September 2025.............................................. 32 0 0 0 0 0 0
September 2026.............................................. 22 0 0 0 0 0 0
September 2027.............................................. 10 0 0 0 0 0 0
September 2028.............................................. 0 0 0 0 0 0 0
--- --- --- --- --- --- ---
Weighted Average Life to Maturity (years)................... 22.8 6.4 4.3 3.0 2.1 1.5 0.7
--- --- --- --- --- --- ---
Weighted Average Life to Call* (years)...................... 22.7 5.9 4.0 2.7 1.9 1.4 0.7
=== === === === === === ===
</TABLE>
*Assuming early termination by repurchase of the related Mortgage Loans.
PERCENT OF CLASS A-2A INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
<TABLE>
<CAPTION>
PREPAYMENT SCENARIO
---------------------------------------------------------
DISTRIBUTION DATE I II III IV V VI VII
----------------- --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Balance............................................. 100% 100% 100% 100% 100% 100% 100%
September 1999.............................................. 100 100 100 100 100 100 100
September 2000.............................................. 99 76 69 63 59 55 53
September 2001.............................................. 97 35 21 15 12 13 26
September 2002.............................................. 94 14 6 3 1 1 9
September 2003.............................................. 91 0 0 0 0 0 0
September 2004.............................................. 88 0 0 0 0 0 0
September 2005.............................................. 85 0 0 0 0 0 0
September 2006.............................................. 81 0 0 0 0 0 0
September 2007.............................................. 77 0 0 0 0 0 0
September 2008.............................................. 72 0 0 0 0 0 0
September 2009.............................................. 67 0 0 0 0 0 0
September 2010.............................................. 61 0 0 0 0 0 0
September 2011.............................................. 54 0 0 0 0 0 0
September 2012.............................................. 47 0 0 0 0 0 0
September 2013.............................................. 38 0 0 0 0 0 0
September 2014.............................................. 29 0 0 0 0 0 0
September 2015.............................................. 18 0 0 0 0 0 0
September 2016.............................................. 7 0 0 0 0 0 0
September 2017.............................................. 0 0 0 0 0 0 0
September 2018.............................................. 0 0 0 0 0 0 0
September 2019.............................................. 0 0 0 0 0 0 0
September 2020.............................................. 0 0 0 0 0 0 0
September 2021.............................................. 0 0 0 0 0 0 0
September 2022.............................................. 0 0 0 0 0 0 0
September 2023.............................................. 0 0 0 0 0 0 0
September 2024.............................................. 0 0 0 0 0 0 0
September 2025.............................................. 0 0 0 0 0 0 0
September 2026.............................................. 0 0 0 0 0 0 0
September 2027.............................................. 0 0 0 0 0 0 0
September 2028.............................................. 0 0 0 0 0 0 0
--- --- --- --- --- --- ---
Weighted Average Life to Maturity (years)................... 12.6 2.8 2.5 2.3 2.3 2.2 2.4
--- --- --- --- --- --- ---
Weighted Average Life to Call* (years)...................... 12.6 2.8 2.5 2.3 2.3 2.2 2.3
=== === === === === === ===
</TABLE>
*Assuming early termination by repurchase of the related Mortgage Loans.
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ORIGINATION AND SERVICING OF THE MORTGAGE LOANS
THE ORIGINATORS
Approximately 44.51% and 34.08% of the Initial Mortgage Loans (by Cut-off
Date Principal Balance) were originated through the broker network of an
affiliate of the Sponsor and through retail originators of the Sponsor and its
affiliates, respectively (the "Affiliated Originators"). The remaining 21.41% 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
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, 1997, 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.
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The following table sets forth delinquency and foreclosure experience of
home equity loans included in the Sponsor's servicing portfolio for the year
ended June 30, 1998:
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30, 1998
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Percentage of dollar amount of delinquent loans to loans
serviced
(period end)(1)(2)(3)
One month.............................................. 3.8%
Two months............................................. 1.3%
Three or more months:
Not foreclosed(4)................................. 9.0%
Foreclosed(5)..................................... 1.5%
-------
Total........................................ 15.6%
=======
Percentage of dollar amount of loans foreclosed to loans
serviced (period end)(2)(3)............................... 2.0%
Number of loans foreclosed.................................. 1,125
Principal amount at time of foreclosure of foreclosed
loans..................................................... $84,613
Net losses on liquidations (6).............................. $26,488
One time charge against loan loss reserve(7)................ $ 6,000
</TABLE>
- ---------------
(1) Delinquent loans are loans for which more than one payment is past 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) The servicing portfolio used in the percentage calculations includes $82
million of loans subserviced by the Sponsor on an interim basis at June 30,
1998.
(4) Represents loans which are in foreclosure but as to which foreclosure
proceedings have not concluded.
(5) Represents properties acquired following a foreclosure sale and still
serviced by the Sponsor at period end.
(6) Represents losses net of gain on foreclosed properties in pools sold during
the indicated period, excluding the one-time charge referred to in footnote
(7) below.
(7) Represents a one-time charge to the loss reserve recorded in March 1998
resulting from the Sponsor's delay in recording information transferred from
a third party servicer.
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 general
and regional economic conditions. See "Risk Factors -- Nature of the Security
for Mortgage Loans" and "The Originators -- Underwriting Guidelines" in the
Prospectus.
The Servicer has entered into pooling and servicing agreements in
connection with securitization transactions which contain specified limits on
delinquencies and losses that may be incurred in each trust. The dollar volume
of loans delinquent more than 90 days in securitization trusts formed in
November 1992, December 1992, June 1993, December 1994 and calendar years 1995
and 1996 have exceeded the permitted limits specified in the related pooling and
servicing agreements. The higher delinquency rates negatively affect the
Servicer's cash flows by obligating the Servicer to advance past due interest
and permit the related monoline insurance company to terminate the Servicer's
servicing rights to the affected trusts.
A majority of the trusts referred to above plus one additional trust have
also exceeded one of two loss limits, which permits the related monoline
insurance company to terminate the Servicer's servicing rights with respect to
the affected trusts. In each case, the limit that has been exceeded provides
that losses may not exceed a certain threshold on a rolling 12 month basis. The
other loss limit, which was not exceeded, provides
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that losses may not exceed a certain cumulative threshold since the inception of
the trust. Current loss levels have increased due to a loss mitigation strategy
of minimizing the real estate owned ("REO") holding period, thereby reducing
carrying costs. It is the Servicer's goal to reduce the REO holding period to
maximize the economics of liquidation transactions. Current loss levels have
also increased due to the seasoning of the lower credit grade loans purchased in
bulk and included in the Servicer's earlier trusts. The Servicer has reduced
significantly its bulk purchase program and the purchase in bulk of lower credit
grade loans. While the accelerated efforts to sell properties is expected to
have a short-term impact on loss levels, the seasoning of the lower credit grade
bulk portfolio may contribute to an increase in losses over time.
Although the related monoline insurance company for each securitization has
the right to terminate servicing with respect to the trusts referred to above,
to date no servicing rights have been terminated. There can be no assurance,
however, that the Servicer's servicing rights with respect to the mortgage loans
in such trusts, or any other trusts which exceed the specified delinquency or
loss limits in future periods, will not be terminated.
The performance of the mortgage loans in any securitization trust other
than the Trust to which the Offered Certificates relate will not affect the
performance of the Mortgage Loans contained in the Trust. The performance of the
mortgage loans in such other securitization trusts is not necessarily predictive
of the performance of the Mortgage Loans contained in the Trust, and no
assurance can be made as to the levels of delinquencies and losses that may be
experienced by the Trust with respect to the Mortgage Loans contained therein.
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.
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
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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. In the
case of Mortgage Loans credit graded "C-" and "D" by the Sponsor, collection
efforts begin immediately after the related due date if a payment is not timely
received. 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
(within five days after the initial due date for Mortgage Loans credit graded
"B", "C", "C-" or "D" by the Sponsor), 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 and the Servicer evaluates
various legal options and remedies to protect the value of such Mortgage Loan,
including arranging for extended payment terms, accepting a deed-in-lieu of
foreclosure, entering into a short sale or commencing foreclosure proceedings.
If no substantial progress has been made in obtaining delinquent monies from the
Mortgagor, foreclosure proceedings will be commenced.
Regulations and practices regarding foreclosure vary greatly from state to
state. Generally, the Servicer will have commenced foreclosure proceedings when
a loan is 45 to 100 days delinquent, depending on credit grade other credit
considerations or borrower bankruptcy status. The Servicer will bid at the
foreclosure sale for such property. 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. Beginning in November 1996, the Servicer began to expand the
number of states in which it services loans directly. During the year ended June
30, 1998, the Servicer completed the transfer in-house of $1.5 billion of loans
previously subserviced by third parties. Of the Servicer's $4.1 billion
servicing portfolio, only 5.0% was subserviced by a third party at June 30,
1998. Of the Servicer's $3.2 billion servicing portfolio at June 30, 1997, 53%
was
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<PAGE> 62
subserviced by a third party at that date. The transfer of servicing files could
lead to temporary disruptions in servicing.
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 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 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
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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 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 in the
related Mortgage Loan Group at the beginning of such Collection Period. The
"Servicing Fee Rate" for each Mortgage Loan Group 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 "-- Monthly
Advances; Servicing Advances; Compensating Interest and Interest Shortfalls"
herein.
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<PAGE> 64
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" with respect to each Class of
Offered Certificates 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 in the related Mortgage Loan Group 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 or the related Subsequent Cut-off Date, as
applicable) 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 in
the related Mortgage Loan Group 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 with respect to each Mortgage Loan Group, 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 Retained Certificateholders.
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 Mortgage Loan Group and 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 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
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Payment") for distribution on the related Class of Offered 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 for the related
Mortgage Loan Group 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 Offered Certificates on such Distribution Date
and such reduction will not be recoverable thereafter.
In addition, the application of the Soldiers' and Sailors' Civil Relief Act
of 1940, as amended (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.
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 of the Rating Agencies shall have confirmed its rating on the
Offered Certificates in connection therewith.
In August 1997, AFC announced that it had retained a financial advisor to
work with it in developing a means to maximize opportunities for AFC, whether by
remaining independent or entering into a business combination. AFC also
announced that it is in discussions with various parties concerning a possible
business combination. There can be no assurance that any such transaction will
be consummated, or if consummated what effect such a transaction would have on
the Servicer or on the operations of the Servicer.
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THE CERTIFICATE INSURANCE POLICY AND THE CERTIFICATE INSURER
THE CERTIFICATE INSURANCE POLICY
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 Owner that an amount equal to
each full and complete Insured Payment will be received by the Trustee, or its
successors, as trustee for the Owners, on behalf of the Owners from the
Certificate Insurer, for distribution by the Trustee to each Owner of each
Owner's proportionate share of the Insured Payment. The Certificate Insurer's
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 made 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 Offered
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 Owner relating to or arising under the Offered Certificates
against the debtor which made such preference payment or otherwise with respect
to such preference payment and (iv) appropriate instruments to effect the
appointment of the Certificate Insurer as agent for such Owner in any legal
proceeding related to such preference payment, such instruments being in a form
satisfactory to the Certificate Insurer, provided that if such documents are
received after 12:00 noon New York City time on such Business Day, they will be
deemed to be received on the following Business Day. Such payments shall be
disbursed to the receiver or trustee in bankruptcy named in the final order of
the court exercising jurisdiction on behalf of the Owner and not to any Owner
directly unless such Owner has returned principal or interest paid on the
Offered Certificates to such receiver or trustee in bankruptcy, in which case
such payment shall be disbursed to such Owner.
The Certificate Insurer will pay any other amount payable under the
Certificate Insurance 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 Owners by wire transfer of
immediately available funds in the amount of the Insured Payment less, in
respect of Insured Payments related to Preference Amounts, any amount held by
the Trustee for the payment of such Insured Payment and legally available
therefor.
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<PAGE> 67
The Fiscal Agent is the agent of the Certificate Insurer only and the
Fiscal Agent shall in no event be liable to Offered 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 September
1, 1998 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 the Insurer or 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, on any Distribution Date and for the related
Certificate Group, the sum of (a) the amount by which the aggregate amount of
the Accrued Certificate Interest, plus any outstanding Interest Carry Forward
Amount for each Class of the related Offered Certificates exceeds the sum of (i)
the Monthly Interest, the Principal Distribution Amount and the Monthly Excess
Cashflow Amount for the related Mortgage Loan Group and (ii) the Monthly Excess
Cashflow Amount for the other Mortgage Loan Group remaining after the payment of
items (1) through (4) under the heading "Credit Enhancement -- Treatment of
Realized Losses" and (b)(i) the Coverage Deficit, if any, or (ii) on the Final
Scheduled Distribution Date of each Class of the related Offered Certificates,
the outstanding Certificate Principal Balance with respect to each applicable
Class of the related Offered Certificates (after taking into account all
distributions thereto in respect of principal on such Distribution Date.
"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.
"Owner" means each Certificateholder or Holder (as defined in the
Agreement) who, on the applicable Distribution Date, is entitled under the terms
of the applicable Offered Certificates to payment thereunder.
"Preference Amount" means any amount previously distributed to an Owner on
the Offered 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.
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<PAGE> 68
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 Offered Certificates.
THE CERTIFICATE INSURER
The Certificate Insurer is the principal operating subsidiary of MBIA Inc.,
a New York Stock Exchange listed company ("MBIA Inc."). 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 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.
Effective February 17, 1998, MBIA Inc. acquired all of the outstanding
stock of Capital Markets Assurance Corporation ("CMAC") through a merger with
its parent CapMAC Holdings Inc. Pursuant to a reinsurance agreement, CMAC has
ceded all of its net insured risks (including any amounts due but unpaid from
third party reinsurers), as well as its unearned premiums and contingency
reserves, to the Insurer. MBIA Inc. is not obligated to pay the debts of or
claims against CMAC.
The consolidated financial statements of the Certificate Insurer, a wholly
owned subsidiary of MBIA Inc., and its subsidiaries as of December 31, 1997 and
December 31, 1996 and for each of the three years in the period ended December
31, 1997, 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, 1997, and the consolidated financial statements of the Certificate
Insurer and its subsidiaries as of June 30, 1998 and for the six month periods
ending June 30, 1998 and June 30, 1997 included in the Quarterly Report on Form
10-Q of MBIA Inc. for the period ending June 30, 1998, 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 Offered 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.
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<PAGE> 69
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, 1997 JUNE 30, 1998
(AUDITED) (UNAUDITED)
----------------- ------------------
(IN MILLIONS)
<S> <C> <C>
Admitted Assets..................................... $5,256 $6,048
Liabilities......................................... 3,496 3,962
Capital and Surplus................................. 1,760 2,086
</TABLE>
<TABLE>
<CAPTION>
GAAP
--------------------------------------
DECEMBER 31, 1997 JUNE 30, 1998
(AUDITED) (UNAUDITED)
----------------- ------------------
(IN MILLIONS)
<S> <C> <C>
Assets.............................................. $5,988 $6,794
Liabilities......................................... 2,624 2,977
Shareholder's Equity................................ 3,364 3,817
</TABLE>
Copies of the financial statements of the Certificate Insurer incorporated
by reference herein and copies of the Certificate Insurer's 1997 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 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 Offered Certificates or the advisability of
investing in the Offered 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 IBCA, Inc. (formerly known as Fitch Investors Service, L.P.)
("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 Offered
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 Offered
Certificates. The Certificate Insurer does not guarantee the market price of the
Offered Certificates nor does it guarantee that the ratings on the Offered
Certificates will not be revised or withdrawn.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
One or more elections will be made to treat the assets of the Trust (other
than the Prefunding Account and the Capitalized Interest Account) as a REMIC or
REMICs for federal income tax purposes. The Offered Certificates and the Class C
Certificates will represent regular interests in a REMIC, and the Class R
Certificate will represent the residual interest in each REMIC. See "Certain
Federal Income Tax Consequences" in the Prospectus.
The Offered Certificates generally will be treated as newly originated debt
instruments for federal income tax purposes. Beneficial owners of the Offered
Certificates will be required to report income on such
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<PAGE> 70
Certificates in accordance with the accrual method of accounting. It is
anticipated that the Offered Certificates will be issued without original issue
discount for federal income tax purposes. However, it is possible that the
Internal Revenue Service could treat a portion of the additional interest which
would become payable on the Class A-5F and Class A-1A Certificates after the
Clean-up Call Date as original issue discount. Certificateholders are urged to
consult their tax advisors with respect to the tax consequences of holding the
Offered Certificates.
The Prepayment Assumption that is to be used in determining whether any
Class of Offered Certificates is issued with original issue discount and the
rate of accrual of original issue discount is 24% of the HEP with respect to the
Fixed Rate Group Certificates and a CPR of 27% with respect to the Adjustable
Rate Group Certificates. 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.
CLASS A-1A CERTIFICATES
The Class A-1A Certificates, except to the extent of any Supplemental
Interest Amount, will be treated as regular interests in a REMIC under section
860G of the Code (the "Class A-1A Regular Interests"). Accordingly, the portion
representing the Class A-1A Regular Interests will be treated as (i) assets
described in section 7701(a)(19)(C) of the Code, and (ii) "real estate assets"
within the meaning of section 856(c)(4) of the Code, in each case to the extent
described in the Prospectus. Interest on such portion of the Class A-1A
Certificates will be treated as interest on obligations secured by mortgages on
real property within the meaning of section 856(c)(3)(B) of the Code to the same
extent that such portion of the Class A-1A Certificates is treated as real
estate assets. See "Certain Federal Income Tax Consequences" in the Prospectus.
Each holder of a Class A-1A Certificate is deemed to own an undivided
beneficial ownership interest in two assets: (i) the Class A-1A Regular
Interests and (ii) an interest rate cap contract (a "Cap Agreement") under which
the Supplemental Interest Amount is paid. The Cap Agreement with respect to the
Class A-1A Certificates is not included in any REMIC. The treatment of amounts
received by a Class A-1A Certificateholder under such Certificateholder's right
to receive the Supplemental Interest Amount will depend upon the portion of such
Certificateholder's purchase price allocable thereto. Under the REMIC
regulations, each Class A-1A Certificateholder must allocate its purchase price
for the Class A-1A Certificates between its undivided interest in the Class A-1A
Regular Interests and its undivided interest in the Cap Agreement in accordance
with the relative fair market values of each property right. Payments made to
the Class A-1A Certificates under the Cap Agreement will be included in income
based on the regulations relating to notional principal contracts (the "Notional
Principal Contract Regulations"). The original issue discount regulations (as
described in the Prospectus), which technically do not apply to REMIC regular
interests, provide that the issuer's allocations of the issue price are binding
on all holders unless the holder explicitly discloses on its tax return that its
allocation is different from the issuer's allocation. Under the REMIC
regulations, the Trustee is required to account for the Class A-1A Regular
Interests and the Cap Agreement as discrete property rights. Ownership of the
Cap Agreement will entitle the owner to amortize the separate price paid for the
related Cap Agreement under the Notional Principal Contract Regulations. The
Internal Revenue Service has issued regulations that provide for the integration
of a qualifying debt instrument with a hedge if the combined cash flows of the
components are substantially equivalent to the cash flows on a variable rate
debt instrument. These regulations expressly exclude REMIC regular instruments
from their application.
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 that proposes to
cause a Plan to acquire any of the Offered Certificates will be required to
determine whether such an investment is permitted under the governing Plan
instruments and is prudent and
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<PAGE> 71
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 "parties
in interest" (as defined in ERISA) or "disqualified persons" (within the meaning
of the Code) in certain specified relationships to the Plan. Therefore, a Plan
fiduciary considering an investment in the Offered Certificates should also
consider whether such an investment might constitute or give rise to a
prohibited transaction under ERISA or the Code. Any Plan fiduciary that proposes
to cause a Plan to acquire any of the Offered Certificates should consult with
its counsel with respect to the potential consequences under ERISA and the Code
of the Plan's acquisition and ownership of Offered Certificates.
The U.S. Department of Labor ("DOL") has granted to NationsBanc Montgomery
Securities LLC an individual administrative exemption (Prohibited Transaction
Exemption ("PTE") 93-31) (the "Exemption"). The Exemption generally exempts from
the application of certain of the prohibited transaction provisions of Section
406 of ERISA, and the excise taxes imposed on such prohibited transactions by
Section 4975(a) and (b) of the Code, transactions related to the purchase, sale
and holding of pass-through certificates underwritten by the Underwriters, such
as the Offered Certificates, and the servicing and operation of asset pools such
as the Trust, provided that certain conditions are satisfied. On July 21, 1997,
the DOL adopted an Amendment to Prohibited Transaction Exemptions (PTE 97-34)
that modified the Exemption with respect to transactions that utilize
prefunding.
Among the conditions that must be satisfied for the Exemption to apply in
this transaction are the following:
(1) The Plan investing in the Offered Certificates is an "accredited
investor" as defined in Rule 501(a)(1) of the Regulation D of the Securities and
Exchange Commission under the Securities Act of 1933, as amended;
(2) The acquisition of the Offered Certificates by a Plan is on terms
(including the price for the Offered Certificates) that are at least as
favorable to the Plan as they would be in an arm's-length transaction with an
unrelated party;
(3) The rights and interests evidenced by the Offered Certificates acquired
by the Plan are not subordinated to the rights and interests evidenced by other
Offered Certificates of the Trust;
(4) The Offered Certificates acquired by the Plan have received a rating at
the time of such acquisition that is one of the three highest generic rating
categories from either Moody's, Fitch, S&P or Duff & Phelps Credit Rating Co.
("D&P");
(5) The Trustee is not an affiliate of any other member of the Restricted
Group (as defined below); and
(6) The sum of all payments made to and retained by the Underwriters in
connection with the distribution of the Offered Certificates represents not more
than reasonable compensation for underwriting the Offered Certificates; the sum
of all payments made to and retained by the Sponsor pursuant to the assignment
of the loans to the Trust represents not more than the fair market value of such
loans; the sum of all payments made to and retained by the 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.
In addition, for transactions that utilize prefunding the following
conditions must also be satisfied:
(a) The principal amount of Subsequent Mortgage Loans does not exceed 25%
of the principal balance of the Offered Certificates as of the Closing Date;
(b) All such Subsequent Mortgage Loans meet the same terms and conditions
for eligibility as the Initial Mortgage Loans (which terms and conditions have
been approved by one of the Rating Agencies) except that such terms and
conditions may be modified with the prior approval of a Rating Agency or of a
majority of the holders of the Offered Certificates;
(c) The addition of Subsequent Mortgage Loans during the Funding Period
does not result in a ratings downgrade;
(d) The weighted average annual percentage rate of all Mortgage Loans in
the Trust at the end of the Funding Period is not more than 100 basis points
lower than such weighted average as of the Closing Date;
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<PAGE> 72
(e) The characteristics of the Subsequent Mortgage Loans are monitored by
the Certificate Insurer that is independent of the Sponsor, or an independent
accountant delivers a letter (with copies to the relevant rating agencies,
underwriters and trustee) stating that the characteristics of the Subsequent
Mortgage Loans conform to the characteristics with respect thereto specified in
this Prospectus Supplement;
(f) The Funding Period ends no later than 90 days after the Closing Date;
and
(g) Amounts on deposit in the Prefunding Account and/or Capitalized
Interest Account are invested only in investments permitted by the Rating
Agencies that are (i) direct obligations of or fully guaranteed by the United
States or any agency or instrumentality thereof or (ii) rated (or issued by an
issuer rated) in one of the three highest generic rating categories by the
Rating Agencies.
Moreover, the Exemption provides relief from certain self-dealing conflict
of interest prohibited transactions that may occur when the Plan fiduciary
causes a Plan to acquire certificates in a trust in which the fiduciary (or its
affiliate) is an obligor on the receivables held in the trust; provided that,
among other requirements, (i) in the case of an acquisition in connection with
the initial issuance of certificates, at least fifty percent of each class of
certificates in which Plans have invested is acquired by persons independent of
the Restricted Group and at least fifty percent of the aggregate interest in the
trust is acquired by persons independent of the Restricted Group; (ii) such
fiduciary (or its affiliate) is an obligor with respect to five percent or less
of the fair market value of the obligations contained in the trust; (iii) the
Plan's investment in certificates of any class does not exceed twenty-five
percent of all of the certificates of that class outstanding at the time of the
acquisition; and (iv) immediately after the acquisition, no more than
twenty-five percent of the assets of the Plan with respect to which such person
is a fiduciary are invested in certificates representing an interest in one or
more trusts containing assets sold or serviced by the same entity. The Exemption
does not apply to Plans sponsored by the Sponsor, the Underwriters, the Trustee,
the Servicer, any obligor with respect to Mortgage Loans included in the Trust
constituting more than five percent of the aggregate unamortized principal
balance of the assets in the Trust, or any affiliate of such parties (the
"Restricted Group").
The purchase of Offered Certificates by, on behalf of or with Plan assets
may qualify for exemptive relief under the Exemption. A fiduciary of a Plan
contemplating purchasing any such Certificate must make its own determination
that the conditions set forth in the Exemption will be satisfied with respect
thereto. As of the date hereof, there is no single Mortgage Loan included in the
Trust that constitutes more than five percent of the aggregate unamortized
principal balance of the assets of the Trust.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the applicability of the Exemption
or any other prohibited transaction exemption issued by the DOL and the
potential consequences in their specific circumstances prior to making an
investment in the Offered Certificates. Moreover, each Plan fiduciary should
determine whether under the general fiduciary standards of investment prudence
and diversification an investment in the Offered Certificates is appropriate for
the Plan, taking into account the overall investment policy of the Plan and the
composition of the Plan's investment portfolio. See "ERISA Considerations" in
the Prospectus.
USE OF PROCEEDS
The Sponsor intends to use the net proceeds to be received from the sale of
the Offered 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 Offered 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 Offered Certificates. No representation is made herein as to whether the
Offered 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 Offered
Certificates as legal investments for such purchasers prior to investing in the
Offered Certificates.
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<PAGE> 73
UNDERWRITING
Under the terms set forth in the Underwriting Agreement and the related
Pricing Agreement, (collectively, the "Underwriting Agreement") for the sale of
the Offered Certificates, dated September 18, 1998, the Sponsor has agreed to
sell, and NationsBanc Montgomery Securities LLC, Bear, Stearns & Co. Inc., Wheat
First Securities, Inc. doing business as First Union Capital Markets, a division
of Wheat First Securities, Inc., Prudential Securities Incorporated and
Donaldson Lufkin & Jenrette Securities Corporation (collectively, the
"Underwriters") have severally agreed to purchase, the respective principal
amounts of Offered Certificates set forth opposite their respective names. 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
Offered Certificates.
<TABLE>
<CAPTION>
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT OF
CLASS A-1F CLASS A-2F CLASS A-3F CLASS A-4F
UNDERWRITER CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES
----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NationsBanc Montgomery Securities LLC.... $ 53,280,000 $36,135,000 $17,955,000 $32,445,000
Bear, Stearns & Co. Inc. ................ $ 17,760,000 $12,045,000 $ 5,985,000 $10,815,000
First Union Capital Markets.............. $ 17,760,000 $12,045,000 $ 5,985,000 $10,815,000
Prudential Securities Incorporated....... $ 17,760,000 $12,045,000 $ 5,985,000 $10,815,000
Donaldson Lufkin & Jenrette Securities
Corporation............................ $ 11,840,000 $ 8,030,000 $ 3,990,000 $ 7,210,000
------------ ----------- ----------- -----------
Total............................. $118,400,000 $80,300,000 $39,900,000 $72,100,000
============ =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT OF
CLASS A-5F CLASS A-6F CLASS A-1A CLASS A-2A
UNDERWRITER CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES
----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NationsBanc Montgomery Securities LLC...... $18,135,000 $17,550,000 $ 87,750,000 $29,250,000
Bear, Stearns & Co. Inc. .................. $ 6,045,000 $ 5,850,000 $ 29,250,000 $ 9,750,000
First Union Capital Markets................ $ 6,045,000 $ 5,850,000 $ 29,250,000 $ 9,750,000
Prudential Securities Incorporated......... $ 6,045,000 $ 5,850,000 $ 29,250,000 $ 9,750,000
Donaldson Lufkin & Jenrette Securities
Corporation.............................. $ 4,030,000 $ 3,900,000 $ 19,500,000 $ 6,500,000
----------- ----------- ------------ -----------
Total............................... $40,300,000 $39,000,000 $195,000,000 $65,000,000
=========== =========== ============ ===========
</TABLE>
The Underwriters have informed the Sponsor that they propose to offer the
Offered 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 Offered 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 Offered
Certificates, the Underwriters may be deemed to have received compensation from
the Sponsor in the form of underwriting compensation. The Underwriters and any
dealers that participate with the Underwriters in the distribution of the
Offered Certificates may be deemed to be underwriters and any commissions
received by them and any profit on the resale of the Offered 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 Offered Certificates, as permitted by applicable
laws and regulations. The Underwriters are not obligated, however, to make a
market in the Offered 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 Offered
Certificates.
S-73
<PAGE> 74
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 Offered 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 Offered 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 1997 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, 1997 and 1996 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, 1997, incorporated by
reference in this Prospectus Supplement, have been incorporated herein in
reliance on the report of PricewaterhouseCoopers LLP, 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, special counsel to the Certificate Insurer.
RATING OF THE OFFERED CERTIFICATES
It is a condition to the issuance of each Class of Offered Certificates
that each such Class shall be rated "Aaa" by Moody's and "AAA" by S&P.
Explanations of the significance of such ratings may be obtained from
Moody's, 99 Church Street, New York, New York 10007, and S&P, 25 Broadway, New
York, New York 10004. Each rating will be the view only of the assigning Rating
Agency.
The ratings on the Offered 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 Offered Certificates.
The ratings of Moody's on home equity pass-through certificates address the
likelihood of the receipt by the Offered Certificateholders of all distributions
to which such Offered Certificateholders are entitled. Moody's rating opinions
address the structural and legal issues and tax-related aspects associated with
the Certificates, including the nature of the underlying home equity loans and
the credit quality of the credit support provider, if any. Moody's ratings on
pass-through certificates do not represent any assessment of the likelihood that
principal prepayments may differ from those originally anticipated.
The ratings assigned by S&P to pass-through certificates address the
likelihood of the receipt of all distributions on the related mortgage loans by
the related Certificateholders under the agreements pursuant to which such
certificates are issued. S&P's ratings take into consideration the credit
quality of the related mortgage pool, including any credit support providers,
structural and legal aspects associated with such certificates, and the extent
to which the payment stream on such mortgage pool is adequate to make payments
required by such certificates. S&P's ratings on such certificates do not,
however, constitute a statement regarding frequency of prepayments on the
related mortgage loans. The "r" symbol is appended to the rating
S-74
<PAGE> 75
by S&P to those Certificates that S&P believes may experience high volatility or
high variability in expected returns due to non-credit risks. The absence of an
"r" symbol in the ratings of the other Offered Certificates should not be taken
as an indication that such Certificates will exhibit no volatility or
variability in total return.
There is no assurance that any rating assigned to the Offered 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 Offered Certificates.
The ratings of the Offered 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 Offered Certificates, or, if one does, what rating will be assigned by such
other rating agency. A rating on the Offered Certificates by another rating
agency, if assigned at all, may be lower than the ratings assigned to the
Offered Certificates by Moody's or S&P.
S-75
<PAGE> 76
INDEX OF PRINCIPAL TERMS
<TABLE>
<CAPTION>
PAGE(S)
-------
<S> <C>
Accounts.................................................... S-48
Accrued Certificate Interest................................ S-7
Adjustable Rate Group Certificates.......................... S-1
Adjustable Rate Group....................................... S-2
Adjustable Rate Group Principal Distribution Amount......... S-11
Advances.................................................... S-64
AFC......................................................... S-5
Affiliated Originators...................................... S-19, S-58
Aggregate Certificate Principal Balance..................... S-6
Aggregate Principal Balance................................. S-43
Book-Entry Certificates..................................... S-33
Business Day................................................ S-7, S-67
Cap Agreement............................................... S-70
Capitalized Interest Account................................ S-17, S-32
CDI Policy.................................................. S-62
Cede........................................................ S-33
Cedel....................................................... S-29, S-33
Cedel Participants.......................................... S-35
Certificate Account......................................... S-48
Certificate Insurance Policy................................ S-1
Certificateholder........................................... S-28
Certificate Insurer......................................... S-1,
Certificate Insurer Premium................................. S-18, S-42
Certificate Owners.......................................... S-33
Certificate Group........................................... S-1
Certificate Principal Balance............................... S-41
Citibank.................................................... S-33
Class....................................................... S-5
Class A-1A Available Funds Cap.............................. S-6
Class A-1A Regular Interests................................ S-70
Class A-2A Lockout Distribution Amount...................... S-10
Class A-2A Lockout Percentage............................... S-10
Class A-2A Lockout Pro Rata Distribution Amount............. S-10
Class A-6F Lockout Distribution Amount...................... S-9
Class A-6F Lockout Percentage............................... S-9
Class A-6F Lockout Pro Rata Distribution Amount............. S-9
Class R Certificate......................................... S-1
Clean-up Call Date.......................................... S-19
CMAC........................................................ S-68
Closing Date................................................ S-5
Code........................................................ S-2, S-28
Collection Account.......................................... S-48
Collection Period........................................... S-11
Combined Loan-to-Value Ratio................................ S-44
Commission.................................................. S-3
Compensating Interest Payment............................... S-18
Constant Prepayment Rate.................................... S-53
</TABLE>
S-76
<PAGE> 77
<TABLE>
<CAPTION>
PAGE(S)
-------
<S> <C>
Cooperative................................................. S-35
Coverage Deficit............................................ S-12, S-41
CPR......................................................... S-53
Cut-off Date................................................ S-5
Cut-off Date Pool Balance................................... S-19, S-37
Cut-off Date Principal Balance.............................. S-46
DLJ......................................................... S-27
D&P......................................................... S-71
Defective Mortgage Loan..................................... S-47
Definitive Certificate...................................... S-34
Deficiency Amount........................................... S-67
Deposit Date................................................ S-48
Distribution Date........................................... S-7
DOL......................................................... S-71
DTC......................................................... S-3, S-21, S-33
ERISA....................................................... S-20, S-70
Euroclear................................................... S-21, S-33
Euroclear Operator.......................................... S-35
Euroclear Participants...................................... S-35
European Depositaries....................................... S-34
Exemption................................................... S-76
Extra Principal Distribution Amount......................... S-13, S-39
Federal Reserve Board....................................... S-36
Final Scheduled Distribution Dates.......................... S-7, S-50
Financial Intermediary...................................... S-34
Fiscal Agent................................................ S-66
Fixed Rate Group Certificates............................... S-1
Fixed Rate Group............................................ S-2
Fixed Rate Group Principal Distribution Amount.............. S-11
Funding Period.............................................. S-31
Formula Pass-Through Rate................................... S-6
GAAP........................................................ S-69
Global Securities........................................... B-1
Group Factor................................................ S-33
HEP......................................................... S-53
Initial Mortgage Loans...................................... S-2
Insured Payment............................................. S-67
Insurer Premium Rate........................................ S-42
Interest Carryforward Amount................................ S-8
Interest Period............................................. S-7
Interest Shortfalls......................................... S-18, S-65
Junior Loans................................................ S-24
LIBOR....................................................... S-5, S-30
LIBOR Determination Date.................................... S-30
Liquidation Proceeds........................................ S-30
Maximum Rates............................................... S-45
MBIA Inc. .................................................. S-68
</TABLE>
S-77
<PAGE> 78
<TABLE>
<CAPTION>
PAGE(S)
-------
<S> <C>
Minimum Rates............................................... S-45
Monthly Advance............................................. S-17, S-64
Monthly Interest............................................ S-8
Monthly Excess Cash Flow Amount............................. S-13, S-39
Moody's..................................................... S-20
Morgan...................................................... S-34
Mortgage Files.............................................. S-46
Mortgage Interest Rate...................................... S-44
Mortgage Loan Group......................................... S-2
Mortgage Loans.............................................. S-2
Mortgage Loan Schedule...................................... S-46
Mortgage Pool............................................... S-2
Mortgaged Properties........................................ S-6
Net Liquidation Proceeds.................................... S-30
Nonrecoverable Advances..................................... S-64
Non-U.S. Person............................................. B-3
Notice...................................................... S-67
Notional Principal Contract Regulations..................... S-70
Offered Certificates........................................ S-1
Offered Certificates Principal Distribution Amount.......... S-11
one-month London Interbank Offered Rate..................... S-22
Originators................................................. S-19, S-58
Overcollateralization Amount................................ S-11
Overcollateralization Deficiency............................ S-12
Overcollateralization Release Amount........................ S-12
Owner....................................................... S-67
Participants................................................ S-35
Paying Agent................................................ S-28
Permitted Investments....................................... S-48
Plan........................................................ S-70
Pool Balance................................................ S-79
Pooling and Servicing Agreement............................. S-2
Preference Amount........................................... S-67
Prefunding Account.......................................... S-16, S-31
Prefunding Account Deposit.................................. S-16, S-31
Prepayment Interest Shortfall............................... S-18, S-64
Prepayment Scenario......................................... S-63
Principal Balance........................................... S-44
Principal Distribution Amount............................... S-29
PTE......................................................... S-71
Purchase Price.............................................. S-47
Qualified Replacement Mortgage.............................. S-47
Rating Agencies............................................. S-20
Record Date................................................. S-7
Relevant Depositary......................................... S-34
</TABLE>
S-78
<PAGE> 79
<TABLE>
<CAPTION>
PAGE(S)
-------
<S> <C>
Reference Banks............................................. S-30
Relief Act.................................................. S-18, S-65
Relief Act Shortfalls....................................... S-18, S-65
REMIC....................................................... S-2, S-20
REMIC Pool.................................................. S-28
REO Property................................................ S-63
Reserve Interest Rate....................................... S-30
Restricted Group............................................ S-71
Retained Certificates....................................... S-6
Rules....................................................... S-34
SAP......................................................... S-68
Securities Act.............................................. S-73
Servicer.................................................... S-5
Servicing Advances.......................................... S-63
Servicing Fee............................................... S-18
Servicing Fee Rate.......................................... S-18, S-63
six-month London Interbank Offered Rate..................... S-22
SMMEA....................................................... S-20
S&P......................................................... S-20
Sponsor..................................................... S-1, S-5
Sponsor's Guidelines........................................ S-58
Subsequent Cut-off Date..................................... S-26
Subsequent Mortgage Loans................................... S-2, S-31
Subsequent Transfer Date.................................... S-16
Sub-Servicer................................................ S-5, S-61
Supplemental Interest Amount................................ S-6
Targeted Overcollateralization Amount....................... S-12
Terms and Conditions........................................ S-36
Trust....................................................... S-5
Trustee..................................................... S-5
Trust Insurance Proceeds.................................... S-29
Unaffiliated Originators.................................... S-19, S-58
Underwriters................................................ S-1, S-72
Underwriting Agreement...................................... S-73
U.S. Person................................................. B-3
Weighted average life....................................... S-53
</TABLE>
S-79
<PAGE> 80
ANNEX A
DESCRIPTION OF THE MORTGAGE POOL
The following is a brief description of certain terms of the Initial
Mortgage Loans based on the Mortgage Loans and each Mortgage Loan Group as of
the Cut-off Date. Certain mortgage loans may be removed from the Mortgage Pool
and each Mortgage Loan Group (and other mortgage loans substituted therefor)
prior to the closing date as described herein, in which case an amount equal to
the aggregate principal balances of such mortgage loans less the aggregate
principal balance of such substitute 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 and each Mortgage Loan Group as of the Cut-off Date may
vary in certain limited respects from comparable information based on the actual
composition of the Mortgage Pool and each Mortgage Loan Group 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 term "Aggregate Principal Balance" means the aggregate Principal
Balance of the Mortgage Loans in the specified Mortgage Loan Group. The
information expressed as a percentage of the Aggregate Principal Balance may not
total 100% due to rounding.
Each Mortgage Loan in the Trust will be assigned to either the Fixed Rate
Group or the Adjustable Rate Group. The Mortgage Loans comprising the Fixed Rate
Group will be secured by first and second liens with respect to the related
Mortgaged Properties and will bear fixed rates of interest. The Mortgage Loans
comprising the Adjustable Rate Group will be secured by first liens on the
related Mortgaged Properties and will bear interest at rates that adjust based
on the index described in the related mortgage notes. Distributions on the Fixed
Rate Group Certificates will be derived primarily from amounts received,
collected or recovered in respect of the Fixed Rate Group. Distributions on the
Adjustable Rate Group Certificates will be derived primarily from amounts
received, collected or recovered in respect of the Adjustable Rate Group.
A-1
<PAGE> 81
FIXED RATE GROUP
TYPE OF MORTGAGED PROPERTY
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE CUT-OFF DATE
NUMBER OF AGGREGATE AGGREGATE
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Single Family Residence.......................... 4,765 $314,324,938.66 91.40%
Condominium Unit................................. 164 10,246,826.42 2.98
Two-to-Four-Family Residence..................... 260 19,335,864.03 5.62
----- --------------- ------
Total.................................. 5,189 $343,907,629.11 100.00%
===== =============== ======
</TABLE>
FIXED RATE GROUP
OCCUPANCY STATUS
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE CUT-OFF DATE
NUMBER OF AGGREGATE AGGREGATE
OCCUPANCY STATUS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
---------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Owner Occupied/Primary Residence................. 5,084 $338,818,644.30 98.52%
Non-Owner Occupied/Investment.................... 105 5,088,984.81 1.48
----- --------------- ------
Total.................................. 5,189 $343,907,629.11 100.00%
===== =============== ======
</TABLE>
FIXED RATE GROUP
PRIORITY OF LIEN
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE CUT-OFF DATE
NUMBER OF AGGREGATE AGGREGATE
LIEN PRIORITY MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
First Lien....................................... 4,615 $326,138,646.62 94.83%
Second Lien...................................... 574 17,768,982.49 5.17
----- --------------- ------
Total.................................. 5,189 $343,907,629.11 100.00%
===== =============== ======
</TABLE>
FIXED RATE GROUP
AMORTIZATION METHOD
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE CUT-OFF DATE
NUMBER OF AGGREGATE AGGREGATE
AMORTIZATION METHOD MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Fully Amortizing................................. 5,116 $338,749,291.64 98.50%
Partially Amortizing/Balloon..................... 73 5,158,337.47 1.50
----- --------------- ------
Total.................................. 5,189 $343,907,629.11 100.00%
===== =============== ======
</TABLE>
A-2
<PAGE> 82
FIXED RATE GROUP
COMBINED LOAN-TO-VALUE RATIO
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE CUT-OFF DATE
RANGE OF COMBINED NUMBER OF AGGREGATE AGGREGATE
LOAN-TO-VALUE RATIOS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
-------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
0.001% to 5.000%............................... 1 $ 25,000.00 0.01%
5.001% to 10.000%............................... 9 138,183.13 0.04
10.001% to 15.000%............................... 18 388,225.83 0.11
15.001% to 20.000%............................... 30 883,728.86 0.26
20.001% to 25.000%............................... 52 1,724,445.78 0.50
25.001% to 30.000%............................... 63 2,083,558.80 0.61
30.001% to 35.000%............................... 83 3,450,474.35 1.00
35.001% to 40.000%............................... 104 4,586,138.52 1.33
40.001% to 45.000%............................... 106 5,020,579.52 1.46
45.001% to 50.000%............................... 186 9,893,657.62 2.88
50.001% to 55.000%............................... 178 10,128,850.25 2.95
55.001% to 60.000%............................... 269 12,849,050.20 3.74
60.001% to 65.000%............................... 579 32,635,286.30 9.49
65.001% to 70.000%............................... 555 33,707,190.83 9.80
70.001% to 75.000%............................... 954 56,924,387.67 16.55
75.001% to 80.000%............................... 1,051 80,130,182.89 23.30
80.001% to 85.000%............................... 343 29,084,104.57 8.46
85.001% to 90.000%............................... 608 60,254,583.99 17.52
----- --------------- ------
Total.................................. 5,189 $343,907,629.11 100.00%
===== =============== ======
</TABLE>
A-3
<PAGE> 83
FIXED RATE GROUP
ORIGINAL TERM TO MATURITY
<TABLE>
<CAPTION>
PERCENTAGE OF
RANGE OF CUT-OFF DATE CUT-OFF DATE
ORIGINAL TERMS TO NUMBER OF AGGREGATE AGGREGATE
MATURITY (MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
49 to 60....................................... 57 $ 1,441,100.85 0.42%
61 to 72....................................... 9 265,716.25 0.08
73 to 84....................................... 19 486,026.04 0.14
85 to 96....................................... 7 329,928.58 0.10
97 to 108....................................... 1 11,915.00 0.00
109 to 120....................................... 212 7,147,808.05 2.08
133 to 144....................................... 3 258,625.64 0.08
145 to 156....................................... 1 49,514.45 0.01
157 to 168....................................... 3 146,482.10 0.04
169 to 180....................................... 1,689 76,138,684.18 22.14
181 to 192....................................... 14 868,397.76 0.25
217 to 228....................................... 1 83,734.89 0.02
229 to 240....................................... 135 8,516,794.69 2.48
241 to 252....................................... 1 104,300.00 0.03
277 to 288....................................... 1 94,326.86 0.03
289 to 300....................................... 24 1,631,928.74 0.47
349 to 360....................................... 3,012 246,332,345.03 71.63
----- --------------- ------
Total.................................. 5,189 $343,907,629.11 100.00%
===== =============== ======
</TABLE>
FIXED RATE GROUP
ORIGINAL TERM TO MATURITY
(BALLOON)
<TABLE>
<CAPTION>
PERCENTAGE OF
RANGE OF CUT-OFF DATE CUT-OFF DATE
ORIGINAL TERMS TO NUMBER OF AGGREGATE AGGREGATE
MATURITY (MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
61 to 72........................................ 2 $ 127,222.91 2.47%
169 to 180........................................ 57 4,162,716.80 80.70
181 to 192........................................ 14 868,397.76 16.83
-- ------------- ------
Total................................... 73 $5,158,337.47 100.00%
== ============= ======
</TABLE>
A-4
<PAGE> 84
FIXED RATE GROUP
REMAINING TERM TO MATURITY
<TABLE>
<CAPTION>
PERCENTAGE OF
RANGE OF CUT-OFF DATE CUT-OFF DATE
REMAINING TERMS TO NUMBER OF AGGREGATE AGGREGATE
MATURITY (MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
37 to 48....................................... 1 $ 11,890.05 0.00%
49 to 60....................................... 59 1,473,487.30 0.43
61 to 72....................................... 9 255,222.32 0.07
73 to 84....................................... 20 494,134.14 0.14
85 to 96....................................... 8 369,976.09 0.11
97 to 108....................................... 1 11,915.00 0.00
109 to 120....................................... 213 7,264,538.86 2.11
121 to 132....................................... 2 43,037.54 0.01
133 to 144....................................... 3 258,625.64 0.08
145 to 156....................................... 2 60,292.53 0.02
157 to 168....................................... 4 165,588.95 0.05
169 to 180....................................... 1,685 76,287,734.88 22.18
181 to 192....................................... 9 465,512.27 0.14
217 to 228....................................... 1 83,734.89 0.02
229 to 240....................................... 134 8,499,038.02 2.47
241 to 252....................................... 1 104,300.00 0.03
277 to 288....................................... 1 94,326.86 0.03
289 to 300....................................... 24 1,631,928.74 0.47
325 to 336....................................... 1 50,680.70 0.01
337 to 348....................................... 2 104,892.91 0.03
349 to 360....................................... 3,009 246,176,771.42 71.58
----- --------------- ------
Total.................................. 5,189 $343,907,629.11 100.00%
===== =============== ======
</TABLE>
A-5
<PAGE> 85
FIXED RATE GROUP
RANGE OF MORTGAGE INTEREST RATES
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE CUT-OFF DATE
RANGE OF MORTGAGE NUMBER OF AGGREGATE AGGREGATE
INTEREST RATES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
6.001% to 6.500%............................... 2 $ 605,545.63 0.18%
6.501% to 7.000%............................... 10 3,280,336.69 0.95
7.001% to 7.500%............................... 59 5,874,632.90 1.71
7.501% to 8.000%............................... 194 20,494,439.23 5.96
8.001% to 8.500%............................... 238 20,514,844.87 5.97
8.501% to 9.000%............................... 677 52,622,261.27 15.30
9.001% to 9.500%............................... 575 45,672,804.10 13.28
9.501% to 10.000%............................... 673 50,232,661.09 14.61
10.001% to 10.500%............................... 666 39,441,869.91 11.47
10.501% to 11.000%............................... 582 35,509,437.07 10.33
11.001% to 11.500%............................... 368 19,462,222.71 5.66
11.501% to 12.000%............................... 364 17,341,006.20 5.04
12.001% to 12.500%............................... 222 8,965,601.99 2.61
12.501% to 13.000%............................... 171 7,495,831.22 2.18
13.001% to 13.500%............................... 112 4,095,941.31 1.19
13.501% to 14.000%............................... 94 4,380,383.63 1.27
14.001% to 14.500%............................... 60 2,490,220.43 0.72
14.501% to 15.000%............................... 66 3,334,062.82 0.97
15.001% to 15.500%............................... 32 1,297,811.01 0.38
15.501% to 16.000%............................... 12 363,171.49 0.11
16.001% to 16.500%............................... 2 71,299.26 0.02
16.501% to 17.000%............................... 2 69,386.31 0.02
17.001% to 17.500%............................... 3 136,333.51 0.04
17.501% to 18.000%............................... 4 139,427.50 0.04
19.001% to 19.500%............................... 1 16,096.96 0.00
----- --------------- ------
Total.................................. 5,189 $343,907,629.11 100.00%
===== =============== ======
</TABLE>
A-6
<PAGE> 86
FIXED RATE GROUP
CUT-OFF DATE PRINCIPAL BALANCE
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE CUT-OFF DATE
RANGE OF CUT-OFF DATE NUMBER OF AGGREGATE AGGREGATE
PRINCIPAL BALANCE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
--------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
$ 0.01 to 25,000.00........................ 717 $ 13,367,668.88 3.89%
$ 25,000.01 to 50,000.00........................ 1,769 66,771,437.58 19.42
$ 50,000.01 to 75,000.00........................ 1,165 72,359,554.27 21.04
$ 75,000.01 to 100,000.00........................ 686 59,566,881.05 17.32
$100,000.01 to 150,000.00........................ 536 64,018,046.36 18.61
$150,000.01 to 200,000.00........................ 179 30,612,756.20 8.90
$200,000.01 to 250,000.00........................ 68 15,132,210.60 4.40
$250,000.01 to 300,000.00........................ 36 9,842,907.67 2.86
$300,000.01 to 350,000.00........................ 20 6,614,465.98 1.92
$350,000.01 to 400,000.00........................ 9 3,435,962.92 1.00
$400,000.01 to 500,000.00........................ 3 1,413,924.47 0.41
$700,000.01 to 800,000.00........................ 1 771,813.13 0.22
----- --------------- ------
Total.................................. 5,189 $343,907,629.11 100.00%
===== =============== ======
</TABLE>
FIXED RATE GROUP
ORIGINATORS OF THE MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE CUT-OFF DATE
NUMBER OF AGGREGATE AGGREGATE
ORIGINATOR MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
---------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Affiliated:
Retail......................................... 3,114 $178,588,552.08 51.93%
Broker Network................................. 1,539 116,820,970.20 33.97
Unaffiliated..................................... 536 48,498,106.83 14.10
----- --------------- ------
Total.................................. 5,189 $343,907,629.11 100.00%
===== =============== ======
</TABLE>
A-7
<PAGE> 87
FIXED RATE GROUP
GEOGRAPHICAL DISTRIBUTION OF MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE CUT-OFF DATE
NUMBER OF AGGREGATE AGGREGATE
STATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----- -------------- ----------------- -----------------
<S> <C> <C> <C>
Alaska........................................... 1 $ 127,435.28 0.04%
Arizona.......................................... 148 9,573,618.05 2.78
Arkansas......................................... 6 267,189.67 0.08
California....................................... 671 66,513,144.65 19.34
Colorado......................................... 119 9,312,008.16 2.71
Connecticut...................................... 35 2,425,500.56 0.71
Delaware......................................... 2 99,938.22 0.03
District of Columbia............................. 18 1,211,504.42 0.35
Florida.......................................... 610 40,755,537.10 11.85
Georgia.......................................... 121 7,783,231.69 2.26
Hawaii........................................... 61 11,664,040.04 3.39
Idaho............................................ 1 47,991.26 0.01
Illinois......................................... 204 10,589,261.38 3.08
Indiana.......................................... 130 6,026,444.90 1.75
Iowa............................................. 3 107,610.91 0.03
Kansas........................................... 39 1,655,180.05 0.48
Kentucky......................................... 45 1,930,096.39 0.56
Louisiana........................................ 122 5,591,601.89 1.63
Maryland......................................... 73 4,863,330.34 1.41
Massachusetts.................................... 76 6,155,098.72 1.79
Michigan......................................... 264 12,006,818.51 3.49
Minnesota........................................ 42 2,342,487.16 0.68
Mississippi...................................... 33 1,475,932.11 0.43
Missouri......................................... 130 5,940,318.74 1.73
Montana.......................................... 1 109,200.00 0.03
Nebraska......................................... 12 758,790.70 0.22
Nevada........................................... 52 4,239,952.53 1.23
New Jersey....................................... 104 6,658,955.95 1.94
New Mexico....................................... 13 874,968.76 0.25
New York......................................... 263 19,520,974.44 5.68
North Carolina................................... 102 6,415,461.83 1.87
North Dakota..................................... 1 45,505.39 0.01
Ohio............................................. 256 13,697,483.78 3.98
Oklahoma......................................... 66 2,879,569.26 0.84
Oregon........................................... 101 8,102,233.79 2.36
Pennsylvania..................................... 215 9,670,963.51 2.81
Rhode Island..................................... 22 1,152,782.38 0.34
South Carolina................................... 54 2,480,345.12 0.72
South Dakota..................................... 2 62,050.00 0.02
Tennessee........................................ 126 7,663,225.82 2.23
Texas............................................ 608 35,007,072.47 10.18
Utah............................................. 38 2,457,237.13 0.71
Virginia......................................... 67 4,611,961.99 1.34
</TABLE>
A-8
<PAGE> 88
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE CUT-OFF DATE
NUMBER OF AGGREGATE AGGREGATE
STATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----- -------------- ----------------- -----------------
<S> <C> <C> <C>
Washington....................................... 91 $ 6,748,957.53 1.96%
West Virginia.................................... 4 154,103.50 0.04
Wisconsin........................................ 36 2,004,713.03 0.58
Wyoming.......................................... 1 125,800.00 0.04
----- --------------- ------
Total.................................. 5,189 $343,907,629.11 100.00%
===== =============== ======
</TABLE>
ADJUSTABLE RATE GROUP
TYPE OF MORTGAGED PROPERTY
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE CUT-OFF DATE
NUMBER OF AGGREGATE AGGREGATE
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Single Family Residence.......................... 2,175 $219,608,210.07 90.60%
Condominium Unit................................. 131 10,629,982.22 4.39
Two-to-Four-Family Residence..................... 110 12,150,966.64 5.01
----- --------------- ------
Total.................................. 2,416 $242,389,158.93 100.00%
===== =============== ======
</TABLE>
ADJUSTABLE RATE GROUP
OCCUPANCY STATUS
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE CUT-OFF DATE
NUMBER OF AGGREGATE AGGREGATE
OCCUPANCY STATUS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
---------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Owner Occupied/Primary Residence................. 2,366 $238,512,484.19 98.40%
Non-Owner Occupied/Investment.................... 50 3,876,674.74 1.60
----- --------------- ------
Total.................................. 2,416 $242,389,158.93 100.00%
===== =============== ======
</TABLE>
A-9
<PAGE> 89
ADJUSTABLE RATE GROUP
COMBINED LOAN-TO-VALUE RATIO
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE CUT-OFF DATE
RANGE OF COMBINED NUMBER OF AGGREGATE AGGREGATE
LOAN-TO-VALUE RATIOS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
-------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
20.001% to 25.000%............................... 2 $ 59,000.00 0.02%
25.001% to 30.000%............................... 2 183,781.35 0.08
30.001% to 35.000%............................... 5 415,882.40 0.17
35.001% to 40.000%............................... 13 596,820.80 0.25
40.001% to 45.000%............................... 14 948,335.45 0.39
45.001% to 50.000%............................... 16 792,456.52 0.33
50.001% to 55.000%............................... 28 1,620,389.71 0.67
55.001% to 60.000%............................... 62 3,771,209.72 1.56
60.001% to 65.000%............................... 215 17,526,956.62 7.23
65.001% to 70.000%............................... 180 14,920,509.68 6.16
70.001% to 75.000%............................... 404 36,744,772.03 15.16
75.001% to 80.000%............................... 670 72,747,958.31 30.01
80.001% to 85.000%............................... 252 27,116,542.54 11.19
85.001% to 90.000%............................... 551 64,721,838.80 26.70
90.001% to 95.000%............................... 2 222,705.00 0.09
----- --------------- ------
Total.................................. 2,416 $242,389,158.93 100.00%
===== =============== ======
</TABLE>
ADJUSTABLE RATE GROUP
ORIGINAL TERM TO MATURITY
<TABLE>
<CAPTION>
PERCENTAGE OF
RANGE OF CUT-OFF DATE CUT-OFF DATE
ORIGINAL TERMS TO NUMBER OF AGGREGATE AGGREGATE
MATURITY (MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
169 to 180..................................... 49 $ 3,395,336.55 1.40%
349 to 360..................................... 2,367 238,993,822.38 98.60
----- --------------- ------
Total.................................. 2,416 $242,389,158.93 100.00%
===== =============== ======
</TABLE>
ADJUSTABLE RATE GROUP
REMAINING TERM TO MATURITY
<TABLE>
<CAPTION>
PERCENTAGE OF
RANGE OF CUT-OFF DATE CUT-OFF DATE
REMAINING TERMS TO NUMBER OF AGGREGATE AGGREGATE
MATURITY (MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
169 to 180..................................... 49 $ 3,395,336.55 1.40%
337 to 348..................................... 3 473,220.77 0.20
349 to 360..................................... 2,364 238,520,601.61 98.40
----- --------------- ------
Total.................................. 2,416 $242,389,158.93 100.00%
===== =============== ======
</TABLE>
A-10
<PAGE> 90
ADJUSTABLE RATE GROUP
RANGE OF MORTGAGE INTEREST RATES
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE CUT-OFF DATE
RANGE OF MORTGAGE NUMBER OF AGGREGATE AGGREGATE
INTEREST RATES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------- -------------- ----------------- -------------------
<S> <C> <C> <C>
5.001% to 5.500%............................. 1 $ 97,885.28 0.04%
5.501% to 6.000%............................. 4 449,950.00 0.19
6.001% to 6.500%............................. 2 226,800.00 0.09
6.501% to 7.000%............................. 24 2,873,777.17 1.19
7.001% to 7.500%............................. 57 7,137,431.51 2.94
7.501% to 8.000%............................. 131 16,951,632.70 6.99
8.001% to 8.500%............................. 192 24,481,653.22 10.10
8.501% to 9.000%............................. 335 38,931,697.81 16.06
9.001% to 9.500%............................. 321 36,112,098.17 14.90
9.501% to 10.000%............................. 417 40,627,932.34 16.76
10.001% to 10.500%............................. 286 27,198,956.22 11.22
10.501% to 11.000%............................. 258 19,853,900.93 8.19
11.001% to 11.500%............................. 114 8,423,236.63 3.48
11.501% to 12.000%............................. 83 6,576,051.16 2.71
12.001% to 12.500%............................. 42 3,139,958.54 1.30
12.501% to 13.000%............................. 53 3,411,428.77 1.41
13.001% to 13.500%............................. 43 2,710,344.48 1.12
13.501% to 14.000%............................. 35 2,065,989.45 0.85
14.001% to 14.500%............................. 16 983,599.63 0.41
14.501% to 15.000%............................. 1 27,600.00 0.01
15.001% to 15.500%............................. 1 107,234.92 0.04
----- --------------- ------
Total................................ 2,416 $242,389,158.93 100.00%
===== =============== ======
</TABLE>
A-11
<PAGE> 91
ADJUSTABLE RATE GROUP
CUT-OFF DATE PRINCIPAL BALANCE
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE CUT-OFF DATE
RANGE OF CUT-OFF DATE NUMBER OF AGGREGATE AGGREGATE
PRINCIPAL BALANCES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
--------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
$ 0.01 to 25,000.00........................ 43 $ 961,360.53 0.40%
$ 25,000.01 to 50,000.00........................ 420 16,609,158.66 6.85
$ 50,000.01 to 75,000.00........................ 554 34,628,927.00 14.29
$ 75,000.01 to 100,000.00........................ 490 42,793,201.70 17.65
$100,000.01 to 150,000.00........................ 530 64,169,850.96 26.47
$150,000.01 to 200,000.00........................ 188 32,374,392.93 13.36
$200,000.01 to 250,000.00........................ 100 22,249,750.13 9.18
$250,000.01 to 300,000.00........................ 44 12,048,078.84 4.97
$300,000.01 to 350,000.00........................ 34 11,091,067.31 4.58
$350,000.01 to 400,000.00........................ 7 2,656,892.94 1.10
$400,000.01 to 500,000.00........................ 6 2,806,477.93 1.16
----- --------------- ------
Total.................................. 2,416 $242,389,158.93 100.00%
===== =============== ======
</TABLE>
ADJUSTABLE RATE GROUP
RANGE OF GROSS MARGINS
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE CUT-OFF DATE
NUMBER OF AGGREGATE AGGREGATE
RANGE OF GROSS MARGINS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
---------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
0.501% to 1.000%............................... 1 $ 125,910.00 0.05%
2.001% to 2.500%............................... 1 114,000.00 0.05
2.501% to 3.000%............................... 4 334,900.00 0.14
3.001% to 3.500%............................... 18 2,480,373.82 1.02
3.501% to 4.000%............................... 19 2,064,238.74 0.85
4.001% to 4.500%............................... 39 4,869,043.62 2.01
4.501% to 5.000%............................... 567 59,563,878.45 24.57
5.001% to 5.500%............................... 421 45,125,541.92 18.62
5.501% to 6.000%............................... 537 46,671,690.62 19.25
6.001% to 6.500%............................... 161 21,062,794.94 8.69
6.501% to 7.000%............................... 407 35,491,679.14 14.64
7.001% to 7.500%............................... 110 12,227,204.93 5.04
7.501% to 8.000%............................... 52 4,576,070.21 1.89
8.001% to 8.500%............................... 32 2,979,809.53 1.23
8.501% to 9.000%............................... 16 1,619,045.19 0.67
9.001% to 9.500%............................... 12 1,179,604.09 0.49
9.501% to 10.000%............................... 12 1,232,272.39 0.51
10.001% to 10.500%............................... 4 488,766.77 0.20
10.501% to 11.000%............................... 2 137,334.57 0.06
11.001% to 11.500%............................... 1 45,000.00 0.02
----- --------------- ------
Total.................................. 2,416 $242,389,158.93 100.00%
===== =============== ======
</TABLE>
A-12
<PAGE> 92
ADJUSTABLE RATE GROUP
RANGE OF MAXIMUM MORTGAGE INTEREST RATES
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE CUT-OFF DATE
RANGE OF MAXIMUM NUMBER OF AGGREGATE AGGREGATE
MORTGAGE RATES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
---------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
11.001% to 11.500%............................... 1 $ 128,000.00 0.05%
11.501% to 12.000%............................... 2 197,700.00 0.08
12.001% to 12.500%............................... 2 227,685.28 0.09
12.501% to 13.000%............................... 16 1,656,778.94 0.68
13.001% to 13.500%............................... 22 2,889,257.33 1.19
13.501% to 14.000%............................... 43 6,216,304.65 2.56
14.001% to 14.500%............................... 107 14,251,657.89 5.88
14.501% to 15.000%............................... 214 26,923,251.97 11.11
15.001% to 15.500%............................... 262 33,708,845.80 13.91
15.501% to 16.000%............................... 338 38,065,774.99 15.70
16.001% to 16.500%............................... 261 26,693,205.93 11.01
16.501% to 17.000%............................... 340 29,825,215.19 12.30
17.001% to 17.500%............................... 240 21,208,920.40 8.75
17.501% to 18.000%............................... 230 17,234,031.66 7.11
18.001% to 18.500%............................... 101 7,854,361.78 3.24
18.501% to 19.000%............................... 77 5,708,488.49 2.36
19.001% to 19.500%............................... 37 2,426,374.15 1.00
19.501% to 20.000%............................... 43 2,607,803.95 1.08
20.001% to 20.500%............................... 40 2,434,196.10 1.00
20.501% to 21.000%............................... 27 1,416,551.52 0.58
21.001% to 21.500%............................... 12 687,152.91 0.28
21.501% to 22.000%............................... 1 27,600.00 0.01
----- --------------- ------
Total.................................. 2,416 $242,389,158.93 100.00%
===== =============== ======
</TABLE>
A-13
<PAGE> 93
ADJUSTABLE RATE GROUP
RANGE OF MINIMUM MORTGAGE INTEREST RATES
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE CUT-OFF DATE
RANGE OF MINIMUM NUMBER OF AGGREGATE AGGREGATE
MORTGAGE RATES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
---------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
4.501% to 5.000%............................... 1 $ 51,040.00 0.02%
5.001% to 5.500%............................... 3 256,694.49 0.11
5.501% to 6.000%............................... 3 374,345.45 0.15
6.001% to 6.500%............................... 2 203,613.36 0.08
6.501% to 7.000%............................... 12 1,649,614.46 0.68
7.001% to 7.500%............................... 39 4,857,365.93 2.00
7.501% to 8.000%............................... 115 14,829,413.70 6.12
8.001% to 8.500%............................... 158 19,898,454.21 8.21
8.501% to 9.000%............................... 328 38,302,605.03 15.80
9.001% to 9.500%............................... 317 35,266,665.61 14.55
9.501% to 10.000%............................... 418 40,382,923.55 16.66
10.001% to 10.500%............................... 318 30,863,626.29 12.73
10.501% to 11.000%............................... 279 22,436,542.45 9.26
11.001% to 11.500%............................... 131 11,226,636.93 4.63
11.501% to 12.000%............................... 88 7,739,219.02 3.19
12.001% to 12.500%............................... 47 3,977,551.80 1.64
12.501% to 13.000%............................... 57 3,900,906.01 1.61
13.001% to 13.500%............................... 45 2,891,329.82 1.19
13.501% to 14.000%............................... 36 2,102,989.45 0.87
14.001% to 14.500%............................... 16 983,599.63 0.41
14.501% to 15.000%............................... 2 86,786.82 0.04
15.001% to 15.500%............................... 1 107,234.92 0.04
----- --------------- ------
Total.................................. 2,416 $242,389,158.93 100.00%
===== =============== ======
</TABLE>
ADJUSTABLE RATE GROUP
ORIGINATORS OF THE MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE CUT-OFF DATE
NUMBER OF AGGREGATE AGGREGATE
ORIGINATOR MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
---------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Affiliated:
Retail......................................... 174 $ 21,245,581.15 8.77%
Broker Network................................. 1,604 144,140,685.25 59.47
Unaffiliated..................................... 638 77,002,892.53 31.77
----- --------------- ------
Total.................................. 2,416 $242,389,158.93 100.00%
===== =============== ======
</TABLE>
A-14
<PAGE> 94
ADJUSTABLE RATE GROUP
GEOGRAPHICAL DISTRIBUTION OF MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE CUT-OFF DATE
NUMBER OF AGGREGATE AGGREGATE
STATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----- -------------- ----------------- -----------------
<S> <C> <C> <C>
Arizona.......................................... 98 $ 9,732,444.27 4.02%
California....................................... 246 39,472,354.70 16.28
Colorado......................................... 100 10,020,567.61 4.13
Connecticut...................................... 41 3,706,904.65 1.53
District of Columbia............................. 9 1,005,309.34 0.41
Florida.......................................... 306 28,681,154.44 11.83
Georgia.......................................... 54 4,978,132.95 2.05
Hawaii........................................... 21 3,917,500.87 1.62
Idaho............................................ 5 654,686.23 0.27
Illinois......................................... 77 8,077,021.72 3.33
Indiana.......................................... 88 5,853,340.71 2.41
Iowa............................................. 13 662,316.69 0.27
Kansas........................................... 18 1,345,219.36 0.55
Kentucky......................................... 49 2,766,185.86 1.14
Louisiana........................................ 54 3,845,898.68 1.59
Maryland......................................... 32 3,240,405.05 1.34
Massachusetts.................................... 8 1,002,664.30 0.41
Michigan......................................... 57 3,848,286.14 1.59
Minnesota........................................ 66 5,464,091.72 2.25
Mississippi...................................... 12 871,523.04 0.36
Missouri......................................... 43 2,870,039.22 1.18
Montana.......................................... 4 509,558.25 0.21
Nebraska......................................... 35 2,727,280.52 1.13
Nevada........................................... 28 3,520,588.45 1.45
New Jersey....................................... 56 7,116,285.23 2.94
New Mexico....................................... 24 1,980,953.75 0.82
New York......................................... 52 8,175,808.05 3.37
North Carolina................................... 70 4,621,140.03 1.91
Ohio............................................. 180 12,782,576.45 5.27
Oklahoma......................................... 1 27,929.20 0.01
Oregon........................................... 89 10,232,334.26 4.22
Pennsylvania..................................... 56 4,441,415.72 1.83
Rhode Island..................................... 7 501,918.15 0.21
South Carolina................................... 54 3,618,295.24 1.49
Tennessee........................................ 36 3,250,752.16 1.34
Texas............................................ 90 9,124,964.50 3.76
Utah............................................. 78 9,338,659.93 3.85
Virginia......................................... 16 1,650,623.74 0.68
Washington....................................... 107 13,959,818.79 5.76
Wisconsin........................................ 34 2,641,058.96 1.09
Wyoming.......................................... 2 151,150.00 0.06
----- --------------- ------
Total.................................. 2,416 $242,389,158.93 100.00%
===== =============== ======
</TABLE>
A-15
<PAGE> 95
ANNEX B
GLOBAL CLEARANCE, SETTLEMENT AND
TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Mortgage
Pass-Through Certificates, Series 1998-C (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, 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
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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.
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
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on the sale side unless affirmative action were taken. At least three techniques
should be readily available to eliminate this potential problem:
(a) borrowing through Cedel or Euroclear for one day (until the
purchase side of the day trade is reflected in their Cedel or Euroclear
accounts) in accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a 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.
"United States Person": A Person who is (a) a citizen or resident of the
United States, (b) a corporation or partnership, including an entity treated as
a corporation or partnership for U.S. federal income tax purposes created in the
United States or organized under the laws of the United States or any state
thereof or the District of Columbia (except, in the case of a partnership, as
otherwise provided by Treasury regulations, (c) an estate the income of which is
includable in gross income for United States federal income tax purposes
regardless of its source, or (d) a trust whose administration is subject to the
primary supervision of a United States court and which has one or more of United
States persons who have the authority to control all substantial decisions of
the trust.
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PROSPECTUS
DATED SEPTEMBER 18, 1998
$2,000,000,000
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"), Aames Capital Acceptance
Corp. ("ACAC") or a special purpose entity formed in connection with a Series of
Certificates or Bonds (together with ACC and ACAC, 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 19 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> 99
(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, if specified in the
related Prospectus Supplement, (i) 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
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<PAGE> 100
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.
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.
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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 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.
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<PAGE> 102
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.
5
<PAGE> 103
TABLE OF CONTENTS
<TABLE>
<S> <C>
SUMMARY................................... 8
RISK FACTORS.............................. 19
Limited Liquidity....................... 19
Limited Assets; Limited Obligations..... 19
Nature of the Security for Mortgage
Loans................................ 19
Risks Associated with Prepayment of the
Mortgage Loans....................... 22
Environmental Statutes Affecting
Security Interests................... 23
Risks Associated With Certain
Origination Fees..................... 23
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
Negative Amortization................... 30
Forward Commitments; Prefunding
Accounts; Capitalized Interest
Accounts............................. 30
USE OF PROCEEDS........................... 31
AAMES CAPITAL CORPORATION................. 31
AAMES CAPITAL ACCEPTANCE CORP............. 31
THE SERVICER.............................. 32
General................................. 32
Mortgage Loan Delinquency and
Foreclosure Experience............... 32
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........................... 38
Revolving Period and Amortization
Period; Transferor Interest.......... 41
Reports to Securityholders.............. 41
CREDIT ENHANCEMENT........................ 43
Subordination........................... 43
Overcollateralization Feature........... 44
Reserve Accounts........................ 44
Financial Guaranty Insurance Policies... 44
Mortgage Pool Insurance Policies........ 45
Special Hazard Insurance Policies....... 46
Bankruptcy Bonds........................ 46
Cross Support........................... 46
Other Insurance, Guarantees and Similar
Instruments or Agreements............ 47
Maintenance of Credit Enhancement....... 47
MATURITY, PREPAYMENT AND YIELD
CONSIDERATIONS.......................... 48
THE POOLING AND SERVICING AGREEMENT....... 50
Assignment of Mortgage Loans............ 50
Payments on the Mortgage Loans.......... 53
Investment of Accounts.................. 53
Permitted Investments................... 53
Monthly Advances and Compensating
Interest............................. 54
Realization upon Defaulted Mortgage
Loans................................ 55
General Servicing Procedures............ 56
Sub-Servicers........................... 56
Servicing and Other Compensation and
Payment of Expenses.................. 56
Maintenance of Hazard Insurance......... 57
Enforcement of Due-on-Sale Clauses...... 57
Voting.................................. 58
Amendments.............................. 58
Certificate Events of Default........... 59
Rights upon Certificate Events of
Default.............................. 59
Termination; Optional Termination....... 60
Evidence as to Compliance............... 60
Indemnification of Officers and
Directors of the Transferors......... 60
The Trustee............................. 61
THE INDENTURE............................. 61
General................................. 61
Modification of Indenture............... 61
Bond Events of Default.................. 62
Rights upon Bond Events of Default...... 63
List of Bondholders..................... 63
Annual Compliance Statement............. 63
Trustee's Annual Report................. 64
Satisfaction and Discharge of
Indenture............................ 64
Redemption of Bonds..................... 64
Reports by Trustee to Bondholders....... 64
Limitation on Suits..................... 64
CERTAIN LEGAL ASPECTS OF THE MORTGAGE
LOANS AND RELATED MATTERS............... 64
Nature of the Mortgage Loans............ 65
Foreclosure/Repossession................ 65
Rights of Redemption.................... 66
Certain Provisions of California Deeds
of Trust............................. 66
</TABLE>
6
<PAGE> 104
<TABLE>
<S> <C>
Anti-deficiency Legislation and Other
Limitations on Lenders............... 67
Enforceability of Due-on-Sale Clauses... 68
Prepayment Charges...................... 68
Applicability of Usury Laws............. 68
Soldiers' and Sailors' Civil Relief
Act.................................. 69
Environmental Considerations............ 69
CERTAIN FEDERAL INCOME TAX CONSEQUENCES... 70
Taxation of Certificates................ 70
General................................. 70
Taxation of Debt Certificates (Including
Regular Certificates)................ 70
Taxation of Certificates as to Which a
REMIC Election Has Been Made......... 76
Taxation of the REMIC and its Holders... 76
REMIC Expenses; Single Class REMICs..... 77
Taxation of the REMIC................... 77
Taxation of Holders of Residual
Certificates......................... 79
Administrative Matters.................. 81
Tax Status as a Grantor Trust........... 81
Tax Characterization of the Trust as a
Partnership; Tax Consequences to
Holders
of the Certificates Issued By a
Partnership.......................... 84
Certain Certificates Treated as
Indebtedness......................... 88
Taxation of Bonds....................... 90
Miscellaneous Tax Aspects............... 90
Tax Treatment of Foreign Investors...... 91
STATE TAX CONSIDERATIONS.................. 92
ERISA CONSIDERATIONS...................... 92
Plan Asset Regulations.................. 93
Prohibited Transaction Class
Exemption............................ 93
LEGAL INVESTMENT CONSIDERATIONS........... 95
SMMEA................................... 95
FFIEC Policy Statement.................. 95
General................................. 95
METHOD OF DISTRIBUTION.................... 96
LEGAL MATTERS............................. 96
FINANCIAL INFORMATION..................... 96
RATING.................................... 97
INDEX OF PRINCIPAL TERMS.................. 98
</TABLE>
7
<PAGE> 105
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 $2,000,000,000 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"), Aames Capital
Acceptance Corp., a Delaware corporation ("ACAC")
and a wholly owned limited purpose finance
subsidiary of AFC or a special purpose entity
formed in connection with a Series of Certificates
or Bonds (together with ACC and ACAC, the
"Transferors"). The principal offices of ACAC and
ACC are 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."
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,
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<PAGE> 106
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
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
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<PAGE> 107
manufactured housing (which is permanently affixed
to and treated as real property under local law),
but excluding cooperatives 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 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
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<PAGE> 108
Mortgage Rates borne by the Mortgage Loans and
(viii) the geographic distribution of the Mortgaged
Properties on a state-by-state basis.
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 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
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<PAGE> 109
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 Mortgage 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, as 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
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<PAGE> 110
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.
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
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<PAGE> 111
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.
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 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
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<PAGE> 112
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. 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
Agreement -- 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.
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<PAGE> 113
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 "real
estate assets" for purposes of Section 856(c)(4)(A)
of the Internal Revenue Code of 1986, as amended
(the "Code"), and assets described in Section
7701(a)(19)(C)(v) of the Code.
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 includable 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 "real estate assets" for purposes of
Section 856(c)(4)(A) of the Code and
"loans . . . secured by an interest in real
property" within the meaning of Section
7701(a)(19)(C)(v) of the Code.
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,
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<PAGE> 114
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 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
"real estate assets" for purposes of Section
856(c)(4)(A) of the Code and "loans . . . secured
by an interest in real property" within the meaning
of Section 7701(a)(19)(C)(v) of the Code.
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 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 and
the excise tax provisions of Section 4975 of the
Code, and to determine whether a prohibited
transaction exemption granted by the Department of
Labor is 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 investment 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
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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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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 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 Sub-Servicer took
the same steps in realizing upon a defaulted Mortgage Loan having a small
remaining principal balance as it would in the case of a defaulted Mortgage Loan
having a larger principal balance, the amount realized after expenses of
liquidation would be smaller as a percentage of the outstanding principal
balance of the smaller Mortgage Loan than would be the case with a larger
Mortgage Loan. Because the average outstanding principal balances of 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.
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.
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 economic, social and other factors, including state and federal
income tax policies, interest rates, the availability of alternative financing
and homeowner mobility. Therefore, no assurance can be given as to the level of
prepayments that the Trust or the Trust Estate 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 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.
In addition, in order to refinance a first lien mortgage loan, the borrower must
generally repay any junior mortgage loans. However, a small principal balance
may make refinancing a Mortgage Loan at a lower interest rate less attractive to
the borrower as the perceived impact to the borrower of lower interest rates on
the size of the monthly payment may not be significant. Other factors that might
be expected to affect the prepayment rate of the Mortgage Pool include general
economic conditions, possible future changes affecting the deductibility for
federal income tax purposes of interest payments on mortgage loans, the amounts
of and interest rates on the underlying senior mortgage loans and the tendency
of borrowers to use first lien mortgage loans as long-term financing for home
purchase and junior mortgage loans as shorter-term financing for a variety of
purposes, including home improvement, education expenses, debt consolidation and
purchases of consumer durables such as automobiles. Accordingly, the Mortgage
Loans may experience higher rates of prepayment than traditional first lien
mortgage loans. See "Maturity, Prepayment and Yield Considerations".
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 of Mortgage
Loans in a Mortgage Loan Group required or permitted to be made by the Sponsor,
the Servicer and, under certain limited circumstances, as applicable, the
Certificate Insurer under the related Pooling and Servicing Agreement or
Servicing Agreement will have the same effect on Securityholders as a prepayment
of the related Mortgage Loans. Prepayments and such repurchases and purchases
will accelerate the receipt of distributions of monthly principal on the
Certificates or the Bonds, as applicable. 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" herein. The Servicer's
practice of soliciting refinancings from existing borrowers under loans
originated by Affiliated Originators may have the effect of increasing the rate
of prepayment, due to
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refinancings, on the Mortgage Loans. See "Origination and Servicing of the
Mortgage Loans -- Servicing of the Mortgage Loans" herein.
ENVIRONMENTAL STATUTES AFFECTING SECURITY INTERESTS
A substantial portion of the 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. These costs, which could be substantial, could be a liability
of the Trust or the 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. 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 or
cross-collateralization features described herein.
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 requiring
accelerated distributions in reduction of the Principal Balances of Bonds or
Certificates.
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
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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 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.
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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 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
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<PAGE> 123
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 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
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<PAGE> 124
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.
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
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<PAGE> 125
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 the earlier of the
completion of such Mortgage Pool and the end of the Prefunding Period (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.
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.
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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 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.
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NEGATIVE AMORTIZATION
If so specified in the related Prospectus Supplement, a Mortgage Pool may
include Mortgage Loans that provide for the temporary or permanent deferral of
all or any portion of one or more specified Monthly Payments in respect of
interest either for an initial period from the origination date of such Mortgage
Loans or during the term of such Mortgage Loans. The provisions governing such
deferred payments of interest may provide that such deferral will result in a
decrease in the rate of amortization of such Mortgage Loan such that in any
month in which interest is so deferred, the interest due during that period (the
"Deferred Interest") would be added to the principal balance of the related
Mortgage Loan ("Negative Amortization"). Each such Mortgage Loan will provide
that all Deferred Interest will bear interest at the Mortgage Loan rate until
paid. Negative Amortization may affect the overall rate of amortization of the
Mortgage Loan and in the aggregate may effect the payment and prepayment
experience of the related Mortgage Pool.
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
permitting Forward Commitments pursuant to which the related Transferor will
agree to transfer additional Mortgage Loans into the related Mortgage Pool
during the Funding Period following the date on which the related Securities are
issued. The Forward Commitment may permit the transfer to the related 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 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 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
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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
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 Aames
Financial Corporation ("AFC"). ACC is primarily engaged in acquiring, owning,
transferring and servicing Mortgage Loans. ACC maintains its principal offices
at 350 South Grand Avenue, Los Angeles, California 90071 and its telephone
number is (213) 210-5000. 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 AFC. ACAC's principal office is located at 350 South Grand
Avenue, Los Angeles, California 90071 and its telephone number is (213)
210-5270. 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.
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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 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
----------------------------
1995 1996 1997
------ ------- -------
<S> <C> <C> <C>
Percentage of dollar amount of delinquent loans to loans
serviced
(period end)(1)(2)
One Month................................................. 3.9% 4.9% 4.3%
Two Months................................................ 1.6% 1.8% 1.9%
Three or More Months:
Not Foreclosed(3)...................................... 5.0% 8.0% 8.1%
Foreclosed(4).......................................... 1.5% 1.0% 1.0%
------ ------- -------
Total.................................................. 11.9% 15.7% 15.3%
====== ======= =======
Percentage of dollar amount of loans foreclosed to loans
serviced
(period end)(2)........................................... 1.2% 1.1% 1.5%
Number of loans foreclosed.................................. 159 221 560
Principal amount at time of foreclosure of foreclosed loans
(in thousands)............................................ $6,675 $14,349 $48,029
Losses on foreclosed loans included in pools of loans
securitized
(in thousands)............................................ $ 322 $ 1,342 $ 5,747
</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.
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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, 1997. While 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, management expects loss rates to increase as
each Sponsor originates and/or purchases a larger portion of higher credit grade
loans which generally carry higher loan to value ratios. 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 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 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. 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
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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.
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 (subject to any escrow
for repairs) 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
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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 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: 350 South Grand
Avenue, Los Angeles, California 90071, 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
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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 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").
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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.
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
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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
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
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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 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
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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.
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
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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
(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
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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;
(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.
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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 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
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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.
OVERCOLLATERALIZATION FEATURE
If so specified in the related Prospectus Supplement, credit enchancement
may include overcollateralization resulting from (i) the application of excess
cash on specified Distribution Dates to the reduction of the principal balances
of the Certificates and/or Bonds, as applicable, so that over time the
outstanding principal balance of the related Mortgage Loans will exceed the
aggregate of the principal balances of the Certificates and/or Bonds, as
applicable, or (ii) collateral securing the Mortgage Loans having a value at the
Closing Date in excess of the aggregate of the principal balances of the
Certificates and/or Bonds, as applicable (any such feature, an
"Overcollateralization Feature"). Any Overcollateralization Feature will be
described more fully in the related Prospectus Supplement.
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 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.
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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 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.
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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.
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 United States
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.
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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.
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
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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 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.
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
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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.
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.
With respect to Mortgage Loans that provide for Negative Amortization, the
related mortgagor has the option to defer payments of interest for periods
specified in such Mortgage Loan. In the aggregate, deferral of interest may
result in reduced collections during one or more Collection Periods, although
collections in future Collection Periods may be relatively greater because (i)
interest not paid during such period will be added to the principal balance of
the related Mortgage Loan to be repaid over time and (ii) such Deferred Interest
will bear interest at the interest rate specified in the Mortgage Loan each
month until paid, increasing the aggregate amount of interest to be paid by the
related mortgagor over time. In the aggregate, Negative Amortization of Mortgage
Loans may have the effect of reducing the overall payment and repayment rate
experience of a Mortgage Pool.
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.
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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.
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;
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(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.
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
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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.
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.
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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.
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.
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(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 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
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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 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 subject to
certain limitations set forth in the Prospectus Supplement. Any such Mortgage
Loan so reacquired will be withdrawn from the related Mortgage Pool on a Deposit
Date at the Loan Withdrawal Amount thereof.
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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. Beginning in November 1996, the Servicer began to expand the
number of states in which it services loans directly. During fiscal 1998, the
Servicer expects to service directly substantially all loans it has originated
or purchased. 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 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
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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 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
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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.
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.
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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 levels, and for periods 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 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
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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 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.
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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 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
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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 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.
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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.
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.
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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 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.
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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 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
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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.
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
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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 judgments, numerous
other federal and state statutory provisions, including the federal bankruptcy
laws and state laws affording relief to debtors, may interfere with or affect
the ability of the secured mortgage lender to realize upon collateral or enforce
a deficiency judgment. For example, with respect to federal bankruptcy law, a
court with federal bankruptcy jurisdiction may permit a debtor through his or
her Chapter 11 or Chapter 13 rehabilitative plan to cure a monetary default in
respect of a mortgage loan on 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 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
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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 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.
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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 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.
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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, as amended (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 includable in income by
holders thereof 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
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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. Because
interest on the Debt Certificates must in any event be accounted for under an
accrual method, applying either analysis would result in only a slight
difference in the timing of the inclusion of income of the yield on the Debt
Certificates. Nevertheless, 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 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
includable 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 includable
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
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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.
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 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
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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 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
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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.
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 includable 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 includable 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
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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. If such an election were made with respect to a Debt
Certificate with market discount, the Certificateholder would be deemed to have
made an election to include currently market discount in income with respect to
all other debt instruments having market discount that such Certificateholder
acquires during the taxable year of the election or thereafter and possibly
previously acquired instruments. Similarly, a Certificateholder that made this
election for a Certificate that is acquired at a premium would be deemed to have
made an election to amortize bond premium with respect to all debt instruments
having amortizable bond premium that such Certificateholder owns or acquires.
See "-- Premium" and "-- Election to Treat all Interest as Original Issue
Discount" below. Each of these elections to accrue interest, discount and
premium with respect to a Certificate on a constant yield method or as interest
would be irrevocable.
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.
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
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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 includable 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 includable 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
includable 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 "real
estate assets" for purposes of Section 856(c)(4)(A) of the Code and assets
described in 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 REMIC's assets are qualifying assets. Moreover,
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 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. 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
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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, Section 68 of the Code provides
that the amount of itemized deductions otherwise allowable for the taxable year
for an individual whose adjusted gross income exceeds a specified amount will be
reduced by the lesser of (i) 3% of the excess of adjusted gross income over the
applicable amount, or (ii) 80% of the amount of itemized deductions otherwise
allowable for such taxable year. The reduction or disallowance of this deduction
may have a significant impact on the yield of the Regular 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 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
"real estate assets" within the meaning of Section 856(c)(4)(A) of the Code, and
"loans . . . secured by an interest in real property" under Section
7701(a)(19)(C)(v) 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
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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 yield 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 Other Possible Taxes. 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 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.
REMICs also are subject to federal income tax at the highest corporate rate
on "net income from foreclosure property," determined by reference to the rules
applicable to real estate investment trusts. "Net income from foreclosure
property" generally means gain from the sale of foreclosure property that is
inventory property, and gross income from foreclosure property other than
qualifying rents and other qualifying income for a real estate investment trust.
Unless otherwise disclosed in the related Prospectus Supplement, it is not
anticipated that any REMIC will recognize "net income from foreclosure property"
subject to federal income tax.
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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 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
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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.
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
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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.
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
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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 "real estate assets" for purposes of Section
856(c)(4)(A) of the Code and "loans . . . secured by an interest in real
property" within the meaning of Section 7701(a)(19)(C)(v) of the Code (assets
qualifying under one or more of those sections, applying each section
separately, "qualifying assets") to the extent that the Trust's assets are
qualifying assets. The Pass-Through 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 "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 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
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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.
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
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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 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.
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.
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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 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
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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
contribute its assets to a new partnership, and the Trust (as part of the
termination) would be treated as distributing the newly-created partnership
interests to the partners in liquidation. 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 (includable 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.
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
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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 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
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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 expect 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 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
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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 would differ to the degree 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 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 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.
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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 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); (ii) 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); (iii) 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)(4)(A); and (iv) Bonds held by a regulated
investment company will not constitute "Government securities" within the
meaning of Code Section 851(b)(3)(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 based 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 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
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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
(defined below). 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 Foreign Investor, 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. For purposes of this summary, the
term "United States holder" means a holder who is a citizen or resident of the
United States, a corporation or partnership including an entity treated as a
corporation or partnership for United States tax purposes or other entity
created or organized under the laws of the United States or any political
subdivision thereof, an estate whose income is includable in gross income for
United States federal income tax purposes regardless of its source, or a trust
if (i) a court within the United States is able to exercise primary supervision
over the administration of the trust, and (ii) one or more United States persons
have authority to control all substantial decisions of the trust. The term
"Foreign Investor" means a holder who is for United Stated federal income tax
purposes, a nonresident alien individual, a foreign corporation, a foreign
partnership or a foreign estate or trust. 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) United States withholding tax. 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
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transferor reasonably expects that the REMIC will distribute to the transferee
residual interest holder amounts that will equal at least 30% of each excess
inclusion, and that such amounts will be distributed at or after the time at
which the excess inclusions accrue and not later than the calendar year
following the calendar year of accrual. If a 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.
Final regulations dealing with withholding tax on income paid to foreign
persons and related matters (the "New Withholding Regulations") were issued by
the Treasury Department on October 6, 1997. The New Withholding Regulations will
generally be effective for payments made after December 31, 1999, subject to
certain transition rules. Foreign Investors are strongly urged to consult their
own tax advisors with respect to the New Withholding Regulations.
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 church or governmental plan that is a Qualified
Retirement Plan and exempt from taxation under Sections 401(a) and 501(a) of the
Code, however, is subject to the prohibited transaction rules set forth in
Section 503 of the Code.
Section 404 of ERISA imposes general fiduciary requirements, including
those of investment prudence and diversification and the requirement that 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.
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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") describing whether or
not a Plan's assets will 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 underlying 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 then any party exercising management or discretionary control regarding
those assets may be deemed to be a Plan "fiduciary," and thus subject to the
fiduciary requirements of ERISA and the prohibited transaction provisions of
ERISA and Section 4975 of the Code with respect to the investing Plan. In
addition, if the Mortgage Loans were to constitute Plan assets, then the
acquisition or holding of Securities by a Plan, as well as the operation of the
Trust 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
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<PAGE> 191
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. PTCE 83-1 also exempts from
the prohibited transaction rules 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, sales 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 to PTCE 83-1, the DOL has granted to certain underwriters
and/or placement agents individual prohibited transaction exemptions, commonly
referred to as the Underwriter Exemptions, PTE 97-34, 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 84-14, regarding investments effected by "qualified plan asset managers,"
PTCE 90-1, regarding investments by insurance company pooled separate accounts,
PTCE 91-38, regarding investments by bank collective investment funds, PTCE
95-60, regarding investments by insurance company general accounts and PTCE
96-23, regarding investments effected by "in-house asset managers." However,
even if the conditions specified in 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.
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<PAGE> 192
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. 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.
95
<PAGE> 193
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 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, as amended, 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
96
<PAGE> 194
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.
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.
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<PAGE> 195
INDEX OF PRINCIPAL TERMS
Unless the context indicates otherwise, the following capitalized terms
shall have the meanings set forth on the pages indicated below:
1933 Act...................................................................4, 96
Aames Guidelines..............................................................33
ACAC....................................................................1, 8, 31
ACC.....................................................................1, 8, 31
Accounts......................................................................36
Accrual Certificates..........................................................40
AFC........................................................................8, 31
Affiliated Originators........................................................33
Amortization Period.......................................................11, 41
Appraised Value...............................................................29
ARM...........................................................................83
ARM Loans.....................................................................25
Available Funds...............................................................39
Balloon Loans.................................................................20
Balloon payment...............................................................20
Bankruptcy Bond...........................................................14, 46
Bond Account..................................................................38
Bond Event of Default.........................................................62
Bondholders................................................................9, 35
Bond Issuer.................................................................1, 8
Bond Rate.....................................................................40
Bonds.......................................................................1, 8
Buydown Funds.................................................................76
Capitalized Interest Account..................................................12
Cash flow investments.........................................................77
Cede......................................................................18, 36
CERCLA........................................................................69
Certificate Account...........................................................38
Certificate Event of Default..................................................59
Certificate Rate..............................................................40
Certificateholders.........................................................8, 35
Certificates................................................................1, 8
Class...................................................................2, 8, 35
Closing Date..................................................................30
Code......................................................................16, 70
Collection Account............................................................53
Collection Period.............................................................39
Combined Loan-to-Value Ratio..................................................29
Commission.....................................................................4
Compensating Interest Payment.................................................55
Cut-off Date..................................................................10
Debt Certificates.............................................................70
Deferred Interest.............................................................30
Definitive Securities.....................................................17, 36
Deleted Mortgage Loan.........................................................52
Deposit Date..................................................................53
Detailed Description..........................................................28
Disqualified Organization.....................................................80
Disqualified Persons..........................................................92
Distribution Date..........................................................2, 38
DOL...........................................................................93
DOL Regulations...............................................................93
DTC.......................................................................18, 36
EPA...........................................................................69
ERISA.....................................................................17, 92
ERISA Plans...................................................................92
Exchange Act...................................................................4
Financial Guaranty Insurance Policy.......................................13, 44
Foreign Investors.............................................................91
Forward Commitment............................................................11
Funding Period................................................................11
Garn-St. Germain Act..........................................................68
Indenture...............................................................1, 8, 35
Indirect Participant..........................................................36
Insurance Proceeds............................................................39
Insured Amount............................................................14, 45
Interest Weighted Class.......................................................25
IRAs..........................................................................92
Junior Loan...................................................................20
Liquidated Mortgage Loan......................................................55
Liquidation Proceeds..........................................................39
Loan Schedule.................................................................50
Loan Withdrawal Amount........................................................52
Lockout periods...............................................................28
Monthly Advance...............................................................54
Mortgage File.................................................................50
Mortgage Loans..............................................................2, 9
Mortgage Note..............................................................9, 38
Mortgage Pool..............................................................9, 17
Mortgage Pool Insurance Policy............................................14, 45
Mortgage Pool Insurer.........................................................45
Mortgaged Property........................................................10, 26
Mortgaged Properties..........................................................28
Mortgagor.................................................................13, 19
Multiple Variable Rate Debt Certificate.......................................74
Negative Amortization.........................................................30
Net Liquidation Proceeds......................................................39
OID...........................................................................70
OID Regulations...............................................................70
Objective Rate................................................................73
Originators................................................................2, 33
Overcollateralization Feature.................................................44
Participants..................................................................36
Parties in Interest...........................................................92
Pass-Through Certificates.....................................................81
Payment Date...........................................................2, 36, 38
Pay-Through Certificate.......................................................72
Permitted Investments.........................................................53
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<PAGE> 196
Plan Asset Regulations........................................................17
Plan(s)...................................................................17, 92
Policy Statement..............................................................95
Pool Balance..................................................................42
Pool Factor...................................................................42
Pooling and Servicing Agreement............................................8, 35
Prefunding Account............................................................12
Prefunding Amount.........................................................12, 30
Prepayment Assumption.........................................................72
Presumed Single Qualified Floating Rate.......................................73
Presumed Single Variable Rate.................................................75
Principal Prepayments.........................................................40
Principal Weighted Class......................................................25
PTCE 83-1.....................................................................93
Qualified floating rate.......................................................73
Qualified inverse floating rate...............................................73
Qualified Replacement Mortgage Loan...........................................52
Qualified Retirement Plans....................................................92
Rating Agency.............................................................15, 97
Regular Certificates......................................................16, 70
Relief Act....................................................................24
REMIC......................................................................2, 70
REMIC Certificates............................................................76
REMIC Regulations.............................................................70
REO Property..................................................................54
Reserve Account...........................................................13, 44
Residual Certificates.....................................................16, 29
Residual Interest Certificate.................................................79
Retail Bond...................................................................90
Revolving Period..........................................................11, 41
Riegle Act................................................................24, 68
SBJPA.........................................................................80
Securities..................................................................1, 8
Securities Insurer............................................................44
Security Register.............................................................38
Securityholders.........................................................2, 9, 35
Security Principal Balance....................................................40
Senior Certificates........................................................8, 36
Senior Lien...................................................................20
Series......................................................................1, 8
Servicer................................................................1, 8, 32
Servicing Advance.............................................................56
Servicing Agreement............................................................2
Single Variable Rate Debt Certificate.........................................73
SMMEA.........................................................................17
Special Hazard Insurance Policy...........................................14, 46
Special Hazard Insurer........................................................46
Standard Hazard Insurance Policies............................................28
Startup Day...................................................................78
Sub-Servicer...................................................................8
Subordinated Classes..........................................................36
Subordinated Certificates......................................................8
Tax-Favored Plans.............................................................92
Thrift institutions...........................................................80
Tiered REMICS.................................................................77
Title V.......................................................................68
Transferor(s)...............................................................1, 8
Transferor Interest...........................................................11
Trust.......................................................................1, 8
Trust Estate................................................................1, 8
Trustee.....................................................................1, 8
Unaffiliated Originators......................................................33
Underwriters..................................................................96
Variable Rate Debt Certificate................................................72
Variable Rate Debt Instrument.................................................72
Variable Rate Pass-Through Certificates.......................................83
99
<PAGE> 197
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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 Offered Certificates offered hereby nor an offer of the Offered 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.
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TABLE OF CONTENTS
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<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-22
Description of the Certificates.............. S-27
Credit Enhancements.......................... S-38
The Mortgage Loans........................... S-43
Prepayment and Yield Considerations.......... S-48
Origination and Servicing of the Mortgage
Loans...................................... S-58
The Certificate Insurance Policy and the
Certificate Insurer........................ S-66
Certain Federal Income Tax Consequences...... S-69
ERISA Considerations......................... S-70
Use of Proceeds.............................. S-72
Legal Investment Considerations.............. S-72
Underwriting................................. S-73
Report of Experts............................ S-74
Legal Matters................................ S-74
Rating of the Offered Certificates........... S-74
Index of Principal Terms..................... S-76
ANNEX A: Description of the Mortgage Pool.... A-1
ANNEX B: Global Clearance, Settlement and Tax
Documentation Procedures............ B-1
Prospectus
Prospectus Supplement........................ 4
Available Information........................ 4
Incorporation of Certain Documents by
Reference.................................. 4
Reports to Securityholders................... 5
Summary...................................... 8
Risk Factors................................. 19
The Trusts and Trust Estates................. 27
Use of Proceeds.............................. 31
Aames Capital Corporation.................... 31
Aames Capital Acceptance Corporation......... 31
The Service.................................. 32
The Originators.............................. 33
Description of the Securities................ 35
Credit Enhancement........................... 43
Maturity, Prepayment and Yield
Considerations............................. 48
The Pooling and Servicing Agreement.......... 50
The Indenture................................ 61
Certain Legal Aspects of the Mortgage Loans
and Related Matters........................ 64
Certain Federal Income Tax Consequences...... 70
State Tax Considerations..................... 92
ERISA Considerations......................... 92
Legal Investment Considerations.............. 95
Method of Distribution....................... 96
Legal Matters................................ 96
Financial Information........................ 96
Rating....................................... 97
Index of Principal Terms..................... 98
</TABLE>
AAMES MORTGAGE TRUST
1998-C
$650,000,000
MORTGAGE PASS-THROUGH CERTIFICATES,
SERIES 1998-C
$118,400,000 6.239% CLASS A-1F CERTIFICATES
$80,300,000 6.037% CLASS A-2F CERTIFICATES
$39,900,000 6.091% CLASS A-3F CERTIFICATES
$72,100,000 6.268% CLASS A-4F CERTIFICATES
$40,300,000 6.633% CLASS A-5F CERTIFICATES
$39,000,000 6.133% CLASS A-6F CERTIFICATES
$195,000,000 CLASS A-1A ADJUSTABLE
RATE CERTIFICATES
$65,000,000 5.912% CLASS A-2A CERTIFICATES
AAMES CAPITAL CORPORATION
Sponsor and Servicer
-------------------------------------
PROSPECTUS SUPPLEMENT
-------------------------------------
NationsBanc Montgomery
Securities LLC
Bear, Stearns & Co. Inc.
First Union Capital Markets
Prudential Securities Incorporated
Donaldson Lufkin & Jenrette
Securities Corporation
September 18, 1998
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