<PAGE>
Filed Pursuant to Rule 424B(5)
Registration No. 333-64903
PROSPECTUS SUPPLEMENT
(To Prospectus dated October 29, 1999)
$400,000,000
AAMES MORTGAGE TRUST 1999-2
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 1999-2
AAMES CAPITAL CORPORATION
AS SPONSOR AND SERVICER
<TABLE>
<CAPTION>
OFFERED PRINCIPAL PASS-THROUGH PRICE TO UNDERWRITING PROCEEDS TO THE
CERTIFICATES BALANCE RATE PUBLIC(1) DISCOUNT SPONSOR(1)(2)
- -------------- -------------- ------------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Class A-F $229,500,000 7.589%(3) 99.99988% 0.350% 99.64988%
Class A-V1 $155,000,000 LIBOR + 0.39%(3)(4) 100.00000% 0.350% 99.65000%
Class A-V2 $ 15,500,000 LIBOR + 0.45%(3)(4) 100.00000% 0.350% 99.65000%
Total $400,000,000 $399,999,725 $1,400,000 $398,599,725
</TABLE>
- ------------
(1) Plus accrued interest, if any, from November 1, 1999 in the case of the
Class A-F Certificates.
(2) Before deducting expenses, estimated to be approximately $600,000.
(3) Subject to a maximum rate as described in this prospectus supplement.
(4) Subject to a step-up if the optional termination is not exercised.
YOU SHOULD CAREFULLY RE-VIEW THE INFORMATION UNDER THE CAPTION "RISK FACTORS"
BEGINNING ON PAGE S-10 IN THIS PROSPECTUS SUPPLEMENT AND ON PAGE 23 IN THE
PROSPECTUS.
THE CERTIFICATES ARE NON-RECOURSE OBLIGATIONS OF THE TRUST ONLY AND DO NOT
REPRESENT AN INTEREST IN OR OBLIGATION OF AAMES CAPITAL CORPORATION, THE
TRUSTEE OR ANY OF THEIR AFFILIATES.
THIS PROSPECTUS SUPPLE-MENT MUST BE ACCOMPANIED BY THE PROSPECTUS IF IT IS
BEING USED TO OFFER AND SELL THE CERTIFICATES.
THE CERTIFICATES
o represent the entire beneficial interest in a
trust, whose assets include a pool of fixed
rate and adjustable rate mortgage loans
secured by first and junior liens on one-to
four-family residential properties.
o currently have no trading market.
o are obligations of the trust only and are not
obligations of the sponsor, the servicer or
their affiliates.
CREDIT ENHANCEMENT
o will be provided in the form of
overcollateralization, cross-collateraliza-
tion and a certificate guaranty insurance
policy issued by Financial Security Assurance
Inc. that will unconditionally and
irrevocably guarantee payment of interest due
on the offered certificates on each
distribution date and ultimate collection of
the principal balance of the certificates.
[GRAPHIC OMITTED]
EXPECTED RATINGS
o AAA from S&P and Aaa from Moody's for the
offered certificates.
THE TRUST
o will make REMIC elections for federal income
tax purposes.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE CERTIFICATES OR PASSED UPON
THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The offered certificates will be delivered in book-entry form only, on or
about November 18, 1999.
BANC OF AMERICA SECURITIES LLC
GREENWICH CAPITAL MARKETS, INC.
LEHMAN BROTHERS
October 29, 1999
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS SUPPLEMENT
AND THE ACCOMPANYING PROSPECTUS
We provide information to you about the certificates in two separate
documents that provide progressively more detail:
o the accompanying prospectus, which provides general information, some
of which may not apply to your certificates; and
o this prospectus supplement, which describes the specific terms of your
certificates.
YOU SHOULD RELY PRIMARILY ON THE DESCRIPTION OF YOUR CERTIFICATES IN THIS
PROSPECTUS SUPPLEMENT.
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We
have not authorized anyone to provide you with different information.
Dealers will deliver a prospectus supplement and prospectus when acting as
underwriters of the Mortgage Pass-Through Certificates, Series 1999-2, and
with respect to their unsold allotments or subscriptions. In addition, all
dealers selling Mortgage Pass-Through Certificates, Series 1999-2, will be
required to deliver a prospectus supplement and prospectus for ninety days
following the date of this prospectus supplement.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
CAPTION PAGE
- ---------------------------------------------------- --------
<S> <C>
Summary ............................................. S-3
Risk Factors ........................................ S-10
Description of the Certificates ..................... S-17
Credit Enhancement .................................. S-36
The Mortgage Loans .................................. S-43
Prepayment and Yield Considerations ................. S-53
Origination and Servicing of the Mortgage Loans .... S-63
The Back-Up Servicer ................................ S-73
The Certificate Insurer ............................. S-73
The PMI Insurer...................................... S-76
Certain Federal Income Tax Consequences ............. S-77
ERISA Considerations ................................ S-78
Use of Proceeds ..................................... S-81
Legal Investment Considerations ..................... S-81
Underwriting ........................................ S-81
Experts ............................................. S-82
Legal Matters ....................................... S-83
Rating of the Offered Certificates .................. S-83
Index of Principal Terms ............................ S-85
Annex A: Description of the Mortgage Pool .......... A-1
Annex B: Global Clearance, Settlement and Tax
Documentation Procedures ........................... B-1
</TABLE>
PROSPECTUS
<TABLE>
<CAPTION>
CAPTION PAGE
- ----------------------------------------------------- ------
<S> <C>
Prospectus Supplement ............................... 4
Available Information ............................... 4
Incorporation of Certain Documents by Reference ..... 4
Reports To Securityholders .......................... 5
Summary ............................................. 7
Risk Factors ........................................ 23
The Trusts and Trust Estates ........................ 34
Use of Proceeds ..................................... 39
Aames Capital Corporation ........................... 39
Aames Capital Acceptance Corp ....................... 39
The Servicer ........................................ 40
The Originators ..................................... 42
Description of the Securities ....................... 45
Credit Enhancement .................................. 55
Maturity, Prepayment and Yield Considerations ....... 62
The Pooling and Servicing Agreement ................. 65
The Indenture ....................................... 80
Certain Legal Aspects of the Mortgage Loans and
Related Matters .................................... 84
Certain Federal Income Tax Consequences ............. 90
State Tax Considerations ............................ 119
ERISA Considerations ................................ 119
Legal Investment Considerations ..................... 122
Method of Distribution............................... 123
Legal Matters ....................................... 124
Financial Information ............................... 124
Rating .............................................. 124
Index of Principal Terms ............................ 126
</TABLE>
S-2
<PAGE>
SUMMARY
This section outlines the significant terms of the offered certificates.
As this is a summary, we do not attempt to discuss or describe in any detail
the terms outlined here. We recommend that you review carefully the more
detailed information in this prospectus supplement and in the attached
prospectus.
THE ISSUER .................... Aames Mortgage Trust 1999-2.
THE SPONSOR ................... Aames Capital Corporation, a California
corporation. The principal office of the
sponsor is located at 350 South Grand
Avenue, Los Angeles, California 90071.
THE SERVICER .................. Aames Capital Corporation. The servicer may
appoint a sub-servicer to service mortgage
loans on its behalf.
THE CERTIFICATE INSURER ....... Financial Security Assurance Inc.
THE TRUSTEE ................... Bankers Trust Company of California, N.A.
THE BACK-UP SERVICER .......... Fairbanks Capital Corp. The functions of the
back-up servicer are as set forth in the
pooling and servicing agreement among the
sponsor and servicer, the trustee and the
back-up servicer.
CUT-OFF DATE .................. November 1, 1999.
CLOSING DATE .................. On or about November 18, 1999.
DISTRIBUTION DATES ............ The 15th day of each month or, if such day
is not a business day, the next business
day, beginning in December 1999.
RECORD DATES .................. The record date for the Class A-F
Certificates is the last business day of the
month before the month in which the
applicable distribution date occurs. The
record date for the Class A-V1 and Class
A-V2 Certificates is the business day
immediately before the applicable
distribution date so long as the Class A-V1
and Class A-V2 Certificates remain in
book-entry form.
FINAL SCHEDULED DISTRIBUTION
DATE ........................ The final scheduled distribution date for
each class of offered certificates is as
follows:
<TABLE>
<CAPTION>
FINAL SCHEDULED
CLASS DISTRIBUTION DATE
- ---------------------------- ---------------------
<S> <C>
Class A-F Certificates: October 2029
Class A-V1 Certificates: October 2029
Class A-V2 Certificates: October 2029
</TABLE>
S-3
<PAGE>
The actual last distribution date for each
class of offered certificates is expected to
be significantly earlier than its final
scheduled distribution date.
DESIGNATIONS .................. Each class of certificates will have
different characteristics. Certain of those
characteristics are reflected in the
following general designations. These
designations are used in this prospectus
supplement and the attached prospectus to
provide you with a better understanding of
the certificates.
Book-Entry Certificates ...... All classes of offered certificates.
Fixed Rate Group
Certificates ................. Class A-F Certificates.
Adjustable Rate Group I
Certificates ................. Class A-V1 Certificates.
Adjustable Rate Group II
Certificates ................. Class A-V2 Certificates.
Certificate Group ............ Fixed rate group certificates, adjustable
rate group I certificates or adjustable rate
group II certificates, as applicable.
Mortgage Loan Group .......... Fixed rate group, adjustable rate group I or
adjustable rate group II, as applicable.
Fixed Rate Group ............. All mortgage loans bearing interest at fixed
rates.
Adjustable Rate Group I ...... Those mortgage loans having
agency-conforming balances, bearing interest
at adjustable rates, including mortgage
loans that bear interest at rates that are
fixed for some specified period before
beginning to adjust, and included in
adjustable rate group I.
Adjustable Rate Group II ..... Those mortgage loans bearing interest at
adjustable rates, including mortgage loans
that bear interest at rates that are fixed
for some specified period before beginning
to adjust, and included in adjustable rate
group II.
Offered Certificates ......... Fixed rate group certificates, adjustable
rate group I certificates and adjustable
rate group II certificates.
Retained Certificates ........ Class C Certificates and Class R
Certificates.
S-4
<PAGE>
REGISTRATION OF OFFERED CERTIFICATES
We will issue the offered certificates in book-entry form. You will hold
your interests either through a depository in the United States or through
one of two depositories in Europe. You will not be entitled to receive a
definitive certificate representing your interests except under limited
circumstances that are described in this prospectus supplement. While the
certificates are in book-entry form, they will be registered in the name of
the applicable depository, or in the name of the depository's nominee.
Transfers within any depository system will be made in accordance with the
usual rules and operating procedures of that system.
We refer you to "Description of the Certificates -- Book-Entry
Registration of Offered Certificates" in this prospectus supplement, "Annex
B: Global Clearance, Settlement and Tax Documentation Procedures" to this
prospectus supplement and "Description of the Securities -- Form of
Securities -- Book-Entry Registration" in the prospectus.
DISTRIBUTIONS ON THE OFFERED CERTIFICATES
INTEREST
The pass-through rate for each class of offered certificates is set forth
on the cover page of, and further described in, this prospectus supplement.
Each pass-through rate is limited by a maximum rate cap that will be
determined based in whole or in part on the weighted average of the interest
rates on the applicable mortgage loans (minus specified fees and expenses).
Holders of the Class A-F Certificates will not be entitled to any interest
amounts in excess of the applicable maximum rate cap. Holders of the Class
A-V1 and Class A-V2 Certificates will be entitled to certain interest amounts
in excess of the applicable maximum rate cap, but such amounts will be paid
on a subordinated basis. The rating on the Class A-V1 and Class A-V2
Certificates does not address the likelihood of, and the policy does not
cover, the payment of any such interest amounts.
We refer you to "Description of the Certificates -- Pass-Through Rates" in
this prospectus supplement for a more detailed description of the
pass-through rates on the offered certificates.
Generally, on each distribution date, each class of offered certificates
will be entitled to interest in an amount equal to:
o the applicable pass-through rate, multiplied by
o the applicable class principal balance on the day before that
distribution date, multiplied by
o 1/12 or, in the case of the Class A-V1 and Class A-V2 Certificates,
the days in the accrual period divided by 360, minus
o the pro rata share of civil relief act interest shortfalls and
prepayment interest shortfalls, plus
o any unpaid interest amounts from prior distribution dates, plus
o interest on such unpaid interest amounts at the applicable pass-through
rate.
The interest accrual period for the fixed rate group certificates is the
calendar month preceding the month in which a distribution date occurs. The
interest accrual period for the adjustable rate group I certificates and
adjustable rate group II certificates is the period
S-5
<PAGE>
from the prior distribution date (or in the case of the first distribution
date from the closing date) to and including the day before the applicable
distribution date. Interest accrues with respect to the fixed rate group
certificates on the basis of a 360-day year consisting of twelve 30-day
months. Interest accrues with respect to the adjustable rate group I
certificates and adjustable rate group II certificates on the basis of the
actual number of days elapsed in the interest accrual period divided by 360.
PRINCIPAL
The initial class principal balances of the offered certificates are set
forth on the cover page of this prospectus supplement.
On each distribution date, to the extent funds are available, you will be
entitled to distributions of principal in the order of priority described in
this prospectus supplement.
Principal in respect of the fixed rate group will be distributed to the
Class A-F Certificates. Principal in respect of adjustable rate group I will
be distributed to the Class A-V1 Certificates. Principal in respect of
adjustable rate group II will be distributed to the Class A-V2 Certificates.
We refer you to "Description of the Certificates -- Distributions" in this
prospectus supplement.
PREFUNDING ACCOUNT
On the closing date, the sponsor will deposit approximately $46,231,820.28
into a segregated prefunding account maintained with the trustee. The trust
will use this amount to buy additional mortgage loans from the sponsor after
the closing date and prior to January 31, 2000. The sponsor must satisfy
conditions specified in the pooling and servicing agreement before it can
sell additional mortgage loans to the trust.
We refer you to "Description of the Certificates -- Prefunding Account" in
this prospectus supplement.
MONTHLY ADVANCES AND COMPENSATING INTEREST
Each month the servicer will determine the amount of any unpaid interest
due on the mortgage loans. If the servicer believes that unpaid interest can
be recovered from the related mortgage loan, then the servicer will either:
o advance the unpaid interest to the trust out of its own funds; or
o advance the unpaid interest to the trust out of collections on the
mortgage loans that are not required to be distributed on the related
distribution date.
The servicer is required to reimburse the trust for amounts advanced from
trust collections on the next deposit date before such amounts are required
to be a part of amounts distributable to you.
The servicer will provide to the trust the amount of any shortfall in the
anticipated collection of interest on a mortgage loan that is caused by a
full or partial prepayment of a mortgage loan generally up to the amount of
the servicer's monthly servicing fee.
We refer you to "Origination and Servicing of the Mortgage Loans --
Monthly Advances; Servicing Advances; Compensating Interest; and Interest
Shortfalls" in this prospectus supplement.
SERVICING ADVANCES
Unless the servicer determines that any proposed advance is not
recoverable
S-6
<PAGE>
from the related mortgage loan, 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:
o expenditures in connection with a foreclosed mortgage loan prior to the
liquidation of the loan;
o the cost of any enforcement of judicial proceedings, including
foreclosures; and
o the cost of the management and liquidation of property acquired in
satisfaction of the related mortgage loan.
The servicer is entitled to be reimbursed by the trust for servicing
advances only from the related mortgage loan in respect of which the
servicing advance was made.
We refer you to "Origination and Servicing of the Mortgage Loans --
Monthly Advances; Servicing Advances; Compensating Interest; and Interest
Shortfalls" in this prospectus supplement.
CREDIT ENHANCEMENT
Credit enhancement refers to a mechanism that is intended to protect the
holders of the offered certificates against losses due to defaults by the
borrowers under the mortgage loans.
The offered certificates have the benefit of four types of credit
enhancement:
o the use of excess interest to cover losses and to create
overcollateralization;
o cross-collateralization of the mortgage loan groups;
o the financial guaranty insurance policy; and
o the primary mortgage guaranty insurance policy with respect to certain
mortgage loans, in each mortgage loan group, having an original
loan-to-value ratio greater than 80%.
THE MORTGAGE LOANS
Set forth below is selected information about the mortgage loans that
existed as of the cut-off date.
Fixed Rate Group
number of mortgage loans: 2,983
aggregate principal
balance: $204,775,276.64
secured by first lien on mortgaged
property: 97.41%
range of loan
sizes: $9,924.64 to $420,000.00
mortgaged property locations: 42 states
and the District
of Columbia
average principal balance: $68,647.43
interest rates range: 6.700% to 16.990%
weighted average interest rate
(approximate): 10.137%
weighted average remaining term to
stated maturity, based on
principal balance (months)
(approximate): 326
range of remaining term to
maturity (months): 48 to 360
weighted average original term to
maturity (months): 327
latest maturity date: November 1, 2029
range of original term to
maturity (months): 60 to 360
S-7
<PAGE>
combined loan-to-value ratio
range (approximate): 6.18% to 97.00%
original weighted average combined
loan-to value ratio
(approximate): 74.55%
balloon loans; loans with amortization
schedules that extend beyond
their maturity date: 0.12%
Adjustable Rate Group I
number of mortgage loans: 1,672
aggregate principal balance: $140,132,704.74
conforming balances: 100%
secured by first lien on
mortgaged property: 100%
range of loan
sizes: $18,194.90 to $359,513.37
mortgaged property locations: 43 states and the District
of Columbia
average principal balance: $83,811.43
interest rates range: 5.190% to 16.020%
weighted average interest rate
(approximate): 10.362%
weighted average remaining term to
stated maturity, based on
principal balance (months)
(approximate): 358
range of remaining term to
stated maturity (months): 177 to 360
weighted average original term to
maturity (months): 359
latest maturity date: December 1, 2029
range of original term to
maturity (months): 180 to 360
combined loan-to-value ratio
range (approximate): 19.99% to 95.00%
original weighted average combined
loan-to value ratio (approximate): 78.89%
balloon loans; loans with amortization
schedules that extend beyond
their maturity date: None
range of gross margins: 2.550% to 9.250%
weighted average gross margin: 5.908%
range of maximum
rates: 11.190% to 22.020%
weighted average maximum rate: 16.424%
range of minimum rates: 5.190% to 16.020%
weighted average minimum rate: 10.357%
2/28 loans; loans with fixed rates for
two years prior to adjustment: 73.65%
3/27 loans; loans with fixed rates for
three years prior to adjustment: 22.48%
Adjustable Rate Group II
number of mortgage loans: 40
aggregate principal balance: $12,355,122.19
secured by first lien on
mortgaged property: 100%
range of loan
sizes: $241,874.01 to $409,329.38
mortgaged property locations: 19 states
average principal balance: $308,878.05
interest rates range: 7.990% to 11.990%
<PAGE>
weighted average interest rate
(approximate): 9.821%
weighted average remaining term to
stated maturity, based on
principal balance (months)
(approximate): 359
range of remaining term to
stated maturity (months): 357 to 360
weighted average original term to
maturity (months): 360
S-8
<PAGE>
latest maturity date: November 1, 2029
original term to maturity (months): 360
combined loan-to-value ratio
range (approximate): 56.43% to 95.00%
original weighted average combined
loan-to value ratio (approximate): 77.46%
balloon loans; loans with amortization
schedules that extend beyond
their maturity: None
range of gross margins: 4.500% to 7.750%
weighted average gross margin: 5.919%
range of maximum
rates: 13.990% to 17.990%
weighted average maximum rate: 15.848%
range of minimum rates: 7.990% to 11.990%
weighted average minimum rate: 9.821%
2/28 loans; loans with fixed rates for
two years prior to adjustment: 80.87%
3/27 loans; loans with fixed rates for
three years prior to adjustment: 12.35%
We refer you to "The Mortgage Loans" in this prospectus supplement and
"Annex A: Description of the Mortgage Pool" to this prospectus supplement.
OPTIONAL TERMINATION OF THE TRUST
On any distribution date when the principal balance of the mortgage loans
is less than 10% of the sum of the principal balances of the mortgage loans
delivered on the closing date and the prefunding account deposit, the holder
of the Class R Certificates may purchase all of the remaining mortgage loans
from the trust and thereby terminate the trust. Upon receipt of the purchase
price of the mortgage loans from the holder of the Class R Certificates, the
trustee will make a final payment to the certificateholders.
We refer you to "Description of the Certificates" in this prospectus
supplement.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The trust will make one or more elections to treat certain assets of the
trust as a real estate mortgage investment conduit (each, a "REMIC") for
federal income tax purposes. The offered certificates and Class C
Certificates will represent regular interests in a REMIC and generally will
be treated as newly originated debt instruments for federal income tax
purposes. In addition, each of the Class A-V1 and Class A-V2 Certificates
will represent an undivided beneficial ownership interest in an interest rate
cap agreement. The Class R Certificates will represent the residual interest
in each REMIC.
We refer you to "Certain Federal Income Tax Consequences" in this
prospectus supplement and in the prospectus.
ERISA CONSIDERATIONS
Subject to the satisfaction of certain conditions described in this
prospectus supplement, the offered certificates may be acquired and held by a
pension or other employee benefit plan.
We refer you to "ERISA Considerations" in this prospectus supplement and
in the prospectus.
LEGAL INVESTMENT CONSIDERATIONS
The offered certificates will NOT constitute "mortgage related securities"
for purposes of the Secondary Mortgage Market Enhancement Act of 1984.
We refer you to "Legal Investment Considerations" in this prospectus
supplement and in the prospectus.
S-9
<PAGE>
RISK FACTORS
An investment in the offered certificates involves significant risks.
Before you decide to invest in the offered certificates, you should consider
the following risk factors and the risk factors discussed under the heading
"Risk Factors" beginning on page 19 of the prospectus.
YOU MAY HAVE DIFFICULTY SELLING YOUR CERTIFICATES
The offered certificates will not be listed on any securities exchange. As
a result, if you wish to sell your certificates, you will have to find a
purchaser that is willing to purchase your certificates. The underwriters
intend to make a secondary market for the offered certificates. The
underwriters may do so by offering to buy the offered certificates from
investors that wish to sell. However, the underwriters will not be obligated
to make offers to buy the offered certificates and may stop making offers at
any time. In addition, the prices offered, if any, may not reflect prices
that other potential purchasers, were they to be given the opportunity, would
be willing to pay. There have been times in the past where there have been
very few buyers of similar asset-backed securities, and there may be such
times in the future. As a result, you may not be able to sell your
certificates if or when you wish to do so or you may not be able to obtain
the price you wish to receive.
THE UNIQUE FEATURES OF THE MORTGAGE LOANS CREATE SPECIAL RISKS
There are a number of unique features of the mortgage loans that create
risks, including the following:
o Risks Associated with Underwriting Standards. The sponsor has
underwritten and originated or re-underwritten all of the mortgage
loans in accordance with the sponsor's guidelines. The sponsor's
guidelines, 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. A derogatory credit history or a
lack of credit history will not necessarily prevent the sponsor from
making or acquiring a mortgage loan. The values of the mortgaged
properties may decline from those on the dates the related mortgage
loans were originated thereby increasing the loan-to-value ratios of
the mortgage loans. 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. The actual rates of delinquencies,
foreclosures and losses on 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. We refer you to "The Originators --
Underwriting Guidelines" in the prospectus.
o Newly Originated Mortgage Loans May Default. Defaults on mortgage loans
tend to occur at higher rates during the early years of the mortgage
loans. A substantial majority of the mortgage loans will have been
originated within 12 months prior to their sale to the trust. As a
result, the trust may experience higher rates of default than if the
mortgage loans had been outstanding for a longer period of time.
S-10
<PAGE>
o Defaults on Junior Lien Mortgage Loans May Result in More Severe
Losses. Based on the principal balances of the mortgage loans in
existence on the cut-off date, approximately 2.59% of the mortgage
loans in the fixed rate group are secured by junior liens on the
related property. If a borrower on a mortgage loan secured by a junior
lien defaults, the trust's rights to proceeds on liquidation of the
related property are subordinate to the rights of the holder of the
first lien on the related property. There may not be enough proceeds
to pay both the first lien and the junior lien, and the trust would
suffer a loss.
o Geographic Concentration Increases Risks. Approximately 15.62%, 11.56%,
9.49%, 6.84%, 5.56% and 5.45% of the mortgage loans in existence as of
the cut-off date in the fixed rate group are secured by mortgaged
properties located in California, Florida, Texas, New York, Hawaii and
Michigan, respectively, approximately 12.95%, 7.77%, 6.14%, 5.82% and
5.15% of the mortgage loans in existence as of the cut-off date in
adjustable rate group I are secured by mortgaged properties located in
Florida, California, Texas, Ohio and Colorado, respectively, and
approximately 35.45%, 7.76%, 7.44%, 5.95%, 5.11% and 5.05% of the
mortgage loans in existence as of the cut-off date in adjustable rate
group II are secured by mortgaged properties located in California,
Texas, Washington, Connecticut, Arizona and Florida, respectively. In
general, declines in the California, Colorado, Florida, Hawaii,
Michigan, New York, Ohio, Texas, Connecticut, Arizona and Washington
residential real estate markets may adversely affect the values of the
mortgaged properties securing mortgage loans in those states such that
the principal balances of the mortgage loans will equal or exceed the
value of the mortgaged properties. In addition, adverse economic
conditions in those states may affect borrowers' timely payment of
scheduled payments of principal and interest on mortgage loans in those
states and, accordingly, the actual rates of delinquencies,
foreclosures and losses on the mortgage loans could be higher than
those currently experienced in the mortgage lending industry in
general.
o Risks Associated with Damaged Mortgage 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). 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 that damage results in losses on
the related mortgage loan, those losses will be covered by funds made
available through operation of the overcollateralization feature
described in this prospectus supplement, or, if necessary, by amounts
paid under the certificate insurance policy. 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 that
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 for it. To the extent the sponsor repurchases any
mortgage loan, the repurchase will
S-11
<PAGE>
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.
THE RETURN ON YOUR INVESTMENT WILL CHANGE OVER TIME
Your pre-tax return on your investment will change from time to time for a
number of reasons, including the following:
o The Rate of Return of Principal is Uncertain. The amount of
distributions of principal of the offered certificates and the time
when you receive those distributions depends on the amount and the
times at which borrowers make principal payments on the mortgage loans.
Those principal payments may be regularly scheduled payments or
unscheduled payments resulting from prepayments or defaults of the
mortgage loans. The rate of prepayment may be affected by the credit
standings of the borrowers. If a borrower's credit standing improves,
that borrower may be able to refinance his existing loan on more
favorable terms, which would result in a principal prepayment.
The majority of the mortgage loans in adjustable rate group I and
adjustable rate group II have fixed interest rates for some specified
period before beginning to adjust. Those mortgage loans may have higher
prepayments as they approach their first adjustment dates because the
borrowers may want to avoid periodic changes to their monthly payments
or the increase in rate after the initial fixed rate period. We refer
you to "--2/28 and 3/27 Loans" below.
o The Rate of Prepayment of the Mortgage Loans is Uncertain. All of the
mortgage loans may be prepaid in full or in part at any time, in some
cases upon the payment to the sponsor 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. 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 terms of the mortgage loans thereby
potentially affecting the yield to maturity of an offered certificate
from the anticipated yield. We refer you to "The Mortgage Loans --
General" in this prospectus supplement and "Risk Factors -- Yield,
Maturity and Prepayment Considerations" in the prospectus.
o Prefunding May Result in Prepayments. If the seller is unable to
deliver sufficient, eligible additional mortgage loans to the trust by
the end of the funding period, a portion of the prefunding account
deposit allocated to each mortgage loan group will be distributed as a
prepayment to the owners of the offered certificates of the related
certificate group.
o You Bear Reinvestment Risk. Asset-backed securities like the offered
certificates usually produce more returns of principal to investors
when market interest rates fall below the interest rates on the
mortgage loans and produce less returns of principal when market
interest rates are above the interest rates on the mortgage loans. If
borrowers refinance their mortgage loans as a result of lower interest
rates, you will receive an unscheduled payment of principal. As a
result, you are likely to receive more money to reinvest at a time when
other
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investments generally are producing a lower yield than that on the
offered certificates, and are likely to receive less money to reinvest
when other investments generally are producing a higher yield than that
on the offered certificates. You will bear the risk that the timing and
amount of distributions on your offered certificates will prevent you
from attaining your desired yield.
o The Optional Termination May Affect the Yield. Your investment in the
offered certificates may be ended before you desire if the optional
termination is exercised. In addition, holders of the Class A-V1 and
Class A-V2 Certificates will not be entitled to any supplemental
interest amounts accrued but unpaid at the time the optional
termination is exercised. We refer you "Description of the Certificates
-- Termination; Retirement of the Certificates" in this prospectus
supplement.
o Pass-Through Rates May be Limited. The rate at which interest accrues
on each class of offered certificates is subject to a rate cap that
differs by mortgage loan group. The rate cap for the Class A-F
Certificates is the maximum rate for the fixed rate group, the rate cap
for the Class A-V1 Certificates is the maximum rate for adjustable rate
group I and the rate cap for the Class A-V2 Certificates is the maximum
rate for adjustable rate group II. Each maximum rate is based in whole
or in part on the weighted average of the interest rates on the
mortgage loans in the related mortgage loan group, net of certain fees
and expenses. If mortgage loans with relatively higher loan rates
prepay, the maximum rate on the related classes of offered certificates
will be lower than otherwise would be the case.
Your investment in the Class A-V1 and A-V2 Certificates also involves
the risk that the level of LIBOR may change in a direction and/or at a
rate that is different from the level of the index used to determine
the interest rates on the related adjustable rate mortgage loans.
If the pass-through rate on your certificates is limited by the
applicable rate cap, the market value and liquidity of your
certificates may decline.
We refer you to "Prepayment and Yield Considerations -- The
Pass-Through Rates" in this prospectus supplement.
o 2/28 and 3/27 Loans. Approximately 73.65% and 80.87% of the mortgage
loans in adjustable rate group I and adjustable rate group II,
respectively, as of the cut-off date, had at origination a two year
fixed rate term followed by either a 13 or 28 year adjustable rate
term, and approximately 22.48% and 12.35% of the mortgage loans in
adjustable rate group I and adjustable rate group II, respectively, as
of the cut-off date, had at origination a three year fixed rate term
followed by either a 12 or a 27 year adjustable rate term. As with all
mortgage loans, the rate of prepayments on 2/28 Loans and 3/27 Loans
(as we respectively call these loans in this prospectus supplement)
that are in their respective initial fixed rate periods is sensitive to
prevailing interest rates. The prepayment behavior of the 2/28 Loans
and 3/27 Loans may differ from that of the other mortgage loans. As a
2/28 Loan or 3/27 Loan approaches its initial adjustment date, the
borrower may become more likely to refinance the loan to avoid an
increase in the coupon rate, even if fixed rate loans are only
available
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at rates that are slightly lower or higher than the coupon rate before
adjustment. The existence of the applicable periodic rate cap, lifetime
cap and lifetime floor also may affect the likelihood of prepayments
resulting from refinancings. You will bear the risk of any faster or
slower prepayments on the mortgage loans. We refer you to "Prepayment
and Yield Considerations" in this prospectus supplement.
THE TRUST ASSETS ARE THE ONLY SOURCE OF PAYMENTS ON THE OFFERED CERTIFICATES
All distributions on the offered certificates will be made from payments
by borrowers under the mortgage loans, payments under the financial guaranty
insurance policy or, in the case of certain mortgage loans, the related PMI
policy. The trust has no other assets to make distributions on the offered
certificates. The mortgage loans are not insured, other than by the related
PMI policy in the case of the PMI loans, or guaranteed by any person. The
trust is the only person that is obligated to make distributions on the
offered certificates. The offered certificates are not insured by any
governmental agency.
A SERVICING TRANSFER, IF ONE OCCURS, COULD BE DISRUPTIVE TO SERVICING
During and immediately following a servicing transfer, interruptions in
servicing may occur and the mortgage loans may suffer a higher delinquency
and/or default rate. A higher delinquency rate may delay payments of
principal to you. A higher default rate may result in accelerated prepayments
on the offered certificates. You will bear any reinvestment risk associated
with any accelerated prepayments.
A servicing transfer could result for a number of reasons, including the
following:
o Aames Financial Corporation's Condition and Dependence on External
Financing Facilities. The sponsor and Aames Financial Corporation, the
corporate parent of the servicer and sponsor, are dependent on
continued access to short-and long-term sources of funding for their
continued operations. The sponsor currently has four existing warehouse
and repurchase credit facilities that (unless renewed) will expire in
February 2000, April 2000, May 2000 and October 2000. To the extent
that the sponsor or Aames Financial Corporation, as guarantor, are
unable to maintain existing facilities, arrange new warehouse,
repurchase or other credit facilities or obtain additional commitments
to sell whole loans for cash, the sponsor may have to curtail its
current rate of loan origination and purchase activity. If this occurs,
it will have a material adverse effect on Aames Financial Corporation's
ability to continue to operate as a going concern. The sponsor and
Aames Financial Corporation are subject to certain financial tests
under the sponsor's warehouse and repurchase credit facilities. If the
sponsor or Aames Financial Corporation is unable to satisfy the
financial targets in such facilities, the sponsor or Aames Financial
Corporation will need to seek amendments to such facilities or find
alternative sources of financing to continue to operate. If the sponsor
or Aames Financial Corporation, as applicable, is unable to do so, the
servicer and sponsor will not likely be able to perform their
obligations under the pooling and servicing agreement and the
certificate insurer would likely remove Aames Capital Corporation as
servicer.
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o Term-to-Term Servicing. The pooling and servicing agreement provides
that the rights and obligations of the servicer terminate each
calendar month commencing December 31, 1999, unless renewed by the
certificate insurer for successive monthly periods. The certificate
insurer has required the servicer to achieve and maintain a specified
minimum liquidity threshold. Failure by the servicer to achieve and
maintain such minimum liquidity threshold would increase the
likelihood that the certificate insurer would not extend the term of
the servicer for additional periods. The servicer is currently seeking
additional credit facilities and taking other steps to improve its
liquidity so that it can achieve such minimum liquidity threshold by
December 31, 1999. No assurances can be made that the servicer will
achieve and maintain the minimum liquidity threshold. If the term of
the servicer is not renewed, servicing of the mortgage loans would be
transferred to the back-up servicer or, unless a certificate insurer
default has occurred and is continuing, to another successor servicer
selected by the certificate insurer. These provisions of the pooling
and servicing agreement may be modified or repealed upon the consent
of the certificate insurer. We refer you to "Origination and Servicing
of the Mortgage Loans -- Initial Term of Servicer and Extensions of
Term" in this prospectus supplement.
RISKS ASSOCIATED WITH 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 mortgage loans
have been named in legal actions brought by mortgagors challenging the amount
or method of imposing or disclosing such fees. 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.
COMPUTER PROBLEMS IN THE YEAR 2000 MAY RESULT IN LOSSES
Many computers and computer chips were not programmed to recognize more
than two digits in the year of a date. As a result, in the year 2000, those
computers will not know whether the '00 refers to the year 1900 or the year
2000. The sponsor has a program to identify and correct this problem in its
computer systems, and expects to complete the necessary changes on a timely
basis. In addition, the sponsor relies on the performance of computer systems
of other companies. Due to the general uncertainty inherent in the year 2000
problem, resulting in part from the uncertainty of the year 2000 readiness of
third parties and the inter-connection of national and international
businesses, the sponsor cannot ensure its ability to timely and cost
effectively resolve problems associated with the year 2000 issue that may
affect its operations and business, or expose it to third party liability.
These problems may cause delays or disruptions in
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the amount and timing of distributions to you. Risks are also associated
with year 2000 compliance of DTC. For a description of those risks, we refer
you to "Description of the Certificates -- Book-Entry Registration of Offered
Certificates" in this prospectus supplement.
VIOLATIONS OF CONSUMER PROTECTION LAWS MAY RESULT IN LOSSES
As of the cut-off date, approximately 16.86% of the mortgage loans in the
fixed rate group, 10.04% of the mortgage loans in adjustable rate group I and
none of the mortgage loans in adjustable rate group II are subject to the
Home Ownership and Equity Protection Act of 1994, which amended the Truth in
Lending Act as it applies to certain mortgages. This act requires certain
additional disclosures, specifies the timing of such disclosures and limits
or prohibits inclusion of certain provisions in mortgages that are subject to
the act, any violation of which could limit the ability of the servicer to
collect on such mortgage loans. The act also provides that any purchaser or
assignee of a mortgage covered by the act is subject to all of the claims and
defenses that the borrower could assert against the original lender. The
maximum damages that may be recovered under the act from an assignee is the
remaining amount of indebtedness plus the total amount paid by the borrower
in connection with the mortgage loan. The trust could be subject to all of
the claims and defenses that the borrower could assert against the sponsor.
Any violation of the act that would result in such liability would be a
breach of the sponsor's representations and warranties under the pooling and
servicing agreement and the sponsor would be obligated to cure, repurchase or
substitute for the mortgage loan in question, which could 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.
WITHDRAWAL OR DOWNGRADING OF INITIAL RATINGS WILL AFFECT THE PRICES FOR
CERTIFICATES
A security rating is not a recommendation to buy, sell or hold securities.
Similar ratings on different types of securities do not necessarily mean the
same thing. You are encouraged to analyze the significance of each rating
independently from any other rating. Any rating agency may change its rating
of the offered certificates after those offered certificates are issued if
that rating agency believes that circumstances have changed. Any subsequent
change in rating will likely affect the price that a subsequent purchaser
will be willing to pay for your certificates.
THE OFFERED CERTIFICATES ARE NOT SUITABLE INVESTMENTS FOR ALL INVESTORS
The offered certificates are not a suitable investment if you require a
regular or predictable schedule of payments or payment on any specific date.
The offered securities are complex investments that should be considered only
by investors who, either alone or with their financial, tax and legal
advisors, have the expertise to analyze the prepayment, reinvestment, default
and market risk, the tax consequences of an investment, and the interaction
of these factors.
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DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates will represent certain undivided beneficial ownership
interests in Aames Mortgage Trust 1999-2 (the "Trust") created pursuant to a
Pooling and Servicing Agreement dated as of November 1, 1999 (the "Pooling
and Servicing Agreement") between Aames Capital Corporation, in the
capacities of sponsor (the "Sponsor") and servicer (the "Servicer"),
Fairbanks Capital Corp., as back-up servicer (the "Back-Up Servicer"), and
Bankers Trust Company of California, N.A., as trustee (the "Trustee"),
subject to the limits and priority of distributions described therein. The
Offered Certificates will be issued in minimum denominations of $1,000 and
integral dollar multiples of $1 in excess thereof.
The assets of the Trust will consist of (a) the Mortgage Loans, consisting
of three groups each constituting a sub-trust, 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 (we refer you to "The Mortgage Loans -- Payments on Mortgage
Loans and Deposits to the Collection Account" in this Prospectus Supplement);
(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; (e) the Certificate Insurance
Policy; and (f) rights under the applicable primary mortgage guaranty policy
in connection with the PMI Mortgage Loans.
You can find the definitions for some of the capitalized terms used both
in the prospectus and this prospectus supplement under the caption "Glossary
of Terms" in this Prospectus Supplement. For the location of the definitions
of capitalized terms used in the Prospectus or this Prospectus Supplement,
but not included under the caption "Glossary of Terms" in this Prospectus
Supplement, we refer you to the "Index of Principal Terms" in the Prospectus
or the one in this Prospectus Supplement.
SEPARATE REMIC STRUCTURE
The Sponsor will designate in the Pooling and Servicing Agreement, for
purposes of the Internal Revenue Code of 1986, as amended (the "Code"), each
of the Offered Certificates (exclusive of any rights of the Class A-V1 and
Class A-V2 Certificates to receive Supplemental Interest Amounts) and the
Class C Certificates as "regular interests" in a REMIC, and the Class R
Certificates as representing the sole class of "residual interests" in each
REMIC created pursuant to the Pooling and Servicing Agreement. The Prefunding
Account, the Capitalized Interest Account and the Supplemental Interest
Reserve Fund will not be part of any REMIC. The Closing Date will be
designated as the "Startup Day" (within the meaning of the Code) of the
REMICs. We refer you to "Certain Federal Income Tax Consequences" in this
Prospectus Supplement and in the Prospectus.
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DISTRIBUTION DATES
The Trustee, in its capacity as paying agent (the "Paying Agent"), will
make distributions of principal and interest on the Offered Certificates on
the 15th day of each month or, if such day is not a Business Day, on the next
succeeding Business Day, commencing December 15, 1999 (each such day, a
"Distribution Date"). Distributions will be made pursuant to the cashflow
priorities hereinafter described and subject to the availability of amounts
therefor, to the person in whose name a Certificate is registered (a
"Certificateholder" or "Holder") as of the Record Date. The "Record Date" for
any Distribution Date and (a) the Fixed Rate Group Certificates, is the last
business day of the calendar month preceding the month in which such
Distribution Date occurs and (b) for either the Adjustable Rate Group I
Certificates or the Adjustable Rate Group II Certificates, the business day
immediately preceding such Distribution Date so long as such Certificates
remain in book-entry form and, otherwise, the last business day of the
calendar month immediately preceding the month in which such Distribution
Date occurs.
Distributions will be made (i) in immediately available funds to Holders
of Certificates the aggregate principal balance of which is at least
$5,000,000, by wire transfer or otherwise, to the account of such
Certificateholder at a domestic bank or other entity having appropriate
facilities therefor, if such Certificateholder has so notified the Trustee,
or (ii) by check mailed to the address of the person entitled thereto as it
appears on the register (the "Certificate Register") maintained by the
Trustee as registrar. Notwithstanding the foregoing, the final distribution
on any Certificate will be made in like manner but only upon presentment and
surrender of such Certificate at the office or agency appointed for such
purpose.
DISTRIBUTIONS
On each Distribution Date, the Trustee will withdraw the Available Funds
for each Mortgage Loan Group plus the amount, if any, paid under the
Certificate Insurance Policy with respect to such Mortgage Loan Group and
apply such amounts in the following order of priority, in each case, to the
extent of the funds remaining:
1. Concurrently, to the Trustee, the Servicer, the Back-Up Servicer, the
PMI Insurer and the Certificate Insurer, the Trustee Fee, the Monthly
Servicing Fee (to the extent not otherwise reimbursed from the Collection
Account), the Back-Up Servicing Fee, the applicable PMI Insurer Premium,
if any, and the Certificate Insurer Premium for such Mortgage Loan Group
and Distribution Date.
2. To the Class of Offered Certificates in the related Certificate Group,
the related Accrued Certificate Interest and any Interest Carry Forward
Amount for such Class of Certificates for such Distribution Date.
3. To the Class of Offered Certificates in the related Certificate Group,
an amount up to the related Principal Distribution Amount in the following
order of priority:
A. Fixed Rate Group:
The Fixed Rate Group Principal Distribution Amount to the
Class A-F Certificates, until the Certificate Principal Balance
thereof has been reduced to zero.
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B. Adjustable Rate Group I:
The Adjustable Rate Group I Principal Distribution Amount
to the Class A-V1 Certificates until the Certificate Principal
Balance thereof has been reduced to zero.
C. Adjustable Rate Group II:
The Adjustable Rate Group II Principal Distribution Amount
to the Class A-V2 Certificates until the Certificate Principal
Balance thereof has been reduced to zero.
4. To the Certificate Insurer, any amounts owing under the Insurance
Agreement.
5. To the Holders of Certificates in either or both of the other
Certificate Groups, the amount of any applicable Available Funds Shortfall
for such other Certificate Group or Groups, allocated on a pro rata basis.
6. To the Class of Offered Certificates in the related Certificate Group,
an amount up to the Extra Principal Distribution Amount for the related
Certificate Group for such Distribution Date, until the related Targeted
Overcollateralization Amount is reached.
7. To the Class of Offered Certificates in either or both of the other
Certificate Groups, any applicable Target Deficiency for such Certificate
Group or Groups remaining after the distributions pursuant to clause 6
above, allocated on a pro rata basis.
8. In the event that Fairbanks has become the Servicer, to Fairbanks to
the extent of any Compensating Interest paid out of servicing fees
otherwise payable to Fairbanks as Servicer.
9. 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-V1 and Class A-V2 Certificates based on the respective outstanding
Supplemental Interest Amounts due thereon), as the case may be.
10. To the Class R Certificates, the remainder.
GLOSSARY OF TERMS
The following terms have the meanings given below to help describe the
cashflows on the Offered Certificates:
"Accrued Certificate Interest" for any Class of Certificates on any
Distribution Date is the amount of interest due thereon in respect of any
Interest Period at the applicable Pass-Through Rate, less the related pro
rata share of Interest Shortfalls.
"Adjustable Rate Group I Principal Distribution Amount" with respect to
any Distribution Date is the Principal Distribution Amount with respect to
the Adjustable Rate Group I Certificates and the related Collection Period.
"Adjustable Rate Group II Principal Distribution Amount" with respect to
any Distribution Date is the Principal Distribution Amount with respect to
the Adjustable Rate Group II Certificates for the related Collection Period.
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"Available Funds" as to any Mortgage Loan Group and any Distribution
Date, is the sum, without duplication of the following amounts with respect
to the Mortgage Loans in such Mortgage Loan Group:
(i) scheduled and unscheduled payments of principal and interest on the
Mortgage Loans received by the Servicer, including amounts deposited in
respect of interest on any Mortgage Loan that does not have a monthly
payment due in the Collection Period relating to the Distribution Date
(net of amounts representing the Monthly Servicing Fee with respect to
each Mortgage Loan and reimbursement for Monthly Advances and Servicing
Advances), prepayments and prepayment premiums;
(ii) Net Liquidation Proceeds and Trust Insurance Proceeds with respect
to the Mortgage Loans (net of amounts applied to the restoration or repair
of a Mortgaged Property);
(iii) amounts payable in connection with each such Mortgage Loan that was
repurchased from the Trust, and all amounts payable in respect of any
Mortgage Loan in the related Mortgage Loan Group in connection with a
substitution of a Qualified Replacement Mortgage Loan therefor;
(iv) payments from the Servicer in connection with (a) Monthly Advances
and (b) Compensating Interest and payments in connection with the
termination of the Trust with respect to the Mortgage Loans as provided in
the Pooling and Servicing Agreement;
(v) on the Distribution Dates during and immediately following the
Funding Period, amounts from the Capitalized Interest Account for the
payment of interest on the Certificates of the related Certificate Group;
and
(vi) on the Distribution Date at or immediately following the end of the
Funding Period, amounts remaining on deposit in the Prefunding Account
with respect to the related Mortgage Loan Group.
"Available Funds Shortfall" as to any Mortgage Loan Group and any
Distribution Date, is the excess, if any, of (x) the aggregate of the amounts
required to be distributed pursuant to clauses 1 through 4 above under
"--Distributions," over (y) the Available Funds for such Mortgage Loan Group
and Distribution Date.
"Basic Principal Amount" as to any Mortgage Loan Group and any
Distribution Date, is an amount equal to the sum of the following amounts
(without duplication) with respect to the Mortgage Loans in such Mortgage
Loan Group and the immediately preceding Collection Period:
(i) each payment of principal on a Mortgage Loan received by the
Servicer during such Collection Period, including all full and partial
principal prepayments;
(ii) the Net Liquidation Proceeds and Trust Insurance Proceeds allocable
to principal received by the Servicer with respect to any Mortgage Loan
during such Collection Period;
(iii) all amounts allocable to principal payable in connection with each
such Mortgage Loan that was repurchased from the Trust during such
Collection Period,
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and all amounts allocable to principal payable in respect of any Mortgage
Loan in the related Mortgage Loan Group in connection with a substitution
of a Qualified Replacement Mortgage Loan therefor; and
(iv) any related amounts remaining in the Prefunding Account with
respect to the related Mortgage Loan Group after the Funding Period.
"Certificate Insurer Premium" means, for any Certificate Group, the sum of
the premium under the Certificate Insurance Policy plus any premium
supplement imposed under the Insurance Agreement upon the occurrence of
certain events thereunder.
"Certificate Principal Balance" of any Class of the Offered Certificates
is the original Certificate Principal Balance of such Class as reduced by all
amounts in respect of principal actually distributed to the related
Certificateholders on all prior Distribution Dates.
"Collection Period" with respect to any Distribution Date is the calendar
month immediately preceding such Distribution Date.
"Extra Principal Distribution Amount" as to any Certificate Group and any
Distribution Date, shall be the lesser of (i) the related Target Deficiency
and (ii) the related Monthly Excess Cashflow Amount.
"Fixed Rate Group Principal Distribution Amount" with respect to any
Distribution Date is the Principal Distribution Amount with respect to the
Fixed Rate Group Certificates and the related Collection Period.
"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 Carry Forward Amount at the related Pass-Through Rate
for the related Interest Period to the extent lawful) exceeds (ii) the amount
of interest actually distributed to the holders of such Certificates on such
preceding Distribution Date.
"Interest Shortfall" as to any Class of Certificates and any Distribution
Date, is the amount equal to the sum of Relief Act Shortfalls and Prepayment
Interest Shortfalls.
"Liquidation Proceeds" means the aggregate of any proceeds received by the
Servicer, including payments received under the PMI Policy, during the
related Collection Period in connection with the liquidation of any Mortgaged
Property securing a Mortgage Loan, whether through trustee's sale,
foreclosure, condemnation, taking by eminent domain or otherwise (including
any insurance proceeds to the extent not duplicative of Trust Insurance
Proceeds).
"Monthly Excess Cashflow Amount" as to any Distribution Date, shall be the
Available Funds remaining after the application of payments pursuant to
clauses 1 through 5 above, under "--Distributions."
"Net Liquidation Proceeds" means the amount equal to Liquidation Proceeds
less expenses incurred by the Servicer in connection with the liquidation of
such Mortgage Loan.
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"Overcollateralization Amount" is, with respect to a Mortgage Loan Group
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 related Collection Period (plus, during the
Funding 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 on the Offered Certificates on such
Distribution Date).
"Overcollateralization Release Amount" is, for any Distribution Date and
any Certificate Group, the lesser of (i) the related Basic Principal Amount
for such Distribution Date and (ii) the excess, if any of (x) the related
Overcollateralization Amount over (y) the Targeted Overcollateralization
Amount.
"PMI Insurer Premium" means, for any Distribution Date and any Certificate
Group, the aggregate of the premiums payable, if any, during the immediately
preceding Collection Period under the PMI Policy for any PMI Mortgage Loans
in the related Mortgage Loan Group.
"Principal Distribution Amount" as to any Distribution Date and any
Certificate Group, means the lesser of (a) the aggregate Certificate
Principal Balances of the related Certificate Group immediately preceding
such Distribution Date and (b) the Basic Principal Amount of the related
Certificate Group minus the related Overcollateralization Release Amount.
"Relief Act" means the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended.
"Relief Act Shortfalls" as to any Distribution Date and any Mortgage Loan
Group, shall be the amount of any reduction of interest collectable on any
Mortgage Loan in such Mortgage Loan Group for the related period due to the
application of the Relief Act.
"Supplemental Interest Amount" means (A) with respect to the Class A-V1
Certificates on any Distribution Date, the sum of (i) the positive excess, if
any, of the amount of interest that would have accrued thereon during the
related Interest Period calculated at the lesser of (x) the related Class
A-V1 Formula Pass-Through Rate and (y) 14%, over the amount of interest that
did accrue thereon at the Class A-V1 Pass-Through Rate and (ii) any related
Supplemental Interest Amount remaining unpaid from a prior Distribution Date
(and, in the case of any related Supplemental Interest Amount remaining
unpaid from a prior Distribution Date, interest thereon calculated at the
lesser of (x) the related Class A-V1 Formula Pass-Through Rate and (y) 14%,
to the extent lawful) and (B) with respect to the Class A-V2 Certificates on
any Distribution Date, the sum of (i) the positive excess, if any, of the
amount of interest that would have accrued thereon during the related
Interest Period calculated at the lesser of (x) the related Class A-V2
Formula Pass-Through Rate and (y) 14%, over the amount of interest that did
accrue thereon at the Class A-V2 Pass-Through Rate and (ii) any related
Supplemental Interest Amount remaining unpaid from a prior Distribution Date
(and, in the case of any related Supplemental Interest Amount remaining
unpaid from a prior Distribution Date, interest thereon calculated at the
lesser of (x) the related Class A-V2 Formula Pass-Through Rate and (y) 14%,
to the extent lawful).
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"Target Deficiency" as to any Certificate Group and any Distribution
Date, shall be the excess, if any, of (i) the related Targeted
Overcollateralization Amount for such Distribution Date over (ii) the related
Overcollateralization Amount for such Distribution Date calculated, for this
purpose only, after giving effect to the distribution of the related Basic
Principal Amount on such Distribution Date but prior to any distributions of
related Extra Principal Distribution Amount on such Distribution Date.
"Targeted Overcollateralization Amount" means, with respect to any
Certificate Group and any Distribution Date, a specified level of
overcollateralization required by the Certificate Insurer calculated as
provided in the Pooling and Servicing Agreement. The Pooling and Servicing
Agreement provides that the Targeted Overcollateralization Amount with
respect to any Mortgage Loan Group may be modified, reduced or eliminated
without the consent of any Certificateholders.
"Trust Insurance Proceeds" means the aggregate of any proceeds from or in
respect of any policy of insurance (other than the PMI Policy or Certificate
Insurance Policy) covering a Mortgage Loan in a Mortgage Loan Group that are
received during a Collection Period and applied by the Servicer to reduce the
principal balance of the related Mortgage Loan or losses with respect thereto
(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).
PASS-THROUGH RATES
The "Pass-Through Rate" for the Class A-F Certificates is set forth on the
cover page of this Prospectus Supplement. Such Pass-Through Rate is subject
to the Fixed Rate Group Available Funds Cap.
The "Fixed Rate Group Available Funds Cap" will be, with respect to any
Distribution Date, the per annum rate equal to the percentage obtained by
dividing (x) the amount of interest that accrued on the Mortgage Loans in the
Fixed 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 Monthly Servicing Fee
and Back-Up Servicing Fee for the Mortgage Loans in the Fixed Rate Group for
such Interest Period, (ii) the Certificate Insurer Premium attributable to
the Fixed Rate Group for the related Distribution Date, (iii) the Trustee Fee
attributable to the Fixed Rate Group for the related Distribution Date and
(iv) the PMI Insurance Premium, if any, attributable to the Fixed Rate Group
for the related Distribution Date by (y) the product of (i) the Fixed Rate
Group balance as of the first day of such Interest Period and (ii) 1/12.
The Class A-V1 Pass-Through Rate with respect to each Interest Period will
be equal to the lesser of (x) with respect to each Interest Period ending on
or prior to the Clean-up Call Date, LIBOR (calculated as described below
under "--Calculation of LIBOR") plus 0.39% per annum and for any Interest
Period thereafter, LIBOR plus 0.78% per annum (the "Class A-V1 Formula
Pass-Through Rate") and (y) the Adjustable Rate Group I Available Funds Cap.
The Pass-Through Rate for the Class A-V1 Certificates generally will be
limited to the Adjustable Rate Group I Available Funds Cap. The "Adjustable
Rate Group I Available Funds Cap" will be, with respect to any Distribution
Date, the per annum
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rate equal to the lesser of (A) the percentage obtained by dividing (x) the
amount of interest that accrued on the Mortgage Loans in Adjustable Rate
Group I 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 Monthly Servicing Fee and
Back-Up Servicing Fee for the Mortgage Loans in Adjustable Rate Group I for
such Interest Period, (ii) the Certificate Insurer Premium attributable to
Adjustable Rate Group I for the related Distribution Date, (iii) the Trustee
Fee attributable to Adjustable Rate Group I for the related Distribution
Date, (iv) the PMI Insurance Premium, if any, attributable to Adjustable Rate
Group I for the related Distribution Date and (v) after the 12th Distribution
Date, one-twelfth of 0.50% of the Adjustable Rate Group I balance as of the
first day of the related Collection Period by (y) the product of (i) the
Adjustable Rate Group I 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 (B) 14%.
The Class A-V2 Pass-Through Rate with respect to each Interest Period will
be equal to the lesser of (x) with respect to each Interest Period ending on
or prior to the Clean-up Call Date, LIBOR (calculated as described below
under "--Calculation of LIBOR") plus 0.45% per annum and for any Interest
Period thereafter, LIBOR plus 0.90% per annum (the "Class A-V2 Formula
Pass-Through Rate") and (y) the Adjustable Rate Group II Available Funds Cap.
The Pass-Through Rate for the Class A-V2 Certificates generally will be
limited to the Adjustable Rate Group II Available Funds Cap. The "Adjustable
Rate Group II Available Funds Cap" will be, with respect to any Distribution
Date, the per annum rate equal to the lesser of (A) the percentage obtained
by dividing (x) the amount of interest that accrued on the Mortgage Loans in
Adjustable Rate Group II 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 Monthly
Servicing Fee and Back-Up Servicing Fee for the Mortgage Loans in Adjustable
Rate Group II for such Interest Period, (ii) the Certificate Insurer Premium
attributable to Adjustable Rate Group II for the related Distribution Date,
(iii) the Trustee Fee attributable to Adjustable Rate Group II for the
related Distribution Date, (iv) the PMI Insurance Premium, if any,
attributable to Adjustable Rate Group II for the related Distribution Date
and (v) after the 12th Distribution Date, one-twelfth of 0.50% of the
Adjustable Rate Group II balance as of the first day of the related
Collection Period by (y) the product of (i) the Adjustable Rate Group II
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 (B) 14%.
The Class A-V1 and Class A-V2 Certificates will be entitled to receive 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 by optional termination or otherwise.
The Certificate Insurer does not guarantee the payment of, and the ratings
assigned to the Class A-V1 and Class A-V2 Certificates do not address the
likelihood of the payment of, any Supplemental Interest Amounts.
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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 rate for one-month
United States dollar deposits, as such rate appears 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) that 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, in the event that 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) is not available,
the Trustee will establish LIBOR 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.
(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 that 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 that New York City
banks selected by the Trustee are quoting on such LIBOR Determination Date
to leading European banks.
The Trustee's establishment of LIBOR on each LIBOR Determination Date and
the Trustee's calculation of the rate of interest applicable to the Class
A-V1 and Class A-V2 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 $46,231,820.28 (the "Prefunding Account Deposit") in a segregated account
(the "Prefunding Account"), which account will be part of the Trust and will
be maintained
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with the Trustee in its corporate trust department. $28,219,647.21 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, $14,867,295.26 of the Prefunding Account Deposit will be allocated for
the purchase of Mortgage Loans bearing adjustable rates of interest that will
be included in Adjustable Rate Group I, and $3,144,877.81 of the Prefunding
Account Deposit will be allocated for the purchase of Mortgage Loans bearing
adjustable rates of interest that will be included in Adjustable Rate Group
II. All Mortgage Loans purchased by the Trust through application of amounts
on deposit in the Prefunding Account are referred to in this Prospectus
Supplement 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. 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) January 31, 2000, 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 February, 2000, the portion of the Prefunding
Account Deposit allocated to the Fixed Rate Group that has not been applied
to purchase Subsequent Mortgage Loans for inclusion in the Fixed Rate Group
during the Funding Period will be applied to reduce the Fixed Rate Group
Certificate Principal Balance, the portion of the Prefunding Account Deposit
allocated to Adjustable Rate Group I that has not been applied to purchase
Subsequent Mortgage Loans for inclusion in Adjustable Rate Group I during the
Funding Period will be applied to reduce the Adjustable Rate Group I
Certificate Principal Balance and the portion of the Prefunding Account
Deposit allocated to Adjustable Rate Group II that has not been applied to
purchase Subsequent Mortgage Loans for inclusion in Adjustable Rate Group II
during the Funding Period will be applied to reduce the Adjustable Rate Group
II 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 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 February,
2000. 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 February, 2000
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 date on which Subsequent Mortgage Loans are conveyed by
the Sponsor to the Trust (a "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 February, 2000 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 February, 2000
Distribution Date. The Prefunding Account will not be included as an asset of
any REMIC created pursuant to the Pooling and Servicing Agreement.
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. Any amounts remaining in the Capitalized Interest
Account and not needed for such purpose will be paid to the Sponsor and will
not thereafter be available for distribution to the Holders of the Offered
Certificates.
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 February, 2000 Distribution Date as specified in the Pooling
and Servicing Agreement. The Capitalized Interest Account will not be
included as an asset of any REMIC created pursuant to the Pooling and
Servicing Agreement.
SUPPLEMENTAL INTEREST RESERVE FUND
The Pooling and Servicing Agreement provides for a reserve fund (the
"Supplemental Interest Reserve Fund"), which is held by the Trustee on behalf
of the Holders of the Class A-V1 and Class A-V2 Certificates. To the extent
amounts on deposit are sufficient, Holders of the Class A-V1 and Class A-V2
Certificates will be entitled to receive payments from the fund equal to any
related Supplemental Interest Amount. The amount required to be deposited in
the fund on any Distribution Date (the "Supplemental Interest Reserve Fund
Deposit") will equal any Supplemental Interest Amount for such Distribution
Date, or, if no Supplemental Interest Amount is payable on such Distribution
Date, an amount such that when added to other amounts already on deposit in
the fund, the aggregate amount on deposit therein is equal to $10,000. Any
investment earnings on amounts on deposits in the fund will be paid to (and
for the benefit of) the Holders of the Class C Certificates and will not be
available to pay any Supplemental Interest Amount. The Supplemental Interest
Reserve Fund will not be included as an asset of any REMIC created pursuant
to the Pooling and Servicing Agreement.
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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) that 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;
(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 certain delinquency and loss triggers under the Pooling and
Servicing Agreement have occurred;
(k) the Overcollateralization Amount and Targeted Overcollateralization
Amount for each Mortgage Loan Group;
(l) the Certificate Principal Balance of each Class of Certificates then
outstanding after giving effect to all payments of principal on such
Distribution Date;
(m) 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;
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(n) 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, Adjustable Rate
Group I Balance or Adjustable Rate Group II Balance, as appropriate, that
are (i) 30 to 59 days delinquent, (ii) 60 to 89 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;
(o) the amount of any Supplemental Interest Amounts paid and remaining
unpaid as of such Distribution Date; and
(p) the amount of any draw to be made on the PMI Policy on the related
Distribution Date, and the amounts paid to the PMI Insurer as of such
Distribution Date in respect of the PMI Insurer Premium.
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 (o)
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 Cedelbank, societe anonyme ("Cedelbank") 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"), the nominee of DTC. Cedelbank and Euroclear will hold omnibus
positions on behalf of Cedelbank Participants and Euroclear Participants,
respectively, through customers' securities accounts in Cedelbank'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 Cedelbank 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
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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 Cedelbank
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 Cedelbank 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 Cedelbank 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
Cedelbank or Euroclear as a result of a transaction with a Participant will
be made during subsequent
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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 Cedelbank Participants on such business day. Cash received in
Cedelbank or Euroclear as a result of sales of securities by or through a
Cedelbank Participant or Euroclear Participant to a Participant will be
received with value on the DTC settlement date but will be available in the
relevant Cedelbank 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, we refer you to
"Certain Federal Income Tax Consequences -- Miscellaneous Tax Aspects --
Backup Withholding" and "--Tax Treatment of Foreign Investors" in the
Prospectus and to "ANNEX B: Global Clearance, Settlement and Tax
Documentation Procedures -- Certain U.S. Federal Income Tax Documentation
Requirements" to this Prospectus Supplement.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between Cedelbank 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 Cedelbank
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. Cedelbank 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.
Cedelbank is incorporated under the laws of Luxembourg as a professional
depository. Cedelbank holds securities for its participating organizations
("Cedelbank Participants") and facilitates the clearance and settlement of
securities transactions between Cedelbank Participants through electronic
book-entry changes in accounts of Cedelbank Participants, thereby eliminating
the need for physical movement of certificates. Transactions may be settled
in Cedelbank in numerous currencies, including United States dollars.
Cedelbank provides to its Cedelbank Participants, among other things,
services for safekeeping, administration, clearance and settlement of
internationally traded securities and securities lending and borrowing.
Cedelbank
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interfaces with domestic markets in several countries. As a professional
depository, Cedelbank is subject to regulation by the Luxembourg Monetary
Institute. Cedelbank 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 Cedelbank is also available to others, such
as banks, brokers, dealers and trust companies that clear through or maintain
a custodial relationship with a Cedelbank 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 numerous
currencies, including United States dollars. Euroclear provides various other
services, including securities lending and borrowing, and interfaces with
domestic markets in several countries generally similar to the arrangements
for cross-market transfers with DTC described above. Euroclear is operated by
the Brussels, Belgium office of Morgan Guaranty Trust Company of New York
(the "Euroclear Operator"), under contract with Euroclear Clearance Systems
S.C., a Belgian cooperative corporation (the "Cooperative"). All operations
are conducted by the Euroclear Operator, and all Euroclear securities
clearance accounts and Euroclear cash accounts are accounts with the
Euroclear Operator, not the Cooperative. The Cooperative establishes policy
for Euroclear on behalf of Euroclear Participants. Euroclear Participants
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries. Indirect access to Euroclear is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation that is a member bank of the Federal Reserve System. As such it
is regulated and examined by the Board of Governors of the Federal Reserve
System (the "Federal Reserve Board") and the New York State Banking
Department, as well as the Belgian Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear
and the related Operating Procedures of the Euroclear System and applicable
Belgian law (collectively, the "Terms and Conditions"). The Terms and
Conditions govern transfers of securities and cash within Euroclear,
withdrawals of securities and cash from Euroclear and receipts of payments
with respect to securities in Euroclear. All securities in Euroclear are held
on a fungible basis without attribution to specific certificates to specific
securities clearance accounts. The Euroclear Operator acts under the Terms
and Conditions only on behalf of Euroclear Participants, and has no record of
or relationship with persons holding through Euroclear Participants.
Distributions on the Book-Entry Certificates will be made on each
Distribution Date by the Trustee to DTC. DTC will be responsible for
crediting the amount of such payments to the accounts of the applicable
Participants in accordance with DTC's
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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
Cedelbank or Euroclear will be credited to the cash accounts of Cedelbank
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. We refer you to
"Certain Federal Income Tax Consequences -- Miscellaneous Tax Aspects --
Backup Withholding" and "--Tax Treatment of Foreign Investors" in the
Prospectus and to "ANNEX B: Global Clearance, Settlement and Tax
Documentation Procedures -- Certain U.S. Federal Income Tax Documentation
Requirements" to this Prospectus Supplement. 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. Cedelbank 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 Cedelbank
Participant or Euroclear Participant only in accordance with its relevant
rules and procedures and subject to the ability of the Relevant Depositary to
effect such actions on its behalf through DTC. DTC may take actions, at the
direction of the related Participants, with respect to some Offered
Certificates that conflict with actions taken with respect to other Offered
Certificates.
Definitive Certificates will be issued in registered form to Certificate
Owners, or their nominees, rather than to DTC, only if (i) DTC or the Sponsor
advises the Trustee in writing that DTC is no longer willing or able to
discharge properly its responsibilities as nominee and depositary with
respect to the Offered 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
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(iii) after an 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 Certificates to Certificate
Owners, such Definitive 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. We
refer you to "Description of the Securities -- Form of Securities -- 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, Cedelbank and Euroclear have agreed to the foregoing
procedures in order to facilitate transfer of Offered Certificates among
participants of DTC, Cedelbank and Euroclear, they are under no obligation to
perform or continue to perform such procedures and such procedures may be
discontinued at any time.
DTC management is aware that some computer applications, systems and the
like for processing dates ("Systems") that are dependent upon calendar dates,
including dates before, on and after January 1, 2000, may encounter "Year
2000 problems." DTC has informed its Participants and other members of the
financial community (the "Industry") that it has developed and is
implementing a program so that its Systems, as the same relate to the timely
payment of distributions (including principal and income payments) to
securityholders, book-entry deliveries and settlement of trades within DTC
("DTC Services"), continue to function appropriately. This program includes a
technical assessment and a remediation plan, each of which is complete.
Additionally, DTC's plan includes a testing phase, which is expected to be
completed within appropriate time frames.
However, DTC's ability to perform properly its services is also dependent
upon other parties, including but not limited to Issuers and their agents, as
well as third party vendors from whom DTC licenses software and hardware, and
third party vendors on whom DTC relies for information or the provision of
services, including telecommunication and electrical utility service
providers, among others. DTC has informed the Industry that it is contacting
(and will continue to contact) third party vendors from whom DTC acquires
services to: (i) impress upon them the importance of such services being Year
2000 compliant; and (ii) determine the extent of their efforts for Year 2000
remediation (and, as appropriate, testing) of their services. In addition,
DTC is in the process of developing such contingency plans as it deems
appropriate.
According to DTC, the information set forth in the preceding two
paragraphs about DTC has been provided to the Industry by DTC for information
purposes only and is not intended to serve as a representation, warranty or
contract modification of any kind.
TERMINATION; RETIREMENT OF THE CERTIFICATES
The obligations created by the Pooling and Servicing Agreement will
terminate upon the later to occur of (a) the payment to Certificateholders of
all amounts held in
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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 or (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.
On any Distribution Date, the Holder of the Class R Certificates may
purchase all of the Mortgage Loans and all property acquired in respect of
such Mortgage Loans at a price not less than the sum of (x) 100% of the
Principal Balance of each such 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 (as determined by the Holder of the Class R Certificates as of the
close of business on the third Business Day next preceding the date upon
which notice of any such repurchase is furnished to Certificateholders), plus
one month's interest at the interest rate on each such 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. The right of the Holder of the Class R
Certificates to make the purchase described above on any Distribution Date is
conditioned upon the principal balance of the Mortgage Loans as of such
Distribution Date being less than 10% of the sum of the principal balance of
the Mortgage Loans as of the Cut-off Date (the "Cut-off Date Pool Balance")
and the Prefunding Account Deposit (the first such Distribution Date, the
"Clean-up Call Date").
The Pooling and Servicing Agreement will provide that notice of any
termination, specifying the final Distribution Date upon which the
Certificateholders may surrender their Certificates to the Trustee for
payment of the final distribution and cancellation, will be given promptly by
the Trustee by letter to Certificateholders specifying (a) the Distribution
Date for the final distribution, (b) the amount of any such final
distribution and (c) that the final distribution will be made only upon
presentation and surrender of the Certificates at the office or agency of the
Trustee therein specified.
If the termination of the Trust is in connection with a purchase of the
assets of the Trust by the Holder of the Class R Certificates 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.
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The distribution on the final Distribution Date in connection with the
purchase by the Holder of the Class R Certificates 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 Holder of the Class R
Certificates 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 any REMIC created pursuant to the Pooling and
Servicing Agreement 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 (the "Trustee Fee") 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, if the Trustee fails to
fulfill its obligations in any material respect 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. We refer you to "The Pooling and
Servicing Agreement -- The Trustee" in the Prospectus.
CREDIT ENHANCEMENT
The credit enhancement provided for the benefit of the Offered
Certificateholders consists of the application of the related Monthly Excess
Cashflow Amounts, the overcollateralization and cross-collateralization
features of the Trust, the Certificate Insurance Policy and, in certain
instances, the PMI 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 the insufficiency will constitute a
"Realized Loss." Realized Losses will reduce the aggregate of the outstanding
principal balances of the Mortgage Loans in the related 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 that 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
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reduction of the related Overcollateralization Amount (including giving
effect to the cross-collateralization feature of the Trust) to the extent of
any Coverage Deficit will be covered by a draw on the Certificate Insurance
Policy.
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. In
addition, to the extent that there is overcollateralization, these Mortgage
Loans will be generating still further excess interest relative to the
Pass-Through Rates on the related Offered Certificates. The Monthly Excess
Cashflow Amount generally consists of both the excess interest generated on
the related Mortgage Loans together with the Overcollateralization Release
Amount. Monthly Excess Cashflow Amounts will be allocated to the extent
described herein to the accelerated payment of principal in the form of the
Extra Principal Distribution Amount.
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 one or both of the
other Mortgage Loan Groups, as described below under the caption
"--Crosscollateralization Provisions," to the payment of the Certificate
Principal Balances of the related Offered Certificates. Any such application
will cause the aggregate of the related Certificate Principal Balances to
amortize more rapidly than the Mortgage Loans in the Mortgage Loan Group,
increasing the amount of overcollateralization. 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, such
accelerated amortization features will cease, unless necessary to maintain
the Targeted Overcollateralization Amount.
As of the Closing Date, there will be limited initial
Overcollateralization Amount only with respect to the Fixed Rate Group in the
amount required by the Certificate Insurer and provided in the Pooling and
Servicing Agreement. Absent Realized Losses in a Mortgage Loan Group, any
Monthly Excess Cashflow Amounts will be paid as Extra Principal Distribution
Amounts, thereby increasing the Overcollateralization Amount related to such
Mortgage Loan Group 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, but will be distributed to
the Retained Certificateholders as described under the caption "Description
of the Certificates -- Distributions," and the amortization of the Offered
Certificates of the related Certificate Group will accordingly be
decelerated. Any Monthly Excess Cashflow 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.
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The Pooling and Servicing Agreement provides that, based on the
delinquency and loss experience of the Mortgage Loans and certain triggers
required by the Certificate Insurer as set forth in the Pooling and Servicing
Agreement, 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 a 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.
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 such Class' allocable percentage of the amount, if any, by which
(x) the aggregate of the Certificate Principal Balances of the Classes of
Offered Certificates, after taking into account all distributions thereto in
respect of principal to be made on such Distribution Date, other than amounts
paid by the Certificate Insurer, exceeds (y) the Aggregate Principal Balance
of the Mortgage Loans 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. YOU
SHOULD REALIZE THAT, UNDER CERTAIN LOSS OR DELINQUENCY SCENARIOS APPLICABLE
TO THE MORTGAGE LOANS, YOU MAY TEMPORARILY RECEIVE NO DISTRIBUTIONS IN
REDUCTION OF THE CERTIFICATE PRINCIPAL BALANCE OF THEIR RESPECTIVE CLASS.
THE CERTIFICATE INSURANCE POLICY
The following summary of the terms of the Certificate Insurance Policy
does not purport to be complete and is qualified in its entirety by reference
to the Certificate Insurance Policy. A form of the Certificate Insurance
Policy may be obtained, upon request, from the Trustee.
Simultaneously with the issuance of the Offered Certificates, the
Certificate Insurer will deliver the Certificate Insurance Policy to the
Trustee for the benefit of the Holders of the Offered Certificates. Under the
Certificate Insurance Policy, the Certificate Insurer will irrevocably and
unconditionally guarantee payment on each Distribution Date to the Trustee
for the benefit of the Holders of the Offered Certificates of Insured
Payments with respect to the Offered Certificates for such Distribution Date,
calculated
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in accordance with the original terms of the Offered Certificates when
issued and without regard to any amendment or modification of the Offered
Certificates except amendments or modifications to which the Certificate
Insurer has given its prior written consent.
As used in the Certificate Insurance Policy, the following terms have the
following meanings:
"Agreement" means the Pooling and Servicing Agreement dated as of November
1, 1999 between Aames Capital Corporation, as Sponsor and Servicer, Fairbanks
Capital Corp., as Back-Up Servicer, and Bankers Trust Company of California,
N.A., 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 Certificate 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, with respect to the Offered Certificates and
any Distribution Date, the excess, if any, of (A) the sum of (i) the Accrued
Certificate Interest for each Class of Offered Certificates plus any Interest
Carry Forward Amount for each Class of Offered Certificates and (ii) the
Guaranteed Principal Amount over (B) Available Funds for all of the Mortgage
Loan Groups (after payment of the Trustee Fee, Monthly Servicing Fee, the
Back-Up Servicing Fee, the Certificate Insurer Premium and the PMI Insurer
Premium, if any). The Certificate Insurance Policy will not cover payment of
any Supplemental Interest Amount.
"Guaranteed Principal Amount" means for any Distribution Date (a) the
amount, if any, by which the aggregate Certificate Principal Balance of the
Offered Certificates exceeds the Aggregate Principal Balance of the Mortgage
Loans at the end of the previous month (after giving effect to all
distributions of principal on the Offered Certificates on such Distribution
Date) and (b) on the Distribution Date in December 2029 (after giving effect
to all other distributions of principal on the Offered Certificates), an
amount equal to the aggregate Certificate Principal Balance.
"Insured Payment" means (i) as of any Distribution Date, any Deficiency
Amount and (ii) any Preference Amount.
"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. Section 101 et seq.), as amended from time to
time, in accordance with a final nonappealable order of a court having
competent jurisdiction.
"Receipt" and "Received" with respect to the Certificate Insurance Policy
means actual delivery to the Certificate Insurer and to the fiscal agent
appointed by the Certificate Insurer at its option, if any, prior to 12:00
p.m., New York City time, on a Business Day; delivery either on a day that is
not a Business Day or after 12:00 p.m., New York City time, shall be deemed
to be Receipt on the next succeeding Business Day. If any notice or
certificate given under the Certificate Insurance Policy by the
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Trustee is not in proper form or is not properly completed, executed or
delivered, it shall be deemed not to have been Received, and the Certificate
Insurer or the fiscal agent shall promptly so advise the Trustee and the
Trustee may submit an amended notice.
"Term of the Policy" means the period from and including the date of
issuance of the Certificate Insurance Policy to and including the date on
which the Certificate Principal Balance for each Class of Certificates is
zero, plus such additional period, to the extent specified in the Certificate
Insurance Policy, during which any payment on the applicable Class of
Certificates could be avoided in whole or in part as a preference payment.
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.
If any Insured Payment is avoided as a preference payment under applicable
bankruptcy, insolvency, receivership or similar law, the Certificate Insurer
will pay such amount out of funds of the Certificate Insurer on the later of
(a) the date when due to be paid pursuant to the Order referred to below or
(b) the first to occur of (i) the fourth Business Day following Receipt by
the Certificate Insurer from the Trustee of (A) a certified copy of the order
of the court or other governmental body that exercised jurisdiction to the
effect that a holder of the applicable Class of Certificates is required to
return principal or interest distributed with respect to the applicable Class
of Certificates during the Term of the Policy because such distributions were
avoidable preferences under applicable bankruptcy law (the "Order"), (B) a
certificate of such Holder of the applicable Class of Certificates that the
Order has been entered and is not subject to any stay, and (C) an assignment
duly executed and delivered by such Holder of the applicable Class of
Certificates, in such form as is reasonably required by the Certificate
Insurer and provided to such Holder of the applicable Class of Certificates
by the Certificate Insurer, irrevocably assigning to the Certificate Insurer
all rights and claims of such Holder of the applicable Class of Certificates
against the debtor which made such preference payment or otherwise with
respect to such preference payment, or (ii) the date of Receipt by the
Certificate Insurer from the Trustee of the items referred to in clauses (A),
(B) and (C) above if, at least four Business Days prior to such date of
Receipt, the Certificate Insurer shall have Received written notice from the
Trustee that such items were to be delivered on such date and such date was
specified in such notice. Such payment shall be disbursed to the receiver,
conservator, debtor-in-possession or trustee in bankruptcy named in the Order
and not to the Trustee or Holder of the applicable Class of Certificates
directly (unless a Holder of the applicable Class of Certificates has
previously paid such amount to the receiver, conservator,
debtor-in-possession or trustee in bankruptcy named in the Order, in which
case such payment shall be disbursed to the Trustee for distribution to such
Certificateholder upon proof of such payment reasonably satisfactory to the
Certificate Insurer). In connection with the foregoing, the Certificate
Insurer shall have the rights provided pursuant to the Pooling and Servicing
Agreement.
Payment of claims under the Certificate Insurance Policy will be made by
the Certificate Insurer following Receipt by the Certificate Insurer of the
appropriate notice
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for payment on the later to occur of (a) 12:00 noon, New York City time, on
the second Business Day following Receipt of such notice for payment, and (b)
12:00 noon, New York City time, on the relevant Distribution Date.
The Certificate Insurer shall be subrogated to the rights of the holders
of the Offered Certificates to receive payments of principal and interest, as
applicable, with respect to distributions on the Offered Certificates to the
extent of any payment by the Certificate Insurer under the Certificate
Insurance Policy. To the extent the Certificate Insurer makes Insured
Payments, either directly or indirectly (as by paying through the Trustee),
to the Holders of the Offered Certificates, the Certificate Insurer will be
subrogated to the rights of the Holders of the Offered Certificates, as
applicable, with respect to such Insured Payment and shall be deemed to the
extent of the payments so made to be a registered holder of Offered
Certificates for purposes of payment.
Claims under the Certificate Insurance Policy constitute direct unsecured
and unsubordinated obligations of the Certificate Insurer, and will rank
equally with any other unsecured and unsubordinated obligations of the
Certificate Insurer except for certain obligations in respect to tax and
other payments to which preference is or may become afforded by statute. The
terms of the Certificate Insurance Policy cannot be modified, altered or
affected by any other agreement or instrument, or by the merger,
consolidation or dissolution of the Sponsor. The Certificate Insurance Policy
by its terms may not be canceled or revoked prior to distribution in full of
all Guaranteed Principal Amounts. The Certificate Insurance Policy is
governed by the laws of the State of New York. The Certificate Insurance
Policy is not covered by the Property/Casualty Insurance Security Fund
specified in Article 76 of the New York Insurance Law.
To the fullest extent permitted by applicable law, the Certificate Insurer
agrees under the Certificate Insurance Policy not to assert, and waives, for
the benefit of each Holder of Offered Certificates, all its rights (whether
by counterclaim, setoff or otherwise) and defenses (including, without
limitation, the defense of fraud), whether acquired by subrogation,
assignment or otherwise, to the extent that such rights and defenses may be
available to the Certificate Insurer to avoid payment of its obligations
under the Certificate Insurance Policy in accordance with the express
provisions of the Certificate Insurance Policy.
Pursuant to the terms of the Pooling and Servicing Agreement, unless a
default by the Certificate Insurer in connection with the Certificate
Insurance Policy exists, the Certificate Insurer will be entitled to exercise
certain rights of the Holders of the Offered Certificates, without the
consent of such Holders, and the Holders of the Offered Certificates may
exercise such rights only with the prior written consent of the Certificate
Insurer.
The Servicer, the Trustee and the Certificate Insurer will enter into an
Insurance and Indemnity Agreement (the "Insurance Agreement") pursuant to
which the Servicer will agree to reimburse, with interest, the Certificate
Insurer for amounts paid pursuant to claims under the Certificate Insurance
Policy. The Servicer will further agree to pay the Certificate Insurer all
reasonable charges and expenses which the Certificate Insurer may pay or
incur relative to any amounts paid under the Certificate Insurance Policy or
otherwise in connection with the transaction and to indemnify the Certificate
Insurer against certain liabilities. Except to the extent provided therein,
amounts owing under
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the Insurance Agreement will be payable solely from the Trust. An event of
default by the Servicer under the Insurance Agreement will constitute an
event of default by the Servicer under the Pooling and Servicing Agreement
and allow the Certificate Insurer, among other things, to direct the Trustee
to terminate the Servicer. An "event of default" by the Servicer under the
Insurance Agreement includes (i) the Servicer's failure to pay when due any
amount owed under the Insurance Agreement or certain other documents, (ii)
the Servicer's untruth or incorrectness in any material respect of any
representation or warranty of the Servicer in the Insurance Agreement, the
Pooling and Servicing Agreement or certain other documents, (iii) the
Servicer's failure to perform or to observe any covenant or agreement in the
Insurance Agreement, the Pooling and Servicing Agreement and certain other
documents, (iv) the Servicer's failure to pay its debts in general or the
occurrence of certain events of insolvency or bankruptcy with respect to the
Servicer, and (v) the occurrence of an event of default under the Pooling and
Servicing Agreement or certain other documents. For a description of the
Certificate Insurer, we refer you to "The Certificate Insurer" in this
Prospectus Supplement.
CROSSCOLLATERALIZATION PROVISIONS
Certain Available Funds with respect to each Certificate Group will be
available to cover certain shortfalls and to create overcollateralization
with respect to the Offered Certificates relating to the other Certificate
Groups as described above under the caption "Description of the Certificates
- -- Distributions."
THE PMI POLICY
The following description of the primary mortgage guaranty insurance
policy (the "PMI Policy") is only a brief outline and does not purport to
summarize or describe all of the provisions, terms and conditions of the PMI
Policy. For a more complete description of these provisions, terms and
conditions, reference is made to the PMI Policy, a copy of which is available
upon request from the Trustee.
As of the Cut-off Date, approximately 1,070 Mortgage Loans (the "PMI
Mortgage Loans") with original Loan-to-Value Ratios in excess of 80% are
insured by Mortgage Guaranty Insurance Corporation (the "PMI Insurer")
pursuant to the PMI Policy. The amount of coverage provided by the PMI Policy
varies on a loan-by-loan basis based upon the original Loan-to-Value Ratio of
the PMI Mortgage Loan. The PMI Policy provides for the payment to the PMI
Insurer of certain initial and renewal premiums with respect to each PMI
Mortgage Loan, at rates calculated under the PMI Policy. Coverage of each PMI
Mortgage Loan under the PMI Policy is conditioned upon timely payment to the
PMI Insurer of such premiums.
Unless otherwise agreed by the Certificate Insurer, the PMI Policy is
required to remain in force with respect to each PMI Mortgage Loan until: (1)
the Principal Balance of such PMI Mortgage Loan is paid in full, or (2) the
Principal Balance of such PMI Mortgage Loan has amortized down to a level
that results in a Loan-to-Value Ratio for such Mortgage Loan agreed to with
the PMI Insurer, provided, however, that no coverage of any PMI Mortgage Loan
under the PMI Policy is required where prohibited by applicable law.
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THE MORTGAGE LOANS
GENERAL
The assets of the Trust will consist primarily of a pool (the "Mortgage
Pool") of mortgage loans (the "Mortgage Loans"), divided into three groups
(each, a "Mortgage Loan Group"), secured by first and junior liens on one-to
four-family residential properties, including units in condominiums and
manufactured housing (each, a "Mortgaged Property"), along with (i) funds on
deposit in the Prefunding Account and Capitalized Interest Account and (ii)
the Certificate Insurance Policy and rights under the PMI 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 following brief description of the Initial Mortgage Loans is based on
the terms of the Initial Mortgage Loans, including their respective principal
balance as of the Cut-off Date (the "Cut-off Date Principal Balance"), 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 and other Mortgage Loans may be substituted therefor with
the consent of the Certificate Insurer. 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. We refer
you to "--Conveyance of Subsequent Mortgage Loans" in this Prospectus
Supplement.
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 each 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 Securities
and Exchange 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, we refer you to "ANNEX A: Description
of the Mortgage Pool" to this Prospectus Supplement.
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Each Mortgage Loan in the Trust will be assigned to the Fixed Rate Group,
Adjustable Rate Group I or Adjustable Rate Group II. Each Mortgage Loan
assigned to the Fixed Rate Group bears interest at a fixed rate, and each
Mortgage Loan assigned to Adjustable Rate Group I and Adjustable Rate Group
II bears interest at an adjustable rate. 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 Adjustable Rate Group I and Adjustable Rate Group II 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, the Adjustable Rate Group I Certificates
represent undivided beneficial ownership interests in all Mortgage Loans
contained in Adjustable Rate Group I and the Adjustable Rate Group II
Certificates represent undivided beneficial ownership interests in all
Mortgage Loans contained in Adjustable Rate Group II.
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.
76.27% of the Fixed Rate Group Mortgage Loans, 77.52% of the Adjustable Rate
Group I Mortgage Loans and 77.25% of the Adjustable Rate Group II Mortgage
Loans provide for certain prepayment charges. Such penalties, to the extent
received, will be included in Available Funds. 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 0.68% of the Initial Mortgage Loans (by Cut-off Date
Principal Balance) had one monthly payment past due. However, you should be
aware that approximately 24.14%, 20.74% and 21.65% (by Cut-off Date Principal
Balance) of the Mortgage Loans in the Fixed Rate Group, Adjustable Rate Group
I and Adjustable Rate Group II, respectively, had a first monthly payment due
before October 1, 1999, 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.
No Mortgage Loan has a Loan-to-Value Ratio at origination of more than
97%. Generally, each Mortgage Loan with a Loan-to-Value Ratio at origination
of greater than 80%, as of the Cut-off Date, is covered by the PMI Policy. We
refer you to "Credit Enhancement -- The PMI Policy" in this Prospectus
Supplement.
FIXED RATE GROUP
As of the Cut-off Date, the Aggregate Principal Balance of the Initial
Mortgage Loans in the Fixed Rate Group was $204,775,276.64. Approximately
87.56%, 8.34%, 3.55% and 0.54% of the related Mortgaged Properties (by
Cut-off Date Principal Balance) were single family residences, two-to
four-family residences, units in condominiums and manufactured housing,
respectively, and no more than 0.80% 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 15.62%, 11.56%,
9.49%, 6.84%, 5.56% and 5.45% of the Initial Mortgage Loans in the
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Fixed Rate Group (by Cut-off Date Principal Balance) are secured by
Mortgaged Properties located in the states of California, Florida, Texas, New
York, Hawaii and Michigan, respectively.
The original weighted average Combined Loan-to-Value Ratio of all Initial
Mortgage Loans in the Fixed Rate Group was approximately 74.55%. The maximum
and average current balances as of the Cut-off Date were approximately
$420,000.00 and $68,647.43, respectively. The average appraised value of the
Mortgaged Properties securing Mortgage Loans in the Fixed Rate Group was
approximately $105,613.67 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. We refer you to "Risk Factors -- The Unique Features of the Mortgage
Loans Create Special Risks -- Risks Associated with Underwriting Standards"
in this Prospectus Supplement.
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 6.700% per annum to 16.990% 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 10.137% per annum.
The weighted average remaining term to stated maturity of the Initial
Mortgage Loans in the Fixed Rate Group was approximately 326 months. The
weighted average original term to maturity of the Initial Mortgage Loans in
the Fixed Rate Group was approximately 327 months. As of the Cut-off Date,
the weighted average seasoning of the Initial Mortgage Loans in the Fixed
Rate Group was approximately 1 month.
Based on the Aggregate Principal Balance of the Mortgage Loans in the
Fixed Rate Group as of the Cut-off Date, approximately 99.88% 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 0.12% 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 I
As of the Cut-off Date, all of the Initial Mortgage Loans in Adjustable
Rate Group I have conforming balances. As of the Cut-off Date, the Aggregate
Principal Balance of the Initial Mortgage Loans in Adjustable Rate Group I
was $140,132,704.74. Approximately 86.26%, 6.41%, 5.69% and 1.64% of the
related Mortgaged Properties (by Cut-off Date Principal Balance) were single
family residences, two-to four-family residences, units in condominiums and
manufactured housing, respectively, and no more than 0.43% of the Mortgage
Loans in Adjustable Rate Group I (by Cut-off Date
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Principal Balance) were secured by Mortgaged Properties located in any
single ZIP code. Approximately 12.95%, 7.77%, 6.14%, 5.82% and 5.15% of the
Initial Mortgage Loans in Adjustable Rate Group I (by Cut-off Date Principal
Balance) are secured by Mortgaged Properties located in the states of
Florida, California, Texas, Ohio and Colorado, respectively.
The original weighted average Combined Loan-to-Value Ratio of all Initial
Mortgage Loans in Adjustable Rate Group I was approximately 78.89%. The
maximum and average current balances as of the Cut-off Date were
approximately $359,513.37 and $83,811.43, respectively. The average appraised
value of the Mortgaged Properties securing Initial Mortgage Loans in
Adjustable Rate Group I was approximately $109,268.91 at the time of
origination of such Mortgage Loans.
Certain Initial Mortgage Loans in Adjustable Rate Group I bear interest
rates that, after a period of approximately two years or three 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. These Initial Mortgage Loans have semi-annual
interest rate and payment adjustment frequencies after the first interest
rate adjustment date. Approximately 73.65% (by Cut-off Date Principal
Balance) of the Initial Mortgage Loans included in Adjustable Rate Group I
have initial Mortgage Interest Rates that will remain fixed for two years
from the date of origination before initial adjustment, and approximately
22.48% (by Cut-off Date Principal Balance) of the Initial Mortgage Loans
included in Adjustable Rate Group I have initial Mortgage Interest Rates that
will remain fixed for three years from the date of origination before initial
adjustment.
Each Initial Mortgage Loan in Adjustable Rate Group I 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 1.0% to 1.5% above the then
current interest rate for such Initial Mortgage Loan. In addition, each
Initial Mortgage Loan in Adjustable Rate Group I that has an initial rate
adjustment date that is approximately two years or three years from its date
of origination has or will have an initial rate adjustment cap of 1.0% to
3.0% above the related initial Mortgage Interest Rate. The Mortgage Loans in
Adjustable Rate Group I have a weighted average initial periodic rate
adjustment cap as of the Cut-off Date equal to approximately 2.87%. As of the
Cut-off Date, the weighted average Mortgage Interest Rate was approximately
10.362% per annum. The Mortgage Loans in Adjustable Rate Group I had a
weighted average gross margin as of the Cut-off Date of approximately 5.908%.
The initial gross margin for the Initial Mortgage Loans in Adjustable Rate
Group I ranged from approximately 2.550% to 9.250%. The interest rates borne
by the Mortgage Loans in Adjustable Rate Group I as of the Cut-off Date
ranged from approximately 5.190% per annum to approximately 16.020% per
annum. As of the Cut-off Date, the maximum rates at which interest may accrue
on the Mortgage Loans (the "Maximum Rates") in Adjustable Rate Group I ranged
from 11.190% per annum to 22.020% per annum. The Mortgage Loans in Adjustable
Rate Group I had a weighted average Maximum Rate as of the Cut-off Date of
approximately 16.424% per annum. As of the Cut-off Date, the minimum rates at
which interest may accrue on the Mortgage Loans (the "Minimum Rates") in
Adjustable Rate Group I after their respective first interest adjustment
dates ranged from approximately 5.190% per annum to approximately 16.020% per
annum. As of the Cut-off Date, the weighted average Minimum Rate was
approximately 10.357% per annum.
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The weighted average remaining term to stated maturity of the Initial
Mortgage Loans in Adjustable Rate Group I was approximately 358 months. The
weighted average original term to maturity of the Initial Mortgage Loans in
Adjustable Rate Group I was approximately 359 months. As of the Cut-off Date,
the weighted average seasoning of the Initial Mortgage Loans in Adjustable
Rate Group I was approximately 1 month.
ADJUSTABLE RATE GROUP II
As of the Cut-off Date, the Aggregate Principal Balance of the Initial
Mortgage Loans in Adjustable Rate Group II was $12,355,122.19. All of the
related Mortgaged Properties (by Cut-off Date Principal Balance) were single
family residences and no more than 3.31% of the Mortgage Loans in Adjustable
Rate Group II (by Cut-off Date Principal Balance) were secured by Mortgaged
Properties located in any single ZIP code. Approximately 35.45%, 7.76%,
7.44%, 5.95%, 5.11% and 5.05% of the Initial Mortgage Loans in Adjustable
Rate Group II (by Cut-off Date Principal Balance) are secured by Mortgaged
Properties located in the states of California, Texas, Washington,
Connecticut, Arizona and Florida, respectively.
The original weighted average Combined Loan-to-Value Ratio of all Initial
Mortgage Loans in Adjustable Rate Group II was approximately 77.46%. The
maximum and average current balances as of the Cut-off Date were
approximately $409,329.38 and $308,878.05, respectively. The average
appraised value of the Mortgaged Properties securing Initial Mortgage Loans
in Adjustable Rate Group II was approximately $405,285.18 at the time of
origination of such Mortgage Loans.
Certain Initial Mortgage Loans in Adjustable Rate Group II bear interest
rates that, after a period of approximately two years or three 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. These Initial Mortgage Loans have semi-annual
interest rate and payment adjustment frequencies after the first interest
rate adjustment date. Approximately 80.87% (by Cut-off Date Principal
Balance) of the Initial Mortgage Loans included in Adjustable Rate Group II
have initial Mortgage Interest Rates that will remain fixed for two years
from the date of origination before initial adjustment, and approximately
12.35% (by Cut-off Date Principal Balance) of the Initial Mortgage Loans
included in Adjustable Rate Group II have initial Mortgage Interest Rates
that will remain fixed for three years from the date of origination before
initial adjustment.
Each Initial Mortgage Loan in Adjustable Rate Group II 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 1.0% to 1.5% above the then
current interest rate for such Initial Mortgage Loan. In addition, each
Initial Mortgage Loan in Adjustable Rate Group II that has an initial rate
adjustment date that is approximately two years or three years from its date
of origination has or will have an initial rate adjustment cap of 3.0% above
the related initial Mortgage Interest Rate. The Mortgage Loans in Adjustable
Rate Group II have a weighted average initial periodic rate adjustment cap as
of the Cut-off Date equal to approximately 2.86%. As of the Cut-off Date, the
weighted average Mortgage Interest Rate was approximately 9.821% per annum.
The Mortgage Loans in Adjustable Rate Group II had a weighted average gross
margin as
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of the Cut-off Date of approximately 5.919%. The initial gross margin for
the Initial Mortgage Loans in Adjustable Rate Group II ranged from
approximately 4.500% to 7.750%. The interest rates borne by the Mortgage
Loans in Adjustable Rate Group II as of the Cut-off Date ranged from
approximately 7.990% per annum to approximately 11.990% per annum. As of the
Cut-off Date, the Maximum Rates for Adjustable Rate Group II ranged from
13.990% per annum to 17.990% per annum. The Mortgage Loans in Adjustable Rate
Group II had a weighted average Maximum Rate as of the Cut-off Date of
approximately 15.848% per annum. As of the Cut-off Date, the Minimum Rates
for Adjustable Rate Group II after their respective first interest adjustment
dates ranged from approximately 7.990% per annum to approximately 11.990% per
annum. As of the Cut-off Date, the weighted average Minimum Rate was
approximately 9.821% per annum.
The weighted average remaining term to stated maturity of the Initial
Mortgage Loans in Adjustable Rate Group II was approximately 359 months. The
weighted average original term to maturity of the Initial Mortgage Loans in
Adjustable Rate Group II was approximately 360 months. As of the Cut-off
Date, the weighted average seasoning of the Initial Mortgage Loans in
Adjustable Rate Group II was approximately 1 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 more than 30 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 7.0% if it is a Fixed Rate Group Mortgage Loan, an initial
interest rate of not less than 5.80% if it is an Adjustable Rate Group I
Mortgage Loan and an initial interest rate of not less than 8.0% if it is
an Adjustable Rate Group II Mortgage Loan,
(iv) such Subsequent Mortgage Loans will be underwritten or
re-underwritten, as applicable, in accordance with the criteria set forth
under "The Originators -- Underwriting Guidelines -- Sponsor's Guidelines"
in the Prospectus, and
(v) following the purchase of such Subsequent Mortgage Loans by the
Trust, the Mortgage Loans in the related Mortgage Loan Group (including
the Subsequent Mortgage Loans) (a) will have a related weighted average
Mortgage Interest Rate not materially different from the weighted average
Mortgage Interest Rate of the Initial Mortgage Loans in the related
Mortgage Loan Group, (b) will each have a principal balance not in excess
of $400,000; and (c) will satisfy any additional requirements set forth in
the Pooling and Servicing Agreement.
In addition, the transfer of Subsequent Mortgage Loans to the Trust on the
Closing Date is subject to the approval of the Certificate Insurer, which may
also, in its
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discretion, approve Subsequent Mortgage Loans not meeting the foregoing
requirements. We refer you to "Risk Factors -- The Return on Your Investment
Will Change Over Time" in this Prospectus Supplement.
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 due and received 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 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 January
31, 2000, 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 100% of
the principal balance thereof. 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
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found to be missing or to be defective in any material respect and such
defect is not cured within the earlier of 60 days following notification
thereof to the Sponsor by the Trustee or 90 days following the Trustee's
discovery of the defect, the Sponsor will be obligated to immediately
repurchase the related Mortgage Loan from the Trust or substitute a Qualified
Replacement Mortgage, in the manner described below.
Because certain of the assignments by the Sponsor to the Trustee of
Mortgage Loans will not be recorded, it may be possible for the Sponsor to
transfer such Mortgage Loans to bona fide purchasers for value without
notice, notwithstanding the rights of the Trustee. However, in most
instances, the Sponsor would not be able to deliver the original documents
evidencing the Mortgage Notes or the mortgages because, under the terms of
the Pooling and Servicing Agreement, such documents will be retained in the
possession of the Trustee, except when released to the Servicer in connection
with its servicing activities. Moreover, a subsequent transferee who failed
to obtain delivery of the original evidence of indebtedness generally would
not, in the absence of special facts, be able to defeat the interests of the
Trustee in a Mortgage Loan so long as such evidence of indebtedness remained
in the possession of the Trustee.
The Sponsor will make certain representations and warranties as to the
accuracy in all material respects of the information set forth on the
Mortgage Loan Schedule. In addition, the Sponsor will make certain other
representations and warranties regarding the Mortgage Loans, including, for
instance, that each Mortgage Loan, at its origination, complied in all
material respects with applicable state and federal laws, that each mortgage
is a valid lien of the applicable priority, that, as of the Cut-off Date, 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. We
refer you to "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
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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 any Mortgage Loan as to which a scheduled payment
thereon becomes 90 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 3% of the sum of the aggregate
Cut-off Date Pool Balance and the Prefunding Account Deposit and such
Mortgage Loans may be purchased only in the order of the most delinquent to
the least delinquent. We refer you to "The Pooling and Servicing Agreement --
Realization upon Defaulted Mortgage Loans" in the Prospectus.
PAYMENTS ON MORTGAGE LOANS AND DEPOSITS TO THE COLLECTION ACCOUNT
The Servicer shall establish and maintain an account or, with respect to
certain Mortgage Loans serviced by a Sub-Servicer, shall cause the related
Sub-Servicer to establish and maintain an account (collectively, the
"Collection Account") into which all collections on or with respect to the
Mortgage Loans 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 Prefunding Account and Capitalized
Interest 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 that 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 that 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. We
refer you to "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 any REMIC
created pursuant to the Pooling and Servicing to be subject to the tax on
income from prohibited transactions imposed by Code Section 860F(a)(1),
otherwise subject any such REMIC to tax or cause any such REMIC to fail to
qualify as a REMIC. Investment income on monies on deposit in the Certificate
Account and the Collection Account will
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not be available for distribution to Certificateholders or otherwise subject
to any claims or rights of the Certificateholders and will be paid to
Servicer as additional servicing compensation. The Servicer will be liable
for any losses resulting from such investments.
The Servicer will deposit, or cause the related Sub-Servicer to deposit,
into the Collection Account not later than two Business Days after receipt,
all payments on or in respect of the Mortgage Loans received from or on
behalf of Mortgagors and all proceeds of Mortgage Loans. On the date in each
month specified in the Pooling and Servicing Agreement, which date shall be
no later than three Business Days prior to the related Distribution Date (the
"Deposit Date"), Available Funds 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, 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.
S-52
<PAGE>
PREPAYMENT AND YIELD CONSIDERATIONS
GENERAL
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 (and to a less extent, the other Mortgage Loan Groups), 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 Holder of the Class R
Certificate. 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 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 Accrued Certificate 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 a
Mortgage Loan Group may be available
S-53
<PAGE>
for distribution in respect of the Extra Principal Distribution Amount for
the other Mortgage Loan Groups, the resulting cross-collateralization may
increase the rate at which the Targeted Overcollateralization Amount with
respect to a 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.
THE PASS-THROUGH RATES
The Pass-Through Rate for the Class A-F Certificates is subject to the
Fixed Rate Group Available Funds Cap. The Fixed Rate Group Available Funds
Cap on any Distribution Date is determined by reference to the weighted
average Mortgage Interest Rate of the Mortgage Loans net of certain expenses
(the "Net Loan Rate") in the Fixed Rate Group in effect at the beginning of
the related Collection Period. All of the Mortgage Interest Rates on the
Mortgage Loans in the Fixed Rate Group are fixed for the lives of such
Mortgage Loans. If Mortgage Loans bearing higher Mortgage Interest Rates were
to prepay at rates faster than Mortgage Loans with lower Mortgage Interest
Rates, the Fixed Rate Group Available Funds Cap would be lower than otherwise
would be the case. Thus, the effective Pass-Through Rate on the Class A-F
Certificates will be dependent on the prepayment experience in the Fixed Rate
Group. There is no mechanism to compensate the holders of the Fixed Rate
Group Certificates if the related Pass-Through Rate is limited by the Fixed
Rate Group Available Funds Cap.
The yield to investors on the Class A-V1 and Class A-V2 Certificates will
be sensitive to, among other things, the level of LIBOR and the levels of
index used for computing the Mortgage Loan Rate on the adjustable rate
mortgage loans (the "Index"). 73.65% and 22.48% (by principal balance) of the
Initial Mortgage Loans in Adjustable Rate Group I and 80.87% and 12.35% (by
principal balance) of the Initial Mortgage Loans in Adjustable Rate Group II
are 2/28 Loans and 3/27 Loans, respectively, which will bear interest at
fixed rates for 24 months and 36 months, respectively, after origination of
such Mortgage Loans. Although each of the adjustable rate Mortgage Loans
bears interest at an adjustable rate, such rate is subject to a periodic rate
cap, a lifetime floor and a lifetime cap. If the Index increases
substantially between the dates on which the adjustable rate Mortgage Loan
adjust (each, a "Change Date"), the adjusted Mortgage Interest Rate on the
related Mortgage Loan may not equal the Index plus the related gross margin
due to the constraint of such caps. In such event, the related Mortgage
Interest Rate will be less than would have been the case in the absence of
such caps. In addition, the Mortgage Interest Rate applicable to any Change
Date will be based on the Index related to the Change Date. Thus, if the
value of the Index with respect to a Mortgage Loan rises, the lag in time
before the corresponding Mortgage Interest Rate increases will, all other
things being equal, slow the upward adjustment of the related Available Funds
Cap. Furthermore, Mortgage Loans that have not reached their first Change
Date are more likely to be subject to the applicable Periodic Rate Cap on
their first Change Date. We refer you to "The Mortgage Loans" in this
Prospectus Supplement. Although the Holders of the Class A-V1 and Class A-V2
Certificates will be entitled to receive the related Supplemental Interest
Amount to the extent funds are available therefor as described herein and in
the
S-54
<PAGE>
priority set forth herein, there is no assurance that sufficient funds will
be available therefor. The ratings on the Class A-V1 and Class A-V2
Certificates do not address the likelihood of, and the Policy does not cover,
the payment of any Supplemental Interest Amount.
Although the Mortgage Interest Rates on the adjustable rate Mortgage Loans
are subject to adjustment, the Mortgage Interest Rates adjust less frequently
than LIBOR and adjust by reference to the Index. Changes in LIBOR may not
correlate with changes in the Index and either may not correlate with
prevailing interest rates. It is possible that an increased level of LIBOR
could occur simultaneously with a lower level of prevailing interest rates,
which would be expected to result in faster prepayments, thereby reducing the
weighted average life of the Class A-V1 and Class A-V2 Certificates.
PAYMENT DELAY FEATURE OF FIXED RATE CERTIFICATES
The effective yield to the Certificateholders of the Fixed Rate Group
Certificates will be lower than the yield otherwise produced by the
Pass-Through Rate for such Class and the purchase price of such Certificates
because distributions will not be payable to the Certificateholders until the
15th day of the month following the month of accrual (without any additional
distribution of interest or earnings thereon in respect of such delay).
MANDATORY PREPAYMENT
In the event that at the end of the Funding Period there is remaining
Prefunding Account Deposit, the related Holders of the Offered Certificates
will receive an additional distribution allocable to principal in an amount
equal to the remaining Prefunding Account Deposit for the applicable
Certificate Group. Although there can be no assurance, the Sponsor
anticipates that there should be no material principal prepayment to the
Offered Certificateholders due to a lack of Subsequent Mortgage Loans.
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
S-55
<PAGE>
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 a Mortgage Loan Group may be available for
distribution in respect of the Extra Principal Distribution Amount for the
other Mortgage Loan Groups. This creates overcollateralization, which results
from the excess of the aggregate Principal Balances of the Mortgage Loans
over the aggregate Certificate Principal Balance of the related Offered
Certificates. 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. In addition, if the Targeted Overcollateralization Amount steps down,
you may experience a deceleration of principal payments.
There will not be any Insured Payment made under the Certificate Insurance
Policy in respect of principal until the aggregate of the Certificate
Principal Balances of all Offered Certificates exceeds the Aggregate
Principal Balances of all the Mortgage Loans. As a result, there may be a
situation where a Certificate Group is undercollateralized with respect to
the Mortgage Loans in the related Mortgage Loan Group while holders of the
related Certificates are not entitled to receive an Insured Payment in the
amount of such undercollateralization.
FINAL DISTRIBUTION DATES
The "Final Scheduled Distribution Date" for each Class of Offered
Certificates is set forth in the "Summary" in this Prospectus Supplement. The
Final Scheduled Distribution Date for any Class of Certificates is the date
on which the initial Certificate Principal Balance for the related Class
would be reduced to zero assuming that no
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<PAGE>
prepayments are received on the Initial Mortgage Loans and 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
for each Class of Offered Certificates could occur significantly earlier than
the Final Scheduled Distribution Date for such Class because (i) prepayments
are likely to occur that will be applied to the payment of the Certificate
Principal Balances of the Offered Certificates, (ii) distributions of Monthly
Excess Cashflow Amounts may occur on each Distribution Date, which will
accelerate the amortization of the Offered Certificates and (iii) the Holder
of the Class R Certificates 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.
STRUCTURING ASSUMPTIONS
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 November 18, 1999; (ii) the Trustee on behalf
of the Trust purchases Subsequent Mortgage Loans with Aggregate Principal
Balances equal to the Prefunding Account Deposit; (iii) all adjustable rate
Mortgage Loans 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 December 1999; (vi) distributions on the Offered
Certificates are received, in cash, on the 15th day of each month, commencing
in December 1999; (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 November 1999 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 6.0225% and the one-month London Interbank Offered Rate
remains constant at 5.4275%; (xi) early termination occurs in the manner set
forth in the respective tables; (xii) the related 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; (xiv) except as otherwise indicated on the following table, the Holder
of the Class R Certificates does not exercise its right of optional
termination; (xv) no delinquency or loss trigger occurs under the Pooling and
Servicing Agreement; and (xvi) each Mortgage Loan Group consists of Initial
Mortgage Loans having the following characteristics (with the Subsequent
Mortgage Loans to be included in each Mortgage Loan Group assumed to have
substantially the same respective characteristics):
S-57
<PAGE>
INITIAL FIXED RATE GROUP
<TABLE>
<CAPTION>
REMAINING
ORIGINAL TERM ORIGINAL
MORTGAGE TERM TO TO AMORTIZATION
AMORTIZATION PRINCIPAL INTEREST MATURITY MATURITY TERM
METHOD BALANCE RATE (MONTHS) (MONTHS) (MONTHS) PMI FEE
- -------------- --------------- ---------- ---------- ----------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balloon $ 229,971.03 11.8762% 180 178 360 N/A
Balloon $ 40,925.95 12.0500% 84 81 360 N/A
Level Pay $ 638,951.99 10.7285% 69 68 69 N/A
Level Pay $ 1,746,191.79 9.9672% 121 120 121 N/A
Level Pay $ 79,749.61 10.3774% 120 119 120 1.25%
Level Pay $ 32,513,728.79 10.1198% 180 179 180 N/A
Level Pay $ 4,166,705.46 9.3643% 180 178 180 1.25%
Level Pay $ 2,194,409.97 11.1488% 240 239 240 N/A
Level Pay $ 718,257.60 9.8351% 240 240 240 1.25%
Level Pay $138,286,656.84 10.1688% 360 359 360 N/A
Level Pay $ 52,379,374.82 10.0763% 360 359 360 1.25%
</TABLE>
INITIAL ADJUSTABLE RATE GROUP I
<TABLE>
<CAPTION>
INITIAL
MONTHS PERIODIC PERIODIC
ORIGINAL REMAINING TO NEXT RATE RATE MAXIMUM MINIMUM
MORTGAGE TERM TO TERM TO MORTGAGE ADJUST- ADJUST- MORTGAGE MORTGAGE
PRODUCT PRINCIPAL INTEREST MATURITY MATURITY RATE GROSS MENT MENT INTEREST INTEREST
TYPE BALANCE RATE (MONTHS) (MONTHS) CHANGE MARGIN CAP CAP RATE RATE PMI FEE
- ----------- -------------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Level Pay $ 320,902.05 9.0652% 180 179 5 5.6941% 1.0000% 1.0000% 15.8438% 9.0652% 1.25%
Level Pay $ 4,141,692.29 9.4964% 360 359 5 5.9542% 1.0335% 1.0335% 15.8538% 9.4605% N/A
Level Pay $ 1,243,906.57 8.9396% 360 358 4 5.1005% 1.0000% 1.0000% 14.9396% 8.9396% 1.25%
Level Pay $ 519,483.56 11.2397% 360 351 15 6.2821% 3.0000% 1.3599% 17.9595% 11.2397% N/A
Level Pay $ 115,992.25 8.7500% 360 353 17 5.5000% 3.0000% 1.5000% 14.7500% 8.7500% 1.25%
Level Pay $ 291,284.53 8.6551% 180 178 4 5.6073% 1.0000% 1.0000% 15.2203% 8.6551% N/A
Level Pay $ 307,416.82 9.8388% 180 180 24 5.9830% 1.7615% 1.0872% 16.6645% 9.8388% 1.25%
Level Pay $15,116,118.90 10.2461% 360 360 36 5.4099% 2.9328% 1.0000% 16.2461% 10.2461% 1.25%
Level Pay $72,220,810.55 10.6175% 360 359 23 6.2407% 2.9518% 1.0155% 16.6808% 10.6175% N/A
Level Pay $40,719,650.11 10.0333% 360 359 23 5.4271% 2.9450% 1.0113% 16.0844% 10.0251% 1.25%
Level Pay $ 40,261.84 10.1700% 180 180 36 5.7000% 3.0000% 1.0000% 16.1700% 10.1700% N/A
Level Pay $19,693,943.19 10.4856% 360 359 35 6.0875% 2.9340% 1.0019% 16.5031% 10.4659% N/A
Level Pay $ 268,537.34 12.0884% 180 178 22 6.9693% 3.0000% 1.0739% 18.2361% 12.0884% N/A
</TABLE>
INITIAL ADJUSTABLE RATE GROUP II
<TABLE>
<CAPTION>
MONTHS INITIAL PERIODIC
ORIGINAL REMAINING TO NEXT PERIODIC RATE MAXIMUM MINIMUM
MORTGAGE TERM TO TERM TO MORTGAGE RATE ADJUST- MORTGAGE MORTGAGE
PRODUCT PRINCIPAL INTEREST MATURITY MATURITY RATE GROSS ADJUST- MENT INTEREST INTEREST
TYPE BALANCE RATE (MONTHS) (MONTHS) CHANGE MARGIN MENT CAP CAP RATE RATE PMI FEE
- ----------- --------------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Level Pay $9,097,639.84 9.9664% 360 359 23 6.1866% 3.0000% 1.0000% 15.9664% 9.9664% N/A
Level Pay $ 738,297.03 10.0516% 360 360 36 5.7558% 3.0000% 1.2780% 16.6077% 10.0516% 1.25%
Level Pay $1,176,670.30 10.3560% 360 360 36 6.2396% 3.0000% 1.0000% 16.3560% 10.3560% N/A
Level Pay $ 729,309.40 9.2623% 360 358 4 5.7256% 1.0000% 1.0000% 15.2623% 9.2623% N/A
Level Pay $ 321,620.90 8.7500% 360 357 3 4.5000% 1.0000% 1.0000% 14.7500% 8.7500% 1.25%
Level Pay $3,436,462.53 9.4240% 360 359 23 5.3112% 3.0000% 1.0000% 15.4240% 9.4240% 1.25%
</TABLE>
"Weighted average life" refers to the average amount of time that will
elapse from the date of issuance of a security until each dollar of principal
of such security will be repaid to the investor. The weighted average lives
of the Offered Certificates will be influenced by the rate at which principal
payments on the Mortgage Loans in the
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<PAGE>
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. The model used in this Prospectus Supplement is
the prepayment assumption, which represents an assumed rate of prepayment
each month relative to the then outstanding principal balance of the pool of
mortgage loans for the life of such mortgage loans. In the case of the Fixed
Rate Group, a 100% prepayment assumption (the "Prepayment Assumption")
assumes a 4.0% constant prepayment rate ("CPR") per annum of the outstanding
principal balance of such mortgage loans in the first month of the life of
the mortgage loans and an additional 1.4545% in each month thereafter until
the twelfth month; beginning in the twelfth month and in each month
thereafter during the life of the mortgage loans, a CPR of 20% per annum each
month is assumed. As used in the table below, 0% Prepayment Assumption
assumes a prepayment rate equal to 0% of the Prepayment Assumption, i.e., no
prepayments. Correspondingly, 100% Prepayment Assumption assumes a prepayment
rate equal to 100% of the Prepayment Assumption, and so forth. In the case of
Adjustable Rate Group I and Adjustable Rate Group II, a 100% Prepayment
Assumption assumes a constant prepayment rate of 27% CPR per annum of the
outstanding principal balance of the mortgage loans in Adjustable Rate Group
I and Adjustable Rate Group II, for each month. The applicable Prepayment
Assumption does not purport to be a historical description of prepayment
experience or a prediction of the anticipated rate of prepayment of any pool
of mortgage loans, including the Mortgage Loans. The Sponsor is not aware of
any statistics that provide a reliable basis for predicting with any
certainty the amount or the timing of receipt of prepayments on the related
mortgage loans.
The "Prepayment Scenarios" are defined as a percentage of the applicable
Prepayment Assumption for the Fixed Rate Group or CPR for Adjustable Rate
Group I and Adjustable Rate Group II:
<TABLE>
<CAPTION>
SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V SCENARIO VI SCENARIO VII
------------ ------------------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed Rate Group; % of
Prepayment Assumption.... 0% 50% 100% 120% 150% 175% 200%
Adjustable Rate Group I;
CPR %.................... 0% 5% 25% 27% 30% 35% 45%
Adjustable Rate Group II;
CPR %.................... 0% 5% 25% 27% 30% 35% 45%
</TABLE>
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<PAGE>
PERCENT OF CLASS A-F 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%
November 2000............................. 97 91 84 81 77 73 70
November 2001............................. 95 79 64 59 51 45 39
November 2002............................. 93 70 50 43 35 29 23
November 2003............................. 92 61 39 32 24 18 14
November 2004............................. 90 54 31 24 17 12 8
November 2005............................. 89 47 24 18 11 8 5
November 2006............................. 87 41 19 13 8 5 3
November 2007............................. 85 36 15 10 5 3 1
November 2008............................. 83 32 12 7 3 2 1
November 2009............................. 80 28 9 5 2 1 0
November 2010............................. 77 24 7 4 1 0 0
November 2011............................. 75 21 5 3 1 0 0
November 2012............................. 71 18 4 2 0 0 0
November 2013............................. 68 16 3 1 0 0 0
November 2014............................. 64 13 2 1 0 0 0
November 2015............................. 62 12 2 0 0 0 0
November 2016............................. 59 10 1 0 0 0 0
November 2017............................. 57 9 1 0 0 0 0
November 2018............................. 54 7 0 0 0 0 0
November 2019............................. 51 6 0 0 0 0 0
November 2020............................. 47 5 0 0 0 0 0
November 2021............................. 44 4 0 0 0 0 0
November 2022............................. 40 4 0 0 0 0 0
November 2023............................. 36 3 0 0 0 0 0
November 2024............................. 31 2 0 0 0 0 0
November 2025............................. 26 1 0 0 0 0 0
November 2026............................. 20 1 0 0 0 0 0
November 2027............................. 14 0 0 0 0 0 0
November 2028............................. 7 0 0 0 0 0 0
November 2029............................. 0 0 0 0 0 0 0
Weighted Average Life to Maturity
(years).................................. 18.48 7.48 4.24 3.58 2.88 2.47 2.16
Weighted Average Life to Call* (years) ... 18.44 7.38 3.84 3.27 2.67 2.29 1.97
</TABLE>
- -----------------
* Assuming early termination by repurchase of the related Mortgage Loans.
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<PAGE>
PERCENT OF CLASS A-V1 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%
November 2000............................. 96 91 72 70 67 62 52
November 2001............................. 94 85 51 48 44 37 26
November 2002............................. 94 80 38 35 31 25 15
November 2003............................. 93 75 28 25 21 16 8
November 2004............................. 93 71 21 18 15 10 4
November 2005............................. 92 66 16 13 10 7 2
November 2006............................. 91 62 12 10 7 4 1
November 2007............................. 90 58 9 7 5 3 0
November 2008............................. 89 55 6 5 3 1 0
November 2009............................. 88 51 5 3 2 1 0
November 2010............................. 87 47 3 2 1 0 0
November 2011............................. 85 44 2 2 1 0 0
November 2012............................. 84 41 2 1 0 0 0
November 2013............................. 82 38 1 1 0 0 0
November 2014............................. 80 36 1 0 0 0 0
November 2015............................. 78 33 0 0 0 0 0
November 2016............................. 75 30 0 0 0 0 0
November 2017............................. 73 28 0 0 0 0 0
November 2018............................. 69 25 0 0 0 0 0
November 2019............................. 66 23 0 0 0 0 0
November 2020............................. 62 21 0 0 0 0 0
November 2021............................. 58 18 0 0 0 0 0
November 2022............................. 53 16 0 0 0 0 0
November 2023............................. 47 14 0 0 0 0 0
November 2024............................. 41 11 0 0 0 0 0
November 2025............................. 34 9 0 0 0 0 0
November 2026............................. 27 7 0 0 0 0 0
November 2027............................. 19 4 0 0 0 0 0
November 2028............................. 10 2 0 0 0 0 0
November 2029............................. 0 0 0 0 0 0 0
Weighted Average Life to Maturity
(years).................................. 21.04 11.95 3.16 2.91 2.58 2.15 1.56
Weighted Average Life to Call* (years) ... 20.98 11.37 3.00 2.71 2.37 1.98 1.47
</TABLE>
- -------------
* Assuming early termination by repurchase of the related Mortgage Loans.
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<PAGE>
PERCENT OF CLASS A-V2 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%
November 2000............................. 97 92 72 70 67 62 52
November 2001............................. 94 85 51 48 44 37 26
November 2002............................. 94 80 38 35 31 25 15
November 2003............................. 93 75 28 25 21 16 8
November 2004............................. 93 71 21 18 15 10 4
November 2005............................. 92 66 16 13 10 7 2
November 2006............................. 91 62 12 10 7 4 1
November 2007............................. 90 58 9 7 5 3 0
November 2008............................. 89 55 6 5 3 1 0
November 2009............................. 88 51 5 3 2 1 0
November 2010............................. 87 48 3 2 1 0 0
November 2011............................. 86 44 2 2 1 0 0
November 2012............................. 84 41 2 1 0 0 0
November 2013............................. 83 39 1 1 0 0 0
November 2014............................. 81 36 1 0 0 0 0
November 2015............................. 78 33 0 0 0 0 0
November 2016............................. 76 31 0 0 0 0 0
November 2017............................. 73 28 0 0 0 0 0
November 2018............................. 70 26 0 0 0 0 0
November 2019............................. 66 23 0 0 0 0 0
November 2020............................. 62 21 0 0 0 0 0
November 2021............................. 58 18 0 0 0 0 0
November 2022............................. 53 16 0 0 0 0 0
November 2023............................. 47 14 0 0 0 0 0
November 2024............................. 41 11 0 0 0 0 0
November 2025............................. 35 9 0 0 0 0 0
November 2026............................. 27 7 0 0 0 0 0
November 2027............................. 19 4 0 0 0 0 0
November 2028............................. 10 2 0 0 0 0 0
November 2029............................. 0 0 0 0 0 0 0
Weighted Average Life to Maturity
(years).................................. 21.12 11.99 3.17 2.91 2.58 2.15 1.57
Weighted Average Life to Call* (years) ... 21.07 11.40 3.00 2.72 2.38 1.99 1.48
</TABLE>
- --------------
* Assuming early termination by repurchase of the related Mortgage Loans.
S-62
<PAGE>
ORIGINATION AND SERVICING OF THE MORTGAGE LOANS
THE ORIGINATORS
Approximately 65.44% and 29.92% 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
4.64% 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. We refer you to "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. We refer you to "The Originators -- Underwriting Guidelines" in
the Prospectus.
MORTGAGE LOAN DELINQUENCY AND FORECLOSURE EXPERIENCE
Certain information concerning the delinquency and foreclosure experience
with respect to home equity mortgage loans serviced by affiliates of the
Sponsor, including home equity loans pooled and securitized or sold in the
secondary market, is set forth under the caption "The Servicer -- 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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<PAGE>
The following table sets forth delinquency and foreclosure experience of
home equity loans included in the Sponsor's servicing portfolio as of or for
the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTH PERIOD
JUNE 30, 1999 ENDED SEPTEMBER 30, 1999
--------------- ------------------------
(DOLLARS IN (DOLLARS IN
THOUSANDS) THOUSANDS)
<S> <C> <C>
Percentage of dollar amount of delinquent loans to loans
serviced (period end)(1)(2)(3)(4)
One month................................................. 2.4% 2.1%
Two months................................................ 1.0 0.9
Three or more months:
Not foreclosed(4)(5)..................................... 10.3 9.9
Foreclosed(6)............................................ 2.0 2.0
--------------- ------------------------
Total................................................... 15.7% 14.9%
=============== ========================
Percentage of dollar amount of loans foreclosed during the
period to average servicing portfolio(4)(8) .............. 2.9% 0.9%
Number of loans foreclosed during the period............... 1,680 478
Principal amount at time of foreclosure of loans
foreclosed during the period ............................. $ 122,445 $ 33,877
Net losses on liquidations during the period(7) ........... $ 51,730 $ 19,479
Percentage of annualized losses to average servicing
portfolio(4)(8)........................................... 1.2% 2.0%
Servicing portfolio at period end ......................... $3,841,300 $3,870,000
</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 serviced by the Sponsor
and any subservicers, as of the end of the periods indicated.
(3) At September 30, 1999, the dollar volume of loans delinquent more than
90 days in 11 of the Sponsor's securitization trusts exceeded the
permitted limits in the related pooling and servicing agreements. Four
of those securitization trusts have also exceeded certain loss limits.
We refer you to the related discussion in this section following this
table.
(4) The servicing portfolio used in the percentage calculations includes
$84 million and $188 million of loans subserviced for others by the
Sponsor on an interim basis at June 30, 1999 and September 30, 1999,
respectively.
(5) Represents loans that are in foreclosure but as to which foreclosure
proceedings have not concluded.
(6) Represents properties acquired following a foreclosure sale and still
serviced by the Sponsor at period end.
(7) Represents losses, net of gains, on foreclosed properties sold during
the period indicated.
(8) The percentages were calculated to reflect the dollar volume of loans
foreclosed or annualized losses, as the case may be, to the average
dollar amount of mortgage loans serviced by the Sponsor and any
subservicers during the related periods indicated.
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<PAGE>
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. We refer you to "Risk Factors -- Nature of the Security for
Mortgage Loans" and "The Originators -- Underwriting Guidelines" in the
Prospectus.
In connection with securitization transactions, the Servicer has entered
into pooling and servicing agreements that contain specified limits on
delinquencies and losses that may be incurred in each trust. At September 30,
1999, the dollar volume of loans delinquent more than 90 days in
securitization trusts formed in calendar years 1992, 1995, 1996 and 1997 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.
At September 30, 1999, four of the trusts referred to above 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 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, consistent with
realizing market value for the related properties, 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 that 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
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<PAGE>
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 that 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. We refer you
to "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 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
S-66
<PAGE>
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
"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.
S-67
<PAGE>
INITIAL TERM OF SERVICER AND EXTENSIONS OF TERM
Pursuant to the Pooling and Servicing Agreement, the Servicer covenants
and agrees to act as the servicer for an initial term from the Closing Date
to December 31, 1999, which term will be extendable by the Certificate
Insurer by notice to the Trustee for successive terms of one calendar month
each, until the termination of the Trust. The Certificate Insurer has
required that the Servicer achieve and maintain certain net worth and minimum
liquidity thresholds. Failure by the Servicer to achieve and maintain such
net worth and minimum liquidity thresholds would increase the likelihood that
the Certificate Insurer would not extend the term of the Servicer for
additional periods.
The Servicer will, upon its receipt of a notice of extension, become bound
for the duration of the term covered by such extension notice to continue as
the servicer subject to and in accordance with the other provisions of the
Pooling and Servicing Agreement. If, as of the fifteenth day prior to the
last day of any term of the Servicer, the Trustee shall not have received any
extension notice from the Certificate Insurer, the Trustee will, within five
days thereafter, give written notice of such non-receipt to the Certificate
Insurer and the Servicer. Upon any such termination of the Servicer, all
authority and power of the Servicer under the Pooling and Servicing Agreement
will pass to the Back-Up Servicer. This provision under the Pooling and
Servicing Agreement may be modified or repealed upon the consent of the
Certificate Insurer, without the consent of Certificateholders.
SUB-SERVICING
The Servicer may 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 any
Sub-Servicer will be paid by the Servicer.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
The Servicer will foreclose upon or otherwise comparably convert to
ownership Mortgaged Properties securing such of the Mortgage Loans as come
into default and as to which no satisfactory arrangements can be made for the
collection of delinquent payments; provided, however, that if the Servicer
has actual knowledge or reasonably believes that any Mortgaged Property is
contaminated by hazardous or toxic wastes or substances, the Servicer need
not cause the Trust to acquire title to such Mortgaged Property in a
foreclosure or similar proceeding. In connection with such foreclosure or
other conversion, the Servicer will follow such practices as it deems
necessary or advisable and as are in keeping with its general mortgage loan
servicing activities; provided, however, that the Servicer will not be
required to expend its own funds in connection with foreclosure or other
conversion, correction of a default on a senior deed of trust or restoration
of any Mortgaged Property unless the Servicer determines that such
foreclosure, correction or restoration will increase Net Liquidation
Proceeds.
S-68
<PAGE>
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 three years
after the close of the taxable year of its acquisition by the Trust, unless
(i) the Servicer, on behalf of the Trust, has applied for and received an
extension of such three-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 for
more than such three-year period will not result in a tax on prohibited
transactions imposed by the Code, otherwise subject any REMIC created
pursuant to the Pooling and Servicing Agreement to tax or cause any such
REMIC 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 any REMIC of any income from non-permitted assets as described in the Code
and that no REMIC derives 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 in an amount that is at least equal to the least of (i)
the outstanding principal balance owing on the Mortgage Loan and any senior
mortgage loan on the property, (ii) the full insurable value of the related
Mortgage Property and (iii) the minimum amount required to compensate for
damage or loss on a replacement cost basis. 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.
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
S-69
<PAGE>
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
and by hazards included within the term "extended coverage."
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 that is at
least equal to the full insurable value of such property. 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 that 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
A servicing fee (the "Monthly 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 for the related Mortgage Loan Group received on or in
respect of the related Mortgage Loans for the related Collection Period. The
Monthly 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. Except as provided in the second succeeding paragraph
below, the "Servicing Fee Rate" for each Mortgage Loan Group will be 0.50%
per annum 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, 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. We
refer you to "--Monthly Advances; Servicing Advances; Compensating Interest
and Interest Shortfalls" in this Prospectus Supplement.
Unless the Back-Up Servicer shall become Servicer (in which event, it
shall be compensated as described in the next sentence), the Back-Up Servicer
will also be entitled on each Deposit Date to compensation (the "Back-Up
Servicer Fee") at 1/12 of the annual rate of 0.025% of the Aggregate
Principal Balance of the Mortgage Loans in the related Mortgage Loan Group at
the beginning of the related Collection Period. If
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<PAGE>
the Back-Up Servicer shall become the Servicer, it shall no longer be
entitled to the Back-Up Servicer Fee, but will be entitled to the Monthly
Servicing Fee calculated using the Servicing Fee Rate, which shall be
increased to 0.65% per annum if Mortgage Loans that are more than 30 days
delinquent are equal to or greater than 12% but less than 18% of all Mortgage
Loans (measured by Aggregate Principal Balance as of the time of servicing
transfer) and to 0.75% per annum if Mortgage Loans that are more than 30 days
delinquent are equal to or exceed 18% of all Mortgage Loans (measured by
Aggregate Principal Balance as of the time of servicing transfer).
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 determine the interest component (net of
the Monthly Servicing Fee) of any payment due during the related Collection
Period and not yet received. If the Servicer reasonably believes that the
delinquent interest payment (net of the Monthly Servicing Fee) will be
recoverable from subsequent collections on the related Mortgage Loan, the
Pooling and Servicing Agreement requires the Servicer to advance such amount
(a "Monthly Advance") on the Deposit Date prior to each Distribution Date
either out of its own funds or to a limited extent from collections on other
Mortgage Loans received since the end of the related Collection Period. To
the extent the Servicer utilizes such collections to advance any portion of
such delinquent interest payments, the Pooling and Servicing Agreement
requires the Servicer to reimburse the Trust prior to the next succeeding
Deposit Date or on such earlier date it receives late collections or Net
Liquidation Proceeds from the related Mortgage Loan. The Servicer will be
entitled to reimbursement of a Monthly Advance made from its own funds from
collections, including late collections, insurance proceeds and Net
Liquidation Proceeds, on the related Mortgage Loan in respect of which such
Monthly Advance was made. The Servicer's right to reimbursement described in
the immediately preceding sentence is prior to any other distributions or
from Monthly Excess Cashflow Amounts as provided in the Pooling and Servicing
Agreement.
To the extent that the Servicer has made an advance of delinquent interest
payments that the Servicer reasonably believes will not be recoverable from
subsequent collections on the related Mortgage Loan, the Servicer will be
entitled to reimbursement for such advance from collections on any Mortgage
Loans in the related Mortgage Loan Group prior to any other distributions of
such amounts.
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 of 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 Servicer will not be required to make any Servicing Advance to
the extent it reasonably believes that such Servicing Advance would not be
recoverable from collections or Net Liquidation Proceeds on the related
Mortgage Loan.
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<PAGE>
The Servicer may enter into agreements with one or more third parties for
the purpose of engaging such persons to make all or a portion of the Advances
described above. Upon the consent of the Certificate Insurer (but without the
consent of Certificateholders) the Servicer may amend the Pooling and
Servicing Agreement as may be appropriate to effect such advancing
arrangements. In this event, the third party may get reimbursed for all of
its Advances prior to any reimbursement of the Servicer of its Advances and
such reimbursement may also be funded from other funds otherwise
distributable to the Servicer.
The Servicer may reimburse itself for a Servicing Advance to the extent
permitted by the related Mortgage Loan or, if not theretofore recovered from
the mortgagor on whose behalf the Servicing Advance was made, from
Liquidation Proceeds realized upon the liquidation of the related Mortgage
Loan. In no case may the Servicer recover Servicing Advances from the
principal and interest payments on any other Mortgage Loan.
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 Monthly Servicing Fee (calculated with a Servicing Fee
Rate of 0.50% per annum) 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 Servicing Fee
Rate, less (b) the amount of interest actually received on such Mortgage Loan
during such Collection Period (each such amount, a "Compensating Interest
Payment") for distribution on the related Class of 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; provided, that if Fairbanks becomes the
Servicer, Fairbanks will be entitled to reimbursement for any Compensating
Interest Payments made by it from amounts otherwise payable to Fairbanks as
its Monthly Servicing Fee. If the Monthly Servicing Fee (calculated with a
Servicing Fee Rate of 0.50% per annum) for the related Mortgage Loan Group in
respect of any 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"). We refer you to "Risk Factors -- Limitations
on Interest Payments and Foreclosures" in the Prospectus. Relief Act
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
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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 that 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 that is not incidental to its duties to service the Mortgage
Loans under the Pooling and Servicing Agreement and that 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)
that may result from any merger, conversion or consolidation to which the
Servicer shall be a party, or (c) that 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.
THE BACK-UP SERVICER
Fairbanks Capital Corp., a Utah corporation (the "Back-Up Servicer"), will
serve as the Back-Up Servicer for the Mortgage Loans. The Certificate Insurer
is a shareholder of the Back-Up Servicer. The terms of the Pooling and
Servicing Agreement providing for the requirement of a Back-Up Servicer may
be modified or repealed with the consent of the Certificate Insurer, without
the consent of Certificateholders. We refer you to "Origination and Servicing
of the Mortgage Loans -- Servicing of the Mortgage Loans" and "--Servicing
and Other Compensation; Payment of Expenses" in this Prospectus Supplement.
THE CERTIFICATE INSURER
The following information has been supplied by Financial Security
Assurance Inc. (the "Certificate Insurer") for inclusion in this Prospectus
Supplement.
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<PAGE>
GENERAL
The Certificate Insurer is a monoline insurance company incorporated in
1984 under the laws of the State of New York. The Certificate Insurer is
licensed to engage in financial guaranty insurance business in all 50 states,
the District of Columbia and Puerto Rico.
The Certificate Insurer and its subsidiaries are engaged in the business
of writing financial guaranty insurance, principally in respect of securities
offered in domestic and foreign markets. In general, financial guaranty
insurance consists of the issuance of a guaranty of scheduled payments of an
issuer's securities -thereby enhancing the credit rating of those
securities -in consideration for the payment of a premium to the insurer.
The Certificate Insurer and its subsidiaries principally insure asset-backed,
collateralized and municipal securities. Asset-backed securities are
generally supported by residential mortgage loans, consumer or trade
receivables, securities or other assets having an ascertainable cash flow or
market value. Collateralized securities include public utility first mortgage
bonds and sale/leaseback obligation bonds. Municipal securities consist
largely of general obligation bonds, special revenue bonds and other special
obligations of state and local governments. The Certificate Insurer insures
both newly-issued securities sold in the primary market and outstanding
securities sold in the secondary market that satisfy the Certificate
Insurer's underwriting criteria.
The Certificate Insurer is a wholly-owned subsidiary of Financial Security
Assurance Holdings Ltd. ("Holdings"), a New York Stock Exchange listed
company. Major shareholders of Holdings include White Mountains Insurance
Group, Inc., MediaOne Capital Corporation, The Tokio Marine and Fire
Insurance Co., Ltd. and XL Capital Ltd. No shareholder of Holdings is
obligated to pay any debt of the Certificate Insurer or any claim under any
insurance policy issued by the Certificate Insurer or to make any additional
contribution to the capital of the Certificate Insurer.
The principal executive offices of the Certificate Insurer are located at
350 Park Avenue, New York 10022, and its telephone number at that location is
(212) 826-0100.
REINSURANCE
Pursuant to an intercompany agreement, liabilities on financial guaranty
insurance written or reinsured from third parties by the Certificate Insurer
or any of its domestic or Bermuda operating insurance company subsidiaries
are generally reinsured among such companies on an agreed-upon percentage
substantially proportional to their respective capital, surplus and reserves,
subject to applicable statutory risk limitations. In addition, the
Certificate Insurer reinsures a portion of its liabilities under certain of
its financial guaranty insurance policies with other reinsurers under various
quota share treaties and on a transaction-by-transaction basis. Such
reinsurance is utilized by the Certificate Insurer as a risk management
device and to comply with certain statutory and rating agency requirements;
it does not alter or limit the Certificate Insurer's obligations under any
financial guaranty insurance policy.
RATING OF CLAIMS-PAYING ABILITY
The Certificate Insurer's insurance financial strength is rated "Aaa" by
Moody's. The Certificate Insurer's insurer financial strength is rated "AAA"
by S&P and Standard
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<PAGE>
& Poor's (Australia) Pty. Ltd. The Certificate Insurer's claims-paying
ability is rated "AAA" by Fitch IBCA, Inc. and Japan Rating and Investment
Information, Inc. Such ratings reflect only the views of the respective
rating agencies, are not recommendations to buy, sell or hold securities and
are subject to revision or withdrawal at any time by such rating agencies. We
refer you to "Rating of the Offered Certificates" in this Prospectus
Supplement.
CAPITALIZATION
The following table sets forth the capitalization of the Certificate
Insurer and its wholly owned subsidiaries on the basis of generally accepted
accounting principles as of June 30, 1999 (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1999
---------------
UNAUDITED
(IN THOUSANDS)
<S> <C>
Deferred Premium Revenue (net of prepaid reinsurance premiums) . $ 520,986
---------------
Surplus Notes................................................... 120,000
---------------
Minority Interest............................................... 21,429
---------------
Shareholder's Equity:
Common Stock................................................... 15,000
Additional Paid-In Capital..................................... 706,117
Accumulated Other Comprehensive Income (net of deferred income
taxes)........................................................ (1,937)
Accumulated Earnings........................................... 418,772
---------------
Total Shareholder's Equity...................................... 1,137,952
---------------
Total Deferred Premium Revenue, Surplus Notes, Minority
Interest and Shareholder's Equity ............................. $1,800,367
===============
</TABLE>
For further information concerning the Certificate Insurer, see the
Consolidated Financial Statements of Financial Security Assurance Inc. and
Subsidiaries, and the notes thereto, incorporated by reference in this
Prospectus Supplement. The Certificate Insurer's financial statements are
included as exhibits to the Annual Report on Form 10-K and Quarterly Reports
on Form 10-Q filed with the Securities and Exchange Commission by Holdings
and may be reviewed at the EDGAR website maintained by the Securities and
Exchange Commission and at Holdings's website, http://www.FSA.com. Copies of
the statutory quarterly and annual statements filed with the State of New
York Insurance Department by the Certificate Insurer are available upon
request to the State of New York Insurance Department.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
In addition to the documents described under "Incorporation of Certain
Documents by Reference" in the Prospectus, the financial statements of the
Certificate Insurer included in or as exhibits to the following documents
that have been filed with the Securities and Exchange Commission by Holdings,
are hereby incorporated by reference in this Prospectus Supplement: (a) the
Annual Report on Form 10-K, as amended, for the year ended December 31, 1998
and (b) the Quarterly Report on Form 10-Q for the quarter ended June 30, 1999.
All financial statements of the Certificate Insurer and its subsidiaries
included in documents filed by Holdings pursuant to Section 13(a), 13(c), 14
or 15(d) of the
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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.
The Sponsor has informed the Certificate Insurer that the Sponsor will
provide without charge to any person to whom this Prospectus Supplement is
delivered, upon oral or written request of such person, a copy of any or all
of the foregoing financial statements incorporated by reference. Requests for
such copies should be directed to General Counsel, Aames Capital Corporation,
350 South Grand Avenue, Los Angeles, California 90071; telephone number (323)
210-5000.
The Sponsor hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, each filing of the financial
statements of the Certificate Insurer included in or as an exhibit to the
Annual Report of Holdings filed pursuant to Section 13(a) or Section 15(d) of
the Securities Exchange Act that is incorporated by reference in the
Registration Statement of which this Prospectus Supplement forms a part shall
be deemed to be a new registration statement relating to the Offered
Certificates, and the offering of the Offered Certificates at that time shall
be deemed to be the initial bona fide offering thereof.
INSURANCE REGULATION
The Certificate Insurer is licensed and subject to regulation as a
financial guaranty insurance corporation under the laws of the State of New
York, its state of domicile. In addition, the Certificate Insurer and its
insurance subsidiaries are subject to regulation by insurance laws of the
various other jurisdictions in which they are licensed to do business. As a
financial guaranty insurance corporation licensed to do business in the State
of New York, the Certificate Insurer is subject to Article 69 of the New York
Insurance Law, which, among other things, limits the business of each such
insurer to financial guaranty insurance and related lines, requires that each
such insurer maintain a minimum surplus to policyholders, establishes
contingency, loss and unearned premium reserve requirements for each such
insurer, and limits the size of individual transactions, or single risks, and
the volume of transactions, or aggregate risks, that may be underwritten by
each such insurer. Other provisions of the New York Insurance Law, applicable
to non-life insurance companies such as the Certificate Insurer, regulate,
among other things, permitted investments, payment of dividends, transactions
with affiliates, mergers, consolidations, acquisitions or sales of assets and
incurrence of liability for borrowings.
THE PMI INSURER
Mortgage Guaranty Insurance Corporation, the PMI Insurer, with its
principal offices in Milwaukee, Wisconsin, is a monoline private mortgage
insurance company. The PMI Insurer provides mortgage guaranty insurance
coverage on residential mortgage loans. The PMI Insurer is a wholly-owned
subsidiary of MGIC Investment Corporation. The PMI Insurer is licensed in 50
states and the District of Columbia to offer such insurance and is approved
as a private mortgage insurer by Fannie Mae and Freddie Mac.
As of September 30, 1999, the PMI Insurer had a rating on its
claims-paying ability of "AA+" from S&P and "Aa2" from Moody's. The rating
agency issuing the
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<PAGE>
claims-paying ability rating can withdraw or change its rating at any time.
The PMI Insurer's business is subject to a number of risks that could
materially and adversely affect its claims-paying ability. Certain of such
risks are described under the caption "Risk Factors" in Item 2 of MGIC
Investment Corporation's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999 filed with the Securities and Exchange Commission.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
One or more elections will be made to treat the assets of the Trust (other
than the Prefunding Account, the Capitalized Interest Account and the
Supplemental Interest Reserve Fund) 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 Certificates will
represent the residual interest in each REMIC. We refer you to "Certain
Federal Income Tax Consequences" in the Prospectus. In addition, as described
below, each of the Class A-V1 and Class A-V2 Certificates will represent an
undivided beneficial ownership interest in an interest rate cap agreement.
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 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. Certificateholders are urged to consult their
tax advisors with respect to the tax consequences of holding the Offered
Certificates.
The Prepayment Assumptions that are to be used in determining whether the
Class A-F, Class A-V1 and Class A-V2 Certificates are issued with original
issue discount and the rate of accrual of original issue discount are 100% of
the related Prepayment Assumption applicable to the Fixed Rate Group,
Adjustable Rate Group I and Adjustable Rate Group II, respectively. No
representation is made as to the actual rate at which the Mortgage Loans will
prepay. We refer you to "Certain Federal Income Tax Consequences -- Taxation
of Certificates" in the Prospectus.
CLASS A-V1 AND CLASS A-V2 CERTIFICATES
The Class A-V1 and Class A-V2 Certificates, except to the extent of any
related Supplemental Interest Amount, will be treated as regular interests in
a REMIC under section 860G of the Code (respectively, the "Class A-V1 Regular
Interests" and "Class A-V2 Regular Interests"). Accordingly, the portion of
the Class A-V1 and Class A-V2 Certificates representing the Class A-V1
Regular Interests and Class A-V2 Regular Interests, respectively, 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)(A) of the
Code, in each case to the extent described in the Prospectus. Interest on
such portion of the Class A-V1 Certificates and Class A-V2 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-V1 Certificates and Class A-V2 Certificates
is treated as real estate assets. We refer you to "Certain Federal Income Tax
Consequences" in the Prospectus.
The right to receive any Supplemental Interest Amount will not be (i) a
regular interest in a REMIC under section 860G of the Code, (ii) an asset
described in section
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<PAGE>
7701(a)(19)(C) of the Code, or (iii) a "real estate asset" within the
meaning of section 856(c)(4)(A) of the Code. Further, the Supplemental
Interest Amount will not be considered interest on obligations secured by
mortgages on real property within the meaning of section 856(c)(3)(B) of the
Code.
Each holder of Class A-V1 Certificates and Class A-V2 Certificates is
deemed to own an undivided beneficial ownership interest in two assets: (i)
the Class A-V1 Regular Interests and Class A-V2 Regular Interests,
respectively, and (ii) an interest rate cap contract (a "Cap Agreement")
under which the related Supplemental Interest Amount is paid. The Cap
Agreement with respect to each of the Class A-V1 Certificates and Class A-V2
Certificates is not included in any REMIC. The treatment of amounts received
by a Class A-V1 or Class A-V2 Certificateholder under such
Certificateholder's right to receive the related Supplemental Interest Amount
will depend upon the portion of such Certificateholder's purchase price
allocable thereto. Under the REMIC regulations, each Class A-V1 and Class
A-V2 Certificateholder must allocate its purchase price for the Class A-V1
and Class A-V2 Certificates between its undivided interest in the Class A-V1
Regular Interests and Class A-V2 Regular Interests, respectively, and its
undivided interest in the related Cap Agreement in accordance with the
relative fair market values of each property right. No representation is or
will be made as to such relative fair market values. Generally, payments made
to the Class A-V1 and Class A-V2 Certificates under the related Cap Agreement
will be included in income based on, and the purchase price allocated to the
related Cap Agreement may be amortized in accordance with, the regulations
relating to notional principal contracts.
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 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 NationsBank
Corporation, Bank of America Corporation's predecessor, an individual
administrative exemption (Prohibited Transaction Exemption ("PTE") 93-31)
(the "Exemption"). The Exemption
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<PAGE>
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.
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 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"). In addition, (i) the corpus of the trust fund must
consist solely of assets of the type that have been included in other
investment pools; (ii) certificates in such other investment pools must
have been rated in one of the three highest rating categories of S&P,
Moody's, Fitch or DCR for at least one year prior to the Plan's
acquisition of certificates; and (iii) certificates evidencing interests
in such other investment pools must have been purchased by investors other
than Plans for at least one year prior to any Plan's acquisition of
certificates;
(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, pursuant to PTE 97-34 which amended PTE 93-31, the following
conditions with respect to prefunding 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
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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;
(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").
It is expected that the Exemption will apply to the acquisition and
holding of the Offered Certificates by Plans and that all conditions of the
Exemption other than those within the control of the investors will be met. 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.
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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. We refer
you to "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, to repay warehouse
facilities (including certain amounts owing to affiliates of the
Underwriters) 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 the Secondary Mortgage Market Enhancement Act of 1984
(SMMEA). Accordingly, many institutions with legal authority to invest in
comparably rated securities may not be legally authorized to invest in the
Offered Certificates. No representation is made in this Prospectus Supplement
as to whether the Offered Certificates constitute legal investments for any
entity under any applicable statute, law, rule, regulation or order. You are
urged to consult with your counsel concerning the status of the Offered
Certificates as legal investments for you prior to investing in the Offered
Certificates.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement and the related Pricing Agreement, (collectively, the "Underwriting
Agreement") among the Sponsor and the underwriters named below (the
"Underwriters"), the Sponsor has agreed to sell to the Underwriters, and each
of the Underwriters has severally agreed to purchase from the Sponsor the
principal amount of Offered Certificates set forth below opposite their
respective names.
<TABLE>
<CAPTION>
UNDERWRITER CLASS A-F CLASS A-V1 CLASS A-V2
- -------------------------------- -------------- -------------- -------------
<S> <C> <C> <C>
Banc of America Securities LLC .. $183,600,000 $124,000,000 $12,400,000
Greenwich Capital Markets, Inc. $ 22,950,000 $ 15,500,000 $ 1,550,000
Lehman Brothers Inc. ............ $ 22,950,000 $ 15,500,000 $ 1,550,000
-------------- -------------- -------------
Total........................ $229,500,000 $155,000,000 $15,550,000
============== ============== =============
</TABLE>
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.
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,
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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 Underwriting Agreement provides that the Sponsor will indemnify the
Underwriters against certain civil liabilities, including liabilities under
the Securities Act.
The Sponsor has been advised by the Underwriters that the Underwriters
presently intend to make a market in the Offered Certificates, as permitted
by applicable laws and regulations; however, the Underwriters are not
obligated to do so, any market-making may be discontinued at any time at the
sole discretion of the Underwriters, and there can be no assurance that an
active public market for the Offered Certificates will develop.
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 that 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 Offered 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.
The Sponsor or its affiliates may apply all or any portion of the net
proceeds of this offering to the repayment of debt, including "warehouse"
debt secured by the Mortgage Loans (prior to their sale to the Trust). One or
more of the Underwriters (or their respective affiliates) has acted as a
"warehouse lender" to the Sponsor or its affiliates, and may receive a
portion of such proceeds as repayment of such warehouse debt.
EXPERTS
The consolidated balance sheets of Financial Security Assurance, Inc. and
its subsidiaries as of December 31, 1998 and 1997 and the related
consolidated statements of income, changes in shareholder's equity, and cash
flows for each of the three years in
S-82
<PAGE>
the period ended December 31, 1998, 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 Stroock & Stroock & Lavan LLP, New York, New York. Andrews
& Kurth L.L.P., Washington, D.C., will act as counsel for the Underwriters.
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 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").
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.
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.
S-83
<PAGE>
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-84
<PAGE>
INDEX OF PRINCIPAL TERMS
2/28 Loans.............................................................. S-13
3/27 Loans.............................................................. S-12
Accounts................................................................ S-51
Accrued Certificate Interest............................................ S-19
Adjustable Rate Group I.................................................. S-4
Adjustable Rate Group I Available Funds Cap............................. S-23
Adjustable Rate Group I Certificates..................................... S-4
Adjustable Rate Group I Principal Distribution Amount................... S-19
Adjustable Rate Group II................................................. S-4
Adjustable Rate Group II Available Funds Cap............................ S-24
Adjustable Rate Group II Certificates.................................... S-4
Adjustable Rate Group II Principal Distribution Amount.................. S-19
Advances................................................................ S-71
Affiliated Originators.................................................. S-63
Aggregate Principal Balance........................................ S-43, A-1
Agreement............................................................... S-39
Available Funds......................................................... S-20
Available Funds Shortfall............................................... S-20
Back-Up Servicer................................................... S-3, S-17
Back-Up Servicer Fee.................................................... S-70
Basic Principal Amount.................................................. S-20
Book-Entry Certificates............................................ S-4, S-29
Business Day...................................................... S-39, S-51
Cap Agreement........................................................... S-78
Capitalized Interest Account............................................ S-27
Cede.................................................................... S-29
Cedelbank............................................................... S-29
Cedelbank Participants.................................................. S-31
Certificate Account..................................................... S-51
Certificate Group........................................................ S-4
Certificate Insurer..................................................... S-73
Certificate Insurer Premium............................................. S-21
Certificate Owners...................................................... S-29
Certificate Principal Balance........................................... S-21
Certificate Register.................................................... S-18
Certificateholder....................................................... S-18
Change Date............................................................. S-54
Citibank................................................................ S-29
Class A-V1 Formula Pass-Through Rate.................................... S-23
Class A-V1 Regular Interests............................................ S-77
Class A-V2 Formula Pass-Through Rate.................................... S-24
Class A-V2 Regular Interests............................................ S-77
Clean-up Call Date...................................................... S-35
Closing Date............................................................. S-3
Code.................................................................... S-17
Collection Account...................................................... S-51
Collection Period....................................................... S-21
S-85
<PAGE>
Combined Loan-to-Value Ratio............................................ S-45
Compensating Interest Payment........................................... S-72
Cooperative............................................................. S-32
Coverage Deficit........................................................ S-38
CPR..................................................................... S-59
Cut-off Date............................................................. S-3
Cut-off Date Pool Balance............................................... S-35
Cut-off Date Principal Balance.......................................... S-43
Defective Mortgage Loan................................................. S-50
Deficiency Amount....................................................... S-39
Definitive Certificate.................................................. S-30
Deposit Date............................................................ S-52
Designations............................................................. S-4
Distribution Date....................................................... S-18
Distribution Dates....................................................... S-3
DOL..................................................................... S-78
D&P..................................................................... S-79
DTC..................................................................... S-29
DTC Services............................................................ S-34
ERISA................................................................... S-78
Euroclear............................................................... S-29
Euroclear Operator...................................................... S-32
Euroclear Participants.................................................. S-32
European Depositaries................................................... S-29
event of default........................................................ S-42
Exemption............................................................... S-78
Extra Principal Distribution Amount..................................... S-21
Federal Reserve Board................................................... S-32
Final Scheduled Distribution Date.................................. S-3, S-56
Financial Intermediary.................................................. S-30
Fixed Rate Group......................................................... S-4
Fixed Rate Group Available Funds Cap.................................... S-23
Fixed Rate Group Principal Distribution Amount.......................... S-21
Fixed Rate Group Certificates............................................ S-4
Funding Period.......................................................... S-26
Global Securities........................................................ B-1
Group Factor............................................................ S-29
Guaranteed Principal Amount............................................. S-39
Holder.................................................................. S-18
Holdings................................................................ S-74
Index................................................................... S-54
Industry................................................................ S-34
Initial Mortgage Loans.................................................. S-43
Insurance Agreement..................................................... S-41
Insured Payment......................................................... S-39
Interest Carry Forward Amount........................................... S-21
Interest Shortfall...................................................... S-21
Issuer................................................................... S-3
S-86
<PAGE>
Liquidation Proceeds.................................................... S-21
Maximum Rates........................................................... S-46
Minimum Rates........................................................... S-46
Monthly Advance......................................................... S-71
Monthly Excess Cashflow Amount.......................................... S-21
Monthly Servicing Fee................................................... S-70
Moody's................................................................. S-83
Morgan.................................................................. S-29
Mortgage Files.......................................................... S-49
Mortgage Interest Rate.................................................. S-45
Mortgage Loan Group................................................ S-4, S-43
Mortgage Loan Schedule.................................................. S-49
Mortgage Loans.......................................................... S-43
Mortgage Pool........................................................... S-43
Mortgaged Property...................................................... S-43
Net Liquidation Proceeds................................................ S-21
Net Loan Rate........................................................... S-54
Offered Certificates..................................................... S-4
Order................................................................... S-40
Originators............................................................. S-63
Overcollateralization Amount............................................ S-22
Overcollateralization Release Amount.................................... S-22
Participants............................................................ S-31
Paying Agent............................................................ S-18
Permitted Investments................................................... S-51
Plan.................................................................... S-78
PMI Insurer............................................................. S-42
PMI Insurer Premium..................................................... S-22
PMI Mortgage Loans...................................................... S-42
PMI Policy.............................................................. S-42
Pooling and Servicing Agreement......................................... S-17
Preference Amount....................................................... S-39
Prefunding Account...................................................... S-25
Prefunding Account Deposit.............................................. S-25
prepayment.............................................................. S-59
Prepayment Assumption................................................... S-59
Prepayment Interest Shortfall........................................... S-72
Prepayment Scenarios.................................................... S-59
Principal Distribution Amount........................................... S-22
PTE..................................................................... S-78
Purchase Price.......................................................... S-50
Qualified Replacement Mortgage.......................................... S-50
Rating Agencies......................................................... S-83
Realized Loss........................................................... S-36
Receipt................................................................. S-39
Received................................................................ S-39
Record Date............................................................. S-18
Record Dates............................................................. S-3
S-87
<PAGE>
regular interests....................................................... S-17
Relevant Depositary..................................................... S-29
Relief Act........................................................ S-22, S-72
Relief Act Shortfalls............................................. S-22, S-72
REMIC.................................................................... S-9
REO..................................................................... S-65
Reserve Interest Rate................................................... S-25
residual interests...................................................... S-17
Restricted Group........................................................ S-80
Retained Certificates.................................................... S-4
Rules................................................................... S-30
Servicer........................................................... S-3, S-17
Servicing Advances...................................................... S-71
Servicing Fee Rate...................................................... S-70
S&P..................................................................... S-83
Sponsor............................................................ S-3, S-17
Startup Day............................................................. S-17
Subsequent Mortgage Loans......................................... S-26, S-43
Subsequent Transfer Date................................................ S-27
Sub-Servicer............................................................ S-68
Supplemental Interest Amount............................................ S-22
Supplemental Interest Reserve Fund...................................... S-27
Supplemental Interest Reserve Fund Deposit.............................. S-27
Systems................................................................. S-34
Target Deficiency....................................................... S-23
Targeted Overcollateralization Amount................................... S-23
Term of the Policy...................................................... S-40
Terms and Conditions.................................................... S-32
Trust................................................................... S-17
Trust Insurance Proceeds................................................ S-23
Trustee............................................................ S-3, S-17
Trustee Fee............................................................. S-36
Unaffiliated Originators................................................ S-63
Underwriters............................................................ S-81
Underwriting Agreement.................................................. S-81
Weighted average life................................................... S-58
S-88
<PAGE>
ANNEX A
DESCRIPTION OF THE MORTGAGE POOL
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 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
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. We refer you to
"The Mortgage Loans -- Conveyance of Subsequent Mortgage Loans" in this
Prospectus Supplement.
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 the Fixed Rate Group,
Adjustable Rate Group I or Adjustable Rate Group II. 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 Adjustable Rate Group I and
Adjustable Rate Group II 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 I Certificates will be derived primarily from
amounts received, collected or recovered in respect of Adjustable Rate Group
I. Distributions on the Adjustable Rate Group II Certificates will be derived
primarily from amounts received, collected or recovered in respect of
Adjustable Rate Group II.
A-1
<PAGE>
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 ......... 359 $ 6,881,687.65 3.36%
$ 25,000.01 to $50,000.00 ... 1,030 38,564,328.17 18.83
$ 50,000.01 to $75,000.00 ... 690 42,466,956.38 20.74
$ 75,000.01 to $100,000.00 .. 364 31,594,479.98 15.43
$ 100,000.01 to $150,000.00 . 335 40,760,005.13 19.90
$ 150,000.01 to $200,000.00 . 106 18,046,806.63 8.81
$ 200,000.01 to $250,000.00 . 49 10,995,393.45 5.37
$ 250,000.01 to $300,000.00 . 26 7,060,192.62 3.45
$ 300,000.01 to $350,000.00 . 15 4,932,423.19 2.41
$ 350,000.01 to $400,000.00 . 7 2,641,719.76 1.29
$ 400,000.01 to $450,000.00 . 2 831,283.68 0.41
-------------- ----------------- -----------------
Total .................... 2,983 $204,775,276.64 100.00%
============== ================= =================
</TABLE>
FIXED RATE GROUP
MORTGAGE INTEREST RATES (1)
<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>
6.501% to 7.000% .. 3 $ 522,359.59 0.26%
7.001% to 7.500% .. 13 1,107,624.26 0.54
7.501% to 8.000% .. 109 9,912,555.12 4.84
8.001% to 8.500% .. 163 16,210,418.83 7.92
8.501% to 9.000% .. 292 27,430,113.81 13.40
9.001% to 9.500% .. 302 24,141,020.25 11.79
9.501% to 10.000% . 393 31,253,417.29 15.26
10.001% to 10.500% . 366 22,619,377.04 11.05
10.501% to 11.000% . 371 22,724,417.83 11.10
11.001% to 11.500% . 261 14,708,425.60 7.18
11.501% to 12.000% . 258 13,814,973.71 6.75
12.001% to 12.500% . 156 7,675,594.70 3.75
12.501% to 13.000% . 94 4,292,718.30 2.10
13.001% to 13.500% . 54 2,391,465.68 1.17
13.501% to 14.000% . 45 2,044,938.82 1.00
14.001% to 14.500% . 37 1,476,230.94 0.72
14.501% to 15.000% . 39 1,567,571.50 0.77
15.001% to 15.500% . 14 486,496.73 0.24
15.501% to 16.000% . 8 189,184.39 0.09
16.001% to 16.500% . 2 56,922.25 0.03
16.501% to 17.000% . 3 149,450.00 0.07
-------------- ----------------- -----------------
Total .......... 2,983 $204,775,276.64 100.00%
============== ================= =================
</TABLE>
- ------------
(1) The lender has acquired mortgage insurance on certain mortgage loans
included in the preceding table. The mortgage interest rates for such
mortgage loans are shown at the mortgage rates inclusive of any premium
for the related mortgage insurance coverage. As of the cut-off date,
the weighted average mortgage rate of the mortgage loans net of the
related premiums for such mortgage insurance is expected to be
approximately 9.829% per annum.
A-2
<PAGE>
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 ......... 17 $ 365,657.53 0.18%
61 to 72 ......... 1 15,538.42 0.01
73 to 84 ......... 8 185,073.03 0.09
85 to 96 ......... 1 31,264.18 0.02
109 to 120 ....... 45 1,566,588.75 0.77
133 to 144 ....... 1 38,200.10 0.02
169 to 180 ....... 729 32,439,927.57 15.84
229 to 240 ....... 58 2,559,894.00 1.25
289 to 300 ....... 5 350,714.25 0.17
349 to 360 ....... 2,118 167,222,418.81 81.66
-------------- ----------------- -----------------
Total ........ 2,983 $204,775,276.64 100.00%
============== ================= =================
</TABLE>
FIXED RATE GROUP
ORIGINAL TERM TO MATURITY
(BALLOON)
<TABLE>
<CAPTION>
RANGE OF PERCENTAGE OF
ORIGINAL TERMS TO CUT-OFF DATE CUT-OFF DATE
MATURITY NUMBER OF AGGREGATE AGGREGATE
(MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
73 to 84 ......... 1 $ 35,969.12 15.11%
169 to 180 ....... 4 202,117.63 84.89
-------------- ----------------- -----------------
Total ........ 5 $238,086.75 100.00%
============== ================= =================
</TABLE>
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 $ 11,967.28 0.01%
49 to 60 .......... 16 353,690.25 0.17
61 to 72 .......... 1 15,538.42 0.01
73 to 84 .......... 8 185,073.03 0.09
85 to 96 .......... 1 31,264.18 0.02
109 to 120 ........ 45 1,566,588.75 0.77
133 to 144 ........ 1 38,200.10 0.02
169 to 180 ........ 729 32,439,927.57 15.84
229 to 240 ........ 58 2,559,894.00 1.25
289 to 300 ........ 5 350,714.25 0.17
349 to 360 ........ 2,118 167,222,418.81 81.66
-------------- ----------------- -----------------
Total ......... 2,983 $204,775,276.64 100.00%
============== ================= =================
</TABLE>
A-3
<PAGE>
FIXED RATE GROUP
COMBINED LOAN-TO-VALUE RATIOS (1)
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE CUT-OFF
RANGE OF COMBINED NUMBER OF AGGREGATE DATE AGGREGATE
LOAN-TO-VALUE RATIOS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
5.01% to 10.00% .... 5 $ 95,941.79 0.05%
10.01% to 15.00% ... 5 151,497.74 0.07
15.01% to 20.00% ... 19 410,614.03 0.20
20.01% to 25.00% ... 20 560,039.97 0.27
25.01% to 30.00% ... 34 1,244,978.07 0.61
30.01% to 35.00% ... 43 1,669,304.01 0.82
35.01% to 40.00% ... 54 2,072,889.51 1.01
40.01% to 45.00% ... 52 2,548,632.96 1.24
45.01% to 50.00% ... 91 4,266,719.65 2.08
50.01% to 55.00% ... 104 5,183,543.68 2.53
55.01% to 60.00% ... 162 7,772,702.27 3.80
60.01% to 65.00% ... 304 15,304,370.45 7.47
65.01% to 70.00% ... 361 21,726,088.14 10.61
70.01% to 75.00% ... 527 35,163,721.81 17.17
75.01% to 80.00% ... 632 55,297,388.34 27.00
80.01% to 85.00% ... 185 16,292,622.71 7.96
85.01% to 90.00% ... 317 28,770,870.06 14.05
90.01% to 95.00% ... 65 6,009,732.06 2.93
95.01% to 100.00% .. 3 233,619.39 0.11
-------------- ----------------- -----------------
Total ........... 2,983 $204,775,276.64 100.00%
============== ================= =================
</TABLE>
- ------------
(1) At the date of origination.
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 ...... 2,697 $190,716,899.88 93.13%
Non-Owner Occupied/Investment Property 286 14,058,376.76 6.87
-------------- ----------------- -----------------
Total .............................. 2,983 $204,775,276.64 100.00%
============== ================= =================
</TABLE>
A-4
<PAGE>
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 ...... 2,624 $179,308,077.36 87.56%
Two-to Four-Family Residence . 224 17,088,123.41 8.34
Condominium Unit .............. 111 7,267,890.53 3.55
Manufactured Housing .......... 24 1,111,185.34 0.54
-------------- ----------------- -----------------
Total...................... 2,983 $204,775,276.64 100.00%
============== ================= =================
</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 ....... 1,589 $101,819,455.11 49.72%
Broker
Network...... 1,335 97,745,284.33 47.73
Unaffiliated . 59 5,210,537.20 2.54
-------------- ----------------- -----------------
Total ..... 2,983 $204,775,276.64 100.00%
============== ================= =================
</TABLE>
A-5
<PAGE>
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>
Arizona .............. 67 $ 3,557,047.20 1.74%
California ........... 308 31,990,893.10 15.62
Colorado ............. 37 2,816,406.36 1.38
Connecticut .......... 15 1,142,783.53 0.56
Delaware ............. 1 75,000.00 0.04
District of Columbia 6 485,276.46 0.24
Florida .............. 363 23,671,010.41 11.56
Georgia .............. 81 5,188,106.02 2.53
Hawaii ............... 61 11,375,869.82 5.56
Idaho ................ 19 1,076,894.00 0.53
Illinois ............. 118 8,147,145.41 3.98
Indiana .............. 114 5,875,227.07 2.87
Iowa ................. 86 5,328,452.97 2.60
Kansas ............... 19 1,405,361.25 0.69
Kentucky ............. 33 1,900,089.37 0.93
Louisiana ............ 89 4,512,845.73 2.20
Maryland ............. 15 724,099.12 0.35
Massachusetts ........ 32 2,334,823.32 1.14
Michigan ............. 236 11,156,740.28 5.45
Minnesota ............ 31 2,919,815.68 1.43
Mississippi .......... 23 977,636.28 0.48
Missouri ............. 83 4,189,559.92 2.05
Montana .............. 29 2,797,755.22 1.37
Nebraska ............. 8 307,213.62 0.15
Nevada ............... 40 3,016,406.31 1.47
New Hampshire ........ 1 44,200.00 0.02
New Jersey ........... 32 2,934,983.34 1.43
New Mexico ........... 8 507,763.74 0.25
New York ............. 183 14,011,711.15 6.84
North Carolina ....... 49 3,256,695.58 1.59
Ohio ................. 126 6,228,235.35 3.04
Oklahoma ............. 28 976,057.70 0.48
Oregon ............... 21 1,824,434.65 0.89
Pennsylvania ......... 108 5,375,412.77 2.63
Rhode Island ......... 9 611,488.02 0.30
South Carolina ....... 24 1,079,608.40 0.53
Tennessee ............ 61 3,699,676.67 1.81
Texas ................ 324 19,425,282.30 9.49
Utah ................. 15 1,466,707.06 0.72
Virginia ............. 21 1,647,455.01 0.80
Washington ........... 27 2,123,211.22 1.04
West Virginia ........ 6 233,098.03 0.11
Wisconsin ............ 26 2,356,797.20 1.15
-------------- ----------------- -----------------
Total ............ 2,983 $204,775,276.64 100.00%
============== ================= =================
</TABLE>
A-6
<PAGE>
FIXED RATE GROUP
PRIORITY OF LIEN
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE CUT-OFF DATE
NUMBER OF AGGREGATE AGGREGATE POOL
PRIORITY MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
First Lien ................... 2,797 $199,464,801.82 97.41%
Second Lien .................. 186 5,310,474.82 2.59
-------------- ----------------- -----------------
Total: ................... 2,983 $204,775,276.64 100.00%
============== ================= =================
</TABLE>
FIXED RATE GROUP
AMORTIZATION METHOD
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE CUT-OFF DATE
NUMBER OF AGGREGATE PRINCIPAL AGGREGATE POOL
AMORTIZATION METHOD MORTGAGE LOANS BALANCE PRINCIPAL BALANCE
- ----------------------------- -------------- ------------------- -----------------
<S> <C> <C> <C>
Fully Amortizing ............. 2,978 $204,537,189.89 99.88%
Partially Amortizing/Balloon 5 238,086.75 0.12
-------------- ------------------- -----------------
Total: ................... 2,983 $204,775,276.64 100.00%
============== =================== =================
</TABLE>
ADJUSTABLE RATE GROUP I
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 ....... 56 $ 1,204,214.41 0.86%
$25,000.01 to $50,000.00 .. 401 15,595,641.32 11.13
$50,000.01 to $75,000.00 .. 441 27,304,297.12 19.48
$75,000.01 to $100,000.00 . 268 23,143,922.86 16.52
$100,000.01 to $150,000.00 338 40,768,094.18 29.09
$150,000.01 to $200,000.00 114 19,547,380.92 13.95
$200,000.01 to $250,000.00 47 10,369,296.01 7.40
$250,000.01 to $300,000.00 3 823,041.94 0.59
$300,000.01 to $350,000.00 3 1,017,302.61 0.73
$350,000.01 to $400,000.00 1 359,513.37 0.26
-------------- ----------------- -----------------
Total .................. 1,672 $140,132,704.74 100.00%
============== ================= =================
</TABLE>
A-7
<PAGE>
ADJUSTABLE RATE GROUP I
MORTGAGE INTEREST RATES (1)
<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 $ 67,820.24 0.05%
5.501% to 6.000% .. 2 176,450.90 0.13
6.001% to 6.500% .. 1 89,323.05 0.06
6.501% to 7.000% .. 6 823,921.82 0.59
7.001% to 7.500% .. 5 511,942.65 0.37
7.501% to 8.000% .. 26 3,062,875.84 2.19
8.001% to 8.500% .. 42 4,978,036.48 3.55
8.501% to 9.000% .. 89 9,823,331.50 7.01
9.001% to 9.500% .. 127 13,415,213.09 9.57
9.501% to 10.000% . 306 27,824,060.81 19.86
10.001% to 10.500% 291 25,679,773.18 18.33
10.501% to 11.000% 305 23,251,211.44 16.59
11.001% to 11.500% 119 9,086,050.34 6.48
11.501% to 12.000% 97 6,926,202.76 4.94
12.001% to 12.500% 42 3,033,254.64 2.16
12.501% to 13.000% 37 2,192,869.65 1.56
13.001% to 13.500% 49 2,360,027.20 1.68
13.501% to 14.000% 28 1,871,265.74 1.34
14.001% to 14.500% 44 2,447,100.72 1.75
14.501% to 15.000% 39 1,794,580.99 1.28
15.001% to 15.500% 11 459,111.98 0.33
15.501% to 16.000% 4 173,789.32 0.12
16.001% to 16.500% . 1 84,490.40 0.06
-------------- ----------------- -----------------
Total .......... 1,672 $140,132,704.74 100.00%
============== ================= =================
</TABLE>
- ------------
(1) The lender has acquired mortgage insurance on certain mortgage loans
included in the preceding table. The mortgage interest rates for such
mortgage loans are shown at the mortgage rates inclusive of any premium
for the related mortgage insurance coverage. As of the cut-off date,
the weighted average mortgage rate of the mortgage loans net of the
related premiums for such mortgage insurance is expected to be
approximately 9.896% per annum.
ADJUSTABLE RATE GROUP I
ORIGINAL TERM TO MATURITY
<TABLE>
<CAPTION>
RANGE OF PERCENTAGE OF
ORIGINAL TERMS TO CUT-OFF DATE CUT-OFF DATE
MATURITY NUMBER OF AGGREGATE AGGREGATE
(MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
169 to 180 ....... 16 $ 1,110,576.62 0.79%
349 to 360 ....... 1,656 139,022,128.12 99.21
-------------- ----------------- -----------------
Total ........ 1,672 $140,132,704.74 100.00%
============== ================= =================
</TABLE>
A-8
<PAGE>
ADJUSTABLE RATE GROUP I
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 ........ 16 1,110,576.62 0.79%
349 to 360 ........ 1,656 139,022,128.12 99.21
-------------- ----------------- -----------------
Total ......... 1,672 $140,132,704.74 100.00%
============== ================= =================
</TABLE>
ADJUSTABLE RATE GROUP I
COMBINED LOAN-TO-VALUE RATIOS (1)
<TABLE>
<CAPTION>
PERCENTAGE OF
RANGE OF COMBINED CUT-OFF DATE CUT-OFF DATE
LOAN-TO-VALUE NUMBER OF AGGREGATE AGGREGATE
RATIOS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
15.01% to 20.00% ... 1 $ 59,982.00 0.04%
20.01% to 25.00% ... 2 76,000.00 0.05
25.01% to 30.00% ... 1 50,000.00 0.04
30.01% to 35.00% ... 4 210,366.32 0.15
35.01% to 40.00% ... 9 319,238.51 0.23
40.01% to 45.00% ... 11 614,733.35 0.44
45.01% to 50.00% ... 24 1,191,633.53 0.85
50.01% to 55.00% ... 19 1,308,847.94 0.93
55.01% to 60.00% ... 52 3,583,631.34 2.56
60.01% to 65.00% ... 200 11,849,089.98 8.46
65.01% to 70.00% ... 157 11,762,782.51 8.39
70.01% to 75.00% ... 285 22,795,424.47 16.27
75.01% to 80.00% ... 383 33,928,951.21 24.21
80.01% to 85.00% ... 137 12,072,454.99 8.62
85.01% to 90.00% ... 301 31,007,751.22 22.13
90.01% to 95.00% ... 86 9,301,817.37 6.64
-------------- ----------------- -----------------
Total ........... 1,672 $140,132,704.74 100.00%
============== ================= =================
</TABLE>
- ------------
(1) At the date of origination.
ADJUSTABLE RATE GROUP I
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 ...... 1,571 $135,028,105.92 96.36%
Non-Owner Occupied/Investment Property 101 5,104,598.82 3.64
-------------- ----------------- -----------------
Total .............................. 1,672 $140,132,704.74 100.00%
============== ================= =================
</TABLE>
A-9
<PAGE>
ADJUSTABLE RATE GROUP I
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 ........ 1,436 $120,880,072.31 86.26%
Two-to Four-Family Residence .. 94 8,985,440.14 6.41
Condominium Unit ............... 106 7,970,551.39 5.69
Manufactured Housing ........... 36 2,296,640.90 1.64
-------------- ----------------- -----------------
Total ...................... 1,672 $140,132,704.74 100.00%
============== ================= =================
</TABLE>
ADJUSTABLE RATE GROUP I
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 ........................ 50 $ 4,280,420.62 3.05%
Broker Network ................ 1,524 125,161,475.25 89.32
Unaffiliated ................... 98 10,690,808.87 7.63
-------------- ----------------- -----------------
Total ...................... 1,672 $140,132,704.74 100.00%
============== ================= =================
</TABLE>
A-10
<PAGE>
ADJUSTABLE RATE GROUP I
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 .............. 33 $ 2,838,284.88 2.03%
California ........... 85 10,883,074.39 7.77
Colorado ............. 64 7,220,779.03 5.15
Connecticut .......... 46 4,634,898.30 3.31
Delaware ............. 1 50,700.00 0.04
District of Columbia 3 251,023.83 0.18
Florida .............. 234 18,145,992.07 12.95
Georgia .............. 33 3,136,528.17 2.24
Hawaii ............... 25 4,604,152.86 3.29
Idaho................. 1 102,715.15 0.07
Illinois ............. 69 5,602,891.04 4.00
Indiana .............. 110 6,857,794.82 4.89
Iowa ................. 15 882,841.51 0.63
Kansas ............... 10 766,865.84 0.55
Kentucky ............. 69 4,294,489.68 3.06
Louisiana ............ 33 2,156,725.92 1.54
Maine ................ 3 167,343.05 0.12
Maryland ............. 21 2,023,594.71 1.44
Massachusetts ........ 22 2,682,594.41 1.91
Michigan ............. 85 5,118,757.15 3.65
Minnesota ............ 45 4,268,563.93 3.05
Mississippi .......... 14 988,429.24 0.71
Missouri ............. 42 2,220,864.91 1.58
Nebraska ............. 27 1,836,556.17 1.31
Nevada ............... 18 2,154,171.57 1.54
New Hampshire ........ 3 221,932.21 0.16
New Jersey ........... 19 2,123,507.04 1.52
New Mexico ........... 15 1,499,860.11 1.07
New York ............. 37 4,354,032.87 3.11
North Carolina ....... 37 2,708,818.80 1.93
Ohio ................. 120 8,160,271.17 5.82
Oklahoma ............. 2 112,000.00 0.08
Oregon ............... 13 1,324,650.10 0.95
Pennsylvania.......... 41 2,329,934.77 1.66
Rhode Island ......... 7 540,742.23 0.39
South Carolina ....... 47 3,499,271.29 2.50
Tennessee ............ 25 1,942,492.80 1.39
Texas ................ 104 8,598,300.81 6.14
Utah.................. 5 449,896.32 0.32
Virginia ............. 13 1,079,594.78 0.77
Washington ........... 36 4,614,566.64 3.29
West Virginia ........ 6 322,001.39 0.23
Wisconsin............. 32 2,270,002.84 1.62
Wyoming .............. 2 90,195.94 0.06
-------------- ----------------- -----------------
Total ............ 1,672 $140,132,704.74 100.00%
============== ================= =================
</TABLE>
A-11
<PAGE>
ADJUSTABLE RATE GROUP I
RANGE OF GROSS MARGINS
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE CUT-OFF DATE
RANGE OF NUMBER OF AGGREGATE AGGREGATE
GROSS MARGINS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
2.501% to 3.000% .. 2 $ 197,773.95 0.14%
3.001% to 3.500% .. 2 218,186.20 0.16
3.501% to 4.000% .. 2 75,250.00 0.05
4.001% to 4.500% .. 2 243,201.21 0.17
4.501% to 5.000% .. 228 21,869,504.81 15.61
5.001% to 5.500% .. 342 34,709,779.12 24.77
5.501% to 6.000% .. 473 39,506,314.09 28.19
6.001% to 6.500% .. 110 10,251,606.33 7.32
6.501% to 7.000% .. 384 25,139,300.17 17.94
7.001% to 7.500% .. 105 6,484,851.88 4.63
7.501% to 8.000% .. 14 894,500.06 0.64
8.001% to 8.500% .. 3 196,351.65 0.14
8.501% to 9.000% .. 3 146,192.65 0.10
9.001% to 9.500% .. 2 199,892.62 0.14
-------------- ----------------- -----------------
Total........... 1,672 $140,132,704.74 100.00%
============== ================= =================
</TABLE>
A-12
<PAGE>
ADJUSTABLE RATE GROUP I
RANGE OF MAXIMUM MORTGAGE INTEREST RATES
<TABLE>
<CAPTION>
PERCENTAGE OF
RANGE OF MAXIMUM CUT-OFF DATE CUT-OFF DATE
MORTGAGE NUMBER OF AGGREGATE AGGREGATE
INTEREST RATES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
11.001% to 11.500% . 1 $ 67,820.24 0.05%
11.501% to 12.000% . 2 176,450.90 0.13
12.001% to 12.500% . 1 89,323.05 0.06
12.501% to 13.000% . 6 823,921.82 0.59
13.001% to 13.500% . 4 317,202.25 0.23
13.501% to 14.000% . 23 2,786,062.47 1.99
14.001% to 14.500% . 35 4,204,600.40 3.00
14.501% to 15.000% . 82 8,980,060.72 6.41
15.001% to 15.500% . 116 12,480,573.28 8.91
15.501% to 16.000% . 297 26,787,109.37 19.12
16.001% to 16.500% . 304 27,058,019.75 19.31
16.501% to 17.000% . 314 24,815,005.41 17.71
17.001% to 17.500% . 124 9,549,329.95 6.81
17.501% to 18.000% . 103 7,285,337.78 5.20
18.001% to 18.500% . 40 2,889,199.61 2.06
18.501% to 19.000% . 39 2,290,952.73 1.63
19.001% to 19.500% . 51 2,493,161.13 1.78
19.501% to 20.000% . 29 2,000,817.80 1.43
20.001% to 20.500% . 44 2,314,451.90 1.65
20.501% to 21.000% . 40 1,830,443.56 1.31
21.001% to 21.500% . 12 634,580.90 0.45
21.501% to 22.000% . 4 173,789.32 0.12
22.001% to 22.500% . 1 84,490.40 0.06
-------------- ----------------- -----------------
Total .......... 1,672 $140,132,704.74 100.00%
============== ================= =================
</TABLE>
A-13
<PAGE>
ADJUSTABLE RATE GROUP I
RANGE OF MINIMUM MORTGAGE INTEREST RATES
<TABLE>
<CAPTION>
PERCENTAGE OF
RANGE OF MINIMUM CUT-OFF DATE CUT-OFF DATE
MORTGAGE INTEREST NUMBER OF AGGREGATE AGGREGATE
RATES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
-------------- ----------------- -----------------
<S> <C> <C> <C>
5.001% to 5.500% ....... 1 $ 67,820.24 0.05%
5.501% to 6.000% ....... 2 176,450.90 0.13
6.001% to 6.500% ....... 1 89,323.05 0.06
6.501% to 7.000% ....... 7 908,721.82 0.65
7.001% to 7.500% ....... 5 511,942.65 0.37
7.501% to 8.000% ....... 26 3,062,875.84 2.19
8.001% to 8.500% ....... 42 4,978,036.48 3.55
8.501% to 9.000% ....... 89 9,823,331.50 7.01
9.001% to 9.500% ....... 128 13,504,821.98 9.64
9.501% to 10.000% ...... 307 27,943,060.81 19.94
10.001% to 10.500% .... 291 25,679,773.18 18.33
10.501% to 11.000% .... 303 23,076,802.55 16.47
11.001% to 11.500% .... 119 9,086,050.34 6.48
11.501% to 12.000% .... 97 6,926,202.76 4.94
12.001% to 12.500% .... 41 2,914,254.64 2.08
12.501% to 13.000% .... 37 2,192,869.65 1.56
13.001% to 13.500% .... 49 2,360,027.20 1.68
13.501% to 14.000% .... 28 1,871,265.74 1.34
14.001% to 14.500% .... 44 2,447,100.72 1.75
14.501% to 15.000% .... 39 1,794,580.99 1.28
15.001% to 15.500% .... 11 459,111.98 0.33
15.501% to 16.000% .... 4 173,789.32 0.12
16.001% to 16.500% .... 1 84,490.40 0.06
-------------- ----------------- -----------------
Total .............. 1,672 $140,132,704.74 100.00%
============== ================= =================
</TABLE>
A-14
<PAGE>
ADJUSTABLE RATE GROUP I
MONTH OF NEXT CHANGE DATE
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE CUT-OFF DATE
NUMBER OF AGGREGATE AGGREGATE
MONTH OF NEXT CHANGE DATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
January-00 ............... 9 $ 1,011,507.46 0.72%
February-00 .............. 12 1,109,003.71 0.79
March-00 ................. 15 1,518,723.71 1.08
April-00 ................. 18 1,561,172.78 1.11
May-00 ................... 3 222,082.00 0.16
November-00 .............. 1 110,178.68 0.08
December-00 .............. 1 103,632.33 0.07
January-01 ............... 1 94,762.86 0.07
February-01............... 1 131,558.30 0.09
March-01.................. 2 134,390.05 0.10
June-01 .................. 7 718,058.76 0.51
July-01 .................. 78 6,957,164.06 4.96
August-01 ................ 218 17,061,662.82 12.18
September-01 ............. 413 35,908,622.40 25.62
October-01 ............... 389 32,195,977.45 22.98
November-01 .............. 116 9,701,993.00 6.92
December-01 .............. 1 84,665.00 0.06
May-02 ................... 1 233,722.95 0.17
July-02 .................. 2 161,827.48 0.12
August-02 ................ 15 1,232,681.90 0.88
September-02 ............. 64 5,810,257.03 4.15
October-02................ 197 15,659,454.01 11.17
November-02 .............. 108 8,409,606.00 6.00
-------------- ----------------- -----------------
Total................. 1,672 $140,132,704.74 100.00%
============== ================= =================
</TABLE>
ADJUSTABLE RATE GROUP II
CUT-OF 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>
$ 200,000.01 to $250,000.00 . 2 $ 487,241.69 3.94%
$ 250,000.01 to $300,000.00 . 18 4,934,459.01 39.94
$ 300,000.01 to $350,000.00 . 15 4,980,242.11 40.31
$ 350,000.01 to $400,000.00 . 3 1,140,750.00 9.23
$ 400,000.01 to $450,000.00 . 2 812,429.38 6.58
-------------- ----------------- -----------------
Total .................... 40 $12,355,122.19 100.00%
============== ================= =================
</TABLE>
A-15
<PAGE>
ADJUSTABLE RATE GROUP II
MORTGAGE INTEREST RATES (1)
<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>
7.501% to 8.000% .. 1 $ 322,782.83 2.61%
8.001% to 8.500% .. 2 697,250.00 5.64
8.501% to 9.000% .. 7 2,077,998.86 16.82
9.001% to 9.500% .. 4 1,046,977.30 8.47
9.501% to 10.000% . 12 3,961,888.24 32.07
10.001% to 10.500% 4 1,302,070.37 10.54
10.501% to 11.000% 7 2,105,823.25 17.04
11.001% to 11.500% 1 259,908.30 2.10
11.501% to 12.000% 2 580,423.04 4.70
-------------- ----------------- -----------------
Total .......... 40 $12,355,122.19 100.00%
============== ================= =================
</TABLE>
- ------------
(1) The lender has acquired mortgage insurance on certain mortgage loans
included in the preceding table. The mortgage interest rates for such
mortgage loans are shown at the mortgage rates inclusive of any premium
for the related mortgage insurance coverage. As of the cut-off date,
the weighted average mortgage rate of the mortgage loans net of the
related premiums for such mortgage insurance is expected to be
approximately 9.459% per annum.
ADJUSTABLE RATE GROUP II
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>
349 to 360 ....... 40 $12,355,122.19 100.00%
-------------- ----------------- -----------------
Total ........ 40 $12,355,122.19 100.00%
============== ================= =================
</TABLE>
ADJUSTABLE RATE GROUP II
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>
349 to 360 ........ 40 $12,355,122.19 100.00%
-------------- ----------------- -----------------
Total ......... 40 $12,355,122.19 100.00%
============== ================= =================
</TABLE>
A-16
<PAGE>
ADJUSTABLE RATE GROUP II
COMBINED LOAN-TO-VALUE RATIOS (1)
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE CUT-OFF
RANGE OF COMBINED NUMBER OF AGGREGATE DATE AGGREGATE
LOAN-TO-VALUE RATIOS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
55.01% to 60.00% .... 1 $ 349,870.21 2.83%
60.01% to 65.00% ... 3 1,056,823.04 8.55
65.01% to 70.00% ... 5 1,593,508.81 12.90
70.01% to 75.00% ... 9 2,507,482.84 20.30
75.01% to 80.00% ... 10 3,263,351.49 26.41
80.01% to 85.00% ... 5 1,559,012.28 12.62
85.01% to 90.00% ... 6 1,763,823.52 14.28
90.01% to 95.00% ... 1 261,250.00 2.11
-------------- ----------------- -----------------
Total ........... 40 $12,355,122.19 100.00%
============== ================= =================
</TABLE>
- ------------
(1) At the date of origination.
ADJUSTABLE RATE GROUP II
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 40 $12,355,122.19 100.00%
-------------- ----------------- -----------------
Total ........................ 40 $12,355,122.19 100.00%
============== ================= =================
</TABLE>
ADJUSTABLE RATE GROUP II
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 40 $12,355,122.19 100.00%
-------------- ----------------- -----------------
Total ............... 40 $12,355,122.19 100.00%
============== ================= =================
</TABLE>
ADJUSTABLE RATE GROUP II
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 $ 799,588.16 6.47%
Broker Network 35 10,878,284.03 88.05
Unaffiliated .. 2 677,250.00 5.48
-------------- ----------------- -----------------
Total ...... 40 $12,355,122.19 100.00%
============== ================= =================
</TABLE>
A-17
<PAGE>
ADJUSTABLE RATE GROUP II
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 ........ 2 $ 631,126.16 5.11%
California ..... 14 4,379,791.02 35.45
Colorado ....... 2 575,648.94 4.66
Connecticut ... 2 735,700.00 5.95
Florida ........ 2 623,470.21 5.05
Indiana ........ 1 336,150.48 2.72
Michigan ....... 1 403,100.00 3.26
Nebraska ....... 1 255,000.00 2.06
Nevada ......... 1 241,874.01 1.96
New Jersey ..... 1 265,490.99 2.15
New York ....... 1 314,882.95 2.55
North Carolina 1 254,902.11 2.06
Oregon ......... 1 261,250.00 2.11
Rhode Island .. 1 290,657.58 2.35
South Carolina 1 262,345.82 2.12
Tennessee ...... 1 296,722.34 2.40
Texas .......... 3 958,237.68 7.76
Utah ........... 1 350,000.00 2.83
Washington ..... 3 918,771.90 7.44
-------------- ----------------- -----------------
Total ...... 40 $12,355,122.19 100.00%
============== ================= =================
</TABLE>
ADJUSTABLE RATE GROUP II
RANGE OF GROSS MARGINS
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE CUT-OFF DATE
RANGE OF NUMBER OF AGGREGATE AGGREGATE
GROSS MARGINS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
4.001% to 4.500% .. 1 $ 256,365.52 2.07%
4.501% to 5.000% .. 5 1,550,477.15 12.55
5.001% to 5.500% .. 8 2,437,785.20 19.73
5.501% to 6.000% .. 13 3,866,882.30 31.30
6.001% to 6.500% .. 6 1,990,900.62 16.11
6.501% to 7.000% .. 3 931,135.20 7.54
7.001% to 7.500% .. 3 1,014,753.16 8.21
7.501% to 8.000% .. 1 306,823.04 2.48
-------------- ----------------- -----------------
Total .......... 40 $12,355,122.19 100.00%
============== ================= =================
</TABLE>
A-18
<PAGE>
ADJUSTABLE RATE GROUP II
RANGE OF MAXIMUM MORTGAGE INTEREST RATES
<TABLE>
<CAPTION>
PERCENTAGE OF
RANGE OF MAXIMUM CUT-OFF DATE CUT-OFF DATE
MORTGAGE NUMBER OF AGGREGATE AGGREGATE
INTEREST RATES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
13.501% to 14.000% 1 $ 322,782.83 2.61%
14.001% to 14.500% 2 697,250.00 5.64
14.501% to 15.000% 7 2,077,998.86 16.82
15.001% to 15.500% 4 1,046,977.30 8.47
15.501% to 16.000% 12 3,961,888.24 32.07
16.001% to 16.500% 3 974,820.37 7.89
16.501% to 17.000% 7 2,105,823.25 17.04
17.001% to 17.500% 2 587,158.30 4.75
17.501% to 18.000% 2 580,423.04 4.70
-------------- ----------------- -----------------
Total .......... 40 $12,355,122.19 100.00%
============== ================= =================
</TABLE>
ADJUSTABLE RATE GROUP II
RANGE OF MINIMUM MORTGAGE INTEREST RATES
<TABLE>
<CAPTION>
PERCENTAGE OF
RANGE OF MINIMUM CUT-OFF DATE CUT-OFF DATE
MORTGAGE INTEREST NUMBER OF AGGREGATE AGGREGATE
RATES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
7.501% to 8.000% ....... 1 $ 322,782.83 2.61%
8.001% to 8.500% ....... 2 697,250.00 5.64
8.501% to 9.000% ....... 7 2,077,998.86 16.82
9.001% to 9.500% ....... 4 1,046,977.30 8.47
9.501% to 10.000% ...... 12 3,961,888.24 32.07
10.001% to 10.500% .... 4 1,302,070.37 10.54
10.501% to 11.000% .... 7 2,105,823.25 17.04
11.001% to 11.500% .... 1 259,908.30 2.10
11.501% to 12.000% .... 2 580,423.04 4.70
-------------- ----------------- -----------------
Total .............. 40 $12,355,122.19 100.00%
============== ================= =================
</TABLE>
ADJUSTABLE RATE GROUP II
MONTH OF NEXT CHANGE DATE
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE CUT-OFF DATE
NUMBER OF AGGREGATE AGGREGATE
MONTH OF NEXT CHANGE DATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
January-00 ............... 1 $ 256,365.52 2.07%
February-00 .............. 1 283,480.96 2.29
March-00 ................. 1 297,854.96 2.41
July-01 .................. 3 846,631.36 6.85
August-01 ................ 4 1,288,135.36 10.43
September-01 ............. 12 3,600,810.23 29.14
October-01 ............... 9 2,803,514.42 22.69
November-01............... 4 1,451,900.00 11.75
September-02.............. 1 409,329.38 3.31
October-02................ 4 1,117,100.00 9.04
-------------- ----------------- -----------------
Total................. 40 $12,355,122.19 100.00%
============== ================= =================
</TABLE>
A-19
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
ANNEX B
GLOBAL CLEARANCE, SETTLEMENT AND
TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Mortgage
Pass-Through Certificates, Series 1999-2 (the "Global Securities") will be
available only in book-entry form. Investors in the Global Securities may
hold such Global Securities through DTC, Cedelbank 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 Cedelbank 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 Cedelbank or
Euroclear and Participants holding Certificates will be effected on a
delivery-against-payment basis through the Relevant Depositaries of Cedelbank
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, Cedelbank 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 Cedelbank 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.
B-1
<PAGE>
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 Cedelbank and/or Euroclear Participants. Secondary market
trading between Cedelbank Participants or Euroclear Participant will be
settled using the Procedures applicable to conventional eurobonds in same-day
funds.
Trading between DTC Seller and Cedelbank or Euroclear Participants. When
Global Securities are to be transferred from the account of a Participant to
the account of a Cedelbank Participant or a Euroclear Participant, the
purchaser will send instructions to Cedelbank or Euroclear through a
Cedelbank Participant or Euroclear Participant at least one business day
prior to settlement. Cedelbank or Euroclear will instruct the respective
Depositary, as the case may be, to receive the Global Securities against
payment. Payment will include interest accrued on the Global Securities from
and including the last coupon payment date to and excluding the settlement
date, on the basis of the actual number of days in such accrual period and a
year assumed to consist of 360 days. For transactions settling on the 31st of
the month, payment will include interest accrued to and excluding the first
day of the following month. Payment will then be made by the respective
Depositary to the Participant's account against delivery of the Global
Securities. After settlement has been completed, the Global Securities will
be credited to the respective clearing system and by the clearing system, in
accordance with its usual procedures, to the Cedelbank 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 Cedelbank or Euroclear cash debt will be valued instead as of the
actual settlement date.
Cedelbank 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 Cedelbank or
Euroclear. Under this approach, they may take on credit exposure to Cedelbank
or Euroclear until the Global Securities are credited to their accounts one
day later.
As an alternative, if Cedelbank or Euroclear has extended a line of credit
to them, Cedelbank 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, Cedelbank 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 Cedelbank. 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
B-2
<PAGE>
European Depositary for the benefit of Cedelbank 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 Cedelbank or Euroclear Seller and DTC Purchaser. Due to
time zone differences in their favor, Cedelbank 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 Cedelbank or Euroclear through a Cedelbank Participant or
Euroclear Participant at least one business day prior to settlement. In these
cases, Cedelbank 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 Cedelbank Participant or Euroclear
Participant the following day, and receipt of the cash proceeds in the
Cedelbank 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 Cedelbank 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 Cedelbank Participant's or Euroclear Participant's account would instead
be valued as of the actual settlement date.
Finally, day traders that use Cedelbank or Euroclear and that purchase
Global Securities from Participants for delivery to Cedelbank Participants or
Euroclear Participants should note that these trades would automatically fail
on the sale side unless affirmative action were taken. At least three
techniques should be readily available to eliminate this potential problem:
(a) borrowing through Cedelbank or Euroclear for one day (until the
purchase side of the day trade is reflected in their Cedelbank 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 Cedelbank 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 Cedelbank Participant or
Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through
Cedelbank or Euroclear (or through DTC if the holder has an address outside
the U.S.) will be
B-3
<PAGE>
subject to the 30% U.S. withholding tax that generally applies to payments
of interest (including original issue discount) on registered debt issued by
U.S. Persons, unless (i) each clearing system, bank or other financial
institution that holds customers' securities in the ordinary course of its
trade or business in the chain of intermediaries between such beneficial
owner and the U.S. entity required to withhold tax complies with applicable
certification requirements and (ii) such beneficial owner takes one of the
following steps to obtain an exemption or reduced tax rate:
Exemption for non-U.S. Persons (Form W-8). Beneficial owners of Global
Securities that are Non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status).
If the information shown on Form W-8 changes, a new Form W-8 must be filed
within 30 days of such change.
Exemption for non-U.S. Persons with effectively connected income (Form
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a
U.S. branch, for which the interest income is effectively connected with its
conduct of a trade or business in the United States, can obtain an exemption
from the withholding tax by filing Form 4224 (Exemption from Withholding of
Tax on Income Effectively Connected with the Conduct of a Trade or Business
in the United States).
Exemption or reduced rate for non-U.S. Persons resident in treaty
countries
(Form 1001). Non-U.S. Persons residing in a country that has a tax treaty
with the United States can obtain an exemption or reduced tax rate depending
on the treaty terms) by filing Form 1001 (Ownership, Exemption or Reduced
Rate Certificate). If the treaty provides only for a reduced rate,
withholding tax will be imposed at that rate unless the filer alternatively
files Form W-8. Form 1001 may be filed by the Certificate Owners or their
agents.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Certificate Owner of a
Global Security or, in the case of a Form 1001 or a Form 4224 filer, his
agent, files by submitting the appropriate form to the person though whom it
holds (the clearing agency, in the case of persons holding directly on the
books of the clearing agency). Form W-8 and Form 1001 are effective for three
calendar years, and Form 4224 is effective for one calendar year.
The term "U.S. Person" means: 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.
B-4
<PAGE>
This summary does not deal with all aspects of U.S. federal income tax
withholding that may be relevant to non-U.S. Persons that hold Global
Securities, including the application of Treasury regulations relating to tax
documentation requirements that are generally effective with respect to
payments made after December 31, 2000. Investors are advised to consult their
own tax advisors for specific tax advice concern their holding and disposing
of the Global Securities.
B-5
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
PROSPECTUS
DATED OCTOBER 29, 1999
$1,331,730,000
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 23 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>
(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 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.
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<PAGE>
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.
The Trustee or Transferor with respect to any Series of Securities will
provide without charge to each person to whom this Prospectus is delivered,
on the written or oral request of such person, a copy of any or all of the
documents referred to above that may be incorporated by reference in this
Prospectus (not including exhibits to the information that is incorporated by
reference unless such exhibits are specifically incorporated by reference
into the information that this Prospectus incorporates). Such requests should
be directed to the Corporate Trust Office of the Trustee specified in the
accompanying Prospectus Supplement.
Except as otherwise specified in the related Prospectus Supplement, no
information that relates to any Series of Securities other than the Series
referred to in the accompanying Prospectus Supplement shall be deemed to be
incorporated by reference in this Prospectus.
REPORTS TO SECURITYHOLDERS
Monthly and annual reports concerning any Securities and the related
assets included in the Trust or Trust Estate, as applicable, will be sent by
the Trustee to all related Securityholders. See "Description of the
Securities -- Reports to Securityholders" herein. If the Securities of a
Series are to be issued in book-entry form, such reports will be sent to the
Securityholder of record, and beneficial owners of such Securities will have
to rely on the procedures described herein under "Description of the
Securities --Form of Securities -- Book-Entry Registration" to obtain such
reports.
4
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
SUMMARY.................................. 7
RISK FACTORS............................. 23
Limited Liquidity........................ 23
Limited Assets; Limited Obligations ..... 23
Nature of the Security for Mortgage
Loans................................... 23
Risks Associated with Prepayment of the
Mortgage Loans.......................... 27
Environmental Statutes Affecting
Security Interests...................... 28
Risks Associated With Certain
Origination Fees........................ 28
Legal Considerations..................... 28
Yield, Maturity and Prepayment
Considerations.......................... 30
Limitations on Interest Payments and
Foreclosures............................ 32
Security Rating.......................... 32
Book-Entry Registration.................. 33
THE TRUSTS AND TRUST ESTATES.............. 34
The Mortgage Loans--General.............. 34
Negative Amortization.................... 36
Forward Commitments; Prefunding
Accounts; Capitalized Interest
Accounts ............................... 37
USE OF PROCEEDS .......................... 39
AAMES CAPITAL CORPORATION ................ 39
AAMES CAPITAL ACCEPTANCE
CORP .................................... 39
THE SERVICER ............................. 40
General ................................. 40
Mortgage Loan Delinquency and
Foreclosure Experience ................. 40
THE ORIGINATORS .......................... 42
Underwriting Guidelines ................. 42
Representations by Originators and the
Transferors ............................ 43
DESCRIPTION OF THE SECURITIES ............ 45
General ................................. 45
Form of Securities ...................... 46
Distributions and Payments on
Securities ............................. 48
Revolving Period and Amortization
Period; Transferor Interest ............ 52
Reports to Securityholders .............. 52
CREDIT ENHANCEMENT ....................... 55
Subordination ........................... 55
Overcollateralization Feature ........... 56
Reserve Accounts ........................ 56
Financial Guaranty Insurance Policies .. 57
Mortgage Pool Insurance Policies ....... 58
Special Hazard Insurance Policies ...... 58
Bankruptcy Bonds ........................ 59
Cross Support ........................... 59
Other Insurance, Guarantees and Similar
Instruments or Agreements .............. 60
Maintenance of Credit Enhancement ...... 60
MATURITY, PREPAYMENT AND YIELD
CONSIDERATIONS .......................... 62
THE POOLING AND SERVICING AGREEMENT ..... 65
Assignment of Mortgage Loans ............ 65
Payments on the Mortgage Loans .......... 68
Investment of Accounts .................. 69
Permitted Investments ................... 69
Monthly Advances and Compensating
Interest ............................... 70
Realization upon Defaulted Mortgage
Loans .................................. 71
General Servicing Procedures ............ 72
Sub-Servicers ........................... 72
Servicing and Other Compensation and
Payment of Expenses .................... 72
Maintenance of Hazard Insurance ........ 73
Enforcement of Due-on-Sale Clauses ..... 74
Voting .................................. 74
Amendments .............................. 75
Certificate Events of Default ........... 76
Rights upon Certificate Events
of Default ............................. 76
Termination; Optional Termination ...... 77
Evidence as to Compliance ............... 77
Indemnification of Officers and
Directors of the Transferors ........... 78
The Trustee ............................. 78
THE INDENTURE ............................ 80
General ................................. 80
Modification of Indenture ............... 80
Bond Events of Default .................. 81
Rights upon Bond Events of Default ..... 81
List of Bondholders ..................... 82
Annual Compliance Statement ............. 83
Trustee's Annual Report ................. 83
Satisfaction and Discharge of Indenture 83
Redemption of Bonds ..................... 83
Reports by Trustee to Bondholders ...... 83
Limitation on Suits ..................... 83
CERTAIN LEGAL ASPECTS OF THE MORTGAGE
LOANS AND RELATED MATTERS ............... 84
Nature of the Mortgage Loans ............ 84
Foreclosure/Repossession ................ 84
Rights of Redemption .................... 86
Certain Provisions of California Deeds
of Trust ............................... 86
Anti-deficiency Legislation and Other
Limitations on Lenders ................. 87
Enforceability of Due-on-Sale Clauses .. 88
5
<PAGE>
Prepayment Charges ...................... 88
Applicability of Usury Laws ............. 88
Soldiers' and Sailors' Civil Relief Act 89
Environmental Considerations ............ 89
CERTAIN FEDERAL INCOME TAX CONSEQUENCES . 90
Taxation of Certificates ................ 90
General ................................. 90
Taxation of Debt Certificates (Including
Regular Certificates) .................. 91
Taxation of Certificates as to Which a
REMIC Election Has Been Made ........... 99
Tax Status as a Grantor Trust ........... 105
Tax Characterization of the Trust as a
Partnership; Tax Consequences to
Holders of the Certificates Issued By a
Partnership ............................ 108
Certain Certificates Treated as
Indebtedness ........................... 113
Taxation of Bonds ....................... 116
Miscellaneous Tax Aspects ............... 116
Tax Treatment of Foreign Investors ..... 117
STATE TAX CONSIDERATIONS ................. 119
ERISA CONSIDERATIONS ..................... 119
Plan Asset Regulations .................. 119
Prohibited Transaction Class Exemption . 120
LEGAL INVESTMENT CONSIDERATIONS .......... 122
SMMEA ................................... 122
FFIEC Policy Statement .................. 122
General ................................. 123
METHOD OF DISTRIBUTION ................... 123
LEGAL MATTERS ............................ 124
FINANCIAL INFORMATION .................... 124
RATING ................................... 124
INDEX OF PRINCIPAL TERMS ................. 126
</TABLE>
6
<PAGE>
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 $1,000,000 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 Supple-
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<PAGE>
ment. 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, 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
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<PAGE>
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 manufactured
housing (which is permanently
10
<PAGE>
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.
10
<PAGE>
The property securing a Mortgage Loan (each,
a "Mortgaged Property") may be located in
any one of the fifty states or the District
of Columbia. Unless otherwise specified in
the related Prospectus Supplement, all of
the Mortgage Loans will be covered by
Standard Hazard Insurance Policies insuring
against certain losses due to fire and other
causes.
The Prospectus Supplement for each Series of
Securities will specify with respect to all
Mortgage Loans included in each related
Mortgage Pool, among other things, (i) the
aggregate outstanding principal balance and
the average outstanding principal balance of
the Mortgage Loans in such Mortgage Pool as
of the date specified in the Prospectus
Supplement (the "Cut-off Date"), (ii) the
largest principal balance of any of the
Mortgage Loans, (iii) the types of Mortgaged
Properties securing the Mortgage Loans, (iv)
the original terms to maturity of the
Mortgage Loans, (v) the weighted average
term to maturity of the Mortgage Loans as of
the Cut-off Date and the range of the terms
to maturity, (vi) the ranges of the Combined
Loan-to-Value Ratios at origination, (vii)
the weighted average Mortgage Rate and
ranges of Mortgage Rates borne by the
Mortgage Loans and (viii) the geographic
distribution of the Mortgaged Properties on
a state-by-state basis.
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
11
<PAGE>
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
Secu-
13
<PAGE>
rities are issued (such provisions being
referred to herein as a "Forward
Commitment"). Any Forward Commitment will
require that any Mortgage Loans so
transferred conform to the requirements
specified in the related Pooling and
Servicing Agreement or Indenture, as
applicable. If a Forward Commitment is to be
utilized, unless otherwise specified in the
related Prospectus Supplement, a deposit
will be made to a segregated account (each,
a "Prefunding Account") in an amount equal
to all or a portion of the proceeds received
by the related Transferor in connection with
the sale of the Securities of the related
Series (such amount, the "Prefunding
Amount"). Subsequently, the additional
Mortgage Loans will be conveyed by the
related Transferor to the related Trust in
exchange for cash from the related
Prefunding Account in one or more transfers.
The related Pooling and Servicing Agreement
or Indenture, as applicable, will require
that, if any of the Prefunding Amount is not
applied to acquire additional Mortgage Loans
by the end of the Funding Period, then any
amounts remaining on deposit in the
Prefunding Account will be released from the
Prefunding Account and distributed or paid,
as applicable, in reduction of the principal
balance of the related Securities as
specified in the related Prospectus
Supplement.
If a Prefunding Account is established, a
segregated account (each, a "Capitalized
Interest Account") may also be established
for the related Series. On the closing date
for such Series, all or a portion of the
proceeds received by the related Transferor
in connection with the sale of the
Securities of the related Series may be
deposited in the Capitalized Interest
Account and used to fund the excess, if any,
of (x) the sum of (i) the amount of interest
accrued on the Securities of such Series
specified in the related Prospectus
Supplement and, (ii) if specified in the
related Prospectus Supplement, certain fees
or expenses during the Funding Period such
as Trustee fees and credit enhancement fees,
over (y) the amount of interest available
therefor from the 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
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<PAGE>
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 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
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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
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principal and interest distributable or
payable, as applicable, to Securityholders
on any Distribution Date or Payment Date, as
applicable, as well as any other amounts
specified in the related Prospectus
Supplement (the "Insured Amount"), will be
available for distribution or payment, as
applicable, to Securityholders on such date.
The terms of any such Financial Guaranty
Insurance Policy will be described in the
related Prospectus Supplement.
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
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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 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.
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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 option of the related Bond Issuer or
another party specified in the related
Prospectus Supplement; or (ii) subject to
special redemption under certain
circumstances. The circumstances and terms
under which the Bonds of a given Series may
be redeemed will be described in the related
Prospectus Supplement.
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES ................. Investors are advised to consult their tax
advisors and to review "Certain Federal
Income Tax Consequences" herein and in the
related Prospectus Supplement.
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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) of the
Code.
For federal income tax purposes, Regular
Certificates generally will be treated as
debt obligations 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 en-
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titled, 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, will
agree to treat such Certificates as debt for
federal, state and local income and
franchise tax purposes.
D. OWNER TRUST CERTIFICATES .. If so specified in the Prospectus Supplement
relating to a Series of Certificates, the
Trust for a Series of Certificates will be
treated as a partnership for federal income
tax purposes (or as a division of the sole
Certificateholder if there is a single
Certificateholder for federal income tax
purposes). Each Certificateholder by the
acceptance of a Certificate of such Series
will agree to treat the related Trust as a
partnership in which such Certificateholder
is a partner for federal income and state
tax purposes if there is more than one
Certificateholder for federal income tax
purposes (or, if there is single
Certificateholder, as a division of the
Certificateholder for federal income 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
(other than original issue discount, if any)
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.
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<PAGE>
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.
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<PAGE>
REGISTRATION OF SECURITIES .... Unless otherwise specified in the related
Prospectus Supplement, the Securities will
be issued as physical securities
("Definitive Securities") in fully
registered form in the denominations
specified in the related Prospectus
Supplement. The Securities may be
represented, however, by a single
certificate or bond, as applicable,
registered in the name of Cede & Co.
("Cede"), as nominee of The Depository Trust
Company ("DTC"), or another nominee if so
specified in the related Prospectus
Supplement. In such case, the beneficial
owners thereof will not be entitled to
receive Definitive Securities representing
their respective interests, except in
certain circumstances described in the
related Prospectus Supplement. See
"Description of the Securities -- Form of
Securities -- Book-Entry Registration"
herein.
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<PAGE>
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
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<PAGE>
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 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
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<PAGE>
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 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
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<PAGE>
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 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.
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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 --
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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 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
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Servicer and any Sub-Servicer. In addition, most states have other laws,
public policies and general principles of equity relating to the protection
of consumers, unfair and deceptive practices and practices which may apply to
the origination, servicing and collection of the Mortgage Loans. In
California, for example, a mortgage lender is subject to the California Fair
Debt Collection Practices Act which regulates practices used to effect
collection on consumer loans. See "Certain Legal Aspects of the Mortgage
Loans and Related Matters" herein.
The Mortgage Loans may also be subject to federal laws, including: (i) the
Truth in Lending Act and Regulation Z promulgated thereunder, which require
certain disclosures to the borrowers regarding the terms of the Mortgage
Loans; (ii) the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race, color,
sex, religion, marital status, national origin, receipt of public assistance
or the exercise of any right under the Consumer Credit Protection Act, in the
extension of credit; (iii) the Real Estate Settlement Procedures Act and
Regulation X promulgated thereunder, which require certain disclosures to
borrowers regarding the settlement and servicing of the Mortgage Loans; (iv)
the Fair Credit Reporting Act, which regulates the use and reporting of
information related to the borrower's credit experience; and (v) the Federal
Trade Commission Preservation of Consumer's Claims and Defenses Rule, 16
C.F.R. Part 433, regarding the preservation of a consumer's rights.
The federal Soldiers' and Sailors' Civil Relief Act of 1940, as amended
(the "Relief Act"), may affect the ability of the Servicer to collect full
amounts of interest on certain Mortgage Loans and could interfere with the
ability of the Servicer to foreclose on certain properties. See "Certain
Legal Aspects of the Mortgage Loans and Related Matters -- Soldiers' and
Sailors' Civil Relief Act" herein.
It is possible that some of the Mortgage Loans will be subject to the
Riegle Community Development and Regulatory Improvement Act of 1994 (the
"Riegle Act") which incorporates the Home Ownership and 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
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or interest on any Mortgage Loans because of a violation of the
aforementioned laws, public policies or general principles of equity,
distributions or payments to Securityholders of realized proceeds of the
assets in the related Trust or Trust Estate, as applicable, may be delayed,
or such proceeds may not be sufficient to repay all amounts owed to
Securityholders. Furthermore, depending upon whether damages and sanctions
are assessed against the Servicer or an Originator, such violations may have
a material impact upon the financial ability of the Servicer to continue to
act in such capacity or the ability of a Transferor to withdraw or replace
Mortgage Loans if such violation breaches a representation or warranty
contained in the related Pooling and Servicing Agreement or Indenture, as
applicable.
YIELD, MATURITY AND PREPAYMENT CONSIDERATIONS
The yield to maturity of the Securities of any Series will be affected by
the amount and timing of principal payments on the related Mortgage Loans,
the manner of allocation of available funds and/or losses to such Securities,
the interest rates or amounts of interest payable on such Securities and the
purchase price paid for such Securities. In the case of a Series of
Certificates issued in Classes, the interaction of the foregoing factors may
have different effects on, and create different risks for, such Classes, and
the effects and/or risks for any one Class may vary over the life of such
Class. The related Prospectus Supplement may include additional prepayment
considerations with respect to the Securities of the related Series.
Investors should carefully consider the different consequences of such risks
as may be described in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, the
Mortgage Loans may be prepaid in full or in part at any time; however, a
prepayment penalty or premium may still be imposed in connection therewith.
The rate of prepayments of the Mortgage Loans cannot be predicted and may be
affected by a wide variety of economic, social and other factors, including
prevailing interest rates, the availability of alternative financing and
homeowner mobility. Therefore, no assurance can be given as to the level of
prepayments that may be experienced on Mortgage Loans included in any
Mortgage Pool.
Although published statistical data regarding the effects of interest
rates on prepayment rates for Mortgage Loans of the type typically made or
acquired by the Originators is limited, a number of factors suggest that the
prepayment behavior of a pool including Mortgage Loans may be significantly
different from that of a pool composed entirely of conforming,
non-conforming, "jumbo" or government-insured (i.e., "traditional") first
mortgage loans with equivalent interest rates and maturities. One such factor
is the smaller average principal balance of Mortgage Loans that may result in
a higher prepayment rate than that of a traditional first mortgage loan with
a larger average balance, regardless of the interest rate environment. A
small principal balance, however, also may make refinancing Mortgage Loans at
a lower interest rate less attractive to the borrower relative to refinancing
a larger balance first mortgage loan, as the perceived impact to the borrower
of lower interest rates on the amount of the monthly payment for a Mortgage
Loan may be 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
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higher rate of prepayments than traditional first mortgage loans. In
addition, any future limitations on the deductibility of interest payments on
the Mortgage Loans for federal income tax purposes may further increase the
rate of prepayments on the Mortgage Loans.
In addition, certain of the Mortgage Loans comprising the Mortgage Pool
may have adjustable Mortgage Interest Rates ("ARM Loans"). As is the case
with conventional fixed-rate mortgage loans, ARM Loans may be subject to a
greater rate of principal prepayments in a declining interest rate
environment. For example, if prevailing interest rates fall appreciably, ARM
Loans could be subject to higher prepayment rates than if prevailing interest
rates remain constant because the availability of fixed-rate mortgage loans
at competitive interest rates may encourage mortgagors to refinance their ARM
Loans to "lock in" a lower fixed interest rate. Conversely, if prevailing
interest rates rise appreciably, ARM Loans may prepay at lower rates than if
prevailing interest rates remain at or below those in effect at the time such
ARM Loans were originated. There can be no certainty as to the rate of
prepayments on the ARM Loans in stable or changing interest rate
environments. See "Maturity, Prepayment and Yield Considerations" herein.
Prepayments may result from voluntary early payments by borrowers
(including payments in connection with refinancings of any related Senior
Liens), sales of Mortgaged Properties subject to due-on-sale provisions and
liquidations due to default, as well as the receipt of proceeds from physical
damage, credit life and disability insurance policies. In addition,
withdrawals or reacquisitions of Mortgage Loans from a Trust or Trust Estate,
as applicable, required to be made under the related Pooling and Servicing
Agreement or Indenture will have the same effect on the Securityholders as a
prepayment of such Mortgage Loans. Unless otherwise specified in the related
Prospectus Supplement, all of the Mortgage Loans contain due-on-sale
provisions, and the Servicer will be required to enforce such provisions
unless (i) such enforcement would materially increase the risk of default or
delinquency on, or materially decrease the security for, such Mortgage Loan
or (ii) such enforcement is not permitted by applicable law, in which case
the Servicer is authorized to permit the purchaser of the related Mortgaged
Property to assume the Mortgage Loan. Additionally, should any Originator
solicit refinancings from existing borrowers, the rate of prepayments on the
Mortgage Loans may increase due to any resulting refinancings.
Prepayments on the Mortgage Loans for a Series generally will result in a
faster rate of distributions or payments, as applicable, of principal on the
Securities. Thus, the prepayment experience of the Mortgage Loans will affect
the average life and yield to investors and the extent to which the
Securities of any Series are paid prior to the final scheduled Distribution
Date or Payment Date, as applicable, therefor. A Series of Certificates may
include Classes which pay "interest only" or are entitled to receive a
disproportionately high level of interest distributions compared to the
amount of principal to which such Classes are entitled (each, an "Interest
Weighted Class") or Classes which pay "principal only" or are entitled to
receive a disproportionately high level of principal distributions compared
to the amount of interest to which such Classes are entitled (each, a
"Principal Weighted Class"). A Series of Certificates may include an Interest
Weighted Class offered at a significant premium or a Principal Weighted Class
offered at a substantial discount. Yields on such Classes will be extremely
sensitive to prepayments on the Mortgage Loans for such Series. In general if
the Securities of any Series, including Certificates that represent an
Interest Weighted Class, are purchased at a premium and principal payments on
the Mortgage Loans occur at a rate faster than anticipated at the time of
purchase, the investor's actual yield to maturity could be significantly
lower than that assumed at the time of purchase. Where the
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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.
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BOOK-ENTRY REGISTRATION
Effect on Liquidity. If so specified in the related Prospectus Supplement,
the Securities may initially be registered in book-entry form. Issuance of
the Securities in book-entry form may reduce the liquidity of such Securities
in the secondary market because investors may be unwilling to purchase
Securities for which they cannot obtain physical certificates.
Difficulty in Pledging. Because transactions in Securities, in most cases,
will be able to be effected only through Participants, Indirect Participants
and certain banks, the ability of a Securityholder to pledge Securities to
persons or entities that do not participate in the DTC system, or otherwise
to take actions in respect of such Securities, may be impaired because
physical certificates representing the Securities will not generally be
available.
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.
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THE TRUSTS AND TRUST ESTATES
The Trust or Trust Estate, as applicable, for any Series of Securities
will include a Mortgage Pool that may consist of Mortgage Loans together with
payments in respect thereof and certain other accounts, obligations or
agreements, in each case as specified in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, the sole
source of distributions or payments, as applicable, in respect of the
Securities will be the assets included in the related Trust or Trust Estate,
as applicable. The Securities will not be entitled to payments in respect of
any other assets included in any other Trust or Trust Estate established by
the related Transferor or any of its affiliates.
The following is a brief description of the Mortgage Loans expected to be
included in the Trust or Trust Estate, as applicable, relating to a given
Series of Securities. The related Prospectus Supplement will set forth
detailed information respecting the Mortgage Loans proposed to be included in
the related Mortgage Pool. Information regarding the actual composition of
the Mortgage Loans in the related Mortgage Pool will be set forth in a report
on Form 8-K to be filed with the Commission within 15 days after 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
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Prospectus Supplement, each Mortgage Loan will require monthly payment of
principal and interest. Scheduled payments of principal on any Mortgage Loan
may be computed (i) on a level debt service basis that will result in full
amortization over the stated term of such Mortgage Loan, (ii) in the case of
a Balloon Loan, on the basis of an assumed amortization schedule that is
significantly longer than the original term to maturity of such Mortgage Loan
and will require payment of a substantial amount of principal at the stated
maturity specified in the related Mortgage Note or (iii) on such other basis
as is specified in the related Prospectus Supplement.
Certain of the Mortgage Loans may have been originated pursuant to
underwriting standards that rely primarily on the value and adequacy of the
Mortgaged Property as collateral and, to a much lesser extent, on the
creditworthiness of the related Mortgagor. Accordingly, the rates of
delinquencies, foreclosures and losses on such Mortgage Loans, particularly
in periods during which the value of the related Mortgaged Properties has
declined, may be higher than those historically experienced by the mortgage
lending industry in general. See "The Originators -- Underwriting Guidelines"
herein.
Prepayments of principal may be subject to a prepayment fee, which may be
fixed for the life of the Mortgage Loan or may decline over time, and may be
prohibited for the life of the Mortgage Loan or for certain periods ("lockout
periods"). Certain Mortgage Loans may permit prepayments after expiration of
the applicable lockout period and may require the payment of a prepayment fee
in connection with any such subsequent prepayment. Other Mortgage Loans may
permit prepayments without payment of a fee unless the prepayment occurs
during specified time periods. The Mortgage Loans may include due-on-sale
clauses which permit the mortgagee to demand payment of the entire Mortgage
Loan in connection with the sale or certain transfers of the related
Mortgaged Property. Other Mortgage Loans may be assumable by persons meeting
the then applicable underwriting standards of the applicable Originator.
The Prospectus Supplement for each Series of Securities will contain
information, as of the date of such Prospectus Supplement and to the extent
then specifically known to the related Transferor, with respect to the
Mortgage Loans contained in the related Mortgage Pool, including (i) the
aggregate outstanding principal balance and the average outstanding principal
balance of the Mortgage Loans as of the applicable Cut-off Date, (ii) the
largest principal balance and the smallest principal balance of any of the
Mortgage Loans, (iii) the types of Mortgaged Properties securing the Mortgage
Loans, (iv) the original terms to maturity of the Mortgage Loans, (v) the
weighted average term to maturity of the Mortgage Loans as of the related
Cut-off Date and the range of the terms to maturity, (vi) the ranges of
Combined Loan-to-Value Ratios at 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.
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"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.
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
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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
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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 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.
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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 (323) 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
(323) 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, foreclosure and loss
information relating to the Servicer's servicing portfolio as of or for the
periods indicated:
<TABLE>
<CAPTION>
AS OF OR FOR THE FISCAL
YEARS ENDED JUNE 30,
-------------------------
1997 1998
------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Percentage of dollar amount of delinquent loans to loans
serviced (period end)(1)(2)(3)
One Month ............................................... 4.3% 3.8%
Two Months............................................... 1.9% 1.3%
Three or More Months:
Not Foreclosed(4)....................................... 8.1% 9.0%
Foreclosed(5)........................................... 1.0% 1.5%
------------ -----------
Total................................................... 15.3% 15.6%
============ ===========
Percentage of dollar amount of loans foreclosed during
the period to loans serviced (2)(3) ................... 1.5% 2.0%
Number of loans foreclosed during the period ............. 560 1,125
Principal amount of foreclosed loans during the period .. $ 48,029 $ 84,613
Net losses on liquidations during the period(6) ......... $ 5,470 $ 26,488
Percentage of losses to average servicing portfolio (3) .. .24% .72%
Servicing portfolio at period end ........................ $3,174,000 $4,147,000
</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 Servicer and, in each case, serviced by the
Servicer and any subservicers 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 Servicer 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 Servicer at period end.
(6) Represents losses net of gains on foreclosed properties sold during
the period indicated.
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.
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
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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.
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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 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,
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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
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.
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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.
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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
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.
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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
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specified percentages. DTC may take conflicting actions with respect to other
current principal amounts of outstanding Securities to the extent that such
actions are taken on behalf of Participants whose holdings include such
current principal amounts of outstanding Securities.
Any Securities initially registered in the name of Cede, as nominee of
DTC, will be issued in fully registered form as Definitive Securities to
Securityholders or their nominees, rather than to DTC or its nominee only
under the events specified in the related Pooling and Servicing Agreement or
Indenture, as applicable, as described in the related Prospectus Supplement.
Upon the occurrence of any of the events specified in the related Pooling and
Servicing Agreement and Prospectus Supplement, DTC will be required to notify
all Participants of the availability through DTC of Definitive Securities.
Upon surrender by DTC of the physical securities representing the Securities
and instruction for re-registration, the Trustee will issue the Securities in
the form of Definitive Securities, and thereafter the Trustee will recognize
the holders of such Definitive Securities as Securityholders. Thereafter,
payments of principal of and interest on the Securities will be made by the
Trustee directly to Securityholders in accordance with the procedures set
forth herein and in the related Pooling and Servicing Agreement or Indenture,
as applicable. The final distribution or payment, as applicable, of any
Security (whether Definitive Securities or Securities registered in the name
of Cede), however, will be made only upon presentation and surrender of such
Securities on the final Distribution Date or Payment Date, as applicable, at
such office or agency as is specified in the notice of final payment to
Securityholders.
DISTRIBUTIONS AND PAYMENTS ON SECURITIES
General. Unless otherwise specified in the related Prospectus Supplement,
distributions of principal and interest (or, if applicable, of principal only
or interest only) on the related Certificates, or payments of principal and
interest on the related Bonds, as applicable, will be made by the Trustee on
each Distribution Date specified in the related Prospectus Supplement (each,
a "Distribution Date") or Payment Date specified in the related Prospectus
Supplement (each, a "Payment Date"), respectively, in the amounts specified
in the related Prospectus Supplement. Distributions or payments, as
applicable, will be made to the persons in whose names the Securities are
registered at the close of business on the record dates specified in the
Prospectus Supplement. Distributions or payments, as applicable, will be made
by check mailed to the 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
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or during specified periods or interests that are subordinated with respect
to certain losses or delinquencies; (iv) the right to receive distributions
only after the occurrence of events specified in the related Prospectus
Supplement; (v) the right to receive distributions in accordance with a
schedule or formula or on the basis of collections from designated portions
of the assets in the related Trust; (vi) as to Certificates entitled to
distributions allocable to interest, the right to receive interest at a fixed
rate or an adjustable rate; (vii) as to Certificates entitled to
distributions allocable to interest, the right to such distributions
allocable to interest only after the occurrence of events specified in the
related Prospectus Supplement; and (viii) as to Certificates entitled to
distributions allocable to interest only after the occurrence of certain
events, the accrual but deferment of payment of interest until such events
occur, in each case as specified in such Prospectus Supplement.
In general, the method of determining the amount of distributions or
payments, as applicable, on a particular Series of Securities will depend on
the type of credit support, if any, that is used with respect to such Series.
See "Credit Enhancement" herein. Set forth below is a general description of
certain methods that may be used to determine the amount of distributions or
payments, as applicable, on the Securities of a particular Series. The
Prospectus Supplement for each Series of Securities will describe the method
to be used in determining the amount of distributions or payments, as
applicable, on the Securities of such Series.
Distributions or payments, as applicable, allocable to principal and
interest on the Securities of a Series will be made by the Trustee out of,
and only to the extent of, funds in a segregated account established and
maintained by the Trustee for the deposits of such amounts (the "Certificate
Account," with respect to Certificates, and the "Bond Account," with respect
to Bonds). The Certificate Account or Bond Account, as applicable, may
include funds transferred from any Reserve Account, any Prefunding Account
and funds received as a result of any other form of credit enhancement. As
between Certificates of different Classes and as between distributions of
interest and principal and, if applicable, between distributions of
prepayments of principal and scheduled payments of principal, distributions
made on any Distribution Date will be applied as specified in the related
Prospectus Supplement. Unless otherwise specified in the Prospectus
Supplement relating to a given Series of Certificates, distributions or
payments, as applicable, on the Certificates of any Class of a Series will be
made pro rata to all related Certificateholders of that Class.
Available Funds. All distributions or payments, as applicable, on the
Securities of each Series on any Distribution Date or Payment Date, as
applicable, will be made from the funds available for distribution or
payment, as applicable, on such Distribution Date or Payment Date, as
applicable, as described below ("Available Funds"), in accordance with the
terms described in the related Prospectus Supplement. Unless otherwise
specified in the related Prospectus Supplement, Available Funds for each
Distribution Date or Payment Date, as applicable, will equal the sum of the
following amounts:
(i) the aggregate of all previously undistributed payments on account of
principal (including principal prepayments, if any, and prepayment
penalties, if so provided in the related Prospectus 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;
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(b) amounts received on particular Mortgage Loans as late payments of
principal or interest and, unless otherwise specified in the related
Prospectus Supplement, other amounts required to be paid by the
Mortgagors which are to be retained by the Servicer (including any
Sub-Servicer) as additional compensation;
(c) amounts representing reimbursement, to the extent permitted as
described under "The Pooling and Servicing Agreement -- Monthly
Advances and Compensating Interest" and "--Servicing and Other
Compensation and Payment of Expenses," for advances made by the
Servicer or any Sub-Servicers that were deposited into the Certificate
Account or Bond Account, as applicable, and amounts representing
reimbursement for certain other losses and expenses incurred by the
Servicer or any Sub-Servicer as permitted under the related Pooling
and Servicing Agreement or Servicing Agreement, as applicable;
(d) that portion of each collection of interest on a particular
Mortgage Loan in such Mortgage Pool representing servicing
compensation payable to the Servicer that is to be retained from such
collection or is permitted to be retained from related Insurance
Proceeds, Liquidation Proceeds or proceeds of Mortgage Loans withdrawn
from the Mortgage Pool pursuant to the related Pooling and Servicing
Agreement or Servicing Agreement, as applicable; and
(e) Trustee fees and other expenses or fees payable out of the
related Trust or Trust Estate, as applicable, as specified in the
related Prospectus Supplement;
(ii) all amounts received and retained, if any, in connection with the
liquidation of defaulted Mortgage Loans ("Liquidation Proceeds"), net of
unreimbursed liquidation expenses and insured expenses incurred and
unreimbursed advances made by the Servicer or any Sub-Servicer ("Net
Liquidation Proceeds"), including all proceeds (net of unreimbursed
Servicing Advances) of title insurance, hazard insurance and primary
mortgage insurance, if any ("Insurance Proceeds"), all Principal
Prepayments, all proceeds received in connection with the condemnation of
a Mortgaged Property or the release of part of a Mortgaged Property and
all proceeds of any Mortgage Loan acquired by the related Transferor or
any other entity pursuant to the Pooling and Servicing Agreement, the
Indenture or the Servicing Agreement;
(iii) the amount of any Monthly Advance or Compensating Interest Payment
made by the Servicer or any Sub-Servicer, as deposited by such in the
Certificate Account or Bond Account, as applicable; and
(iv) if applicable, amounts withdrawn from a Reserve Account or a
Prefunding Account or received in connection with other credit
enhancement.
Distributions and Payments of Interest. Unless otherwise specified in the
Prospectus Supplement relating to a given Series of Certificates, each Class
of Certificates may bear interest at a different rate, which may be fixed or
adjustable (the "Certificate Rate"). All of the Bonds of a given Series will
bear interest at the same rate, which may be fixed or adjustable (the "Bond
Rate"). Interest will accrue on the Security Principal Balance (or, in the
case of a Class of Certificates entitled only to distributions allocable to
interest, the aggregate notional principal balance) of Securities entitled to
interest, at the Certificate Rate or Bond Rate, as applicable, and for the
periods specified in the Prospectus Supplement. To the extent funds are
available therefor, interest accrued during each such specified period on
Securities entitled to interest (other than a Class of Certificates that
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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
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advance of their scheduled due dates and are not accompanied by amounts
representing scheduled interest due after the month of such payments
("Principal Prepayments") in the percentages and under the circumstances or
for the periods specified in the Prospectus Supplement. Any such allocation
of Principal Prepayments to such Class or Classes of Certificates will have
the effect of accelerating the amortization of such Senior Certificates while
increasing the interests evidenced by Subordinated Certificates in the Trust.
Increasing the interests of Subordinated Certificates relative to that of the
Senior Certificates is intended to preserve the availability of the
subordination provided by the Subordinated Certificates. See "Credit
Enhancement -- Subordination" herein. The timing and amounts of distributions
allocable to interest and principal and, if applicable, Principal Prepayments
and scheduled payments of principal, to be made on any Distribution Date may
vary among Classes over time, or otherwise, as specified in the Prospectus
Supplement.
REVOLVING PERIOD AND AMORTIZATION PERIOD; TRANSFEROR INTEREST
If the Prospectus Supplement relating to a given Series of Certificates so
provides, there may be a period commencing on the date of issuance of a Class
or Classes of Certificates of a Series and ending on the date set forth in
the related Prospectus Supplement (the "Revolving Period") during which no
principal payments will be made to one or more Classes of Certificates of the
related Series as are identified in such Prospectus Supplement. All
collections of principal otherwise allocated to such Class or Classes of
Certificates may be (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
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related Series of Securities will be entitled to receive a statement setting
forth, to the extent applicable to such Series, the following information
with respect to the distribution for such Distribution Date or Payment Date,
as applicable.
(i) the amount of such distribution or payment, as applicable, allocable
to principal, separately identifying the aggregate amount of any Principal
Prepayments and, if so specified in the related Prospectus Supplement, any
prepayment penalties included therein;
(ii) the amount of such distribution or payment, as applicable, allocable
to interest;
(iii) the amounts of (a) any overdue accrued interest included in such
distribution or payment, as applicable, (b) any remaining overdue accrued
interest with respect to such Securities or (c) any current shortfall in
amounts to be distributed or paid, as applicable, as accrued interest to
holders of such Securities;
(iv) the amounts of (a) any overdue payments of scheduled principal
included in such distribution, (b) any remaining overdue principal amounts
with respect to such Securities, (c) any current shortfall in receipt of
scheduled principal payments on the related Mortgage Loans or (d) any
realized losses or Liquidation Proceeds to be allocated as reductions in
the outstanding principal balances of such Securities;
(v) if applicable with respect to a given Series of Certificates, the
aggregate amount (a) otherwise allocable to the Subordinated
Certificateholders on such Distribution Date and (b) withdrawn from a
Reserve Account, if any, that is included in the amounts distributed with
respect to Senior Certificates;
(vi) the total amount of the Insured Amount included in the amount
distributed on such Distribution Date or Payment Date, as applicable;
(vii) the Pool Balance and the Pool Factor of the Mortgage Loans after
giving effect to the distribution or payment, as applicable, on the
Distribution Date or Payment Date, as applicable;
(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;
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(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
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delinquencies and Subordinated Certificates with respect to the right to
receive other types of payments or with respect to the allocation of certain
types of losses or delinquencies. If specified in the Prospectus Supplement,
various Classes of Senior Certificates and Subordinated Certificates may
themselves be subordinate in their right to receive certain distributions to
other Classes of Senior and Subordinated Certificates, respectively, through
a cross-support mechanism or otherwise. As between Classes of Senior
Certificates and as between Classes of Subordinated Certificates,
distributions may be allocated among such Classes (i) in the order of their
scheduled final distribution dates, (ii) in accordance with a schedule or
formula, (iii) in relation to the occurrence of certain events or (iv)
otherwise, in each case as specified in the related Prospectus Supplement.
The related Prospectus Supplement will set forth information concerning
the amount of subordination of a Class or Classes of Subordinated
Certificates in a Series, the circumstances in which such subordination will
be applicable, the manner, if any, in which the amount of subordination will
decrease over time, the manner of funding any Reserve Account and the
conditions under which amounts in any such Reserve Account will be used to
make distributions to Senior Certificateholders or released to Subordinated
Certificateholders from the related Trust.
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
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related Trust or Trust Estate, as applicable, to pay the expenses of the
Trust or Trust Estate, as applicable, or for such other purposes specified in
such Prospectus Supplement. Any cash in a Reserve Account and the proceeds
upon maturity or liquidation of any other asset or instrument therein will be
invested, to the extent acceptable to the applicable Rating Agency, in
Permitted Investments, including obligations of the United States and certain
agencies thereof, certificates of deposit, certain commercial paper, time
deposits and bankers acceptances sold by eligible commercial banks, certain
repurchase agreements of United States government securities with eligible
commercial banks and certain other instruments acceptable to the applicable
Rating Agency. Unless otherwise specified in the related Prospectus
Supplement, any asset or instrument deposited in any Reserve Account will
name the Trustee, in its capacity as trustee for the Securityholders, as
beneficiary and will be issued by an entity acceptable to the applicable
Rating Agency.
Any amounts on deposit in a Reserve Account will be available for
withdrawal from such Reserve Account for distribution or payment, as
applicable, to holders of Securities or release to holders of Securities, the
related Transferor, the Servicer, the Originators or another entity for the
purposes, in the manner and at the times specified in the related Prospectus
Supplement.
FINANCIAL GUARANTY INSURANCE POLICIES
If so specified in the related Prospectus Supplement, a financial guaranty
insurance policy or policies (each, a "Financial Guaranty Insurance Policy")
may be obtained and maintained for the Securities of a given Series. The
provider of any Financial Guaranty Insurance Policy (a "Securities Insurer")
will be described in the related Prospectus Supplement. A copy of any such
Financial Guaranty Insurance Policy will be attached as an exhibit to the
related Pooling and Servicing Agreement or Indenture, as applicable.
Unless otherwise specified in the related Prospectus Supplement, a
Financial Guaranty Insurance Policy will unconditionally and irrevocably
guarantee to Securityholders that a certain amount will be available for
distribution or payment, as applicable, to Securityholders on a related
Distribution Date or Payment Date, as applicable (the "Insured Amount"). The
Insured Amount will equal the full amount of principal and interest
distributable as of any Distribution Date or due and payable as of any
Payment Date, as applicable, to Securityholders under the related Pooling and
Servicing Agreement or Indenture, as applicable, plus any other amounts
specified therein or in the related Prospectus Supplement.
The specific terms of any Financial Guaranty Insurance Policy will be
described in the related Prospectus Supplement.
Subject to the terms of the related Pooling and Servicing Agreement or
Indenture, as applicable, a Securities Insurer may be subrogated to the
rights of Securityholders to receive payments under the Securities to the
extent of any payments by such Securities Insurer under the related Financial
Guaranty Insurance Policy that were not previously reimbursed. However, any
such subrogation rights of a Securities Insurer may not result in a reduction
of the amount otherwise distributable on any Distribution Date or due and
payable on any Payment Date, as applicable, to holders of the Securities
covered by such Financial Guaranty Insurance Policy.
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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.
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
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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
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Guaranty Insurance Policies or Reserve Accounts, may apply concurrently to
two or more separate Trusts, without priority among such Trusts, until the
credit support is exhausted. If applicable, the Prospectus Supplement will
identify the Trusts to which such credit enhancement relates and the manner
of determining the amount of the coverage provided thereby and the
application of such coverage to the identified Trusts or asset groups.
OTHER INSURANCE, GUARANTEES AND SIMILAR INSTRUMENTS OR AGREEMENTS
If so specified in the related Prospectus Supplement, a Trust or Trust
Estate, as applicable, may include, in addition to or in lieu of some or all
of the foregoing, letters of credit, third party guarantees and other
arrangements for maintaining timely payments or providing additional
protection against losses on the assets included in such Trust or Trust
Estate, as applicable, paying administrative expenses or accomplishing such
other purpose. The related Prospectus Supplement will describe any such
arrangements, including information as to the extent of coverage and any
conditions or limitations thereto. The related Trust or Trust Estate, as
applicable, may include a guaranteed investment contract or reinvestment
agreement pursuant to which funds held in one or more accounts will be
invested at a specified rate. Any such arrangement must be acceptable to each
Rating Agency named in the related Prospectus Supplement.
MAINTENANCE OF CREDIT ENHANCEMENT
To the extent that the related Prospectus Supplement expressly provides
for credit enhancement and maintenance arrangements, the following paragraphs
shall apply.
If a form of credit enhancement has been obtained for a Series of
Securities, the related Transferor or the Servicer will be obligated to
exercise its reasonable efforts to keep or cause to be kept such form of
credit support in full force and effect throughout the term of the related
Pooling and Servicing Agreement, Indenture or Servicing Agreement, as
applicable, unless coverage thereunder has been exhausted through payment of
claims or otherwise, or substitution therefor is made as described below.
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
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related Agreement or Indenture, as applicable. All collections by the
Servicer under any Mortgage Pool Insurance Policy or any Bankruptcy Bond and,
where the related property has not been restored, any Special Hazard
Insurance Policy, are to be deposited initially in the Collection Account and
ultimately in the Certificate Account or Bond Account, as applicable, subject
to withdrawal. Unless otherwise specified in the related Prospectus
Supplement, all draws under any Financial Guaranty Insurance Policy or letter
of credit will be deposited directly in the Certificate Account or Bond
Account, as applicable.
If any property securing a defaulted Mortgage Loan is damaged and
proceeds, if any, from the related hazard insurance policy or any applicable
Special Hazard Insurance Policy are insufficient to restore the damaged
property to a condition sufficient to permit recovery under any applicable
form of credit enhancement, the Servicer is not required to expend its own
funds to restore the damaged property unless it determines (i) that such
restoration will increase the proceeds to Securityholders on liquidation of
the Mortgage Loan after reimbursement to the Servicer for its expenses and
(ii) that such expenses will be recoverable out of related Liquidation
Proceeds or Insurance Proceeds. If recovery under any applicable form of
credit enhancement is not available because the Servicer has been unable to
make the above determinations or has made such determinations incorrectly or
recovery is not available for any other reason, the Servicer is nevertheless
obligated to follow such normal practices and procedures (subject to the
preceding sentence) as it deems necessary or advisable to realize upon the
defaulted Mortgage Loan and in the event such determination has been
incorrectly made, is entitled to reimbursement of its expenses in connection
with such restoration.
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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
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proposed conveyance or proposed further encumbrance of the Mortgaged Property
and reasonably believes that it is entitled to do so under applicable law;
provided, however, that the Servicer will not take any enforcement action
that would materially increase the risk of default or delinquency on, or
materially decrease the security for, such Mortgage Loan. See "The Pooling
and Servicing Agreement -- Enforcement of Due-on-Sale Clauses" herein.
The weighted average lives of Securities will also be affected by the
amount and timing of delinquencies and defaults on the Mortgage Loans and the
liquidations of defaulted Mortgage Loans. Delinquencies and defaults will
generally slow the rate of payment of principal to the Securityholders.
However, this effect will be offset to the extent that lump sum recoveries on
defaulted Mortgage Loans and foreclosed Mortgaged Properties result in
principal payments on the Mortgage Loans that are faster than otherwise
scheduled.
When a full prepayment occurs on a Mortgage Loan, the Mortgagor will be
charged interest on the principal amount of the Mortgage Loan so prepaid only
for the number of days in the month actually elapsed up to the date of the
prepayment rather than for a full month. Interest shortfalls also could
result from the application of the Relief Act, as described under "Certain
Legal Aspects of the Mortgage Loans and Related Matters -- Soldiers' and
Sailors' Civil Relief Act" herein. Unless otherwise specified in the related
Prospectus Supplement, in the event that less than 30 days' interest is
collected on a Mortgage Loan during a Collection Period, the Servicer or any
Sub-Servicer, if applicable, will be obligated to make a Compensating
Interest Payment with respect thereto, but only to the extent of the
aggregate Servicing Fee for the related Distribution Date or Payment Date, as
applicable. To the extent such shortfalls exceed the amount of the
Compensating Interest Payment that the Servicer or any Sub-Servicer is
obligated to pay, the yield on the Securities could be adversely affected.
Partial prepayments in a given month may be applied to the outstanding
principal balances of the Mortgage Loans so prepaid on the first day of the
month of receipt or the month following receipt. In the latter case, partial
prepayments will not reduce the amount of interest passed through in such
month.
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 option of
the related Bond Issuer or another party specified in the Prospectus
Supplement relating to such Series of Bonds; or (ii) 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.
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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.
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.
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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
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not conform in a material respect to the description thereof as set forth in
the related Loan Schedule, the Trustee will be required to promptly notify
the related Transferor of any defect. Such Transferor will use reasonable
efforts to remedy a material defect in a document constituting part of a
Mortgage File within 60 days after the Trustee's notice. Thereafter, the
Trustee shall also certify that it has received all of the documents referred
to in clauses (a) through (f) and that all corrections or curative actions
required to be taken by the related Transferor within the 60-day period have
been completed or effected, or that the related Mortgage Loans will be
withdrawn or substituted, as specified below.
Withdrawal or Substitution of Mortgage Loans. Unless otherwise specified
in the related Prospectus Supplement, if, within 60 days after the Trustee's
notice of defect, the related Transferor has not remedied the defect and the
defect materially and adversely affects the interest of the
Certificateholders in the related Mortgage Loan, such Transferor will be
required to, prior to the next Distribution Date, at its option, (i)
substitute in lieu of such Mortgage Loan another Mortgage Loan of like kind
(a "Qualified Replacement Mortgage Loan") or (ii) withdraw such Mortgage Loan
from the related Mortgage Property by paying an amount equal to its Principal
Balance together with one month's interest at the Mortgage Rate, less any
payments received during the related Collection Period ("Loan Withdrawal
Amount").
If as provided above, the related Transferor, rather than withdrawing the
Mortgage Loan, removes a Mortgage Loan (a "Deleted Mortgage Loan") from the
related Trust and substitutes in its place a Qualified Replacement Mortgage
Loan, such substitution must be effected within 90 days of the date of the
initial issuance of the Certificates of a Series with respect to which no
REMIC election is made. With respect to a Trust for which a REMIC election is
to be made, except as otherwise provided in the related Prospectus
Supplement, such substitution of a defective Mortgage Loan must be effected
within two years of the date of the initial issuance of the Certificates, and
may not be made if such substitution would cause the Trust to not qualify as
a REMIC or result in a prohibited transaction tax under the Code. Except as
otherwise provided in the related Prospectus Supplement, any Qualified
Replacement Mortgage Loan generally will, on the date of substitution, (i)
have an outstanding principal balance, after deduction of all scheduled
payments due in the month of substitution, not in excess of and not
substantially less than the outstanding principal balance of the Deleted
Mortgage Loan (the amount of any shortfall to be paid by or at the direction
of the related Transferor to the related Trust in the month of substitution
for distribution to the Certificateholders as a reduction of principal), (ii)
have a Mortgage Rate neither one percentage point or more less than nor one
percentage point or more greater than the Mortgage Rate of the Deleted
Mortgage Loan as of the date of substitution, (iii) have a remaining term to
maturity neither one year or more earlier than nor one year or more later
than that of the Deleted Mortgage Loan and (iv) comply with all of the
representations and warranties set forth in the related Pooling and Servicing
Agreement as of the date of substitution. The related Pooling and Servicing
Agreement may include additional provisions relating to meeting the foregoing
requirements on an aggregate basis where a number of substitutions occur
contemporaneously.
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
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not available, an attorney's certificate of title) was in effect on the
Closing Date; (ii) that such Transferor had title to each such Mortgage Loan
and such Mortgage Loan was subject to no offsets, defenses or counterclaims;
(iii) that each Mortgage Loan constituted a valid first or junior lien on the
Mortgaged Property (subject only to permissible title insurance exceptions,
if applicable, and certain other exceptions described in the Pooling and
Servicing Agreement) and that the Mortgaged Property was free from damage and
was in acceptable condition; (iv) that there were no delinquent tax or
assessment liens against the Mortgaged Property; (v) that no required payment
on a Mortgage Loan was more than thirty days delinquent as of the related
Cut-off Date; and (vi) that each Mortgage Loan was made in compliance with,
and, subject to certain limitations, is enforceable under, all applicable
state and federal laws and regulations in all material respects. Upon the
discovery by the related Transferor or the Trustee that the representations
in the applicable Pooling and Servicing Agreement are untrue in any material
respect as of the dates specified therein, with the result that the interests
of the Certificateholders in the related Mortgage Loan are materially and
adversely affected, the party discovering such breach is required to give
prompt written notice to the other parties. Upon the earliest to occur of the
related Transferor's discovery, its receipt of notice of breach from any of
the other parties or such time as a situation resulting from a representation
which is untrue and materially and adversely affects the interests of the
Certificateholders, such Transferor is required promptly to cure such breach
in all material respects or such Transferor will (or will cause the
applicable Originator to) on the Distribution Date next succeeding such
discovery, receipt of notice or such other time, withdraw, or provide a
Qualified Replacement Mortgage Loan, as set forth above. The obligation of
the related Transferor so to cure, substitute or withdraw any Mortgage Loan
as to which breach has not been remedied constitutes the sole remedy
available to the Certificateholders or the Trustee respecting such breach.
Any agreements pursuant to which the related Transferor acquires certain
Mortgage Loans to be deposited in a Trust will contain representations and
obligations of the related Originators that are similar to those described in
the preceding paragraph. The related Transferor may enforce any obligations
of the related Originators in connection with its efforts to cure any breach
of a representation pursuant to the related Pooling and Servicing Agreement.
See "The Originators -- Representations by Originators and the Transferors"
herein.
PAYMENTS ON THE MORTGAGE LOANS
Unless otherwise specified in the related Prospectus Supplement, the
Pooling and Servicing Agreement will require the Servicer to establish and
maintain one or more accounts (each, a "Collection Account") at one or more
institutions meeting the requirements set forth in the related Pooling and
Servicing Agreement. Pursuant to the related Pooling and Servicing Agreement,
the Servicer will be required to deposit all collections (other than amounts
escrowed for taxes and insurance) related to the Mortgage Loans into the
Collection Account no later than the second business day after receipt. All
funds in the Collection Accounts will be required to be invested in
instruments designated as Permitted Investments. Any investment earnings on
funds held in the Collection Accounts are for the benefit of the Servicer.
The Servicer may make withdrawals from the Collection Account only for the
following purposes: (a) to make deposits into the Certificate Account as set
forth below; (b)
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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.
(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.
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(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
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collections on the related Mortgage Loans, including Liquidation Proceeds,
insurance proceeds and such other amounts as may be collected by the Servicer
from the Mortgagor or otherwise relating to the Mortgage Loan. To the extent
the Servicer, in its good faith business judgment, determines that any
Monthly Advance will not be ultimately recoverable from late collections,
insurance proceeds, Liquidation Proceeds on the related Mortgage Loans or
otherwise, the Servicer may reimburse itself or a Sub-Servicer, if
applicable, on the next Distribution Date from Available Funds remaining in
the Certificate Account after making required payments on such Distribution
Date.
With respect to each Mortgage Loan as to which a prepayment is received,
that becomes a Liquidated Mortgage Loan or is otherwise charged-off during
the Collection Period related to a Distribution Date, unless otherwise
specified in the related Prospectus Supplement, the Servicer will be required
with respect to such Distribution Date to remit to the Trustee, from amounts
otherwise payable to the Servicer as the Servicing Fee, an amount generally
representing the excess of interest on the principal balance of such Mortgage
Loan prior to such prepayment, liquidation or charge-off over the amount of
interest actually received on the related Mortgage Loan during the applicable
Collection Period (each such amount, a "Compensating Interest Payment"). The
Servicer will not be entitled to be reimbursed from collections on the
Mortgage Loans or any assets of the Trust for any Compensating Interest
Payments made. If the Servicing Fee in respect of such Collection Period is
insufficient to make the entire required Compensating Interest Payment, the
resulting shortfall will reduce the amount of interest payable to the
Certificateholders on such Distribution Date and such reduction will not be
recoverable thereafter.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
Unless otherwise specified in the related Prospectus Supplement, the
Servicer is required to foreclose upon or otherwise comparably effect the
ownership in the name of the Servicer, on behalf of the Trustee, of Mortgaged
Properties relating to defaulted Mortgage Loans as to which no satisfactory
arrangements can be made for collection of delinquent payments and which the
related Transferor or the Servicer has not reacquired pursuant to the option
described below, unless the Servicer reasonably believes that Liquidation
Proceeds with respect to such Mortgage Loan would not be increased as a
result of such foreclosure or other action, in which case the Mortgage Loan
will be charged off and will be liquidated (a "Liquidated Mortgage Loan"). In
connection with such foreclosure or other conversion, the Servicer is
required to exercise or use foreclosure procedures with the same degree of
care and skill as it would ordinarily exercise or use under the 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,
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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.
GENERAL SERVICING PROCEDURES
The Servicer will service the Mortgage Loans, either directly or through
Sub-Servicers, in accordance with the provisions of each related Pooling and
Servicing Agreement and the policies and procedures customarily employed by
the Servicer in servicing other comparable mortgage loans. Servicing
includes, but is not limited to, post-origination loan processing, customer
service, remittance handling, collections and liquidations.
The Servicer, in its own name or in the name of any Sub-Servicer, will be
authorized and empowered pursuant to the related Pooling and Servicing
Agreement (i) to execute and deliver any and all instruments of satisfaction
or cancellation or of partial or full release or discharge and all other
comparable instruments with respect to the Mortgage Loans and with respect to
the Mortgaged Properties, (ii) to institute foreclosure proceedings or obtain
a deed in lieu of foreclosure so as to effect ownership of any Mortgaged
Property in its own name on behalf of the Trustee and (iii) to hold title in
its own name to any Mortgaged Property upon such foreclosure or deed in lieu
of foreclosure on behalf of the Trustee.
During a foreclosure, any expenses incurred by the Servicer are added to
the amount owed by the Mortgagor, as permitted by applicable law. Upon
completion of the foreclosure, the property is sold to an outside bidder, or
passes to the mortgagee, in which case the Servicer will proceed to liquidate
the asset. Servicing and charge-off policies and collection practices may
change over time in accordance with the Servicer's business judgment, changes
in its real estate loan portfolio and applicable laws and regulations.
SUB-SERVICERS
The Servicer will be permitted under the related Pooling and Servicing
Agreement to enter into sub-servicing arrangements with certain mortgage
servicing institutions meeting the requirements of such Pooling and Servicing
Agreement (each, a "Sub-Servicer") to service the Mortgage Loans in a
Mortgage Pool. Any such sub-servicing arrangements will not relieve the
Servicer of any liability associated with servicing the Mortgage Loans.
Compensation for the services of the Sub-Servicer with respect to the
Mortgage Loans will be paid by the Servicer. See "--Servicing and Other
Compensation and Payment of Expenses" below.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
Unless otherwise specified in the related Prospectus Supplement, as
compensation for its servicing activities under a Pooling and Servicing
Agreement, the Servicer will be entitled
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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 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
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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 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"
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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.
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Unless otherwise specified in the related Prospectus Supplement, no
Certificateholder, solely by virtue of its status as a Certificateholder,
will have any right under the related Pooling and Servicing Agreement to
institute any action, suit or proceeding with respect to the related Pooling
and Servicing Agreement unless such Certificateholder previously has given to
the Trustee written notice of default and unless Certificateholders
evidencing Voting Interests represented by all Certificates aggregating not
less than 51% have made written request upon the Trustee to institute such
action, suit or proceeding in its own name as Trustee thereunder and have
offered to the Trustee reasonable indemnity for costs, expenses and
liabilities to be incurred, and the Trustee for 60 days has neglected or
refused to institute any such action, suit or proceeding. However, the
Trustee will be under no obligation to exercise any of the rights or powers
vested in it by the related Pooling and Servicing Agreement or to institute,
conduct or defend any litigation thereunder or in relation thereto at the
request, order or direction of any of the Certificateholders, unless such
Certificateholders have offered to the Trustee reasonable security or
indemnity against the costs, expenses and liabilities which may be incurred
therein or thereby.
TERMINATION; OPTIONAL TERMINATION
Unless otherwise specified in the related Pooling and Servicing Agreement,
the obligations created by each Pooling and Servicing Agreement for each
Series of Certificates will terminate upon the payment to the related
Certificateholders of all amounts held in any Accounts or by the Servicer,
and required to be paid to them pursuant to such Pooling and Servicing
Agreement following the later of (i) the final payment or other liquidation
of the last of the Mortgage Loans subject thereto or the disposition of all
property acquired upon foreclosure or deed in lieu of foreclosure of any such
Mortgage Loans remaining in the Trust and (ii) the acquiring by the related
Transferor, the Servicer or other entity specified in the related Prospectus
Supplement including, if REMIC treatment has been elected, the holder of the
residual interest in the REMIC (see "Certain Federal Income Tax Consequences"
below), from the related Trust of all of the remaining Mortgage Loans and all
property acquired in respect of such Mortgage Loans. Unless otherwise
specified in the related Prospectus Supplement, any such acquisition of
Mortgage Loans and property acquired in respect of Mortgage Loans evidenced
by a Series of Certificates will be made at the option of the related
Transferor, the Servicer or other entity at a price, and in accordance with
the procedures, specified in the Prospectus Supplement. The exercise of such
right will effect early retirement of the Certificates of that Series, but
the right of the related Transferor, the Servicer or other entity to so
acquire is subject to the principal balance of the related Mortgage Loans
being less than the percentage specified in the related Prospectus Supplement
of the aggregate principal balance of such Mortgage Loans at the Cut-off Date
for the Series. The foregoing is subject to the provisions that if a REMIC
election is made with respect to a Trust, any reacquisition pursuant to
clause (ii) above will be made only in connection with a "qualified
liquidation" of the REMIC within the meaning of Section 860F(g)(4) of the
Code.
EVIDENCE AS TO COMPLIANCE
Unless otherwise specified in the related Prospectus Supplement, each
Pooling and Servicing Agreement will provide that on or before a specified
date in each year, a firm of independent public accountants will furnish a
statement to the Trustee to the effect that on the basis of certain
procedures substantially in conformance with the Uniform Single Audit
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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.
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.
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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.
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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 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
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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 or (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.
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.
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
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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.
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ANNUAL COMPLIANCE STATEMENT
The related Bond Issuer will be required to file annually with the Trustee
a written statement as to the fulfillment of its obligations under the
Indenture.
TRUSTEE'S ANNUAL REPORT
The Trustee will be required to mail each year to all Bondholders a brief
report relating to its eligibility and qualifications to continue as the
Trustee under the Indenture, any amounts advanced by it under the Indenture,
the amount, interest rate and maturity date of certain indebtedness owing by
the related Bond Issuer to it in the Trustee's individual capacity, the
property and funds physically held by the Trustee as such, any release, or
release and substitution, of property subject to the lien of the Indenture
that has not been previously reported, any additional Series of Bonds not
previously reported and any action taken by it which materially affects the
Bonds and which has not been previously reported.
SATISFACTION AND DISCHARGE OF INDENTURE
The Indenture will be discharged with respect to the assets securing the
Bonds of a Series upon the delivery to the Trustee for cancellation of all of
the Bonds of such Series or, with certain limitations, upon deposit with the
Trustee of funds sufficient for the payment in full of all of the Bonds of
such Series.
REDEMPTION OF BONDS
To the extent provided in the related Prospectus Supplement, the Bonds of
any Series may be (i) redeemed at the option of the related Bond Issuer or
another party specified in the related Prospectus Supplement; or (ii) 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.
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CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS AND
RELATED MATTERS
The following discussion contains summaries, which are general in nature,
of material legal matters relating to the Mortgage Loans. Because such legal
aspects are governed primarily by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete or to encompass
the laws of all states in which Mortgaged Properties are situated. The
summaries are qualified in their entirety by reference to the appropriate
laws of the states in which Mortgage Loans may be originated.
NATURE OF THE MORTGAGE LOANS
The Mortgage Loans will be secured by mortgages, deeds of trust, security
deeds or deeds to secure debt, depending upon the prevailing practice in the
state in which the Mortgaged Property is located. In California, for example,
Mortgage Loans are secured by deeds of trust. In other states, a mortgage
creates a lien upon the real property encumbered by the mortgage, which lien
is generally not prior to the lien for real estate taxes and assessments and
other charges under governmental police powers. Priority between mortgages
depends on their terms and generally on the order of recording in the
appropriate state or county office. There are two parties to a mortgage: the
mortgagor, who is the borrower and owner of the mortgaged property, and the
mortgagee, who is the lender. The mortgagor delivers to the mortgagee a note
or bond and the mortgage. Although a deed of trust is similar to a mortgage,
a deed of trust has three parties: the borrower property owner called the
trustor (similar to a mortgagor), the lender (similar to a mortgagee) called
the beneficiary, and a third-party grantee called the trustee. Under a deed
of trust, the borrower grants the property, irrevocably until the debt is
paid, in trust, generally with a power of sale, to the trustee to secure
payment of the borrower's obligation to the lender. A security deed and a
deed to secure debt are special types of deeds that indicate on their face
that they are granted to secure an underlying debt. By executing a security
deed or deed to secure debt, the grantor conveys title to, as opposed to
merely creating a lien upon, the subject property to the grantee until such
time as the underlying debt is repaid. The mortgagee's authority under a
mortgage, the trustee's authority under a deed of trust and the grantee's
authority under a security deed or deed to secure debt are governed by law
and, with respect to some deeds of trust, the directions of the beneficiary.
Certain of the Mortgage Loans may be loans secured by condominium units.
The condominium building may be a multi-unit building or buildings, or a
group of buildings whether or not attached to each other, located on property
subject to condominium ownership. Condominium ownership is a form of
ownership of a real property wherein each owner is entitled to the exclusive
ownership and possession of his or her individual condominium unit and also
owns a proportionate undivided interest in all parts of the condominium
building (other than the individual condominium units) and all areas or
facilities, if any, for the common use of the condominium units. The
condominium unit owners appoint or elect the condominium association to
govern the affairs of the condominium.
FORECLOSURE/REPOSSESSION
Foreclosure of a deed of trust is generally accomplished by a non-judicial
sale under a specific provision in the deed of trust which authorizes the
trustee to sell the property at
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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 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
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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 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
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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
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impose substantive requirements upon mortgage lenders in connection with the
origination, servicing and enforcement of such loans. These laws include the
federal Truth in Lending Act, Real Estate Settlement Procedures Act, Equal
Credit Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act
and related statutes and regulations. These federal and state laws impose
specific statutory liabilities upon lenders who fail to comply with the
provisions of the law. In some cases, this liability may affect assignees of
the loans.
It is possible that some of the Mortgage Loans will be subject to the
Riegle Community Development and Regulatory Improvement Act of 1994 (the
"Riegle Act") which incorporates the Home Ownership and Equity Protection Act
of 1994. The Riegle Act adds certain additional provisions to Regulation Z,
the implementing regulation of the Truth-in-Lending Act. These provisions
impose additional disclosure and other requirements on creditors with respect
to nonpurchase money mortgage loans with high interest rates or high up-front
fees and charges. In general, mortgage loans within the purview of the Riegle
Act have annual percentage rates over 10% greater than the yield on Treasury
Securities of comparable maturity and/or fees and points which exceed the
greater of 8% of the total loan amount or $400. The provisions of the Riegle
Act apply on a mandatory basis to all mortgage loans originated on or after
October 1, 1995. The provisions can impose specific statutory liabilities
upon creditors who fail to comply with their provisions and may affect the
enforceability of the related loans. In addition, any assignee of the
creditor would generally be subject to all claims and defenses that the
consumer could assert against the creditor, including, without limitation,
the right to rescind the mortgage loan.
ENFORCEABILITY OF DUE-ON-SALE CLAUSES
Unless otherwise provided in the related Prospectus Supplement, each
Mortgage Loan will contain a due-on-sale clause which will generally provide
that if the Mortgagor sells, or voluntarily transfers or conveys the
Mortgaged Property, the Mortgage Loan may be accelerated by the mortgagee.
The Garn-St. Germain Depository Institutions Act of 1982 (the "Garn-St.
Germain Act"), subject to certain exceptions, preempts state constitutional,
statutory and case law prohibiting the enforcement of due-on-sale clauses. As
to loans secured by an owner-occupied residence, the Garn-St. Germain Act
sets forth nine specific instances in which a mortgagee covered by such Act
may not exercise its rights under a due-on-sale clause, notwithstanding the
fact that a transfer of the property may have occurred. The inability to
enforce a due-on-sale clause may result in transfer of the related Mortgaged
Property to an uncreditworthy person, which could increase the likelihood of
default.
PREPAYMENT CHARGES
Under certain state laws, prepayment charges may not be imposed at all or
after a certain period of time following origination of the mortgage loans
with respect to prepayments on mortgage loans secured by liens encumbering
owner-occupied residential properties. Because many of the Mortgaged
Properties will be owner-occupied, it is anticipated that prepayment charges
may not be imposed with respect to many of the 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
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certain types of residential first mortgage loans originated by certain
lenders after March 31, 1980. The Office of Thrift Supervision, as successor
to the Federal Home Loan Bank Board, is authorized to issue rules and
regulations and to publish interpretations governing implementation of Title
V. The statute authorized the states to reimpose interest rate limits by
adopting, before April 1, 1983, a law or constitutional provision which
expressly rejects an application of the federal law. In addition, even where
Title V is not so rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on mortgage loans covered
by Title V. Certain states have taken action to reimpose interest rate limits
and/or to limit discount points or other charges.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
Generally, under the terms of the Relief Act, a Mortgagor who enters
military service after the origination of the related Mortgage Loan
(including a Mortgagor who is a member of the National Guard or is in reserve
status at the time of the origination of the Mortgage Loan and is later
called to active duty) may not be charged interest above an annual rate of 6%
during the period of such borrower's active duty status, unless a court
orders otherwise upon application of the lender. It is possible that such
interest rate limitation could have an effect, for an indeterminate period of
time, on the ability of the Servicer to collect full amounts of interest on
certain of the Mortgage Loans. Unless otherwise provided in the applicable
Prospectus Supplement, any shortfall in interest collections resulting from
the application of the Relief Act could result in losses to Securityholders.
In addition, the Relief Act imposes limitations which would impair the
ability of the Servicer to foreclose on an affected Mortgage Loan during the
Mortgagor's period of active duty status. Thus, in the event that such a
Mortgage Loan goes into default, there may be delays and losses occasioned by
the inability to realize upon the Mortgaged Property in a timely fashion.
ENVIRONMENTAL CONSIDERATIONS
Real property pledged as security to a lender may be subject to unforeseen
environmental risks. Under the laws of certain states, contamination of a
property may give rise to a lien on the property to assure the payment of the
costs of clean-up. In several states such a lien has priority over the lien
of an existing mortgage against such property. In addition, under the federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA"), the United States Environmental Protection Agency (the "EPA") may
impose a lien on property where the EPA has incurred cleanup costs. However,
a CERCLA lien is subordinate to pre-existing, perfected security interests.
Under the laws of some states, and under CERCLA, it is conceivable that a
lender may be held liable, as an "owner" or "operator," for costs of
addressing releases or threatened releases of hazardous substances at a
Mortgaged Property, regardless of whether or not the environmental damage or
threat was caused by a prior owner or operator. CERCLA imposes liability on
any and all "responsible parties" (which term includes, among others, the
property owner and operator) for the cost of clean-up of releases of
hazardous substances. However, CERCLA excludes from the definition of "owner
or operator" secured creditors who hold indicia of ownership for the purpose
of protecting their security interest, but "without participating in the
management of the facility."
Court decisions, such as United States v. Fleet Factors, 901 F.2d 1550
(11th Cir. 1990), cert. denied, 498 US 1049 (1991) (CERCLA liability may be
imposed on a secured lender if
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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.
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 Stroock & Stroock & Lavan LLP, counsel
to the Transferors ("Federal Tax Counsel"). This summary is based on laws,
regulations, including the real estate mortgage investment conduit ("REMIC")
regulations promulgated by the Treasury Department (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
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federal income tax purposes the Trust relating to a particular Series of
Certificates is classified as a partnership or is disregarded as an entity
separate from its owner. 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. Certificates characterized as debt for federal income
tax purposes and Regular Certificates will be referred to hereinafter
collectively as "Debt Certificates."
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 (the "OID Regulations"). A
Certificateholder should be aware, however, that the OID Regulations do not
adequately address certain issues relevant to prepayable securities, such as
the Debt Certificates.
In general, OID, if any, will equal the excess of the stated redemption
price at maturity of a Debt Certificate over its issue price. A holder of a
Debt Certificate must include such OID in gross income as ordinary interest
income as it accrues under a prescribed method which takes into account an
economic accrual of the discount. In general, OID must be included in income
in advance of the receipt of the cash representing that income. The amount of
OID on a Debt Certificate will be considered to be zero if it is less than a
de minimis amount as determined under the Code.
The issue price of a Debt Certificate is the first price at which a
substantial amount of Debt Certificates of that class are sold to the public
(excluding bond houses, brokers, underwriters or wholesalers). If less than a
substantial amount of a particular class of Debt Certificates is sold for
cash on or prior to the Closing Date, the issue price for such class will be
treated as the fair market value of such class on the Closing Date. The
stated redemption price at maturity of a Debt Certificate includes the
original principal amount of the Debt Certificate, but generally will not
include distributions of interest if such distributions constitute "qualified
stated interest."
Under the OID Regulations, interest payments will not be qualified stated
interest unless the interest payments are "unconditionally payable." The OID
Regulations state that interest is unconditionally payable if reasonable
legal remedies exist to compel timely payment or the debt instrument
otherwise provides terms and conditions that make the likelihood of late
payment of interest (other than late payment that occurs within a reasonable
grace period) or nonpayment of interest a remote contingency. It is unclear
whether the terms and conditions of the debt instruments underlying the Debt
Certificates
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or the Debt Certificates themselves are determinative of whether the
likelihood of late payment or non-payment is a remote contingency.
Accordingly, Federal Tax Counsel is unable to opine whether the interest with
respect to a Debt Certificate is qualified stated interest and, consequently,
whether a Debt Certificate has OID as a result of the failure of such
interest to be treated as qualified stated interest.
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 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.
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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 Internal Revenue Service
("IRS") and to holders of
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interest-only Debt Certificates based on the assumption that the stated
redemption price at maturity is equal to the sum of all payments determined
under the applicable prepayment assumption. As a result, such interest-only
Debt Certificates will be treated as having original issue discount.
Variable Rate Debt Certificates. Under the OID Regulations, Debt
Certificates paying interest at a variable rate (a "Variable Rate Debt
Certificate") are subject to special rules. A Variable Rate Debt Certificate
will qualify as a "variable rate debt instrument" if (i) its issue price does
not exceed the total noncontingent principal payments due under the Variable
Rate Debt Certificate by more than a specified de minimis amount, (ii) it
provides for stated interest, paid or compounded at least annually, at (a)
one or more qualified floating rates, (b) a single fixed rate and one or more
qualified floating rates, (c) a single objective rate or (d) a single fixed
rate and a single objective rate that is a qualified inverse floating rate,
(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) and (iv) it does not provide for any
principal payments that are contingent, as defined in the OID Regulations,
except as provided in (i).
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 0.65 but not more than 1.35 or (ii) the product of a qualified floating
rate and a fixed multiple that is greater than 0.65 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
objective financial or economic information. The OID Regulations also provide
that other variable rates may be treated as objective rates if so designated
by the IRS in the future. An interest rate based on the weighted average of
the interest rates on some or all of the qualified mortgages held by a REMIC
should constitute an objective rate. 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
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term. Further, an objective rate does not include a rate that is based on
information that is within the control of or unique to the circumstances of
the issuer or a party related to the issuer. 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 qualified
floating rate. 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, (ii) by assuming that the
variable rate on the Single Variable Debt Certificate is a fixed rate equal
to: (a) in the case of a Single Variable Rate Debt Certificate with a
qualified floating rate or a qualified inverse floating rate, the value of,
as of the issue date, the qualified floating rate or the qualified inverse
floating rate or (b) in the case of a Single Variable Rate Debt Certificate
with an objective rate (other than a qualified inverse floating rate), a
fixed rate which reflects the reasonably expected yield for such Single
Variable Debt Certificate; and (iii) the qualified stated interest allocable
to an accrual period is increased (or decreased) if the interest actually
paid during an accrual period exceeds (or is less than) the interest assumed
to be paid under the assumed fixed rate described in (ii) above.
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
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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.
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.
The IRS has issued final regulations (the "Contingent Regulations")
governing the calculation of OID on instruments having contingent interest
payments. The Contingent Regulations specifically do not apply however to
debt instruments to which Code Section 1272(a)(6) is applicable, such as a
Pay-Through Certificate. Additionally, the OID Regulations do not contain
provisions specifically interpreting Code Section 1272(a)(6). Until the
Treasury issues guidelines to the contrary, the Trustee intends to base its
computation of OID on Pay-Through Certificates as described in this
Prospectus. However, because no regulatory guidance exists under Code Section
1272(a)(6), there can be no assurance that such methodology represents the
correct manner of calculating OID.
Market Discount. A purchaser of a Certificate may be subject to the market
discount rules of Sections 1276-1278 of the Code. A holder that acquires a
Debt Certificate with more than a prescribed de minimis amount of "market
discount" (generally, the excess of the principal amount of the Debt
Certificate over the purchaser's purchase price) will be required to include
accrued market discount in income as ordinary income in each month, but
limited to an amount not exceeding the principal payments on the Debt
Certificate received in that month and, if the Certificates are sold, the
gain realized. Such market discount would accrue in a manner to be provided
in Treasury Department regulations but, until such regulations are issued,
such market discount would in general accrue either (i) on the basis of a
constant yield (in the case of a Pay-Through Certificate, taking into account
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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.
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The IRS has issued regulations (the "Amortizable Bond Premium
Regulations") dealing with amortizable bond premium. These regulations
specifically do not apply to prepayable debt instruments subject to Code
Section 1272(a)(6) such as the Pay-Through Certificates. Absent further
guidance from the IRS, the Trustee intends to account for amortizable bond
premium in the manner described above. Prospective purchasers of the
Certificates should consult their tax advisors regarding the possible
application of the Amortizable Bond Premium Regulations.
Election to Treat All Interest as Original Issue Discount. The OID
Regulations permit a holder of a Debt Certificate to elect to accrue all
interest, discount (including de minimis market or OID) and premium in income
as interest, based on a constant yield method for Debt Certificates acquired
on or after April 4, 1994. If such an election were to be made with respect
to a Debt Certificate with market discount, the holder of the Debt
Certificate would be deemed to have made an election to include in income
currently market discount with respect to all other debt instruments having
market discount that such holder of the Debt Certificate acquires during the
year of the election or thereafter. Similarly, a holder of a Debt Certificate
that makes this election for a Debt Certificate that is acquired at a premium
will be deemed to have made an election to amortize bond premium with respect
to all debt instruments having amortizable bond premium that such holder owns
or acquires. The election to accrue interest, discount and premium on a
constant yield method with respect to a Debt Certificate is irrevocable
except with the approval of the IRS.
Sale or Exchange. A holder's adjusted tax basis in its Debt Certificate is
the price such holder pays for a Debt Certificate, plus amounts of OID or
market discount included in income and reduced by any payments received
(other than qualified stated interest payments) and any amortized premium.
Except as described in "--Interest and Acquisition Discount" and "--Market
Discount," gain or loss recognized on a sale, exchange, or redemption of a
Debt Certificate, measured by the difference between the amount realized and
the Debt Certificate's basis as so adjusted, will generally be capital gain
or loss, assuming that the Debt Certificate is held as a capital asset. In
the case of a Debt Certificate held by a bank, thrift or similar institution
described in Section 582 of the Code, however, gain or loss realized on the
sale or exchange of a Debt Certificate will be taxable as ordinary income or
loss. Gain from the disposition of a Debt Certificate that might otherwise be
capital gain will be treated as ordinary income (i) if a Debt Certificate is
held as part of a "conversion transaction" as defined in Code Section
1258(c), up to the amount of interest that would have accrued on the Debt
Certificateholder's net investment in the conversion transaction at 120% of
the appropriate applicable federal rate under Code Section 1274(d) in effect
at the time the taxpayer entered into the transaction minus any amount
previously treated as ordinary income with respect to any prior disposition
of property that was held as part of such transaction, (ii) in the case of a
non-corporate taxpayer, to the extent such taxpayer has made an election
under Code Section 163(d)(4) to have net capital gains taxed as investment
income at ordinary income rates, or (iii) in the case of a Regular
Certificate to the extent that such gain does not exceed the excess, if any,
of (a) the amount that would have been 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
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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 Federal Tax Counsel, 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. 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 both
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 each 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 Federal Tax Counsel is
unable to opine whether the Mortgage Loans will be qualifying assets. The
REMIC Regulations treat credit enhancements as part of the mortgage or pool
of mortgages to which they relate, and therefore credit enhancements
generally should be qualifying assets. Regulations issued in conjunction with
the REMIC Regulations provide that amounts paid on 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
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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. For taxable
years beginning after December 31, 1997, in the case of a partnership that
has 100 or more partners and elects to be treated as an "electing large
partnership," 70 percent of such partnership's miscellaneous itemized
deductions will be disallowed, although the remaining deductions will
generally be allowed at the partnership level and will not be subject to the
2 percent floor that would otherwise be applicable to individual partners.
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
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stated interest and any original issue discount or market discount on loans
and other assets, and (ii) deductions, including stated interest and original
issue discount accrued on Regular Interest Certificates, amortization of any
premium with respect to Mortgage Loans, and servicing fees and other expenses
of the REMIC. A holder of a Residual Interest Certificate that is an
individual or a "pass-through interest holder" (including certain
pass-through entities, but not including real estate investment trusts) will
be unable to deduct servicing fees payable on the Mortgage Loans or other
administrative expenses of the REMIC for a given taxable year, to the extent
that such expenses, when aggregated with such holder's other miscellaneous
itemized deductions for that year, do not exceed 2% of such holder's adjusted
gross income and such holder may not be able to deduct such fees and expenses
to any extent in computing such holder's alternative minimum tax liability.
For taxable years beginning after December 31, 1997, in the case of a
partnership that has 100 or more partners and elects to be treated as an
"electing large partnership," 70 percent of such partnership's miscellaneous
itemized deductions will be disallowed, although the remaining deductions
will generally be allowed at the partnership level and will not be subject to
the 2 percent floor that would otherwise be applicable to individual
partners.
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
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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.
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. 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.
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
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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 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
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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 of a holder of a Residual Certificate is determined without regard to
the special rule that 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 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. For taxable years
beginning after December 31, 1997, all partners of certain electing
partnerships having 100 or more
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partners ("electing large partnerships") will be treated as disqualified
organizations for purposes of the tax imposed on pass-through entities if
such electing large partnerships hold residual interests in a REMIC. However,
the electing large partnership would be entitled to exclude the excess
inclusion income from gross income for purposes of determining the taxable
income of the partners.
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. Treasury regulations provide that any REMIC Residual
Interest acquired after January 3, 1995 is not a security and cannot be
marked to market under Section 475.
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 Federal Tax Counsel 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
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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 Trust assets 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 Trust assets and received or accrued directly its share
of the payments on the Trust assets 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 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. 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 both
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 Federal Tax Counsel 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.
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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 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 Pass-Through Certificate 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 the Pass-Through
Certificates.
Section 1272(a)(6) of the Code provides for use of a prepayment assumption
in determining OID for any pool of debt instruments the yield on which may be
affected by reason of prepayments. Therefore, if there is OID, 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. If required to report
interest income on the Pass-Through Certificates to the IRS under the
stripped bond rules, it is anticipated that the Trustee will calculate the
yield of the Pass-Through Certificates based on a representative initial
offering price of the Pass-Through Certificates and a reasonable assumed rate
of prepayment of the Mortgage Loans (although such yield may differ from the
yield to any particular holder that would be used in calculating the interest
income of such holder). The Prospectus Supplement for each series of
Pass-Through Certificates will describe the prepayment assumption that will
be used for this purpose, but no representation is made that the Mortgage
Loans will prepay at that rate or at any other rate.
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.
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
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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 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 Federal Tax Counsel 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. Federal Tax Counsel
will deliver its opinion that a Trust which is intended to be a partnership
for federal income tax purposes
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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 addition, 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, or if there is a single Certificateholder for federal
income tax purposes to disregard the Trust as an entity separate from the
single Certificateholder. However, the proper characterization of the
arrangement involving the Certificates and the Servicer is not clear because
there is no authority on transactions closely comparable to that contemplated
herein.
A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the Trust. Generally, provided such
Certificates are issued at or close to face value, 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.
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, that a
Series of Certificates includes a single Class of Certificates and that there
are multiple Certificateholders for federal income tax purposes. 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.
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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.
If Bonds are also issued, all of the taxable income allocated to a
Certificateholder that is a pension, profit sharing or employee benefit plan
or other tax-exempt entity (including an individual retirement account) will
constitute "unrelated business taxable income" generally taxable to a
Certificateholder under the Code.
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 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
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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 and liabilities to a new partnership in exchange for
interests in that 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.
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The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or
losses of the Trust might be reallocated among the Certificateholders. The
Trust's method of allocation between transferors and transferees may be
revised to conform to a method permitted by future regulations.
Section 754 Election. In the event that a Certificateholder sells its
Certificates at a profit (loss), the purchasing Certificateholder will have a
higher (lower) basis in the Certificates than the selling Certificateholder
had. The tax basis of the Trust's assets would not be adjusted to reflect
that higher (or lower) basis unless the Trust were to file an election under
Section 754 of the Code. In order to avoid the administrative complexities
that would be involved in keeping accurate accounting records, as well as
potentially onerous information reporting requirements, the Trust currently
does not intend to make such election. As a result, Certificateholders might
be allocated a greater or lesser amount of Trust income than would be
appropriate based on their own purchase price for Certificates.
Administrative Matters. The Trustee is required to keep or have kept
complete and accurate books of the Trust. Such books will be maintained for
financial reporting and tax purposes on an accrual basis and the fiscal year
of the Trust will be the calendar year. The Trustee will file a partnership
information return (IRS Form 1065) with the IRS for each taxable year of the
Trust and will report each Certificateholder's allocable share of items of
Trust income and expense to Certificateholders and the IRS on Schedule K-1.
The Trust will provide the Schedule K-I information to nominees that fail to
provide the Trust with the information statement described below and such
nominees will be required to forward such information to the beneficial
owners of the Certificates. Generally, holders must file tax returns that are
consistent with the information return filed by the Trust or be subject to
penalties unless the holder notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust
with a statement containing certain information on the nominee, the
beneficial owners and the Certificates so held. Such information includes (i)
the name, address and taxpayer identification number of the nominee and (ii)
as to each beneficial owner (x) the name, address and identification number
of such person, (y) whether such person is a United States person, a
tax-exempt entity or a foreign government, an international organization, or
any wholly owned agency or instrumentality of either of the foregoing, and
(z) certain information on Certificates that were held, bought or sold on
behalf of such person throughout the year. In addition, brokers and financial
institutions that hold Certificates through a nominee are required to furnish
directly to the Trust information as to themselves and their ownership of
Certificates. A clearing agency registered under Section 17A of the Exchange
Act is not required to furnish any such information statement to the Trust.
The information referred to above for any calendar year must be furnished to
the Trust on or before the following January 31. Nominees, brokers and
financial institutions that fail to provide the Trust with the information
described above may be subject to penalties.
The related Transferor will be designated as the tax matters partner in
the related Pooling and Servicing Agreement and, as such, will be responsible
for representing the Certificateholders in any dispute with the IRS. The Code
provides for administrative examination of a partnership as if the
partnership were a separate and distinct taxpayer. Generally, the statute of
limitations for partnership items does not expire before three years
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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
Foreign Investors (as defined below) because there 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 pursuant to Section 1446 of the Code on the portion of its taxable
income that is allocable to Certificateholders that are Foreign Investors, as
if such income were effectively connected to a U.S. trade or business, at a
rate of 35% for Foreign Investors that are taxable as corporations and 39.6%
for all other Foreign Investors. Subsequent adoption of Treasury Department
regulations or the issuance of other administrative pronouncements may
require the Trust to change its withholding procedures.
Each Certificateholder that is a Foreign Investor 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.
A Foreign Investor 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 Investor 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 Investor
would be entitled to claim a refund only 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, Federal Tax Counsel 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.
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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. Federal Tax Counsel 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, Federal Tax Counsel 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, Federal Tax
Counsel will opine that the Certificates will properly be characterized for
federal income tax purposes as indebtedness. Contrary characterizations that
could be asserted by the IRS are described under "--Possible Characterization
of the Transaction as a Partnership or as an Association Taxable as a
Corporation" below. In this regard, it should be noted that the IRS has
recently issued a notice stating that, upon examination, it will scrutinize
instruments treated as debt for federal income tax purposes but as equity for
regulatory, rating agency or financial accounting purposes to determine if
their purported status as debt for federal income tax purposes is
appropriate.
Certificateholders as the holders of debt instruments for federal tax
purposes will be taxed in the manner described above in "--Taxation of Debt
Certificates (Including Regular Certificates)" for Debt Certificates that are
not Regular Certificates.
Possible Characterization of the Transaction as a Partnership or as
Association Taxable as a Corporation. As stated above, the opinion of Federal
Tax Counsel 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
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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 Federal Tax Counsel 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.
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.
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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, Federal Tax Counsel, counsel to the Transferors, will deliver
their opinion that the Bonds will be treated for federal income tax purposes
as indebtedness, and the related Bond Issuer will not be 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
that are not Regular 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 (other than original issue discount, if any) is
not required to be reported under the accrual method unless the Bondholder
otherwise uses the accrual method.
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
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.
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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 above with respect to Trusts that are treated as
partnerships 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" 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 any
holder who for United States federal income tax purposes is not a "United
States holder." 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 a Foreign Investor are not subject to withholding if
they are effectively connected with a United States business conducted by the
holder and the holder timely provides 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 Investors
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,
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for example, require withholding prior to the distribution of cash in the
case of Residual Certificates that do not have significant value. Under the
REMIC Regulations, if a Residual Interest Certificate has tax avoidance
potential, a transfer of a Residual Interest Certificate to a Foreign
Investor will be disregarded for all federal tax purposes. A Residual
Interest Certificate has tax avoidance potential unless, at the time of the
transfer, the transferor reasonably expects that the REMIC will distribute to
the transferee residual interest holder amounts that will equal at least 30%
of each excess inclusion, and that such amounts will be distributed at or
after the time at which the excess inclusions accrue and not later than the
calendar year following the calendar year of accrual. If a Foreign Investor
transfers a Residual Interest Certificate to a United States holder, 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. The New Withholding Regulations will generally be
effective for payments made after December 31, 2000, subject to certain
transition rules. Foreign Investors are strongly urged to consult their own
tax advisors with respect to the New Withholding Regulations.
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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.
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
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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.
Under Title I of ERISA and Section 4975 of the Code, the 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
may be considered to be or may 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
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reductions in pass-through payments due to defaults in loan payments or
property damage in an amount at least equal to the greater of 1% of the
aggregate principal balance of the Mortgage Loans, or 1% of the principal
balance of the largest covered pooled Mortgage Loan, (ii) the Trustee may not
be an affiliate of the related Transferor; and (iii) the payments made to and
retained by the related Transferor in connection with the Trust, together
with all funds inuring to its benefit for administering the Trust, represent
no more than "adequate consideration" for assigning the Mortgage Loans, plus
reasonable compensation for services provided to the Trust.
In addition, PTCE 83-1 exempts the initial sale of Certificates to a Plan
with respect to which the related Transferor, the Servicer, the Trustee or
the Securities Insurer, if any, is a party in interest if the Plan does not
pay more than fair market value for such Certificates and the rights and
interests evidenced by such Certificates are not subordinated to the rights
and interests evidenced by other Certificates of the same pool. 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 in reliance on PTCE 83-1, 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, 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 that are Bonds, depending in
part upon the type
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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.
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
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underlying the analysis and resulting calculations are reasonable. Reliance
on analyses and documentation from a securities dealer or other outside party
without internal analyses by the institution is unacceptable.
A "high-risk mortgage security" is not suitable as an investment portfolio
holding for a depository institution. A high-risk mortgage security must be
reported in the trading account at market value or as an asset held for sale
at the lower of cost or market value and generally may only be acquired to
reduce an institution's interest rate risk. However, an institution with
strong capital and earnings and adequate liquidity that has a closely
supervised trading department is not precluded from acquiring high-risk
mortgage securities for trading purposes.
The Policy Statement and any applicable modifications or supplements
thereto should be reviewed prior to the purchase of any Securities by a
depository institution. The summary of the Policy Statement contained herein
does not purport to be complete and should not be relied upon for purposes of
making any regulatory determinations. In addition, any regulator may adopt
modifications or supplements to the Policy Statement or additional
restrictions on the purchase of mortgage-backed or other securities.
Investors are urged to consult their own legal advisors prior to making any
determinations with respect to the Policy Statement or other regulatory
requirements.
GENERAL
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Securities, to purchase
Securities representing more than a specified percentage of the investor's
assets, or to purchase certain types of Certificates, such as residual
interests or stripped mortgage-backed securities. Investors should consult
their own legal advisors in determining whether and to what extent the
Securities of a given Series constitute legal investments for such investors
and comply with any other applicable requirements.
METHOD OF DISTRIBUTION
The Securities offered hereby and by the Prospectus Supplement will be
offered in Series, either directly by the related Transferor or through one
or more underwriters or underwriting syndicates ("Underwriters"). The
Prospectus Supplement for each Series will set forth the terms of the
offering of the Securities of such Series, including the name or names of the
Underwriters, the proceeds to the related Transferor (in the case of a Series
of Certificates) or to the related Bond Issuer (in the case of a Series of
Bonds), and either the initial public offering price, the discounts and
commissions to the Underwriters and any discounts or concessions 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
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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 Stroock & Stroock & Lavan LLP, New York, New
York.
FINANCIAL INFORMATION
The Transferors have determined that their financial statements are not
material to the offering made hereby.
A new Trust will be formed to hold the Mortgage Loans in connection with
each Series of Certificates. Each such Trust will have no assets or
obligations prior to the issuance of the Certificates and will not engage in
any activities other than those described herein. Accordingly, no financial
statements with respect to such Trusts will be included in this Prospectus or
any Prospectus Supplement.
Although the Bonds of any Series will represent obligations of the related
Bond Issuer, such obligations will be non-recourse and the proceeds of the
assets included in the related Trust Estate will be the sole source of
payments on the Bonds of such Series. The Bond Issuer for any Series of Bonds
(whether it is ACAC or a trust, partnership, limited liability company or
corporation formed by ACAC solely for the purpose of issuing the Bonds of
such Series) will not have, nor be expected in the future to have, any
significant assets available for payments on such Series of Bonds other than
the assets included in the related Trust Estate. Accordingly, the investment
characteristics of a Series of Bonds will be determined by the assets
included in the related Trust Estate and will not be affected by the identity
of the obligor with respect to such Series of Bonds. Accordingly, no
capitalization information or any historical or pro forma ratio of earnings
to fixed charges or any other financial information with respect to ACAC or
any trust, partnership, limited liability company or corporation formed for
the purpose of issuing a Series of Bonds has been or will be included herein
or in the related Prospectus Supplement.
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").
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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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INDEX OF PRINCIPAL TERMS
Aames Guidelines.......................................................... 42
ACAC.................................................................... 1, 7
ACC..................................................................... 1, 7
Accounts.................................................................. 46
Accrual Certificates...................................................... 51
AFC.................................................................... 7, 39
Affiliated Originators.................................................... 42
Amortizable Bond Premium Regulations...................................... 98
ARM...................................................................... 108
ARM Loans................................................................. 31
Available Funds........................................................... 49
Bankruptcy Bond....................................................... 16, 59
Bond Account.............................................................. 49
Bond Issuer............................................................. 1, 8
Bond Rate................................................................. 50
Bondholders............................................................... 45
Bonds................................................................... 1, 7
Buydown Funds............................................................. 99
Capitalized Interest Account.............................................. 13
Cede.................................................................. 22, 46
CERCLA.................................................................... 89
Certain Federal Income Tax Consequences................................... 77
Certificate Account....................................................... 49
Certificate Event of Default.............................................. 76
Certificate Rate.......................................................... 50
Certificateholders........................................................ 45
Certificates............................................................ 1, 7
Class................................................................... 2, 7
Closing Date.............................................................. 37
Code.................................................................. 19, 90
Collection Account........................................................ 68
Collection Period......................................................... 49
Commission................................................................. 3
Compensating Interest Payment............................................. 71
Contingent Regulations.................................................... 96
Cut-off Date.............................................................. 11
Deferred Interest......................................................... 37
Definitive Securities................................................. 22, 46
Deleted Mortgage Loan..................................................... 67
Deposit Date.............................................................. 69
Detailed Description...................................................... 34
Disqualified Persons..................................................... 119
Distribution Date...................................................... 2, 48
DOL...................................................................... 119
DOL Regulations.......................................................... 119
DTC................................................................... 22, 46
EPA....................................................................... 89
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ERISA................................................................ 21, 119
ERISA Plans.............................................................. 119
Exchange Act............................................................... 4
Financial Guaranty Insurance Policy................................... 15, 57
Forward Commitment........................................................ 13
Funding Period............................................................ 12
Indenture............................................................... 1, 8
Indirect Participant...................................................... 46
Insurance Proceeds........................................................ 50
Insured Amount........................................................ 16, 57
Interest Weighted Class................................................... 31
IRAs..................................................................... 119
IRS....................................................................... 93
Junior Loan............................................................... 24
Liquidated Mortgage Loan.................................................. 71
Liquidation Proceeds...................................................... 50
Loan Schedule............................................................. 65
Loan Withdrawal Amount.................................................... 67
Monthly Advance........................................................... 70
Mortgage File............................................................. 65
Mortgage Loans.......................................................... 2, 9
Mortgage Note.............................................................. 9
Mortgage Pool........................................................... 2, 9
Mortgage Pool Insurance Policy........................................ 16, 58
Mortgage Pool Insurer..................................................... 58
Mortgaged Properties...................................................... 34
Mortgaged Property........................................................ 11
Mortgagor............................................................. 15, 24
Multiple Variable Rate Debt Certificate................................... 95
Negative Amortization..................................................... 37
Net Liquidation Proceeds.................................................. 50
New Withholding Regulations.............................................. 118
OID....................................................................... 91
OID Regulations........................................................... 91
Originators............................................................ 2, 42
Overcollateralization Feature............................................. 56
Participants.............................................................. 46
Parties in Interest...................................................... 119
Pass-Through Certificates................................................ 105
Payment Date........................................................... 2, 48
Pay-Through Certificate................................................... 93
Plan Asset Regulations.................................................... 21
Plan(s)................................................................... 21
Policy Statement......................................................... 122
Pooling and Servicing Agreement......................................... 1, 7
Prefunding Account........................................................ 13
Prefunding Amount..................................................... 13, 37
Prepayment Assumption..................................................... 93
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Presumed Single Qualified Floating Rate................................... 94
Presumed Single Variable Rate............................................. 95
Principal Prepayments..................................................... 52
Principal Weighted Class.................................................. 31
PTCE 83-1................................................................ 120
Qualified Replacement Mortgage Loan....................................... 67
Qualified Retirement Plans............................................... 119
Rating Agency........................................................ 17, 124
Regular Certificates.................................................. 19, 91
Relief Act................................................................ 29
REMIC.................................................................. 2, 90
REMIC Certificates........................................................ 99
REMIC Regulations......................................................... 90
REO Property.............................................................. 70
Reserve Account....................................................... 15, 56
Residual Certificates..................................................... 19
Residual Interest Certificate............................................ 102
Revolving Period...................................................... 11, 52
Riegle Act............................................................ 29, 88
Sales of Pass-Through Certificates....................................... 107
SBJPA.................................................................... 104
Securities.............................................................. 1, 7
Securities Insurer........................................................ 57
Security Register......................................................... 48
Securityholders........................................................ 2, 45
Senior Certificates.................................................... 8, 45
Senior Lien............................................................... 24
Series.................................................................. 1, 7
Servicer................................................................ 1, 7
Servicing Advance......................................................... 73
Servicing Agreement........................................................ 2
Single Variable Rate Debt Certificate..................................... 95
SMMEA..................................................................... 21
Special Hazard Insurance Policy....................................... 16, 58
Special Hazard Insurer.................................................... 58
Standard Hazard Insurance Policies........................................ 34
Subordinated Certificates.................................................. 8
Subordinated Classes...................................................... 45
Sub-Servicer........................................................... 7, 72
Tax-Favored Plans........................................................ 119
Tiered REMICs............................................................ 100
TIN...................................................................... 116
Title V................................................................... 88
Transferor Interest....................................................... 12
Transferors............................................................. 1, 7
Trust................................................................... 1, 7
Trust Estate............................................................ 1, 8
Trustee................................................................. 1, 7
128
<PAGE>
Unaffiliated Originators.................................................. 42
Underwriters............................................................. 123
Variable Rate Debt Certificate............................................ 94
129
<PAGE>
$400,000,000
AAMES MORTGAGE TRUST
1999-2
MORTGAGE PASS-THROUGH
CERTIFICATES,
SERIES 1999-2
AAMES CAPITAL CORPORATION
(SPONSOR AND SERVICER)
---------------------------------
PROSPECTUS SUPPLEMENT
October 29, 1999
---------------------------------
BANC OF AMERICA SECURITIES LLC
GREENWICH CAPITAL MARKETS, INC.
LEHMAN BROTHERS
