<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 17, 1999
REGISTRATION NO. 333-64903
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
<TABLE>
<S> <C>
AAMES CAPITAL CORPORATION AAMES CAPITAL ACCEPTANCE CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
</TABLE>
<TABLE>
<S> <C> <C> <C>
CALIFORNIA 95-4438859 DELAWARE 95-4619902
(STATE OF (I.R.S. EMPLOYER IDENTIFICATION (STATE OF (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION) NO.) INCORPORATION) NO.)
</TABLE>
<TABLE>
<S> <C>
350 SOUTH GRAND AVENUE 350 SOUTH GRAND AVENUE
LOS ANGELES, CALIFORNIA 90071 LOS ANGELES, CALIFORNIA 90071
323/210-5000 323/210-5270
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE
OFFICES) OFFICES)
BARBARA S. POLSKY, ESQ. BARBARA S. POLSKY, ESQ.
AAMES CAPITAL CORPORATION AAMES CAPITAL ACCEPTANCE CORP.
350 SOUTH GRAND AVENUE 350 SOUTH GRAND AVENUE
LOS ANGELES, CALIFORNIA 90071 LOS ANGELES, CALIFORNIA 90071
323/210-5000 323/210-5000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE) INCLUDING AREA CODE, OF AGENT FOR SERVICE)
</TABLE>
COPIES TO:
JAMES A. BLALOCK III, ESQ.
ANDREWS & KURTH L.L.P.
1701 PENNSYLVANIA AVENUE, NW -- SUITE 200
WASHINGTON, D.C. 20006
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
From time to time after the effective date of this Registration Statement.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the registration statement number of the earlier effective registration
statement for the same offering. [ ]______
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]______
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=======================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES TO BE AMOUNT TO BE AGGREGATE OFFERING AGGREGATE OFFERING AMOUNT OF
REGISTERED REGISTERED(1) PRICE PER UNIT(2) PRICE(2) REGISTRATION FEE(3)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asset-Backed Certificates and
Bonds.............................. $1,331,730,000 100% $1,331,730,000 $278,000
(Each Issuable in Series)
=======================================================================================================================
</TABLE>
(1) Includes $331,730,000 principal amount of Asset-Backed Certificates and
Bonds previously registered under the Registrants' Registration Statement on
Form S-3 (Registration No. 333-46893). As permitted by Rule 429 under the
Securities Act of 1933, as amended, the Prospectuses filed as part of this
Registration Statement on Form S-3 will be used in connection with the
offering of such previously registered and unsold securities and the
securities covered hereby.
(2) Estimated solely for purposes of computing the registration fee.
(3) $295.00 of which was previously paid. The registration fee specified in the
table has been computed on the basis of the $1,000,000,000 principal amount
of securities covered hereby, prior to including the previously registered
and unsold securities referred to in footnote (1), as to which appropriate
Registration Fees have already been paid.
------------------------
PURSUANT TO RULE 429 UNDER THE SECURITIES ACT, THE PROSPECTUSES INCLUDED IN
THIS REGISTRATION STATEMENT ARE COMBINED PROSPECTUSES THAT ALSO RELATE TO
REGISTRATION STATEMENT NO. 333-46893 AS PREVIOUSLY FILED BY THE REGISTRANTS ON
FORM S-3. THIS REGISTRATION STATEMENT ALSO CONSTITUTES POST-EFFECTIVE AMENDMENT
NO. 1 TO REGISTRATION STATEMENT NO. 333-46893, AND SUCH POST-EFFECTIVE AMENDMENT
WILL BECOME EFFECTIVE CONCURRENTLY WITH THE EFFECTIVENESS OF THIS REGISTRATION
STATEMENT AND IN ACCORDANCE WITH SECTION 8(c) OF THE SECURITIES ACT.
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<PAGE> 2
[This form of Prospectus Supplement for Asset-Backed Certificates is for
illustrative purposes only. A Prospectus Supplement in definitive form
reflecting the terms of each Series of Certificates will be filed with the
Commission under the Securities Act of 1933, as amended, pursuant to Rule 424(b)
promulgated thereunder.]
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED [ ])
AAMES MORTGAGE TRUST 199[ ]-[ ]
$[ ]
MORTGAGE PASS-THROUGH CERTIFICATES,
SERIES 199[ ]-[ ]
$[ ] [ ]% CLASS A-1A CERTIFICATES
$[ ] [ ]% CLASS A-1B CERTIFICATES
$[ ] [ ]% CLASS A-1C CERTIFICATES
$[ ] CLASS A-2 ADJUSTABLE RATE CERTIFICATES
AAMES CAPITAL CORPORATION
SPONSOR AND SERVICER
------------------------
The Mortgage Pass-Through Certificates, Series 199[ ]-[ ], will consist of
the Class [ ] Certificates, the Class [ ] Certificates and the Class [ ]
Certificates (collectively, the "Class A-1 Certificates"), the Class A-2
Certificates (the "Class A-2 Certificates," together with the Class A-1
Certificates, the "Class A Certificates") and the Class R Certificate (the
"Class R Certificate," together with the Class A Certificates, the
"Certificates"). Only the Class A Certificates are offered hereby. The
Certificates will represent undivided beneficial ownership interests in Aames
Mortgage Trust 199[ ]-[ ] (the "Trust") established by [ ] (the
"Sponsor").
SEE "RISK FACTORS" STARTING ON PAGE S-26 HEREOF AND ON PAGE 19 OF THE
PROSPECTUS FOR A DESCRIPTION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY
PROSPECTIVE INVESTORS IN THE CLASS A CERTIFICATES OFFERED HEREBY.
------------------------
THE CLASS A CERTIFICATES WILL REPRESENT BENEFICIAL OWNERSHIP INTERESTS ONLY IN
THE TRUST AND WILL NOT REPRESENT ANY INTEREST IN OR OBLIGATION OF THE SPONSOR,
THE SERVICER, ANY ORIGINATOR, THE TRUSTEE OR ANY OF THEIR RESPECTIVE AFFILIATES.
NEITHER THE CLASS A CERTIFICATES NOR THE UNDERLYING MORTGAGE LOANS WILL BE
GUARANTEED OR INSURED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The Class A Certificates will be offered by the Underwriters named below
(the "Underwriters") from time to time to the public in negotiated transactions
or otherwise at varying prices to be determined at the time of the related sale.
Proceeds to the Sponsor from the sale of the Class A Certificates are
anticipated to be approximately $[ ] plus, with respect to the Class
A-1 Certificates, accrued interest from [ ], before deducting expenses
payable by the Sponsor, estimated to be $[ ]. The Class A Certificates
are offered by the Underwriters subject to prior sale, when, as and if issued to
and accepted by them and subject to approval of certain legal matters by counsel
for the Underwriters. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
delivery of the Class A Certificates will be made in book-entry form only
through the Same-Day Funds Settlement System of The Depository Trust Company,
Cedel Bank, societe anonyme and the Euroclear System on or about [ ]. The
Class A Certificates will be offered in Europe and the United States of America.
[UNDERWRITERS]
<PAGE> 3
(continued from cover)
The Certificates will represent undivided beneficial ownership interests in
Aames Mortgage Trust [ ] (the "Trust") established by Aames Capital
Corporation (the "Sponsor") pursuant to a Pooling and Servicing Agreement to be
dated as of [ ], 1998 (the "Pooling and Servicing Agreement") between
the Sponsor, in its capacities as Sponsor and Servicer, and the trustee
specified herein (the "Trustee").
Initially, the assets of the Trust will consist primarily of a pool (the
"Mortgage Pool") of mortgage loans (the "Mortgage Loans") secured by first and
junior liens on one- to four-family residential properties or condominiums and
monies on deposit in the Prefunding Account and Capitalized Interest Account as
described herein. The Mortgage Pool will be divided into two groups (each, a
"Mortgage Loan Group"). Distributions on the Class A-1 Certificates will be
derived primarily from amounts received, collected or recovered in respect of
the Mortgage Loan Group comprised entirely of Mortgage Loans bearing fixed rates
of interest (the "Fixed Rate Group"). Distributions on the Class A-2
Certificates will be derived primarily from amounts received, collected or
recovered in respect of the Mortgage Loan Group comprised entirely of Mortgage
Loans bearing interest at rates that are subject to periodic adjustment (the
"Adjustable Rate Group").
[The Class [ ] Certificates will be unconditionally and irrevocably
guaranteed as to payment of interest due to Class A Certificateholders on each
Distribution Date and as to ultimate collection of the Class A Certificate
Principal Balances of the related Class A Certificates, in each case pursuant to
the terms of the Certificate Insurance Policy (as defined herein) issued by name
of Certificate Insurer. See "Description of the Certificates -- The Certificate
Insurance Policy" herein].
[As described herein, the yield on the Class [ ] Certificates will be
affected by the rate of prepayments of the Mortgage Loans in the related
Mortgage Loan Group and the timing of receipt of such payments. Because a
substantial portion of the Mortgage Loans in the Fixed Rate Group are secured by
junior liens, the rate of prepayments experienced on the related Mortgage Loans
may be higher than would be the case if such Mortgage Loan Group consisted only
of first lien Mortgage Loans. The yield on the Class A Certificates will also be
affected by Excess Cash (as defined herein) that is applied in reduction of the
Class A Certificate Principal Balance on any Distribution Date, as described
herein. See "Risk Factors" herein.]
[As described herein, the yields to maturity of the Offered Certificates
will be sensitive to the rate and timing of principal payments (including
prepayments, defaults and liquidations) on the Mortgage Loans in the related
Mortgage Loan Group. The yield to maturity on each Class of Subordinate
Certificates will be extremely sensitive to losses due to defaults on the
Mortgage Loans in the Fixed Rate Group (and the timing thereof) to the extent
that such losses are not covered by overcollateralization or cross-
collateralization (in each case as described herein), or by the
subordination thereto of any other Subordinate Certificates that have a lower
payment priority. The Mortgage Loans generally may be prepaid in full or in part
at any time; however, a prepayment may subject the related mortgagor to a
prepayment charge. The yields to maturity of the Class [ ] Adjustable Rate
Certificates and the Adjustable Rate Group Certificates will be sensitive in
varying degrees to, among other things, the level of [LIBOR] (in the case of the
Class [ ]Certificates) [and the Fed Funds Rate (in the case of the Class [
] Adjustable Rate Certificates),] which may vary significantly over time. The
yield to investors on the Offered Certificates (and in particular, the
Subordinate Certificates) will be adversely affected by any shortfalls in
interest collected on the related Mortgage Loans due to prepayments,
liquidations or otherwise, to the extent not otherwise covered as described
herein. See "Certain Yield and Prepayment Considerations" herein. Because a
portion of the Mortgage Loans in the Fixed Rate Group are secured by junior
liens, the rate of prepayments experienced on the related Mortgage Loans may be
higher or lower than would be the case if such Mortgage Loan Group consisted
only of first lien Mortgage Loans.
The Class M Certificates are subordinate in right of distribution to the
Fixed Rate Group Class A Certificates and the Class M-2F Certificates are
subordinate in right of distribution to the Fixed Rate Group Class A
Certificates and the Class M-1F Certificates to the extent described herein. The
Class B-1F Certificates are subordinate in right of distribution to the Fixed
Rate Group Class A Certificates and the Class M Certificates to the extent
described herein. The initial aggregate Certificate Principal Balance of the
S-2
<PAGE> 4
Subordinate Certificates will equal approximately 15.5% of the initial aggregate
Certificate Principal Balance of the Fixed Rate Group Certificates.]
Except as described herein, the Subordinate Certificates may not be
acquired by Plans (as defined herein). See "ERISA Considerations" herein and in
the Prospectus.
As described herein, an election will be made to treat the Trust (other
than the Prefunding Account and the Capitalized Interest Account) as a "real
estate mortgage investment conduit" ("REMIC") pursuant to the Internal Revenue
Code of 1986, as amended (the "Code"). The Class A Certificates will be "regular
interests" in such REMIC. See "Certain Federal Income Tax Consequences" herein
and in the Prospectus.
There is currently no secondary market for the Class A Certificates. The
Underwriters intend to make a secondary market for the Class A Certificates, but
have no obligation to do so. There can be no assurance that a secondary market
for any of the Class A Certificates will develop or, if one does develop, that
it will continue.
The Trust is subject to optional termination under the limited
circumstances described herein. Any such optional termination may result in an
early retirement of the Class A Certificates offered hereby. See "The Pooling
and Servicing Agreement -- Termination; Optional Termination" in the Prospectus.
THE CLASS A CERTIFICATES OFFERED BY THIS PROSPECTUS SUPPLEMENT CONSTITUTE A
SEPARATE SERIES OF CERTIFICATES BEING OFFERED BY THE SPONSOR PURSUANT TO ITS
PROSPECTUS DATED [ ], OF WHICH THIS PROSPECTUS SUPPLEMENT IS A PART AND
WHICH ACCOMPANIES THIS PROSPECTUS SUPPLEMENT. THE PROSPECTUS CONTAINS IMPORTANT
INFORMATION REGARDING THIS OFFERING THAT IS NOT CONTAINED HEREIN, AND
PROSPECTIVE INVESTORS ARE URGED TO READ THE PROSPECTUS AND THIS PROSPECTUS
SUPPLEMENT IN FULL. SALES OF CLASS A CERTIFICATES MAY NOT BE CONSUMMATED UNLESS
THE PROSPECTIVE INVESTOR HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS.
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE CLASS A CERTIFICATES, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND THE
RELATED PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS ACTING AS
UNDERWRITERS TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN
THE CLASS A CERTIFICATES OFFERED HEREBY NOR AN OFFER OF THE CLASS A CERTIFICATES
TO ANY PERSON IN ANY STATE OR OTHER JURISDICTION IN WHICH SUCH OFFER WOULD BE
UNLAWFUL. THE DELIVERY OF THE PROSPECTUS AND THIS PROSPECTUS SUPPLEMENT AT ANY
TIME DOES NOT IMPLY THAT INFORMATION THEREIN OR HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF; HOWEVER, IF ANY MATERIAL CHANGE OCCURS WHILE THIS
PROSPECTUS SUPPLEMENT OR PROSPECTUS IS REQUIRED BY LAW TO BE DELIVERED, THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS WILL BE AMENDED OR SUPPLEMENTED
ACCORDINGLY.
FOR UNITED KINGDOM PURCHASERS: THE [ ] CERTIFICATES MAY NOT BE OFFERED
OR SOLD IN THE UNITED KINGDOM OTHER THAN TO PERSONS WHOSE ORDINARY BUSINESS IS
TO BUY OR SELL SECURITIES, WHETHER AS PRINCIPAL OR AGENT (EXCEPT IN
CIRCUMSTANCES THAT DO NOT CONSTITUTE AN OFFER TO THE PUBLIC WITHIN THE MEANING
OF THE PUBLIC OFFERS OF SECURITIES REGULATION 1995), AND THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS MAY ONLY BE ISSUED OR PASSED ON TO ANY PERSON IN
THE UNITED KINGDOM IF THAT PERSON IS OF THE KIND DESCRIBED IN ARTICLE 11(3) OF
THE FINANCIAL SERVICES ACT 1986 (INVESTMENT ADVERTISEMENTS) (EXEMPTIONS) ORDER
1997.
REPORTS TO CERTIFICATEHOLDERS
Monthly and annual reports concerning the Class A Certificates and the
Trust will be sent by the Trustee to all Certificateholders. So long as any
Class A Certificate is in book-entry form, such reports will be sent to Cede &
Co., as the nominee of The Depository Trust Company ("DTC") and as the
Certificateholder of such Class A Certificates pursuant to the Pooling and
Servicing Agreement described herein. DTC will supply such
S-3
<PAGE> 5
reports to all persons acquiring beneficial ownership interests in the Class A
Certificates. See "Description of the Certificates -- Book-Entry Registration of
Class A Certificates" herein.
AVAILABLE INFORMATION
The Sponsor has filed a Registration Statement under the Securities Act of
1933, as amended, with the Securities and Exchange Commission (the "Commission")
with respect to the Class A Certificates. The Registration Statement and
amendments thereof and the exhibits thereto may be inspected at the Public
Reference Room of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, and at the Commission's regional offices at Seven World Trade Center,
13th Floor, New York, New York 10048, and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials can also
be obtained at prescribed rates from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Electronic filings
made through the Electronic Data Gathering, Analysis and Retrieval System are
publicly available through the Commission's Web Site (http://www.sec.gov).
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
Certain documents filed with the Commission by or on behalf of the Trust
are incorporated by reference herein. See "Incorporation of Certain Documents by
Reference" in the Prospectus. [Insert information here regarding incorporation
by reference, if any, of financial information of Certificate Insurer.]
S-4
<PAGE> 6
TABLE OF CONTENTS
<TABLE>
<S> <C>
REPORTS TO CERTIFICATEHOLDERS.......... S-3
AVAILABLE INFORMATION.................. S-4
INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE............................ S-4
SUMMARY OF TERMS....................... S-7
RISK FACTORS........................... S-26
Risk of Limitations on Adjustments of
Pass-Through Rates................ S-26
Limited Sources of Credit
Enhancement....................... S-26
Subordination........................ S-27
Risks Associated with Underwriting
Standards......................... S-27
Risks Associated with Geographic
Concentration of Mortgaged
Properties........................ S-28
Risks Associated with Damaged
Mortgaged Properties.............. S-28
Risks Associated with Junior Loans... S-29
Concentration of Balloon Loans....... S-29
Risks Associated with Prepayment of
the Mortgage Loans................ S-30
The Subsequent Mortgage Loans and the
Prefunding Account................ S-31
Yield Considerations Relating to
Excess Cash....................... S-31
Prepayment of Fixed Rate Group May
Affect Current Interest........... S-32
Environmental Statutes Affecting
Security Interests................ S-32
Risks Associated with Certain
Origination Fees.................. S-32
Limitations on Fixed Rate Group
Certificateholders' Rights........ S-33
DESCRIPTION OF THE CERTIFICATES........ S-33
General.............................. S-33
Assignment of Mortgage Loans......... S-37
Payments on Mortgage Loans and
Deposits to the Collection
Account........................... S-39
Distributions on the Certificates.... S-40
Interest............................. S-43
Principal............................ S-43
Prefunding Account................... S-48
Capitalized Interest Account......... S-49
Overcollateralization Feature........ S-49
The Certificate Insurance Policy..... S-52
The Certificate Insurer Premium...... S-52
Subordination of Subordinate
Certificates...................... S-53
Application of Realized Losses....... S-53
Overcollateralization and Application
of Monthly Excess Cashflow
Amounts........................... S-54
Monthly Advances; Servicing Advances;
Compensating Interest and Interest
Shortfalls........................ S-57
Reports to Certificateholders........ S-58
Termination; Retirement of the
Certificates...................... S-59
The Trustee.......................... S-60
THE MORTGAGE LOANS..................... S-61
General.............................. S-61
Fixed Rate Group..................... S-62
Adjustable Rate Group................ S-62
Conveyance of Subsequent Mortgage
Loans............................. S-64
PREPAYMENT AND YIELD CONSIDERATIONS.... S-64
Projected Prepayments and Yields for
the Class A Certificates.......... S-66
Initial Fixed Rate Group............. S-67
Subsequent Fixed Rate Group.......... S-67
Initial Adjustable Rate Group........ S-68
Subsequent Adjustable Rate Group..... S-68
Weighted Average Lives............... S-69
ORIGINATION AND SERVICING OF THE
MORTGAGE LOANS....................... S-70
The Originators...................... S-70
Underwriting of Mortgage Loans....... S-70
Mortgage Loan Delinquency and
Foreclosure Experience............ S-70
Servicing of Mortgage Loans.......... S-72
Sub-Servicing........................ S-73
Realization upon Defaulted Mortgage
Loans............................. S-73
Hazard Insurance..................... S-74
Servicing and Other Compensation;
Payment of Expenses............... S-75
Certain Matters Regarding Servicer's
Servicing Obligations............. S-75
THE CERTIFICATE INSURANCE POLICY AND
THE CERTIFICATE INSURER.............. S-76
The Certificate Insurer.............. S-76
The Certificate Insurance Policy..... S-78
Credit Enhancement Does Not Apply to
Prepayment Risk................... S-79
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES......................... S-80
Supplemental Interest Amounts........ S-80
ERISA CONSIDERATIONS................... S-81
USE OF PROCEEDS........................ S-82
LEGAL INVESTMENT CONSIDERATIONS........ S-82
</TABLE>
S-5
<PAGE> 7
<TABLE>
<S> <C>
UNDERWRITING........................... S-83
REPORT OF EXPERTS...................... S-84
LEGAL MATTERS.......................... S-84
RATING OF THE CLASS A CERTIFICATES..... S-84
ANNEX A................................ A-1
DESCRIPTION OF THE MORTGAGE POOL....... A-1
ANNEX B................................ B-1
GLOBAL CLEARANCE, SETTLEMENT AND TAX
DOCUMENTATION PROCEDURES............. B-1
</TABLE>
S-6
<PAGE> 8
SUMMARY OF TERMS
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus Supplement and the
accompanying Prospectus.
Issuer..................... Aames Mortgage Trust 199[ ]-[ ] (the "Trust").
The Sponsor................ [Name of Sponsor] (the "Sponsor"). The principal
office of the Sponsor is located in [City, State].
See "The Sponsor" in the Prospectus.
The Servicer............... Aames Capital Corporation will act as servicer of
the Mortgage Loans (in such capacity, the
"Servicer"). The Servicer intends to appoint one or
more mortgage servicing institutions (each, a
"Sub-Servicer"), which may be affiliates of the
Sponsor, to service and administer certain Mortgage
Loans on behalf of the Servicer. See "Origination
and Servicing of the Mortgage Loans --
Sub-Servicers" herein and "The Pooling and
Servicing Agreement -- Sub-Servicers" in the
Prospectus.
The Trustee................ [Name of Trustee] (the "Trustee").
Cut-Off Date............... [ ].
Closing Date............... On or about [ ].
Description of the
Certificates............... The Mortgage Pass-Through Certificates, Series
199[ ]-[ ] (the "Certificates"), will consist of
[ ] Classes of Class A Certificates, the Class [ ]
Certificates (consisting of [ ] subclasses, and the
Class [ ] Certificates, and a Class of Certificates
evidencing the residual interest in each REMIC (the
"Class R Certificate"). The Certificates will
represent undivided beneficial ownership interests
in the Trust to be created pursuant to a Pooling
and Servicing Agreement to be dated as of
[ ] (the "Pooling and Servicing
Agreement") between the Sponsor, in its capacity as
Sponsor and Servicer, and the Trustee. Only the
Class [ ] Certificates are being offered hereby.
Initially, the assets of the Trust will consist of
(i) a pool (the "Mortgage Pool") of two groups
(each, a "Mortgage Loan Group") of home equity
mortgage loans described herein (the "Initial
Mortgage Loans") secured by first and junior lien
mortgages or deeds of trust on one- to four-family
residential properties or condominiums (the
"Mortgaged Properties"); (ii) all payments received
under the respective Mortgage Loans on and after
the Cut-off Date; (iii) security interests in the
Mortgaged Properties; (iv) amounts to be deposited
in the Prefunding Account (as defined herein) that
will be available for the purchase of Subsequent
Mortgage Loans (as defined herein) during the
Commitment Period; (v) amounts to be deposited in
the Capitalized Interest Account (as defined
herein); (vi) [the insurance policy (the
"Certificate Insurance Policy") to be issued by
name of Certificate Insurer (the "Certificate
Insurer")]; and (vii) certain other property.
Distributions on the Class A-1 Certificates will be
derived primarily from amounts received, collected
or recovered in respect of the Mortgage Loan Group
comprised entirely of Mortgage Loans bearing fixed
rates of interest (the "Fixed Rate Group").
Distributions on the Class A-2 Certificates will be
derived primarily from amounts received, collected
or recovered in respect of the Mortgage Loan Group
comprised entirely of Mortgage Loans bearing
interest at rates that are subject to periodic
adjustment (the "Adjustable Rate Group"). As of the
Cut-off Date, the Initial Mortgage Loans in the
S-7
<PAGE> 9
Fixed Rate Group had an Aggregate Principal Balance
of $[ ] and the Initial Mortgage Loans in the
Adjustable Rate Group had an Aggregate Principal
Balance of $[ ] (in each case subject to reduction
in the event mortgage loans are removed from the
Mortgage Pool prior to the Closing Date). See "The
Mortgage Loans -- General" herein.
Original Class [ ]
Certificate Principal
Balance.................... $[ ].
Original Class [ ]
Certificate Principal
Balance.................... $[ ].
Original Class [ ]
Certificate Principal
Balance.................... $[ ].
Original Class [ ]
Certificate
$[ ] Principal Balance..... $[ ]. [The Pass-Through Rate with respect
to such Fixed Principal Balance Rate Group
Certificates on any Distribution Date will equal
the lesser of (x) the Pass-Through Rate for such
Class set out above and (y) the weighted average
coupon rate of the Mortgage Loans in the Fixed Rate
Group as of the first day of the related Collection
Period less the Servicing Fee Rate for the Mortgage
Loans in the Fixed Rate Group as of the first day
of the related Collection Period (the "Fixed Rate
Net WAC"). The Pass-Through Rates for each Class of
Adjustable Rate Group Certificates generally will
be limited to the Adjustable Rate Group Available
Funds Cap. The "Adjustable Rate Group Available
Funds Cap" will be, with respect to any
Distribution Date, the per annum rate equal to the
percentage obtained by (I) dividing (x) the amount
of interest that accrued on the Mortgage Loans in
the Adjustable Rate Group in respect of the related
Collection Period at the weighted average of the
related Mortgage Interest Rates applicable to
Monthly Payments due on such Mortgage Loans during
such Collection Period, reduced by (i) the
Servicing Fee for such Collection Period, (ii) the
Financial Guaranty Insurer Premium and (iii)
commencing on the seventh Distribution Date,
one-twelfth of 1.00% of the Adjustable Rate Group
Balance as of the first day of the related
Collection Period by (y) the product of (i) the
Adjustable Rate Group Balance as of the first day
of the related Collection Period, (ii) the actual
number of days elapsed during such Interest Period
divided by 360 and (II) multiplying the result by
100.]
Class [ ] Pass-Through
Rate....................... The Class [ ] Pass-Through Rate will be [ ]% per
annum [The Pass-Through Rate for such Class for the
initial Interest Period will be [ ]% and for each
subsequent Interest Period will be a per annum rate
equal to the lesser of (x) the London interbank
offered rate for one-month United States dollar
deposits as of the second business day preceding
the first day of such Interest Period (calculated
as described under "Description of the
Certificates -- Distributions on the Certificates")
("LIBOR") plus 0.155% and (y) the Fixed Rate Net
WAC times a fraction, the numerator of which is 30
and the denominator of which is the actual number
of days in the related Interest Period.].
Class [ ] Pass-Through
Rate....................... The Class [ ] Pass-Through Rate will be [ ]% per
annum.
Class [ ] Pass-Through
Rate....................... The Class [ ] Pass-Through Rate will be [ ]% per
annum.
S-8
<PAGE> 10
The "Formula Pass-Through Rate" with respect to the
Class [ ], Class [ ] and Class [ ] Certificates, is
the rate described using the margins above LIBOR
and the Fed Funds Rate described in clause (x) of
footnotes (1), (3) and (4), as the case may be.
With respect to either Class of Adjustable Rate
Group Certificates on any Distribution Date, the
positive excess, if any, of the amount of interest
that would have accrued thereon during the related
Interest Period at the related Formula Pass-Through
Rate over the amount of interest that did accrue
thereon at the Adjustable Rate Group Available
Funds Cap (and in the case of any such excess
remaining unpaid from a prior Distribution Date,
interest thereon at the related Formula Pass-
Through Rate to the extent lawful) is the related
"Supplemental Interest Amount." The Class C
Certificateholders have agreed to pay any related
Supplemental Interest Amount on the Distribution
Date on which it arises or on a subsequent
Distribution Date (with interest thereon at the
related Formula Pass-Through Rate) 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,
if any, on which the Servicer exercises its option
to purchase the property of the Trust as described
below under "Optional Termination."
Record Date................ Distributions will be made on each Distribution
Date to Class A Certificateholders of record on the
last Business Day (as defined herein) of the
immediately preceding calendar month (each, a
"Record Date"), except that the final distribution
in respect of the Class A Certificates will be made
only upon presentation and surrender of such
Certificates at the office or agency designated by
the Trustee for that purpose. See "Description of
the Certificates -- Distributions on the
Certificates" herein.
Distributions on the
Class A Certificates.......
A. General................. Distributions on the Class A Certificates will be
made on the 15th [ ].
The Class M Certificates are subordinate in right
of distribution to the Fixed Rate Group Class A
Certificates, and the Class [ ] Certificates are
subordinate in right of distribution to the Fixed
Rate Group Class A Certificates and the Class [ ]
Certificates to the extent described herein. The
Class [ ] Certificates are subordinate in right of
distribution to the Fixed Rate Group Class A
Certificates and the Class M Certificates to the
extent described herein. The initial aggregate
Certificate Principal Balance of the Subordinate
Certificates will equal approximately [ ]% of the
initial Aggregate Certificate Principal Balance of
the Fixed Rate Group Certificates.]
1. Class A Interest
Distributions.............. On each Distribution Date, the Class A Certificates
will be entitled to distributions in respect of
Class A Monthly Interest.
As of any Distribution Date, "Class A Monthly
Interest" for the Class [ ] Certificates will be an
amount equal to (a) with respect to the [ ]
Distribution Date, interest for the number of days
in the period commencing on the Closing Date and
ending on the day prior to such Distribution Date
at the initial Class [ ] Pass-Through Rate on the
S-9
<PAGE> 11
Original Class A-2 Certificate Principal Balance,
and (b) with respect to each subsequent
Distribution Date, interest for the number of days
in the related Interest Period at the Class [ ]
Pass-Through Rate in effect for such Distribution
Date on the Class [ ] Certificate Principal Balance
(as defined herein) as of the preceding
Distribution Date (after giving effect to the
distribution, if any, in reduction of principal
made on the Class A-2 Certificates on such
preceding Distribution Date), in either case net of
any applicable Interest Shortfalls.
[If, with respect to either Class of Class A
Certificates and any Distribution Date, funds are
not available from Available Funds for the related
Mortgage Loan Group and any available Excess Cash
(as defined herein) from the other Mortgage Loan
Group to distribute the full amount of the Class A
Monthly Interest to the related Class of Class A
Certificates, the deficiency will be covered by
payments made pursuant to the Certificate Insurance
Policy in respect of such Class for such
Distribution Date. See "Description of the
Certificates -- The Certificate Insurance Policy"
herein. The Class C Certificateholders have agreed
to pay any Supplemental Interest Amount to the
related Adjustable Rate Group Certificateholders on
the Distribution Date on which it arises or on a
subsequent Distribution Date (with interest thereon
at the related Formula Pass-Through Rate) from and
to the extent of amounts otherwise distributable to
the Class C Certificateholders. However, such
amounts will not be paid after the date, if any, on
which the Servicer exercises its option to purchase
the property of the Trust as described below under
"Optional Termination."]
The "Interest Period" in respect of any
Distribution Date will be (i) for the Class [ ]
Certificates, the calendar month preceding the
month in which such Distribution Date occurs, and
(ii) for the Class [ ] Certificates, the period
from and including the Closing Date, in the case of
the first Distribution Date, or the immediately
preceding Distribution Date, as applicable, to but
excluding the related Distribution Date. All
calculations of interest on the Class [ ]
Certificates will be computed on the basis of a
360-day year of twelve 30-day months. All
calculations of interest on the Class [ ]
Certificates will be computed on the basis of the
actual number of days elapsed in the related
Interest Period and in a year of 360 days.
2. Class A Principal
Distributions.............. On each Distribution Date, Monthly Principal will
be distributed on the Class A-1 Certificates in
reduction of the Class [ ] Certificate Principal
Balance (as defined herein) and on the Class [ ]
Certificates in reduction of the Class [ ]
Certificate Principal Balance. "Monthly Principal"
with respect to each Class of Class A Certificates
and any Distribution Date will be equal to the
aggregate of amounts collected, received or
otherwise recovered in respect of principal on the
Mortgage Loans in the related Mortgage Loan Group
during the related Collection Period, subject to
reduction for any Coverage Surplus (as defined
herein) with respect to such Class and the related
Distribution Date as described herein.
Distributions in respect of Monthly Principal on
the Class [ ] Certificates will be distributed
first to Class [ ] Certificateholders, in reduction
of the Class [ ] Certificate Principal Balance,
until such Class [ ] Certificate Principal Balance
is reduced to zero, then to
S-10
<PAGE> 12
Class [ ] Certificateholders, in reduction of the
Class [ ] Certificate Principal Balance, until such
Class [ ] Certificate Principal Balance is reduced
to zero and then to Class [ ] Certificateholders,
in reduction of the Class A-1C Certificate
Principal Balance, until such Class [ ] Certificate
Principal Balance is reduced to zero. See
"Description of the Certificates -- Distributions
on the Certificates" herein. [The "Final Scheduled
Distribution Dates" for the indicated Classes of
Certificates are as follows, although it is
anticipated that the actual final Distribution Date
for each Class will occur earlier than the
indicated related Final Scheduled Distribution Date
and it is possible that Offered Certificates of any
Class (other than the Class [ ] Certificates, the
outstanding Certificate Principal Balance of which
is guaranteed as to payment on the related Final
Scheduled Distribution Date pursuant to the terms
of the Financial Guaranty Insurance Policy) may
receive payments of interest or principal later
than such related Final Scheduled Distribution
Date. See "Prepayment and Yield Considerations"
herein.
<TABLE>
<CAPTION>
FINAL SCHEDULED
CLASS DISTRIBUTION DATE
----- -----------------------------
<S> <C>
</TABLE>
[In addition, the overcollateralization feature of
the Trust results in accelerated payments of
principal with respect to each Mortgage Loan Group
to achieve, and thereafter maintain a specified
level of overcollateralization with respect to such
Mortgage Loan Group. Such accelerated principal
will generally be funded from excess interest with
respect to the related Mortgage Loan Group. With
respect to the Adjustable Rate Group Certificates
only, the Financial Guaranty 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.]
[With respect to the Fixed Rate Group and each
Distribution Date on or after the Stepdown Date,
the Fixed Rate Group Certificateholders will be
entitled to receive payments of principal in the
order of priority and amounts set forth below up to
the Principal Distribution Amount with respect to
the Fixed Rate Group:]
First, the Fixed Rate Group Principal Distribution
Amount, not to exceed the Class A Principal
Distribution Amount, shall be distributed to the
Class [ ] Certificateholders, in sequential order
by Class, until the Certificate Principal Balance
of each such Class has been reduced to zero;
Third, any remaining Fixed Rate Group Principal
Distribution Amount, not to exceed the Class M-2F
Principal Distribution Amount, shall be distributed
to the Class M-2F Certificateholders, until the
Certificate Principal Balance thereof has been
reduced to zero;
Third, any remaining Fixed Rate Group Principal
Distribution Amount, not to exceed the Class M-2F
Principal Distribution Amount, shall be
S-11
<PAGE> 13
distributed to the Class M-2F Certificateholders,
until the Certificate Principal Balance thereof has
been reduced to zero;
Fourth, any remaining Fixed Rate Group Principal
Distribution Amount, not to exceed the related
Class B-1F Principal Distribution Amount, shall be
distributed to the Class B-1F Certificateholders,
until the Certificate Principal Balance thereof has
been reduced to zero; and
Fifth, any remaining Fixed Rate Group Principal
Distribution Amount shall be distributed as part of
the Monthly Excess Cashflow Amount with respect to
the Fixed Rate Group (a) to pay the Extra Principal
Distribution Amount, Interest Carry Forward
Amounts, or Realized Loss Amortization Amounts with
respect to the Fixed Rate Group Certificates, (b)
to be treated as if a portion of the Monthly Excess
Interest Amount or Monthly Excess Cashflow Amount
with respect to the Adjustable Rate Group and so
applied to fund any Interest Carry Forward Amounts,
certain amounts due to be reimbursed to the
Financial Guaranty Insurer or the Servicer and any
Extra Principal Distribution Amount with respect to
such Distribution Date and the Adjustable Rate
Group Certificates, (c) to reimburse certain
Advances, and (d) to pay distributions to the
Retained Certificateholders or in respect of the
Adjustable Rate Group Certificates, any Interest
Amounts, as described below under "-- Credit
Enhancement -- Application of Monthly Excess
Cashflow Amounts."
On any Distribution Date on which the sum of the
Certificate Principal Balances of the Subordinate
Certificates and the related Overcollateralization
Amount is zero, any amounts of principal payable to
the Fixed Rate Group Class A Certificateholders on
such Distribution Date shall instead be distributed
pro rata based on the outstanding Certificate
Principal Balances of each such Class.
"Stepdown Date" means the later to occur of (x) the
Distribution Date in [ ] or (y) the first
Distribution Date on which the Senior Enhancement
Percentage (after taking into account distributions
in respect of principal on such Distribution Date)
is greater than or equal to the Specified Senior
Enhancement Percentage.]
["Class A Principal Distribution Amount" means,
with respect to each Distribution Date on or after
the Stepdown Date, the excess of (x) the aggregate
of the Certificate Principal Balances of the Fixed
Rate Group Class A Certificates immediately prior
to such Distribution Date over (y) the lesser of
(A) the product of (i) the lesser of (1) the
Stepped Up Enhancement Percentage and (2) [ ]% and
(ii) the aggregate of the outstanding Principal
Balances of the Mortgage Loans in the Fixed Rate
Group as of the last day of the related Collection
Period (plus, in the case of Collection Periods
during the Funding Period, amounts on deposit in
the Prefunding Account on such date allocable to
such Mortgage Loan Group) and (B) the excess of the
amount described in clause (ii) over [$ ].
"Class M-1F Principal Distribution Amount" means,
with respect to each Distribution Date on or after
the Stepdown Date, the excess of (x) the sum of (i)
the Aggregate Certificate Principal Balance of the
Fixed Rate Group Class A Certificates (after
application of the Class A Principal Distribution
Amount on such Distribution Date) and (ii) the
S-12
<PAGE> 14
Class M-1F Certificate Principal Balance
immediately prior to such Distribution Date over
(y) the lesser of (I) [ ]% of the aggregate of the
outstanding Principal Balances of the Mortgage
Loans in the Fixed Rate Group as of the last day of
the related Collection Period (plus, in the case of
Collection Periods during the Funding Period,
amounts on deposit in the Prefunding Account on
such date allocable to such Mortgage Loan Group)
and (ii) the excess of the amount described in
clause (ii) above over [$ ].
"Class M-2F Principal Distribution Amount" means,
with respect to each Distribution Date on or after
the Stepdown Date, the excess of (x) the sum of (i)
the Aggregate Certificate Principal Balance of the
Fixed Rate Group Class A Certificates (after
application of the Class A Principal Distribution
Amount on such Distribution Date), (ii) the Class
M-1F Certificate Principal Balance (after
application of the Class M-1F Principal
Distribution Amount on such Distribution Date) and
(iii) the related Class M-2F Certificate Principal
Balance immediately prior to such Distribution Date
over (y) the lesser of (I) [ ]% of the aggregate
of the outstanding Principal Balances of the
Mortgage Loans in the Fixed Rate Group as of the
last day of the related Collection Period (plus, in
the case of Collection Periods during the Funding
Period, amounts on deposit in the Prefunding
Account on such date allocable to such Mortgage
Loan Group) and (ii) the excess of the amount
described in clause (ii) above over [$ ].
"Class B-1F Principal Distribution Amount" means,
with respect to each Distribution Date on or after
the Stepdown Date, the excess of (x) the sum of (i)
the Aggregate Certificate Principal Balance of the
Fixed Rate Group Class A Certificates (after
application of the Class A Principal Distribution
Amount on such Distribution Date), (ii) the Class
M-1F Certificate Principal Balance (after
application of the Class M-1F Principal
Distribution Amount on such Distribution Date),
(iii) the Class M-2F Certificate Principal Balance
(after application of the Class M-2F Principal
Distribution Amount on such Distribution Date) and
(iv) the Class B-1F Certificate Principal Balance
immediately prior to such Distribution Date, over
(y) the lesser of (I) [ ]% of the aggregate of the
outstanding Principal Balance of the Mortgage Loans
in the Fixed Rate Group as of the last day of the
related Collection Period (plus, in the case of
Collection Periods during the Funding Period,
amounts on deposit in the Prefunding Account on
such date allocable to such Mortgage Loan Group)
and (ii) the excess of the amount described in
clause (ii) above of the Mortgage Loans in such
Mortgage Loan Group as of the last day of the
related Collection Period over [$ ].
"Overcollateralization Amount" means with respect
to a Mortgage Loan Group and as of any Distribution
Date the excess of (x) the aggregate of the
outstanding Principal Balances of the Mortgage
Loans in such Mortgage Loan Group as of the last
day of the immediately preceding Collection Period
(plus, in the case of Collection Periods 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
Certificates (after taking into
S-13
<PAGE> 15
account all distributions of principal collections
on such Distribution Date).
"Senior Enhancement Percentage" means with respect
to the Fixed Rate Group and any Distribution Date,
the percentage obtained by dividing (x) the sum of
(i) the Aggregate Certificate Principal Balance of
the Subordinate Certificates (or, after the
Certificate Principal Balance of each Class of
Fixed Rate Group Class A Certificates has been
reduced to zero, the Aggregate Certificate
Principal Balance of Subordinate Certificates other
than the most senior Class of Subordinate
Certificates then outstanding) and (ii) the related
Overcollateralization Amount, in each case after
taking into account distributions in respect of the
Fixed Rate Group Principal Distribution Amount to
the related Certificateholders on such Distribution
Date by (y) the aggregate of the outstanding
Principal Balances of the Mortgage Loans in the
Fixed Rate Group as of the last day of the related
Collection Period (plus, in the case of Collection
Periods during the Funding Period, amounts on
deposit in the Prefunding Account on such date
allocable to such Mortgage Loan Group) .
The "Stepped Up Enhancement Percentage" means, as
determined on any Distribution Date, a percentage
equal to (x) 100% minus (y) [ ] times the average
for the three preceding Collection Periods of the
Principal Balances of Mortgage Loans in the Fixed
Rate Group which were 60 or more days contractually
delinquent as of the last day of the related
Collection Period (stated as a percentage of the
outstanding Principal Balances of such Mortgage
Loans), but not less than zero.
"Specified Senior Enhancement Percentage" on any
date of determination thereof means [ ]%.
"Extra Principal Distribution Amount" means, for a
Mortgage Loan Group and any Distribution Date, the
lesser of (x) the related Monthly Excess Interest
Amount and (y) the related Overcollateralization
Deficiency.
"Coverage Deficit" means, for the Adjustable Rate
Group and any Distribution Date, the excess, if
any, of the aggregate of the Certificate Principal
Balances of the Adjustable Rate Group Certificates
(after taking into account all distributions in
respect of principal on such Distribution Date
other than amounts paid by the Financial Guaranty
Insurer) over the Adjustable Rate Group Balance as
of the last day of the related Collection Period
(plus in the case of any Collection Period during
the Funding Period, the portion of the Prefunding
Account Deposit allocable to the Adjustable Rate
Group).
"Overcollateralization Deficiency" means, for a
Mortgage Loan Group and Distribution Date, the
excess, if any, of (x) the related Targeted
Overcollateralization Amount over (y) the related
Overcollateralization Amount, calculated for this
purpose after taking into account the reduction on
such Distribution Date of the Certificate Principal
Balances of all related Classes of Certificates
resulting from distributions of principal
collections, but before taking into account any
related Applied Realized Loss Amount or amount paid
by the Financial Guaranty Insurer in respect of
principal for such Distribution Date.
S-14
<PAGE> 16
"Overcollateralization Release Amount" means, for
any Distribution Date and (i) the Fixed Rate Group,
the lesser of (x) the Fixed Rate Group Principal
Distribution Amount (other than any related Extra
Principal Distribution Amount) and (y) the excess
of (1) the related Overcollateralization Amount,
assuming that 100% of such related Principal
Distribution Amount (excluding the application of
any Extra Principal Distribution Amount) is applied
to the payment of principal on the related
Certificates on such Distribution Date over (z) the
related Targeted Overcollateralization Amount, and
(ii) the Adjustable Rate Group, the amount
specified on the Pooling and Servicing Agreement.
"Targeted Overcollateralization Amount" means (x)
in the case of the Fixed Rate Group, (i) prior to
the related Stepdown Date, [ ]% of the initial
Aggregate Certificate Principal Balance of the
related Certificates, or (ii) on and after the
Stepdown Date, the greater of (A) [ ]% of the
aggregate of the outstanding Principal Balance of
the Mortgage Loans in such Mortgage Loan Group as
of the last day of the related Collection Period
and (B) $1,100,000, and (y) in the case of the
Adjustable Rate Group, an amount required by the
Financial Guaranty Insurer pursuant to the Pooling
and Servicing Agreement, provided, however, that if
a Trigger Event has occurred and is continuing for
either Mortgage Loan Group, the applicable Targeted
Overcollateralization Amount for such Mortgage Loan
Group cannot be reduced to less than the applicable
Targeted Overcollateralization Amount in effect on
the Distribution Date immediately preceding the
occurrence of such Trigger Event.
A "Trigger Event" will have occurred with respect
to the Fixed Rate Group and any Distribution Date:
(a) if the percentage obtained by dividing (x) the
average, for the three preceding Collection
Periods, of the Principal Balance of Mortgage Loans
in such Mortgage Loan Group that are 60 or more
days contractually delinquent as of the last day of
each such Collection Period by (y) the aggregate
outstanding Principal Balance of the Mortgage Loans
in such Mortgage Loan Group as of the last day of
the related Collection Period equals or exceeds
[ ]% of the Senior Enhancement Percentage; or (b)
upon the occurrence of certain cumulative rates of
losses during specified periods of time as set
forth in the Pooling and Servicing Agreement.
Notwithstanding the foregoing, with respect to
clause (a) a Trigger Event will not be in effect on
any Distribution Date as to which the percentage
equivalent of a fraction equal to the aggregate
Certificate Principal Balance of the Fixed Rate
Group Class A Certificates divided by the aggregate
of the outstanding Principal Balances of the
Mortgage Loans in the Fixed Rate Group as of the
end of the related Collection Period is less than
or equal to the related Stepped Up Enhancement
Percentage after all distributions thereon in
respect of principal. A "Trigger Event" will have
occurred with respect to the Adjustable Rate Group
and any Distribution Date upon the occurrence of
certain delinquency rates or certain cumulative
loss rates during specified periods of time as set
forth in the Pooling and Servicing Agreement.]
3. Distributions of Excess
Cash....................... On each Distribution Date with respect to which the
Coverage Amount (as defined herein) for a Class of
Class A Certificates is less than the Required
Coverage Amount (as defined herein) for such Class
and such
S-15
<PAGE> 17
Distribution Date, Excess Cash derived from
Available Funds for the related Mortgage Loan
Group, if any, will be distributed on the related
Class of Class A Certificates, in reduction of the
Class A Certificate Principal Balance of such
Class, up to the amount necessary for the related
Coverage Amount to equal the applicable Required
Coverage Amount. Excess Cash with respect to each
Class of Class A Certificates on any Distribution
Date will be equal to Available Funds for the
related Mortgage Loan Group on such Distribution
Date, reduced by the sum of (i) the Class A Monthly
Interest for the related Class and Distribution
Date, (ii) the Monthly Principal for the related
Class and Distribution Date, [(iii) the Certificate
Insurer Premium attributable to the related
Mortgage Loan Group and Distribution Date and (iv)
any amounts payable to the Certificate Insurer for
Insured Amounts (as defined herein) paid on prior
Distribution Dates and not yet reimbursed and any
unpaid Certificate Insurer Premium from prior
Distribution Dates, with respect to the related
Class]. Any distributions in respect of Excess Cash
on the Class A-1 Certificates will be distributed
first to the Class A-1A Certificates, then to the
Class A-1B Certificates and then to the Class A-1C
Certificates as described under the caption
"-- Application of Distributions on the Class A-1
Certificates" herein.
Any Excess Cash with respect to a Class of Class A
Certificates not required to be distributed on the
related Class of Class A Certificates on any
Distribution Date will be distributed on the other
Class of Class A Certificates first, to cover any
shortfall in the Class A Monthly Interest for such
Class and Distribution Date, and then to the extent
necessary to reduce the Class A Certificate
Principal Balance of such other Class up to the
amount necessary for the related Coverage Amount to
equal the then applicable Required Coverage Amount
for such Class on the related Distribution Date.
Any Excess Cash not required to be distributed on
either Class of Class A Certificates on any
Distribution Date shall be applied first, [to
reimburse the Certificate Insurer for amounts to
which it then may be entitled in respect of Insured
Amounts for the other Class and to pay amounts of
any unpaid Certificate Insurer Premium on prior
Distribution Dates; second,] to reimburse the
Servicer for any amounts to which it may then be
entitled; and, thereafter, any remaining amount
shall be distributed to the holder of the Class R
Certificate. Amounts so distributed to the Class R
Certificateholder on a Distribution Date will not
be available to pay amounts due to Class A
Certificateholders on subsequent Distribution
Dates. See "Description of the Certificates --
Distributions on the Certificates" herein.
4. Application of
Distributions on the
Class A-1 Certificates..... Distributions on the Class A-1 Certificates will be
allocated among Class A-1 Certificateholders, Class
A-1B Certificateholders and Class A-1C
Certificateholders in the following manner. All
distributions in respect of interest on the Class
A-1 Certificates will be distributed pro rata to
Class A-1A Certificateholders, Class A-1B
Certificateholders and Class A-1C
Certificateholders in proportion to the Class A-1A
Monthly Interest, Class A-1B Monthly Interest and
Class A-1C Monthly Interest for the related
Distribution Date. All distributions in respect of
principal on the Class A-1 Certificates (including
any Excess Cash distributable in respect of the
Class A-1 Certificates) for any Distribution Date
will be distributed to holders of Class A-1
Certificates sequentially in an amount
S-16
<PAGE> 18
not to exceed the amount required to reduce the
Certificate Principal Balance of the related
subclass to zero, but not prior to the Distribution
Date on which the Certificate Principal Balance of
each subclass of Class A-1 Certificates that is
sequentially prior to such subclass has been
reduced to zero. See "Description of the
Certificates -- Distributions on the Certificates"
herein.
B. Available Funds......... "Available Funds" for each Mortgage Loan Group and
any Distribution Date will generally be the sum of
amounts collected, received or otherwise recovered
by or on behalf of the Servicer on or with respect
to the Mortgage Loans in the related Mortgage Loan
Group during the calendar month immediately
preceding the month in which such Distribution Date
occurs (each, a "Collection Period"), net of the
related Servicing Fee and any additional servicing
compensation paid to the Servicer, Payments Ahead
(as defined herein) and reimbursements for certain
Advances (as defined herein) (other than those
included in Liquidation Expenses reimbursed from
related Liquidation Proceeds), plus the amount of
any Monthly Advances and Compensating Interest
Payments made by the Servicer with respect to such
Mortgage Loan Group for such Distribution Date, any
amounts deposited in the Certificate Account by the
Sponsor or the Servicer in respect of the purchase,
repurchase or substitution of Mortgage Loans in
such Mortgage Loan Group during the related
Collection Period and any amounts deposited in the
Certificate Account during such Collection Period
from the Prefunding Account and the Capitalized
Interest Account or in connection with the
termination of the Trust that are attributable to
the related Mortgage Loan Group, all as more fully
described under "Description of the
Certificates -- Distributions on the Certificates"
herein.
C. Overcollateralization
Feature.................... Credit enhancement with respect to the Class A-1
Certificates is expected to result from the
application of Excess Cash on each Distribution
Date to the reduction of the Certificate Principal
Balance of the Class A-1 Certificates so that over
time the Aggregate Principal Balance of the
Mortgage Loans in the Fixed Rate Group will exceed
the aggregate Certificate Principal Balance of the
Class A-1 Certificates. Credit enhancement with
respect to the Class A-2 Certificates initially
will be provided in part by overcollateralization
resulting from the Aggregate Principal Balance of
the Initial Mortgage Loans in the Adjustable Rate
Group and the Prefunding Account Deposit
attributable to such Adjustable Rate Group
exceeding the Original Class A-2 Certificate
Principal Balance which is expected to be
supplemented by the application of Excess Cash on
each Distribution Date so that over time such
overcollateralization will increase. In either
case, such overcollateralization is intended to
result in receipts, collections and recoveries on
the Mortgage Loans in the related Mortgage Loan
Group in excess of the amount necessary to pay the
related Class A Monthly Interest and Class A
Monthly Principal required to be distributed on the
Class A Certificates on any Distribution Date and
to reduce the Certificate Principal Balances of
each Class or subclass, as applicable, of the Class
A Certificates to zero prior to the applicable
Final Scheduled Payment Date (as defined herein).
Excess Cash attributable to a Mortgage Loan Group
will be distributed on the related Class of Class A
Certificates on each Distribution Date to the
extent necessary to reduce
S-17
<PAGE> 19
the Certificate Principal Balance of such Class up
to the amount necessary for the related Coverage
Amount to equal the Required Coverage Amount for
such Class and for such Distribution Date. Any
Excess Cash that is not distributed on the related
Class of Class A Certificates on a given
Distribution Date will be distributed on the other
Class of Class A Certificates, first to cover any
shortfall in the Class A Monthly Interest for such
Class and such Distribution Date and then to the
extent necessary to reduce the Class A Certificate
Principal Balance of such Class up to the amount
necessary for the related Coverage Amount to equal
the applicable Required Coverage Amount.
The "Coverage Amount" for each Class of Class A
Certificates on any Distribution Date will be equal
to the amount by which the Aggregate Principal
Balance of the Mortgage Loans in the related
Mortgage Loan Group as of the end of the related
Collection Period exceeds the Class A Certificate
Principal Balance of the related Class for such
Distribution Date after taking into account
distributions of Monthly Principal (disregarding
any permitted reduction in Monthly Principal due to
a Coverage Surplus in respect of such Class of
Class A Certificates) made on such Distribution
Date. The "Required Coverage Amount" for each Class
of Class A Certificates on any Distribution Date
will be equal to the amount specified as such in
the Pooling and Servicing Agreement. The "Coverage
Surplus" for each Class of Class A Certificates on
any Distribution Date will be the amount, if any,
by which the Coverage Amount for such Class on such
Distribution Date exceeds the then applicable
Required Coverage Amount for such Class. The
"Coverage Deficit" for each Class of Class A
Certificates on any Distribution Date will be the
amount, if any, by which the Class A Certificate
Principal Balance of such Class on such
Distribution Date (after taking into account the
Monthly Principal and Excess Cash to be distributed
on such Distribution Date in reduction of the Class
A Certificate Principal Balance of such Class)
exceeds the Aggregate Principal Balance of the
Mortgage Loans in the related Mortgage Loan Group
at the end of the related Collection Period.
On the Closing Date, the initial Coverage Amount
for the Class A-1 Certificates (the amount by which
the sum of the Aggregate Principal Balance of the
Initial Mortgage Loans in the Fixed Rate Group and
the portion of the Prefunding Account Deposit
attributable to the Fixed Rate Group exceeds the
sum of the Original Class A-1A Certificate
Principal Balance, the Original Class A-1B
Certificate Principal Balance and the Original
Class A-1C Certificate Principal Balance) is
expected to be zero. On the Closing Date, the
initial Coverage Amount for the Class A-2
Certificates will be approximately [ ]% of the sum
of the Aggregate Principal Balance of the Initial
Mortgage Loans in the Adjustable Rate Group and the
portion of the Prefunding Account Deposit
attributable to the Adjustable Rate Group. The
initial Coverage Amount for either the Class A-1
Certificates or the Class A-2 Certificates is not
indicative of the quality of the related Mortgage
Loan Group nor is it intended to reflect the loss,
default or delinquency experience anticipated on
the Mortgage Loans in such Mortgage Loan Group.
The Pooling and Servicing Agreement may provide
that the Required Coverage Amount for a Class of
Class A Certificates may increase or
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decrease during the period such Class remains
outstanding. With respect to the Class A-2
Certificates, if on any Distribution Date occurring
after [ ], the amount of Excess Cash distributable
on the Class A-2 Certificates is less than an
amount specified in the Pooling and Servicing
Agreement, the Required Coverage Amount for the
Class A-2 Certificates will be increased (any such
Distribution Date, a "Class A-2 Trigger Event
Date"); provided, however, that upon the
satisfaction of certain cash flow requirements in
respect of the Class A-2 Certificates for the
period specified in the Pooling and Servicing
Agreement, such Required Coverage Amount will
return to its original level. Any increase in the
Required Coverage Amount for a Class of Class A
Certificates may result in an accelerated
amortization of such Class until such Required
Coverage Amount for such Class is reached, and any
decrease in the Required Coverage Amount for a
Class of Class A Certificates will result in a
decelerated amortization of such Class until such
Required Coverage Amount for such Class is reached.
See "Description of the Certificates --
Overcollateralization Feature" herein.
[D. Certificate Insurance
Policy..................... The Certificate Insurance Policy will be issued on
the Closing Date by by the Certificate Insurer in
favor of the Trustee for the benefit of the Class A
Certificateholders. If, with respect to either
Class of Class A Certificates and any Distribution
Date, sufficient funds are not available from
Available Funds for the related Mortgage Loan Group
and any available Excess Cash from the other
Mortgage Loan Group to distribute the Class A
Monthly Interest to the related Class of Class A
Certificates, or if a Coverage Deficit exists with
respect to such Class on such Distribution Date
(after taking into account any distributions in
reduction of the Class A Certificate Principal
Balance of such Class on such Distribution Date),
the Trustee will make a draw on the Certificate
Insurance Policy in an amount equal to the amount
necessary to pay the full amount of the related
Class A Monthly Interest on such Distribution Date
and the amount of any Coverage Deficit with respect
to such Class of Class A Certificates on such
Distribution Date, as more fully described under
"Description of the Certificates -- The Certificate
Insurance Policy" herein. See also "The Certificate
Insurance Policy and the Certificate Insurer"
herein.]
E. Subordination........... The rights of the Subordinate Certificateholders
and Retained Certificateholders to receive
distributions of interest and principal will be
subordinated to the rights of the Fixed Rate Group
Class A Certificateholders to receive such
distributions, to the extent described herein. This
subordination is intended to enhance the likelihood
of regular receipt by such Certificateholders of
the full amount of their scheduled monthly payments
of interest and principal and to afford them
limited protection against Realized Losses with
respect to the Fixed Rate Group. The delinquency
experience of the Mortgage Loans in the Fixed Rate
Group will impact the relative levels of
subordination through the operation of the
applicable Principal Distribution Amounts.
The protection afforded to the Fixed Rate Group
Class A Certificates by means of the subordination
of the Subordinate Certificates and the Retained
Certificates will be accomplished by the
preferential right of such Certificateholders to
receive on each Distribution Date, prior to any
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<PAGE> 21
distribution being made to the Subordinate
Certificateholders and the Retained
Certificateholders, of the amounts of interest due
them and principal available for distribution on
such Distribution Date and, if necessary, by the
right of such Certificateholders to receive future
distributions of amounts that would otherwise be
payable to the Subordinate Certificateholders and
the Retained Certificateholders.
Similarly, and for the same reasons, the rights of
the Retained Certificateholders and of the Class
M-2F, and Class B-1F Certificateholders to receive
distributions will be subordinated, to the extent
described herein, to such rights of the Fixed Rate
Group Class A and Class M-1F Certificateholders.
Also for the same reasons, the rights of the
Retained Certificateholders and Class B-1F
Certificateholders to receive distributions will be
subordinated in the same manner to such rights of
the Fixed Rate Group Class A and Class M
Certificateholders.
Finally, the rights of the Retained
Certificateholders to receive distributions will be
subordinated in the same manner to all such rights
of all of the Certificateholders such that such
Retained Certificateholders will receive no
distributions in respect of interest or principal
until all holders of Certificates relating to both
Mortgage Loan Groups have received all interest and
principal due them on each Distribution Date.
In the case of the Fixed Rate Group, if on any
Distribution Date, after taking into account the
foregoing and (i) all Realized Losses experienced
during the prior Collection Period, (ii) the
distribution of principal (including the Extra
Principal Distribution Amount) with respect to the
Fixed Rate Group Certificates on such Distribution
Date and (iii) the application of any Excess
Monthly Cashflow Amount available from the
Adjustable Rate Group to cover such Realized Losses
to the extent described herein, the related
Overcollateralization Amount is negative, then the
Certificate Principal Balance of the Subordinate
Certificates will be reduced without a
corresponding principal distribution until such
Overcollateralization Amount equals zero (the
amount of such reduction, the "Applied Realized
Loss Amount"). Any such Applied Realized Loss
Amounts shall be applied to the Subordinate
Certificates in reverse order of seniority (i.e.,
first, against the Class B-1F Certificate Principal
Balance until it is reduced to zero, second,
against the Class M-2F.
Certificate Principal Balance until it is reduced
to zero, and third, against the Class M-1F
Certificate Principal Balance until it is reduced
to zero). The Certificate Principal Balances of the
Fixed Rate Group Class A Certificates and the
Adjustable Rate Group Certificates will not be so
written down. Once the Certificate Principal
Balance of a Class of Subordinate Certificates has
been "written down," the amount of such write down
will no longer bear interest, nor will such amount
thereafter be "reinstated"or "written up," although
the amount of such reductions may, on future
Distribution Dates, be reimbursed to Subordinate
Certificateholders sequentially by Class (i.e.,
first, the Class M-1F Certificates, second, the
Class M-2F Certificates and, third, the Class B-1F
Certificates. Any such reimbursements (the
applicable "Realized Loss Amortization Amounts")
will be made from any related Monthly Excess
Cashflow Amount remaining on a future Distribution
Date after the funding of any related Extra
Principal Distribution Amount, any Interest
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<PAGE> 22
Carry Forward Amounts and any Realized Loss
Amortization Amounts with respect to related
Subordinate Certificates of higher priority as
described herein.
Forward Purchase
Commitment; Prefunding
Account.................... On the Closing Date, a deposit (the "Prefunding
Account Deposit") in the amount of approximately
$[ ] will be made by the Sponsor to a
Prefunding Account in the name of the Trustee.
Approximately $[ ] of the Prefunding
Account Deposit shall be allocated for the purchase
of Subsequent Mortgage Loans for inclusion in the
Fixed Rate Group, and approximately $[ ]
of the Prefunding Account Deposit shall be
allocated for the purchase of Subsequent Mortgage
Loans for inclusion in the Adjustable Rate Group.
The Prefunding Account Deposit may be increased by
an amount equal to the aggregate of the principal
balances of any mortgage loans removed from the
Mortgage Pool prior to the Closing Date as
described herein, provided that any such increase
shall not exceed $[ ]. See "The Mortgage
Loans -- General" herein. During the period (the
"Commitment Period") from the Closing Date until
the earlier of (i) the date on which the Prefunding
Account Deposit is reduced to zero and (ii)
[ ], the Prefunding Account Deposit will
be reduced by the amount thereof used to purchase
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 (as defined herein)
must satisfy the criteria set forth in the Pooling
and Servicing Agreement [and must be approved by
the Certificate Insurer]. Any date on which such
Subsequent Mortgage Loans will be conveyed by the
Sponsor to the Trust is a "Subsequent Transfer
Date." On the Distribution Date in [ ],
the portion of the Prefunding Account Deposit
allocated to the Fixed Rate Group that is remaining
at the end of the Commitment Period (net of
reinvestment income payable to the Sponsor) will be
distributed in reduction of the Class A-1
Certificate Principal Balance and the portion of
the Prefunding Account Deposit allocated to the
Adjustable Rate Group that is remaining at the end
of the Commitment Period (net of reinvestment
income payable to the Sponsor) will be distributed
in reduction of the Class A-2 Certificate Principal
Balance. Although it is intended that the principal
amount of Subsequent Mortgage Loans sold to the
Trust will require application of substantially all
of the Prefunding Account Deposit and it is not
currently anticipated that there will be any
material amount of principal distributions from
amounts remaining on deposit in the Prefunding
Account in reduction of the Class A Certificate
Principal Balances of either Class, no assurance
can be given that such a distribution with respect
to either Class or both Classes of Class A
Certificates will not occur on the Distribution
Date in [ ]. In any event, it is unlikely
that the Sponsor will be able to deliver Subsequent
Mortgage Loans with aggregate principal balances
that exactly equal the Prefunding Account Deposit,
and any portion of the Prefunding Account Deposit
allocated to each Mortgage Loan Group remaining at
the end of the Commitment Period will be
distributed on the [ ] Distribution Date
in reduction of the Class A Certificate Principal
Balances of the related Classes. The Prefunding
Account will
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<PAGE> 23
not be part of the REMIC Pool. See "Description of
the Certificates -- Prefunding Account" herein.
Capitalized Interest
Account.................... On the Closing Date, cash will be deposited in the
name of the Trustee in the Capitalized Interest
Account. The Capitalized Interest Account will be
maintained with the Trustee in its corporate trust
department. The amount on deposit in the
Capitalized Interest Account will be specifically
allocated to cover shortfalls in interest on each
Class of Class A Certificates that may arise as a
result of the utilization of the Prefunding Account
for the purchase by the Trust of Subsequent
Mortgage Loans after the Cut-off Date and will be
so applied by the Trustee on the [ ]
Distribution Date. The Capitalized Interest Account
will not be part of the REMIC Pool. See
"Description of the Certificates -- Capitalized
Interest Account" herein.
Monthly Advances........... The Servicer is required to make advances ("Monthly
Advances") on each Distribution Date in respect of
delinquent payments of interest on the Mortgage
Loans in the related Mortgage Loan Group for the
related Collection Period, subject to certain
limitations described herein. See "Description of
the Certificates -- Monthly Advances; Servicing
Advances; Compensating Interest and Interest
Shortfalls" herein.
Compensating Interest and
Interest Shortfalls........ With respect to any Mortgage Loan as to which a
prepayment was received that became a Liquidated
Mortgage Loan (as defined herein) or was otherwise
charged off during a Collection Period, the
Servicer will be required to remit to the Trustee,
from amounts otherwise payable to the Servicer as
the Servicing Fee for the related Mortgage Loan
Group and Collection Period, an amount generally
calculated to ensure that a full month's interest
on each such Mortgage Loan (less the applicable
Servicing Fee attributable to such Mortgage Loan)
is available for distribution to the holders of the
related Class of Class A Certificates on the
applicable Distribution Date (each such amount, a
"Compensating Interest Payment"). If the Servicing
Fee for the related Mortgage Loan Group and
Collection Period is insufficient to make any
portion of such Compensating Interest Payments, the
resulting shortfall (a "Prepayment Interest
Shortfall") will reduce the amount of interest
distributable in respect of the related Class of
Class A Certificates on the related Distribution
Date and such reduction will not be recoverable
thereafter.
In addition, the application to any Mortgage Loan
of the Soldiers' and Sailors' Civil Relief Act of
1940, as amended (the "Relief Act"), or similar
legislation may adversely affect, for an
indeterminate period of time, the ability of the
Servicer to collect full amounts of interest on
such Mortgage Loan ("Relief Act Shortfalls"; Relief
Act Shortfalls and Prepayment Interest Shortfalls
are collectively, "Interest Shortfalls"). [Interest
Shortfalls will not be covered by the Certificate
Insurance Policy.] See "Risk Factors -- Limitations
on Interest Payments and Foreclosures" in the
Prospectus.
[Certificate Insurer
Premium.................... The Certificate Insurer will be entitled to receive
from the Trust a monthly premium (the "Certificate
Insurer Premium") payable out of Available Funds on
each Distribution Date in respect of the related
Class of Class A Certificates from amounts on
deposit in the Certificate Account after
reimbursement to the Certificate Insurer of certain
In-
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<PAGE> 24
sured Amounts. The Certificate Insurer Premium as
of any Distribution Date will equal one-twelfth
(1/12) of the product of the applicable Insurer
Premium Rate and the Class A Certificate Principal
Balance of the related Class of Class A
Certificates for such Distribution Date. The
"Insurer Premium Rate" will be [ ]%; provided,
however, that with respect to the Class A-2
Certificates and each Distribution Date commencing
with the Distribution Date immediately after
[ ], if the Coverage Amount for the Class
A-2 Certificates is less than the then applicable
Required Coverage Amount for such Class as of the
immediately preceding Distribution Date, the
Insurer Premium Rate with respect to the Class A-2
Certificates and such Distribution Date will be
[ ]%. See "Description of the Certificates -- The
Certificate Insurer Premium" herein.]
Servicing Fee.............. The primary compensation payable to the Servicer on
each Distribution Date in respect of the related
Collection Period and the related Mortgage Loan
Group (the "Servicing Fee") will equal one-twelfth
(1/12) of the product of (a) the applicable
Servicing Fee Rate and (b) the Aggregate Principal
Balance of the Mortgage Loans in the related
Mortgage Loan Group at the beginning of such
Collection Period. The "Servicing Fee Rate" for
each Mortgage Loan Group will be [ ]% for each
Collection Period. The Servicer will also be
entitled to retain late fees, prepayment charges
and certain other amounts and charges as additional
servicing compensation. See "Origination and
Servicing of the Mortgage Loans -- Servicing and
Other Compensation; Payment of Expenses" herein.
The Mortgage Loans......... The statistical information presented in this
Prospectus Supplement regarding the Mortgage Pool
is based on the Initial Mortgage Loans as of the
date of this Prospectus Supplement. The statistical
information does not take into account any
Subsequent Mortgage Loans that may be added to the
Mortgage Pool during the Commitment Period through
application of amounts on deposit in the Prefunding
Account. Certain mortgage loans may be removed,
prior to the Closing Date, from the Mortgage Pool
as described herein. In such event, an amount equal
to the aggregate principal balances of such
mortgage loans, but in no event more than
$[ ], would be added to the Prefunding
Account Deposit on the Closing Date. As a result,
the statistical information presented herein
regarding the Initial Mortgage Loans and each
Mortgage Loan Group as of the date of this
Prospectus Supplement may vary in certain limited
respects from comparable information based on the
actual composition of the Mortgage Pool and each
Mortgage Loan Group on the Closing Date.
As of the Cut-off Date, the Mortgage Pool consisted
of a total of [ ] Mortgage Loans of which [ ] are
fixed rate Mortgage Loans and [ ] are adjustable
rate Mortgage Loans. The Mortgage Loans will be
conventional, closed-end, home equity mortgage
loans acquired by the Sponsor from certain
affiliates of the Sponsor (the "Affiliated
Originators") and institutions not affiliated with
the Sponsor (the "Unaffiliated Originators" and,
together with the Affiliated Originators, the
"Originators"). See "Origination and Servicing of
the Mortgage Loans -- The Originators" and
"-- Underwriting of Mortgage Loans" herein.
Approximately [ ]% of the Initial Mortgage Loans
in the Fixed Rate Group and approximately [ ]% of
the Initial Mortgage Loans in the Adjusta-
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<PAGE> 25
ble Rate Group (by principal balance as of the
Cut-off Date) are secured by Mortgaged Properties
located in California. As of the Cut-off Date, the
Initial Mortgage Loans in the Mortgage Pool had an
Aggregate Principal Balance of $[ ]. The
Initial Mortgage Loans in the Fixed Rate Group had
an Aggregate Principal Balance of $[ ] and
the Initial Mortgage Loans in the Adjustable Rate
Group had an Aggregate Principal Balance of
$[ ]. See "The Mortgage Loans -- General,"
"-- Fixed Rate Group" and "-- Adjustable Rate
Group" and "ANNEX A: Description of the Mortgage
Pool" herein for detailed information about the
Initial Mortgage Loans in each Mortgage Loan Group.
Optional Termination....... On any Distribution Date when the Aggregate
Principal Balance of the Mortgage Loans in the
Mortgage Pool (the "Pool Balance") as of such
Distribution Date is less than [ ]% of the sum of
the Pool Balance as of the Cut-off Date and the
original Prefunding Account Deposit, the Servicer
may purchase from the Trust all remaining Mortgage
Loans and all property acquired in respect of any
Mortgage Loan held by the Trust and thereby effect
an early retirement of the Class A Certificates.
The purchase price will generally be equal to the
Principal Balance of each Mortgage Loan in the
Mortgage Pool at such time plus the fair market
value of each Mortgaged Property then held by the
Trust, together with any unpaid accrued interest on
such Mortgage Loan.
[If, on any Distribution Date, Mortgage Loans with
original Cut-off Date aggregate Principal Balances
equal to or in excess of [ ]% of the sum of the
Pool Balance as of the Cut-off Date and the
Prefunding Account Deposit have become Liquidated
Mortgage Loans, the Certificate Insurer will have
the option to purchase all remaining Mortgage Loans
and all property acquired in respect of any
Mortgage Loan held by the Trust, and thereby effect
an early retirement of the Certificates. The
purchase price for such Mortgage Loans will be the
price set forth in the immediately preceding
paragraph plus any outstanding unpaid fees and
expenses of the Trustee and Servicer.] See
"Description of Certificates -- Termination;
Retirement of the Certificates" herein.
Rating..................... It is a condition to the issuance of the Class A
Certificates that each of the Class A-1A
Certificates, the Class A-1B Certificates, the
Class A-1C Certificates and the Class A-2
Certificates be rated "[ ]" by [ ] and
"[ ]" by [ ] (the "Rating Agencies"). A
security rating is not a recommendation to buy,
sell or hold the securities and may be subject to
revision or withdrawal at any time by the assigning
Rating Agency. See "Rating of the Class A
Certificates" herein.
Certain Federal Income Tax
Consequences............... An election will be made to treat the Trust (other
than the Prefunding Account and the Capitalized
Interest Account) as a real estate mortgage
investment conduit (the "REMIC") for federal income
tax purposes. The Class A-1A Certificates, Class
A-1B Certificates, Class A-1C Certificates and
Class A-2 Certificates will be designated as the
regular interests in the REMIC and generally will
be treated as newly originated debt instruments for
federal income tax purposes. The Class R
Certificate will be designated as the residual
interest in the REMIC. Beneficial owners of the
Class A Certificates will be required to report
income on such Certificates in accordance with the
accrual method of accounting.
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<PAGE> 26
It is anticipated that the Class A Certificates
will be issued without original issue discount for
federal income tax purposes. However, it is
possible that the Internal Revenue Service could
treat a portion of the additional interest which
would become payable on the Class A-2 Certificates
after the Distribution Date in [ ] as
original issue discount. Certificateholders are
urged to consult their tax advisors with respect to
the tax consequences of holding the Class A
Certificates. See "Certain Federal Income Tax
Consequences" herein and in the Prospectus.
ERISA Considerations....... Subject to the satisfaction of certain conditions
set forth herein, the Class A Certificates may be
acquired and held by a pension or other employee
benefit plan subject to the Employee Retirement
Income Security Act of 1974, as amended ("ERISA")
and/or Section 4975 of the Internal Revenue Code of
1986, as amended. See "ERISA Considerations" herein
and in the Prospectus.
Legal Investment
Considerations............. The Class A Certificates will NOT constitute
"mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984
("SMMEA"). See "Legal Investment Considerations"
herein and in the Prospectus.
Risk Factors............... For a discussion of certain factors that should be
considered by prospective investors in the Class A
Certificates, including certain yield and
prepayment risks, see "Risk Factors" herein and in
the Prospectus.
Registration and
Denominations Form of The
Class A
Certificates............... The Class A Certificates will be issued in minimum
denominations of $1,000 and integral multiples of
$1 in excess thereof. Persons acquiring beneficial
ownership interests in the Class A Certificates
("Certificate Owners") will hold their Certificates
through The Depository Trust Company ("DTC"), in
the United States, or Cedel Bank, societe anonyme
("Cedel") or the Euroclear System ("Euroclear") in
Europe. Transfers within DTC, Cedel or Euroclear,
as the case may be, will be in accordance with the
usual rules and operating procedures of the
relevant system. So long as the Class A
Certificates are bookentry Certificates, such
Certificates will be evidenced by one or more
Certificates registered in the name of Cede & Co.,
as the nominee of DTC, or Citibank N.A. or Morgan
Guaranty Trust Company of New York, the relevant
depositaries of Cedel and Euroclear, respectively,
and each a participating member of DTC. No
Certificate Owner will be entitled to receive a
definitive certificate representing such person's
interest, except in the event that Definitive
Certificates are issued under the limited
circumstances described herein. See "Risk
Factors -- Book-Entry Registration", "Description
of the Certificates -- Book-Entry Registration of
Class A Certificates" herein, "ANNEX B: Global
Clearance, Settlement and Tax Documentation
Procedures" hereto and "Description of the
Certificates -- Form of Certificates -- Book-Entry
Registration" in the Prospectus.
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<PAGE> 27
RISK FACTORS
Prospective investors in the Class A Certificates should consider the
following risk factors (as well as the factors set forth under "Risk Factors" in
the Prospectus) in connection with the purchase of the Class A Certificates. Any
statistical information presented below is based upon the characteristics of the
Initial Mortgage Loans as of the date of this Prospectus Supplement. Such
information may vary as a result of the possibility that certain mortgage loans
may be removed from the Mortgage Pool prior to the Closing Date.
RISK OF LIMITATIONS ON ADJUSTMENTS OF PASS-THROUGH RATES
The Adjustable Rate Group contains Mortgage Loans that, after a period of
approximately six months, two years, three years or five years following the
date of origination, adjust either semi-annually based upon a six-month LIBOR
index or annually based on the weekly average yield on United States Treasury
securities adjusted to a constant maturity of one year, as made available by the
Federal Reserve Board (the "one-year CMT index"), in each case subject to
periodic caps on such adjustment, whereas the Class A-2 Pass-Through Rate
adjusts monthly based upon a one-month LIBOR index, subject to the Adjustable
Rate Cap. Consequently, the interest due on such Mortgage Loans (reduced by the
sum of (i) the Servicing Fee, [(ii) the Certificate Insurer Premium,] and (iii)
after the Distribution Date in [ ], an amount equal to one-twelfth ( 1/12)
of [ ] basis points multiplied by the Aggregate Principal Balance of the
Mortgage Loans in the Adjustable Rate Group for the related Distribution Date)
during any Collection Period may not equal the amount of interest that would
accrue at one-month LIBOR plus the applicable margin on the Class A-2
Certificates during the related Interest Period. In particular, because the
interest rates of the Mortgage Loans in the Adjustable Rate Group adjust less
frequently than the Class A-2 Pass-Through Rate, the amount of Class A Monthly
Interest distributed on the Class A-2 Certificates on any Distribution Date may
be limited (as a result of being determined on the basis of the Adjustable Rate
Cap) to an amount that is less than the amount of interest that would be due on
the then Class A-2 Certificate Principal Balance for such Distribution Date at a
rate equal to LIBOR plus [ ]% or LIBOR plus [ ]%, as applicable, for
extended periods in a rising interest rate environment.
A significant percentage of the Initial Mortgage Loans included in the
Adjustable Rate Group have Mortgage Interest Rates that remain fixed for
approximately two years, three years or five years from the date of origination
and thereafter are adjustable semi-annually on the basis of the six-month LIBOR
index (as defined herein). It is expected that, in the aggregate, such Mortgage
Loans will represent not more than [ ]% of the Mortgage Loans (by Aggregate
Principal Balance) included in the Adjustable Rate Group as of the Closing Date.
The inclusion of such Mortgage Loans in the Adjustable Rate Group may increase
the likelihood that the Class A-2 Pass-Through Rate will be determined based on
the Adjustable Rate Cap rather than on the basis of LIBOR plus [ ]% if
LIBOR increases appreciably prior to the time that such Mortgage Loans have
reached their respective dates of first adjustment.
If the Class A-2 Pass-Through Rate is determined on the basis of the
Adjustable Rate Cap, the value of the Class A-2 Certificates may be temporarily
or permanently reduced.
LIMITED SOURCES OF CREDIT ENHANCEMENT
The assets of the Trust, excluding the Financial Guaranty Insurance Policy,
are the sole source of funds for distributions on the Fixed Rate Group
Certificates. The assets of the Trust, including the Financial Guaranty
Insurance Policy and amounts paid by the Class C Certificateholders in respect
of Supplemental Interest Amounts, are the sole sources of funds for distribution
on the Adjustable Rate Group Certificates. The subordination of the Subordinate
Certificates to the Fixed Rate Group Class A Certificates, the further
subordination among the Subordinate Certificates, the Compensating Interest
Payments, and the overcollateralization and cross-collateralization features of
the Trust are the sole sources of protection against losses on the Mortgage
Loans and other shortfalls in available funds in the case of the Fixed Rate
Group Certificates. Compensating Interest Payments, the overcollateralization
and limited cross-collateralization features of the Trust and the Financial
Guaranty Insurance Policy are the sole sources of protection against losses on
the Mortgage Loans and other shortfalls in available funds in the case of the
Adjustable Rate Group Certificates.
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<PAGE> 28
If losses or other shortfalls exceed the protection afforded by such mechanisms,
Certificateholders will bear their proportionate share of such losses and
shortfalls. The Certificates represent interests only in the Trust and do not
represent interests in, or obligations of the Sponsor, the Servicer, the Trustee
or any of their respective affiliates except insofar as the Sponsor, as holder
of the Class C Certificates, has agreed to pay Supplemental Interest Amounts to
the Adjustable Rate Group Certificateholders to the extent of amounts
distributable on the Class C Certificates.
SUBORDINATION
The rights of the Subordinate Certificateholders to receive distributions
with respect to collections on the Mortgage Loans in the Fixed Rate Group will
be subordinate to the rights of the holders of certain more senior Classes of
Fixed Rate Group Certificates. In addition, the Subordinate Certificates are
expected to be allocated relatively higher amounts of Realized Losses with
respect to Mortgage Loans in the Fixed Rate Group than are the related Fixed
Rate Group Class A Certificates. Because of these two features, the yields to
maturity of the Subordinate Certificates will be sensitive, in varying degrees,
to defaults on the Mortgage Loans in the Fixed Rate Group (and the timing
thereof). Investors should fully consider the risks associated with an
investment in the Subordinate Certificates, including the possibility that such
investors may not fully recover their initial investment as a result of Realized
Losses on the Mortgage Loans in the Fixed Rate Group. See "Summary -- Credit
Enhancement -- Allocation of Realized Losses", "Credit Enhancement -- Allocation
of Realized Losses" and "Prepayment and Yield Considerations -- Projected
Payment and Yield for Offered Certificates" herein.
The Subordinate Certificates will not be entitled to any principal
distributions until at least the related Stepdown Date (unless the aggregate
Certificate Principal Balance of the Fixed Rate Group Class A Certificates has
been reduced to zero). As a result, the weighted average lives of the
Subordinate Certificates will be longer than would be the case if distributions
of principal were to be allocated on a pro rata basis among the Fixed Rate Group
Class A Certificates and the Subordinate Certificates. As a result of the longer
weighted average lives of the Subordinate Certificates, the Subordinate
Certificateholders have a greater risk of suffering a loss on their investments.
RISKS ASSOCIATED WITH UNDERWRITING STANDARDS
All of the Mortgage Loans will have been underwritten and originated or, in
the case of Mortgage Loans acquired by the Sponsor from Unaffiliated
Originators, re-underwritten by the Sponsor, in either case pursuant to the
Sponsor's Guidelines (as described in the Prospectus under the caption "The
Originators -- Underwriting Guidelines") which, in most cases, rely on the value
and adequacy of the related Mortgaged Property as collateral and, to a lesser
extent, on the creditworthiness of the Mortgagor. No assurance can be given that
the values of the Mortgaged Properties will not decline from those on the dates
the related Mortgage Loans were originated and any such decline could render the
information set forth herein with respect to the Loan-to-Value or Combined
Loan-to-Value Ratios of such Mortgage Loans an unreliable measure of security
for the related debt. If the residential real estate market should experience an
overall decline in property values such that the outstanding principal balances
of the Mortgage Loans (including any senior liens on the related Mortgage
Properties) become equal to or greater than the values of such Mortgaged
Properties, the actual rate of delinquencies, foreclosures and losses on the
related Mortgage Loans could be higher than those now generally experienced in
the mortgage lending industry. Even assuming that the Mortgaged Properties
provide adequate security for the Mortgage Loans, substantial delays could be
encountered in connection with the foreclosure and liquidation of defaulted
Mortgage Loans and corresponding delays in the receipt of related proceeds by
Class A Certificateholders could occur. In the event that any Mortgaged
Properties fail to provide adequate security for the related Mortgage Loans, any
resulting losses will be covered by funds made available through operation of
the overcollateralization feature described herein, [or, if necessary, by
amounts paid under the Certificate Insurance Policy to the extent of the Class A
Monthly Interest due to the holders of the related Class of Class A Certificates
on the related Distribution Date] and the amount of any Coverage Deficit with
respect to such Class and Distribution Date. See "Certain Legal Aspects of the
Mortgage Loans and Related Matters -- Foreclosure/Repossession," "-- Rights of
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Redemption" and "The Pooling and Servicing Agreement -- Realization upon
Defaulted Mortgage Loans" in the Prospectus.
In general, a prospective borrower applying for a Mortgage Loan is required
to fill out a detailed application designed to provide the related Originator
pertinent information. As part of the description of the borrower's financial
condition, the borrower generally is required to provide a current list of
assets and liabilities and a statement of income and expenses, as well as an
authorization to apply for a credit report that summarizes the borrower's credit
history. The Originator obtains a credit report from credit reporting agencies.
In many cases, the borrower's credit history will include major derogatory
credit items such as credit write-offs, outstanding judgments and prior
bankruptcies. In most cases, the Originator verifies the borrower's employment
and income. Because certain Mortgage Loans may have been underwritten pursuant
to standards that rely to a greater extent on the value of the related Mortgaged
Properties than on the creditworthiness of the related Mortgagor, the actual
rates of delinquencies, foreclosures and losses on such Mortgage Loans could be
higher than those historically experienced in the mortgage lending industry in
general, particularly in periods during which the values of the related
Mortgaged Properties decline. See "The Originators -- Underwriting Guidelines"
in the Prospectus.
RISKS ASSOCIATED WITH GEOGRAPHIC CONCENTRATION OF MORTGAGED PROPERTIES
Approximately [ ]% of the Initial Mortgage Loans (by Cut-off Date
Principal Balance) are secured by Mortgaged Properties located in California.
The California residential real estate market has experienced a sustained
decline over the last several years. In general, declines in the California
residential real estate market may adversely affect the values of the Mortgaged
Properties securing such Mortgage Loans such that the Principal Balances of such
Mortgage Loans, together with any primary financing on such Mortgaged
Properties, will equal or exceed the value of such Mortgaged Properties. In
addition, adverse economic conditions in California (which may or may not affect
real property values) may affect the timely payment by borrowers of scheduled
payments of principal and interest on such Mortgage Loans and, accordingly, the
actual rates of delinquencies, foreclosures and losses on such Mortgage Loans
could be higher than those currently experienced in the mortgage lending
industry in general.
RISKS ASSOCIATED WITH DAMAGED MORTGAGED PROPERTIES
Generally, the standard form of hazard insurance policy required to be
maintained under the terms of each Mortgage Loan does not cover physical damage
resulting from floods and other water-related causes or from earth movement
(including earthquakes, landslides and mudflows). See "Origination and Servicing
of the Mortgage Loans -- Hazard Insurance" herein. Accordingly, to the extent a
Mortgaged Property has been materially damaged since the Cut-off Date due to
flooding or other water-related causes or due to an earthquake or other earth
movement and such damage results in losses on the related Mortgage Loan, such
losses will be covered by funds made available through operation of the
overcollateralization feature described herein, [or, if necessary, by amounts
paid under the Certificate Insurance Policy to the extent of the Class A Monthly
Interest due to the holders of the related Class of Class A Certificates on the
related Distribution Date] and the amount of any Coverage Deficit with respect
to such Class and Distribution Date. See "Description of the
Certificates -- Overcollateralization Feature [ -- Overcollateralization and the
Certificate Insurance Policy" and "-- The Certificate Insurance Policy"] herein.
Certain Initial Mortgage Loans are secured, and certain Subsequent Mortgage
Loans may be secured by Mortgaged Properties located in areas that have been
affected by natural disasters not covered by standard hazard insurance policies.
However, under the Pooling and Servicing Agreement, the Sponsor will represent
that, as of the Cut-off Date, each Mortgaged Property is free of substantial
damage and is in good repair. In the event that any uncured breach of such
representation materially and adversely affects the interest of
Certificateholders in the related Mortgage Loan, the Sponsor will be required to
repurchase the Mortgage Loan or deliver a substitute Mortgage Loan therefor. To
the extent the Sponsor repurchases such Mortgage Loan, such repurchase will
accelerate the timing of principal distributions with respect to the related
Mortgage Loan Group and may thereby affect the yields and weighted average lives
of the related Class or Classes of Certificates.
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RISKS ASSOCIATED WITH JUNIOR LOANS
Because a substantial portion of the Mortgage Loans in the Fixed Rate Group
are secured by junior liens ("Junior Loans") subordinate to the rights of the
beneficiary under each related senior lien, the proceeds from any liquidation,
insurance or condemnation proceedings will be available to satisfy the principal
balance of a Mortgage Loan only to the extent that the claims, if any, of each
such senior beneficiary are satisfied in full, including any related foreclosure
costs. In addition, a beneficiary of a junior lien may not foreclose on the
Mortgaged Property securing such lien unless it forecloses subject to the
related senior lien(s), in which case it must either make payments on each
senior lien in the event of default thereunder or pay the entire amount of each
senior lien to the applicable beneficiary prior to the foreclosure sale. In
servicing home equity mortgage loans in its portfolio, it is the practice of the
Servicer to satisfy each such senior lien at or prior to the foreclosure sale
only to the extent that it determines any amounts so paid will be recoverable
from future payments and collections on the related home equity mortgage loan or
otherwise. The Trust will have no source of funds to satisfy any such senior
lien or make payments due to each related senior beneficiary. See "Risk
Factors -- Nature of the Security for Mortgage Loans -- Risks Associated with
Junior Liens" and "Certain Legal Aspects of the Mortgage Loans and Related
Matters -- Foreclosure/Repossession" in the Prospectus.
Even assuming that the Mortgaged Properties provide adequate security for
the related Mortgage Loans, substantial delays could be encountered in
connection with the foreclosure and liquidation of defaulted Mortgage Loans and
corresponding delays in the receipt of related proceeds by Class A
Certificateholders could occur. An action to foreclose on a Mortgaged Property
securing a Mortgage Loan is regulated by state statutes and rules and is subject
to many of the same delays and expenses as other lawsuits if defenses or counter
claims are interposed, sometimes requiring several years to complete.
Furthermore, an action to obtain a deficiency judgment is generally not
permitted following a non-judicial foreclosure of a Mortgaged Property. In the
event of a default by a Mortgagor, these restrictions, among other things, may
impede the ability of the Servicer to foreclose on and sell the Mortgaged
Property or to obtain Net Liquidation Proceeds (as defined herein) sufficient to
repay all amounts due on the related Mortgage Loan. In the event that any
Mortgaged Properties fail to provide adequate security for the related Mortgage
Loans, any resulting losses will be covered by funds made available through
operation of the overcollateralization feature described herein [or, if
necessary, by amounts paid under the Certificate Insurance Policy to the extent
of the Class A Monthly Interest due on the related Class of Class A Certificates
on the related Distribution Date and the amount of any Coverage Deficit with
respect to such Class and Distribution Date.] See "Certain Legal Aspects of the
Mortgage Loans and Related Matters -- Foreclosure/Repossession," "-- Certain
Provisions of California Deeds of Trust," "-- Anti-deficiency Legislation and
other Limitations on Lenders" and "The Pooling and Servicing
Agreement -- Realization upon Defaulted Mortgage Loans" in the Prospectus.
In addition, other factors may affect the prepayment rate of Junior Loans
such as the amounts of, and interest rates on, the underlying senior mortgage
loans, if any, and the use of first lien mortgage loans as long-term financing
for home purchase and Junior Loans as shorter-term financing for a variety of
purposes, including home improvement, education expenses and purchases of
consumer durables such as automobiles. Accordingly, Junior Loans may experience
a higher rate of prepayments than traditional first lien mortgage loans. In
addition, any future limitations on the right of borrowers to deduct interest
payments on Junior Loans for federal income tax purposes may further increase
the rate of prepayments of such Junior Loans. See "Maturity, Prepayment and
Yield Considerations" in the Prospectus.
CONCENTRATION OF BALLOON LOANS
Approximately [ ]% of the Aggregate Principal Balance of the Initial
Mortgage Loans in the Fixed Rate Group (by Cut-off Date Principal Balance) are
Balloon Loans. Approximately [ ]% of the Initial Mortgage Loans in the
Adjustable Rate Group (by Cut-off Date Principal Balance) are Balloon Loans. See
"Risk Factors -- Nature of the Security for Mortgage Loans -- Risks Associated
with Balloon Loans" in the Prospectus.
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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 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" in the Prospectus.
Prepayments may result from voluntary early payments by borrowers
(including payments in connection with refinancing of any related senior
mortgage loans), sales of Mortgaged Properties subject to "due-on-sale" clauses
as to which the Servicer exercises its rights thereunder and liquidations due to
default, as well as the receipt of proceeds from hazard, credit life and
disability insurance policies. In addition, repurchases or purchases from the
Trust of Mortgage Loans in a Mortgage Loan Group required or permitted to be
made by the Sponsor, the Servicer and, [under certain limited circumstances, the
Certificate Insurer] under the Pooling and Servicing Agreement will have the
same effect on the holders of the related Class of Class A Certificates 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 Class A Certificates. See "The Pooling and Servicing Agreement -- Assignment
of Mortgage Loans" and "-- Termination; Optional Termination" and "Certain Legal
Aspects of the Mortgage Loans and Related Matters -- Enforceability of
Due-on-Sale Clauses" in the Prospectus. The Servicer'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.
Prepayments, liquidations, repurchases and purchases of the Mortgage Loans
will result in distributions to Class A Certificateholders of principal amounts
which would otherwise be distributed over the remaining terms of the Mortgage
Loans. The extent to which the yield to maturity of a Class A Certificate may
vary from the anticipated yield will depend upon the degree to which it is
purchased at a premium or discount and the degree to which the timing of
payments thereon is sensitive to prepayments, liquidations, repurchases and
purchases of Mortgage Loans. In the case of any Class A Certificate purchased at
a discount, an investor should consider the risk that a slower than anticipated
rate of principal payments on the Mortgage Loans could result in an actual yield
to such investor that is lower than the anticipated yield and, in the case of
any Class A Certificate purchased at a premium, the risk that a faster than
anticipated rate of prepayments, liquidations, repurchases and purchases could
result in an actual yield to such investor that is lower than the anticipated
yield. Further, there can be no assurance that Class A Certificateholders will
be able to reinvest distributions
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in respect of prepayments, liquidations, repurchases and purchases of the
Mortgage Loans in securities or other instruments that have a yield comparable
to that of the related Class of Class A Certificates.
THE SUBSEQUENT MORTGAGE LOANS AND THE PREFUNDING ACCOUNT
Any conveyance of Subsequent Mortgage Loans is subject to the following
conditions, among others: (i) each Subsequent Mortgage Loan must satisfy the
representations and warranties specified in the Subsequent Transfer Agreement
and the Pooling and Servicing Agreement; (ii) the Sponsor will not select such
Subsequent Mortgage Loans in a manner that it believes is adverse to the
interests of either Class of Class A Certificateholders; (iii) as of the
Subsequent Cut-off Date, the Mortgage Loans in the Mortgage Pool at that time,
including the Subsequent Mortgage Loans to be conveyed by the Sponsor as of such
Subsequent Cut-off Date, will satisfy the criteria set forth in the Pooling and
Servicing Agreement; [and (iv) the Subsequent Mortgage Loans will have been
approved by the Certificate Insurer.] Following the transfer of Subsequent
Mortgage Loans to the Mortgage Pool, the aggregate characteristics of the
Mortgage Loans then held in the Mortgage Pool may vary from those of the Initial
Mortgage Loans included in the Mortgage Pool. A Current Report on Form 8-K
containing a description of the Mortgage Loans included in the final Mortgage
Pool as of the end of the Commitment Period in a form comparable to the
description of the Initial Mortgage Loans contained in "ANNEX A: Description of
the Mortgage Pool" will be filed with the Securities and Exchange Commission
within 15 days after expiration of the Commitment Period. See "The Mortgage
Loans -- Conveyance of Subsequent Mortgage Loans" herein.
If, by the end of the Commitment Period, amounts on deposit in the
Prefunding Account are not fully applied to the purchase of Subsequent Mortgage
Loans, the portion of the Prefunding Account Deposit allocated to the Fixed Rate
Group that is not so applied will be distributed in reduction of the Class A-1
Certificate Principal Balance and the portion of the Prefunding Account Deposit
allocated to the Adjustable Rate Group that is not so applied will be
distributed in reduction of the Class A-2 Certificate Principal Balance.
Although it is intended that the principal amount of Subsequent Mortgage Loans
sold to the Trust will require application of substantially all of the
Prefunding Account Deposit and it is not currently anticipated that there will
be any material amount of principal distributions from amounts remaining on
deposit in the Prefunding Account in reduction of the Class A Certificate
Principal Balance of either Class, no assurance can be given that such a
distribution with respect to either Class or both Classes of Class A
Certificates will not occur on the Distribution Date in [ ]. In any event,
it is unlikely that the Sponsor will be able to deliver Subsequent Mortgage
Loans with an aggregate principal balance that exactly matches the Prefunding
Account Deposit.
YIELD CONSIDERATIONS RELATING TO EXCESS CASH
Excess Cash attributable to any Mortgage Loan Group will be distributed in
reduction of the Class A Certificate Principal Balance of the related Class of
Class A Certificates on each Distribution Date to the extent the then applicable
Required Coverage Amount exceeds the Coverage Amount for such Class on such
Distribution Date and, after such Required Coverage Amount equals the Coverage
Amount for such Class, any remaining Excess Cash attributable to such Mortgage
Loan Group will be distributed on the other Class of Class A Certificates first
to cover any shortfall in the Class A Monthly Interest for such Class, then to
reduce the Class A Certificate Principal Balance of such Class until the
Coverage Amount for that Class equals the then applicable Required Coverage
Amount for such Class. If purchased at a premium or a discount, the yield to
maturity on a Class A Certificate will be affected by the rate at which Excess
Cash is distributed to Class A Certificateholders in reduction of the Class A
Certificate Principal Balance of such Class. If the actual rate of such Excess
Cash distributions on the Class A Certificates is slower than the rate
anticipated by an investor who purchases a Class A Certificate at a discount,
the actual yield to such investor will be lower than such investor's anticipated
yield. If the actual rate of such Excess Cash distributions is faster than the
rate anticipated by an investor who purchases a Class A Certificate at a
premium, the actual yield to such investor will be lower than such investor's
anticipated yield. The amount of Excess Cash on any Distribution Date will be
affected by the actual amount of interest received, collected or recovered in
respect of the Mortgage Loans during the related Collection Period and such
amount will be influenced by changes in
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the weighted average of the Mortgage Interest Rates resulting from prepayments
and liquidations of Mortgage Loans as well as from, in the case of the
Adjustable Rate Group, adjustments of adjustable Mortgage Interest Rates. The
amount of Excess Cash distributions to the Class A Certificateholders applied in
reduction of the related Class A Certificate Principal Balance on each
Distribution Date will be based on the then applicable Required Coverage Amount
applicable to the related Class of Class A Certificates, which may increase or
decrease during the period such Class remains outstanding. With respect to the
Class A-2 Certificates, if on any Distribution Date occurring after [ ],
the amount of Excess Cash distributable on the Class A-2 Certificates is less
than an amount specified in the Pooling and Servicing Agreement, the Required
Coverage Amount for the Class A-2 Certificates will be increased (any such
Distribution Date, a "Class A-2 Trigger Event Date"); provided, however, that
upon the satisfaction of certain cash flow requirements in respect of the Class
A-2 Certificates for the period specified in the Pooling and Servicing
Agreement, such Required Coverage Amount will return to its original level. Any
increase in a Required Coverage Amount (including, in the case of the Class A-2
Certificates, an increase required on a Class A-2 Trigger Event Date) may result
in an accelerated rate of amortization of the related Class of Class A
Certificates until the Coverage Amount for such Class equals such Required
Coverage Amount and any decrease in a Required Coverage Amount will result in a
decelerated rate of amortization of the Class A Certificates until the Coverage
Amount for such Class equals such Required Coverage Amount.
PREPAYMENT OF FIXED RATE GROUP MAY AFFECT CURRENT INTEREST
The Pass-Through Rates on the Class [ ] Certificates are subject to
the Fixed Rate Net WAC. Disproportionate prepayments (including prepayments due
to liquidations and repurchases or purchases by the Sponsor or the Servicer as
required by the Pooling and Servicing Agreement) of Mortgage Loans in the Fixed
Rate Group with relatively high Mortgage Interest Rates in comparison to the
Pass-Through Rate for any such Class of Certificates will increase the
possibility that the Pass-Through Rate for such Class of Certificates will be
limited by the Fixed Rate Net WAC. Any difference between interest determined at
the Fixed Rate Net WAC and interest at the applicable Formula Pass-Through Rate
or fixed Pass-Through Rates shown on the cover page will be foregone permanently
and the value of any such Class of Certificates may be temporarily or
permanently reduced.
ENVIRONMENTAL STATUTES AFFECTING SECURITY INTERESTS
A substantial percentage of the Initial Mortgage Loans (by Cut-off Date
Principal Balance) are secured by Mortgaged Properties located in states that
may impose a statutory lien for associated costs on property that is the subject
of a clean-up action by the state on account of hazardous wastes or hazardous
substances released or disposed of on the property. Such a lien generally will
have priority over all subsequent liens on the property, although in some
states, including California, it will not have priority over prior recorded
liens, including the lien of a mortgage. In addition, under federal
environmental statutes and under the laws of many states, including California,
a secured party that takes a deed in lieu of foreclosure, acquires a mortgaged
property at a foreclosure sale or, prior to foreclosure, has been involved in
decisions or actions that may lead to contamination of a property, may be liable
for the costs of cleaning up a contaminated site. See "Certain Legal Aspects of
the Mortgage Loans and Related Matters -- Environmental Considerations" in the
Prospectus. Any such liens or costs imposed in connection with a clean-up action
by the state may impede the ability of the Servicer to foreclose on or sell the
related Mortgaged Property or to obtain Net Liquidation Proceeds sufficient to
repay all amounts due on the related Mortgage Loan. Any resulting losses will be
covered by funds made available through operation of the overcollateralization
feature described herein or, if necessary, [by amounts paid under the
Certificate Insurance Policy to the extent of the Class A Monthly Interest due
on the related Class of Class A Certificates on the related Distribution Date]
and the amount of any Coverage Deficit with respect to such Class and
Distribution Date.
RISKS ASSOCIATED WITH CERTAIN ORIGINATION FEES
Fees earned on the origination of loans and placement of related insurance
by the Sponsor and Affiliated Originators are often paid by the borrower out of
related loan proceeds. From time to time, in the ordinary
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course of their businesses, originators of home equity loans have been named in
legal actions brought by mortgagors challenging the amount or method of imposing
or disclosing such fees. To date, no such action has been decided against the
Sponsor or any Affiliated Originator. If such an action against any Originator
with respect to any Mortgage Loan were successful, a court might require that
the principal balances of the related Mortgage Loans be reduced by the amount of
contested fees or charges. Any such reductions could result in substantial
Realized Losses during one or more Collection Periods, potentially leading to
Coverage Deficits. [Under such circumstances, payments by the Certificate
Insurer would result in accelerated distributions in reduction of the Class A
Certificate Principal Balance.]
[LIMITATIONS ON FIXED RATE GROUP CERTIFICATEHOLDERS' RIGHTS
Although the Fixed Rate Group Certificateholders do not have the benefit of
the Financial Guaranty Insurance Policy, absent an existing default by the
Financial Guaranty Insurer, (i) the rights of the Fixed Rate Group
Certificateholders to give notices of breach or to terminate the rights and
obligations of the Servicer under the Pooling and Servicing Agreement in the
event of a Servicer Event of Default cannot be exercised thereby without the
consent of the Financial Guaranty Insurer, and (ii) the Financial Guaranty
Insurer, rather than such Certificateholders, will have the right to direct the
actions of the Trustee during the continuation of a Servicer Event of Default.
Additionally, the consent of the Financial Guaranty Insurer is required (i) for
the appointment of any successor Servicer or successor Trustee or (ii) to amend
the Pooling and Servicing Agreement. See "Financial Guaranty Insurance Policy"
herein.]
DESCRIPTION OF THE CERTIFICATES
The Class A Certificates will be issued pursuant to a Pooling and Servicing
Agreement, to be dated as of [ ] (the "Pooling and Servicing Agreement"),
between the Sponsor, Servicer, and the Trustee. The following summaries describe
the material provisions of the Pooling and Servicing Agreement but do not
purport to be complete. The Sponsor will provide a copy of the Pooling and
Servicing Agreement (without exhibits) without charge upon the written request
of a Certificate Owner addressed to: [Sponsor], [350 South Grand Avenue, Los
Angeles, California 90071], Attention: [Corporate Secretary].
GENERAL
The Certificates will evidence undivided beneficial ownership interests in
the Trust created pursuant to the Pooling and Servicing Agreement. The Class
A-1A Certificates, the Class A-1B Certificates and the Class A-1C Certificates
will respectively evidence the right to receive from the Trust (i) the Class
A-1A Certificate Principal Balance, plus interest at the Class A-1A Pass-Through
Rate, (ii) the Class A-1B Certificate Principal Balance, plus interest at the
Class A-1B Pass-Through Rate and (iii) the Class A-1C Certificate Principal
Balance, plus interest at the Class A-1C Pass-Through Rate, as described herein.
The Class A-2 Certificates will evidence the right to receive from the Trust an
aggregate amount equal to the Class A-2 Certificate Principal Balance, plus
interest at the Class A-2 Pass-Through Rate, as described herein. The holder of
the Class R Certificate (which has no stated principal balance) is not entitled
to any distributions with respect to any Distribution Date until such time as
the Coverage Amount for each Class of Class A Certificates equals or exceeds the
then applicable Required Coverage Amount for the related Class of Class A
Certificates and [the Certificate Insurer] and the Servicer, in that order, have
been reimbursed amounts to which they may be entitled. The holder of the Class R
Certificate will thereafter be entitled to certain amounts as described herein
under "-- Distributions on the Certificates."
The assets of the Trust will consist of (a) the Mortgage Loans that from
time to time are subject to the Pooling and Servicing Agreement; (b) the assets
that from time to time are required by the Pooling and Servicing Agreement to be
deposited in the Collection Account and the Certificate Account, held in the
Prefunding Account and the Capitalized Interest Account or invested in Permitted
Investments (see "-- Payments on Mortgage Loans and Deposits to the Collection
Account" herein); (c) all rights of the mortgagee under any insurance policy
covering a Mortgage Loan or the related Mortgaged Property;
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<PAGE> 35
(d) property and any proceeds thereof acquired by foreclosure of the Mortgage
Loans, deed in lieu of foreclosure or a comparable conversion; and [(e) the
Certificate Insurance Policy].
The Sponsor will designate in the Pooling and Servicing Agreement, for
purposes of the Internal Revenue Code of 1986, as amended (the "Code"), the
Class A Certificates as "regular interests," and the Class R Certificate as the
sole class of "residual interests," in a REMIC generally comprised of the
Mortgage Pool, the Collection Account, the Certificate Account [and the
Certificate Insurance Policy] (the "REMIC Pool"). The Prefunding Account and the
Capitalized Interest Account will not be part of the REMIC Pool. The Closing
Date will be designated as the "Startup Day" (within the meaning of the Code) of
the REMIC. See "Certain Federal Income Tax Consequences" in the Prospectus.
The Class A Certificates will be issued in minimum denominations of $1,000
and integral dollar multiples of $1 in excess thereof.
The Class A Certificates initially will be book-entry Certificates (the
"Book-Entry Certificates"). Persons acquiring beneficial ownership interests in
the Class A Certificates ("Certificate Owners") will hold such Certificates
through the Depository Trust Company ("DTC"), in the United States, or Cedel
Bank, societe anonyme ("Cedel") or the Euroclear System ("Euroclear"), in
Europe, if they are participants of such systems, or indirectly through
organizations which 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 Class A Certificates, and
will initially be registered in the name of Cede & Co. ("Cede"), the nominee of
DTC. Cedel and Euroclear will hold omnibus positions on behalf of Cedel
Participants and Euroclear Participants (each as defined herein, respectively,
through customers' securities accounts in Cedel's and Euroclear's names on the
books of their respective depositaries which in turn will hold such positions in
customers' securities accounts in the depositaries' names on the books of DTC.
Citibank N.A. ("Citibank") will act as depositary for Cedel and Morgan Guaranty
Trust Company of New York ("Morgan") will act as depositary for Euroclear
(Citibank and Morgan, in such capacities, individually the "Relevant Depositary"
and, collectively, the "European Depositaries"). Investors may hold such
beneficial interests in the Book-Entry Certificates in minimum denominations
representing Certificate Principal Balances of $1,000 and in integral multiples
of $1 in excess thereof. Except as described below, no person acquiring a
Book-Entry Certificate will be entitled to receive a physical certificate
representing such Certificate (a "Definitive Certificate"). Unless and until
Definitive Certificates are issued, it is anticipated that the only
"Certificateholder" of the Class A Certificates will be Cede, as nominee of DTC.
Certificate Owners will not be Certificateholders as that term is used in the
Pooling and Servicing Agreement. Certificate Owners are permitted to exercise
their rights only indirectly through DTC and its Participants (including Cedel
and Euroclear).
The beneficial ownership of a Book-Entry Certificate will be recorded on
the records of the brokerage firm, bank, thrift institution or other financial
intermediary (each, a "Financial Intermediary") that maintains the Certificate
Owner's account for such purpose. In turn, the Financial Intermediary's
ownership of such Book-Entry Certificate will be recorded on the records of DTC
(or of a participating firm that acts as agent for the Financial Intermediary,
whose interest will in turn be recorded on the records of DTC, if the beneficial
owner's Financial Intermediary is not a Participant and on the records of Cedel
or Euroclear, as appropriate).
Certificate Owners will receive all distributions of principal of, and
interest on, the Class A Certificates from the Trustee through DTC and its
Participants (including Cedel and Euroclear). While the Class A Certificates are
outstanding (except under the circumstances described below), under the rules,
regulations and procedures creating and affecting DTC and its operations (the
"Rules"), DTC is required to make book-entry transfers among Participants on
whose behalf it acts with respect to the Certificates and is required to receive
and transmit distributions of principal of, and interest on, such Certificates.
Participants and indirect participants with whom Certificate Owners have
accounts with respect to Book-Entry Certificates are similarly required to make
book-entry transfers and receive and transmit such distributions on behalf of
their respective 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.
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Certificate Owners will not receive or be entitled to receive certificates
representing their respective interests in the Class A Certificates, except
under the limited circumstances described below. Unless and until Definitive
Certificates are issued, Certificate Owners who are not Participants may
transfer ownership of Class A Certificates only through Participants and
indirect participants by instructing such Participants and indirect participants
to transfer Class A Certificates, by book-entry transfer, through DTC for the
account of the purchasers of such Class A Certificates, which account is
maintained with their respective Participants. Under the Rules and in accordance
with DTC's normal procedures, transfers of ownership of Class A Certificates
will be executed through DTC and the accounts of the respective Participants at
DTC will be debited and credited. Similarly, the Participants and indirect
participants will make debits or credits, as the case may be, on their records
on behalf of the selling and purchasing Certificate Owners.
Because of time zone differences, credits of securities received in Cedel
or Euroclear as a result of a transaction with a Participant will be made during
subsequent securities settlement processing and dated the business day following
the DTC settlement date. Such credits or any transactions in such securities
settled during such processing will be reported to the relevant Euroclear or
Cedel Participants on such business day. Cash received in Cedel or Euroclear as
a result of sales of securities by or through a Cedel Participant or Euroclear
Participant to a Participant will be received with value on the DTC settlement
date but will be available in the relevant Cedel or Euroclear cash account only
as of the business day following settlement in DTC. For information with respect
to tax documentation procedures relating to the Certificates, see "Certain
Federal Income Tax Consequences -- Non-U.S. Persons -- Senior Certificates" and
"-- Information Reporting and Backup Withholding" in the Prospectus and in
"ANNEX B: Global Clearance, Settlement and Tax Documentation
Procedures -- Certain U.S. Federal Income Tax Documentation Requirements"
hereto.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between Cedel Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedel
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. Cedel Participants and Euroclear Participants may not deliver instructions
directly to the European Depositaries.
DTC, which is a New York-chartered limited purpose trust company, performs
services for its participants ("Participants"), some of which (and/or their
representatives) own DTC. In accordance with its normal procedures, DTC is
expected to record the positions held by each Participant in the Book-Entry
Certificates, whether held for its own account or as a nominee for another
person. In general, beneficial ownership of Book-Entry Certificates will be
subject to the rules, regulations and procedures governing DTC and its
Participants as in effect from time to time.
Cedel is incorporated under the laws of Luxembourg as a professional
depository. Cedel holds securities for its participating organizations ("Cedel
Participants") and facilitates the clearance and settlement of securities
transactions between Cedel Participants through electronic book-entry changes in
accounts of Cedel Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in Cedel in any of 28
currencies, including United States dollars. Cedel provides to its Cedel
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Cedel interfaces with domestic markets in several
countries. As a professional depository, Cedel is subject to regulation by the
Luxembourg Monetary Institute. Cedel Participants are recognized financial
institutions around the world, including underwriters, securities
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brokers and dealers, banks, trust companies, clearing corporations and certain
other organizations. Indirect access to Cedel is also available to others, such
as banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Cedel Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for its participants
("Euroclear Participants") and to clear and settle transactions between
Euroclear Participants, through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may be settled through Euroclear in any of 32 currencies,
including United States dollars. Euroclear provides various other services,
including securities lending and borrowing, and interfaces with domestic markets
in several countries generally similar to the arrangements for cross-market
transfers with DTC described above. Euroclear is operated by the Brussels,
Belgium office of Morgan Guaranty Trust Company of New York (the "Euroclear
Operator"), under contract with Euroclear Clearance Systems S.C., a Belgian
cooperative corporation (the "Cooperative"). All operations are conducted by the
Euroclear Operator, and all Euroclear securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear Operator, not the
Cooperative. The Cooperative establishes policy for Euroclear on behalf of
Euroclear Participants. Euroclear Participants include banks (including central
banks), securities brokers and dealers and other professional financial
intermediaries. Indirect access to Euroclear is also available to other firms
that clear through or maintain a custodial relationship with a Euroclear
Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution to specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions on the Book-Entry Certificates will be made on each
Distribution Date by the Trustee to DTC. DTC will be responsible for crediting
the amount of such payments to the accounts of the applicable Participants in
accordance with DTC's normal procedures. Each Participant will be responsible
for disbursing such payments to the Certificate Owners that it represents and to
each Financial Intermediary for which it acts as agent. Each such Financial
Intermediary will be responsible for disbursing funds to the Certificate Owners
that it represents.
Under a book-entry format, Certificate Owners may experience some delay in
their receipt of payments because such payments will be forwarded by the Trustee
to Cede. Distributions with respect to Certificates held through Cedel or
Euroclear will be credited to the cash accounts of Cedel Participants or
Euroclear Participants in accordance with the relevant system's rules and
procedures, to the extent received by the Relevant Depositary. Such
distributions will be subject to tax reporting in accordance with relevant
United States tax laws and regulations. See "Certain Federal Income Tax
Consequences -- Non-U.S. Persons -- Senior Certificates" in the Prospectus and
"-- Information Reporting and Backup Withholding" in "ANNEX B: Global Clearance,
Settlement and Tax Documentation Procedures" hereto. Because DTC has indicated
that it will act only on behalf of Financial Intermediaries, the ability of
Certificate Owners to pledge Book-Entry Certificates to persons or entities that
do not participate in the depository system or otherwise take actions in respect
of such Book-Entry Certificates may be limited due to the lack of physical
certificates representing such Book-Entry Certificates. In addition, issuance of
the Book-Entry Certificates in book-entry form may reduce the liquidity of such
Certificates in the secondary market because certain potential investors may be
unwilling to purchase Certificates for which they cannot obtain physical
certificates.
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Monthly and annual reports on the Trust will be provided to Cede, as
nominee of DTC, and may be made available by Cede to Certificate Owners upon
request, in accordance with the Rules, and to the Financial Intermediaries to
whose DTC accounts the related Book-Entry Certificates are credited.
DTC has advised the Trustee that, unless and until Definitive Certificates
are issued, DTC will take any action permitted to be taken by a
Certificateholder under the Pooling and Servicing Agreement only at the
direction of one or more Financial Intermediaries to whose DTC accounts the
Book-Entry Certificates are credited, to the extent that such actions are taken
on behalf of Financial Intermediaries whose holdings include such Book-Entry
Certificates. Cedel or the Euroclear Operator, as the case may be, will take any
other action permitted to be taken by a Certificateholder under the Pooling and
Servicing Agreement on behalf of a Cedel Participant or Euroclear Participant
only in accordance with its relevant rules and procedures and subject to the
ability of the Relevant Depositary to effect such actions on its behalf through
DTC. DTC may take actions, at the direction of the related Participants, with
respect to some Class A Certificates which conflict with actions taken with
respect to other Class A Certificates.
Definitive Class A 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 depository with
respect to the Class A Certificates and the Sponsor or the Trustee is unable to
locate a qualified successor, (ii) the Sponsor, at its option, advises the
Trustee that it elects to terminate the book-entry system through DTC, or (iii)
after an Event of Default under the Pooling and Servicing Agreement, the
Certificate Owners representing not less than 51% of the Class A Certificate
Principal Balance of the book-entry certificates advise the Trustee and DTC that
the book-entry system is no longer in the best interests of such Certificate
Owners. Upon issuance of Definitive Class A Certificates to Certificate Owners,
such Class A Certificates will be transferable directly (and not exclusively on
a book-entry basis) and registered holders will deal directly with the Trustee
with respect to transfers, notices and distributions. See "Description of the
Certificates -- Form of Certificates -- General " in the Prospectus.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all Certificate
Owners of the occurrence of such event and the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the global certificates
representing the Book-Entry Certificates and instructions for re-registration,
the Trustee will issue Definitive Certificates and thereafter the Trustee will
recognize the holders of such Definitive Certificates as Certificateholders
under the Pooling and Servicing Agreement.
Although DTC, Cedel and Euroclear have agreed to the foregoing procedures
in order to facilitate transfer of Class A Certificates among participants of
DTC, Cedel and Euroclear, they are under no obligation to perform or continue to
perform such procedures and such procedures may be discontinued at any time.
ASSIGNMENT OF MORTGAGE LOANS
At the time of issuance of the Certificates, the Sponsor will assign to the
Trustee all of its right, title and interest in and to the Initial Mortgage
Loans, including all principal and interest on or in respect of the Initial
Mortgage Loans received on or after the Cut-off Date, together with its right,
title and interest in and to the proceeds of any related insurance policies
received on and after the Cut-off Date. The Trustee, concurrently with such
assignment, will deliver the Certificates at the direction of the Sponsor in
exchange for, among other things, the Initial Mortgage Loans. Each Initial
Mortgage Loan will be identified in a schedule appearing as an exhibit to the
Pooling and Servicing Agreement (the "Mortgage Loan Schedule") that will provide
information about each Mortgage Loan, including, among other things, its
identifying number and the name of the related Mortgagor, the street address of
the related Mortgaged Property, its date of origination, the original number of
months to stated maturity, the original stated maturity, its original Principal
Balance, its Principal Balance as of the Cut-off Date (the "Cut-off Date
Principal Balance"), its interest rate as of the Cut-off Date and its monthly
payment as of the Cut-off Date.
Following the Closing Date, the Trust will be obligated to purchase from
the Sponsor, from time to time on or before [ ], subject to the
availability thereof, Subsequent Mortgage Loans consisting of closed-
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end fixed and adjustable rate home equity mortgage loans. In connection with
each purchase of Subsequent Mortgage Loans, the Trustee on behalf of the Trust
will pay to the Sponsor from amounts comprising the Prefunding Account Deposit a
cash purchase price of not more than 100% of the principal balance thereof; the
Trust may pay a cash purchase price of less than 100% for the purpose of
increasing the Coverage Amount, but in no event less than the fair market value
of the Subsequent Mortgage Loans. In connection with any purchase of Subsequent
Mortgage Loans, pursuant to the Pooling and Servicing Agreement, the Sponsor
will assign to the Trustee all of its right, title and interest in and to such
Subsequent Mortgage Loans as provided above with respect to the Initial Mortgage
Loans.
The Pooling and Servicing Agreement will require the Sponsor to deliver to
the Trustee the Mortgage Loans, the related Mortgage Notes endorsed without
recourse to the Trustee, the related mortgages or deeds of trust with evidence
of recording thereon, assignments of the Mortgages in recordable form, the title
policies with respect to the related Mortgaged Properties, all intervening
mortgage assignments, if applicable, and certain other documents relating to the
Mortgage Loans (the "Mortgage Files"). Assignments of the Mortgage Loans to the
Trustee (or its nominee) will be recorded in the appropriate public office for
real property records in the states where such recording is required to protect
the Trustee's interest in the Mortgage Loans against the claims of any
subsequent transferee or any successor to or creditor of the Sponsor. The
Trustee will hold such documents in trust for the benefit of the
Certificateholders [and the Certificate Insurer].
The Trustee will review the Mortgage Files delivered to it within 45 days
following such delivery, and if any document required to be included in any
Mortgage File is found to be missing or to be defective in any material respect
and such defect is not cured within 60 days following notification thereof to
the Sponsor by the Trustee, the Sponsor will be obligated to repurchase the
related Mortgage Loan from the Trust or substitute a Qualified Replacement
Mortgage (as defined below), 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, 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 condominium, that the Sponsor had good title to each Mortgage Loan
prior to the sale and assignment by the Sponsor and that the Originator was
authorized to originate each Mortgage Loan. See "The Pooling and Servicing
Agreement -- Assignment of Mortgage Loans" in the Prospectus.
If with respect to any Mortgage Loan (1) a defect in any document
constituting a part of the related Mortgage File remains uncured and materially
and adversely affects the interests of the Certificateholders [or the
Certificate Insurer] in such Mortgage Loan or (2) a breach of any representation
or warranty made by the Sponsor in the Pooling and Servicing Agreement relating
to such Mortgage Loan occurs and such breach materially and adversely affects
the interests of the Certificateholders [or the Certificate Insurer] in such
Mortgage Loan, the Sponsor will be required to repurchase the related Mortgage
Loan (any such Mortgage Loan, a "Defective Mortgage Loan") from the Trust at a
price equal to its Principal Balance together with one month's interest at the
Mortgage Interest Rate (net of the applicable Servicing Fee Rate) on such
Defective Mortgage Loan, less any payments received during the related
Collection Period in respect of such
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Defective Mortgage Loan (the "Purchase Price"). The Sponsor will also have the
option, but not the obligation, during the two years (or such longer period as
permitted by the applicable REMIC Regulations) immediately following the Closing
Date, to substitute for such Defective Mortgage Loan a Mortgage Loan conforming
to the requirements of the Pooling and Servicing Agreement (a "Qualified
Replacement Mortgage"). Upon delivery of a Qualified Replacement Mortgage and
deposit of certain amounts in the Collection Account as set forth in the Pooling
and Servicing Agreement, or deposit of the Purchase Price in the Collection
Account and receipt by the Trustee of written notification of any such
substitution or repurchase, as the case may be, the Trustee shall execute and
deliver an instrument of transfer or assignment necessary to vest in the Sponsor
legal and beneficial ownership of such Defective Mortgage Loan (including any
property acquired in respect thereof or proceeds of any insurance policy with
respect thereto).
The obligation of the Sponsor to cure, repurchase or substitute any
Mortgage Loan as described above will constitute the sole remedy available to
Certificateholders or the Trustee for a Defective Mortgage Loan.
The Pooling and Servicing Agreement additionally provides that the Servicer
will have the option, but not the obligation, to purchase from the Trust at the
Purchase Price (i) any Mortgage Loan as to which the related Mortgagor has
failed to make scheduled payments thereon for three consecutive months at any
time following the Cut-off Date and (ii) during the 90-day period following the
Closing Date, any Mortgage Loan as to which a scheduled payment thereon becomes
60 or more days contractually delinquent; provided, however, that the aggregate
of the Principal Balances of the Mortgage Loans so purchased by the Servicer may
not exceed 5% of the sum of the Cut-off Date Pool Balance and the Prefunding
Account Deposit. See "The Pooling and Servicing Agreement -- Realization upon
Defaulted Mortgage Loans" in the Prospectus.
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 (as defined herein), shall
cause the related Sub-Servicer to establish and maintain an account
(collectively, the "Collection Account") into which all collections on or with
respect to the Mortgage Loans in each Mortgage Loan Group will be deposited and
the Trustee shall establish and maintain an account (the "Certificate Account"
and, together with the Collection Account, the "Accounts") from which all
distributions with respect to the Certificates will be made. All amounts held in
the Accounts shall be invested in Permitted Investments (as defined herein) that
mature not later than the date which is one Business Day prior to the Deposit
Date (as defined herein) for the related Distribution Date next succeeding the
date of investment. A "Business Day" will be any day other than a Saturday or
Sunday or a day on which banking institutions in the State of California or the
State of New York are required or authorized by law, executive order or
governmental decree to be closed. "Permitted Investments" will be specified in
the Pooling and Servicing Agreement and will be limited to investments [which
are approved by the Certificate Insurer and] meet the criteria of the Rating
Agencies (as defined herein) from time to time as being consistent with their
then current ratings of the Class A Certificates. See "The Pooling and Servicing
Agreement -- Permitted Investments" in the Prospectus. No Permitted Investment
shall be sold or disposed of at a gain prior to maturity unless the Servicer has
obtained a satisfactory opinion of counsel that such sale or disposition will
not cause the REMIC Pool to be subject to the tax on income from prohibited
transactions imposed by Code Section 860F(a)(1), otherwise subject the REMIC
Pool to tax or cause the REMIC Pool to fail to qualify as a REMIC. Investment
income on monies on deposit in the Certificate Account and the Collection
Account will not be available for distribution to Certificateholders or
otherwise subject to any claims or rights of the Certificateholders and will be
paid to Servicer as additional servicing compensation. The Servicer will be
liable for any losses resulting from such investments.
The Servicer will deposit, or cause the related Sub-Servicer to deposit,
into the Collection Account not later than two Business Days after receipt, all
payments on or in respect of the Mortgage Loans received from or on behalf of
Mortgagors and all proceeds of Mortgage Loans. On the date in each month
specified in the Pooling and Servicing Agreement, which date shall be no later
than three Business Days prior to the related Distribution Date (the "Deposit
Date"), funds to be distributed in respect of the Class A Monthly Interest,
Monthly Principal and any Excess Cash in respect of each Class of Class A
Certificates will be transferred from the Collection Account to the Certificate
Account. Notwithstanding the foregoing, payments and
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collections that do not constitute Available Funds (e.g., fees, late payment
charges, prepayment charges, charges for checks returned for insufficient funds,
extension or other administrative charges or other amounts received for
application towards the payment of taxes, insurance premiums, assessments and
similar items) will not be required to be deposited into the Collection Account.
The Servicer may make withdrawals from the Collection Account to make the
deposits to the Certificate Account, to pay the monthly Servicing Fee for each
Mortgage Loan Group to itself, to reimburse itself for certain Advances (as
defined herein) that it has made and for which it may be entitled to
reimbursement under the Pooling and Servicing Agreement and for any other
expenses incurred by it for which it may be entitled to reimbursement under the
Pooling and Servicing Agreement.
DISTRIBUTIONS ON THE CERTIFICATES
Distributions of principal and interest on the Class A Certificates will be
made by the Trustee (in such capacity, the "Paying Agent") on the fifteenth day
of each month or, if such day is not a Business Day, on the next succeeding
Business Day (each, a "Distribution Date") commencing in [ ] to holders of
record of the related Class of Class A Certificates as of the close of business
on the last Business Day of the calendar month immediately preceding such
Distribution Date (each, a "Record Date") in an amount equal to the product of
such Certificateholders' Percentage Interest and the amount distributed in
respect of the related Class of Class A Certificates. The "Percentage Interest"
represented by any Class A-1A Certificate, Class A-1B Certificate, Class A-1C
Certificate or Class A-2 Certificate will be equal to the percentage obtained by
dividing the Certificate Principal Balance of such Class A-1A Certificate, Class
A-1B Certificate, Class A-1C Certificate or Class A-2 Certificate, respectively,
by the aggregate of the principal balances of all Certificates of the same Class
or subclass, as applicable.
On each Distribution Date, the Paying Agent will distribute the following
amounts in the following order of priority, to the extent of Available Funds for
the Fixed Rate Group and any available Excess Cash from the Adjustable Rate
Group:
[(a) to the Certificate Insurer, the aggregate amount necessary to
reimburse the Certificate Insurer for any unreimbursed payments of Insured
Amounts in respect of the Class A-1 Certificates on prior Distribution
Dates and the amount of any unpaid Certificate Insurer Premium in respect
of the Class A-1 Certificates on prior Distribution Dates; provided,
however, that the Certificate Insurer's right to such reimbursement is
subject to the right of Class A-1A Certificateholders, Class A-1B
Certificateholders and Class A-1C Certificateholders to receive Class A-1A
Monthly Interest, Class A-1B Monthly Interest and Class A-1C Monthly
Interest, respectively, and any Coverage Deficit for the Class A-1
Certificates with respect to such Distribution Date;
(b) to the Certificate Insurer, an amount equal to the Certificate
Insurer Premium (as defined herein) attributable to the Fixed Rate Group;]
(c) concurrently to the Class A-1A Certificateholders, Class A-1B
Certificateholders and Class A-1C Certificateholders, Class A-1A Monthly
Interest, Class A-1B Monthly Interest and Class A-1C Monthly Interest,
respectively;
(d) to the Class A-1A Certificateholders, the amount of Monthly
Principal for the Class A-1 Certificates, in reduction of the Class A-1A
Certificate Principal Balance until such Class A-1A Certificate Principal
Balance is reduced to zero, then to Class A-1B Certificateholders, the
amount of any remaining Monthly Principal for the Class A-1 Certificates,
in reduction of the Class A-1B Certificate Principal Balance, until such
Class A-1B Certificate Principal Balance is reduced to zero, and then to
Class A-1C Certificateholders, the amount of any remaining Monthly
Principal for the Class A-1 Certificates, in reduction of the Class A-1C
Certificate Principal Balance, until such Class A-1C Certificate Principal
Balance is reduced to zero;
(e) to the Class A-1A Certificateholders, the amount, if any, of
Excess Cash for the Fixed Rate Group in reduction of the Class A-1A
Certificate Principal Balance, up to an amount equal to the lesser of (1)
the amount necessary for the Coverage Amount of the Class A-1 Certificates
to equal the
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Required Coverage Amount for such Class A-1 Certificates on such
Distribution Date and (2) the amount necessary to reduce the Class A-1A
Certificate Principal Balance to zero;
(f) to the Class A-1B Certificateholders, the amount, if any, of
Excess Cash for the Fixed Rate Group retaining after distribution pursuant
to clause (e) above in reduction of the Class A-1B Certificate Principal
Balance, up to an amount equal to the lesser of (1) the amount necessary
for the Coverage Amount of the Class A-1 Certificates to equal the Required
Coverage Amount for such Class A-1 Certificates on such Distribution Date
and (2) the amount necessary to reduce the Class A-1B Certificate Principal
Balance to zero;
(g) to the Class A-1C Certificateholders, the amount, if any, of
Excess Cash for the Fixed Rate Group remaining after distribution pursuant
to clauses (e) and (f) above in reduction of the Class A-1C Certificate
Principal Balance, up to an amount equal to the lesser of (1) the amount
necessary for the Coverage Amount of the Class A-1 Certificates to equal
the Required Coverage Amount for such Class A-1 Certificates on such
Distribution Date and (2) the amount necessary to reduce the Class A-1C
Certificate Principal Balance to zero;
(h) to the Class A-2 Certificateholders, the amount, if any, of Excess
Cash for the Fixed Rate Group, remaining after the distributions pursuant
to clauses (e), (f) and (g) above, to be applied first to cover any
shortfalls in the Class A Monthly Interest of the Class A-2 Certificates,
and second to reduce the Class A-2 Certificate Principal Balance, up to an
amount equal to the lesser of (1) the amount necessary for the Coverage
Amount of Class A-2 Certificates to equal the Required Coverage Amount for
such Class A-2 Certificates on such Distribution Date and (2) the amount
necessary to reduce the Class A-2 Certificate Principal Balance to zero
(after taking into account the Monthly Principal and Excess Cash
distributed on such date in reduction of the Class A-2 Certificate
Principal Balance);
[(i) to the Certificate Insurer, the amount of any Available Funds for
the Fixed Rate Group remaining in the Certificate Account, to the extent
necessary to reimburse the Certificate Insurer for any Insured Amounts paid
on prior Distribution Dates in respect of the Class A-2 Certificates and
not previously reimbursed;] and
(j) to the Class R Certificateholder, subject to the right of the
Servicer to be reimbursed for any prior unreimbursed Advances, any
Available Funds for the Fixed Rate Group remaining in the Certificate
Account.
On each Distribution Date, the Paying Agent will distribute the following
amounts in the following order of priority, to the extent of Available Funds for
the Adjustable Rate Group and any available Excess Cash from the Fixed Rate
Group:
[(a) to the Certificate Insurer, the aggregate amount necessary to
reimburse the Certificate Insurer for any unreimbursed payments of Insured
Amounts in respect of the Class A-2 Certificates on prior Distribution
Dates and the amount of any unpaid Certificate Insurer Premium in respect
of the Class A-2 Certificates on prior Distribution Dates; provided,
however, that the Certificate Insurer's right to such reimbursement is
subject to the right of such Class A-2 Certificateholders to receive Class
A Monthly Interest and any Coverage Deficit for the Class A-2 Certificates
with respect to such Distribution Date;
(b) to the Certificate Insurer, an amount equal to the Certificate
Insurer Premium (as defined herein) attributable to the Adjustable Rate
Group;]
(c) to the Class A-2 Certificateholders, the Class A Monthly Interest
for the Class A-2 Certificates;
(d) to the Class A-2 Certificateholders, Monthly Principal for the
Class A-2 Certificates in reduction of the Class A-2 Certificate Principal
Balance;
(e) to the Class A-2 Certificateholders, the amount of Excess Cash for
the Adjustable Rate Group in reduction of the Class A-2 Certificate
Principal Balance up to an amount equal to the lesser of (1) the amount
necessary for the Coverage Amount of the Class A-2 Certificates to equal
the Required Coverage
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Amount for such Class A-2 Certificates on such Distribution Date and (2)
the amount necessary to reduce the Class A-2 Certificate Principal Balance
to zero;
(f) concurrently, to the Class A-1A Certificateholders, the Class A-1B
Certificateholders and the Class A-1C Certificateholders, the amount, if
any, of such Excess Cash for the Adjustable Rate Group remaining after
distribution pursuant to clause (e) above, to be applied pro rata to cover
any shortfalls in Class A-1A Monthly Interest, Class A-1B Monthly Interest
and Class A-1C Monthly Interest;
(g) to the Class A-1A Certificateholders, the amount, if any, of
Excess Cash for the Adjustable Rate Group remaining after the distributions
pursuant to clauses (e) and (f) above, to reduce the Class A-1A Certificate
Principal Balance, up to an amount equal to the lesser of (1) the amount
necessary for the Coverage Amount of the Class A-1 Certificates to equal
the Required Coverage Amount for such Class A-1 Certificates on such
Distribution Date and (2) the amount necessary to reduce the Class A-1A
Certificate Principal Balance to zero (after taking into account the
Monthly Principal and Excess Cash distributed on such date in reduction of
the Class A-1 Certificate Principal Balance);
(h) to the Class A-1B Certificateholders, the amount, if any, of
Excess Cash for the Adjustable Rate Group remaining after the distributions
pursuant to clauses (e), (f) and (g) above, to reduce the Class A-1B
Certificate Principal Balance, up to an amount equal to the lesser of (1)
the amount necessary for the Coverage Amount of the Class A-1 Certificates
to equal the Required Coverage Amount for such Class A-1 Certificates on
such Distribution Date and (2) the amount necessary to reduce the Class
A-1B Certificate Principal Balance to zero (after taking into account the
Monthly Principal and Excess Cash distributed on such date in reduction of
the Class A-1 Certificate Principal Balance);
(i) to the Class A-1C Certificateholders, the amount, if any, of
Excess Cash for the Adjustable Rate Group remaining after the distributions
pursuant to clauses (e), (f), (g) and (h) above, to reduce the Class A-1C
Certificate Principal Balance, up to an amount equal to the lesser of (1)
the amount necessary for the Coverage Amount of the Class A-1 Certificates
to equal the Required Coverage Amount for such Class A-1 Certificates on
such Distribution Date and (2) the amount necessary to reduce the Class
A-1C Certificate Principal Balance to zero (after taking into account the
Monthly Principal and Excess Cash distributed on such date in reduction of
the Class A-1 Certificate Principal Balance);
[(j) to the Certificate Insurer, the amount of any Available Funds for
the Adjustable Rate Group remaining in the Certificate Account to the
extent necessary to reimburse the Certificate Insurer for any unreimbursed
Insured Amounts paid on prior Distribution Dates in respect of the Class
A-1 Certificates; and]
(k) to the Class R Certificateholder, subject to the right of the
Servicer to be reimbursed for any prior unreimbursed Advances, any
Available Funds remaining in the Certificate Account.
[In the event that, on a particular Distribution Date, the Available Funds
with respect to the related Mortgage Loan Group and any available Excess Cash
with respect to the other Mortgage Loan Group on such date are not sufficient to
pay any portion of the Class A Monthly Interest for the related Class of Class A
Certificates, the Trustee will make a claim on the Certificate Insurance Policy
in an amount equal to such deficiency and apply the Insured Amount received in
respect of such claim to the payment of the deficiency in such Class A Monthly
Interest. In addition, the Trustee will make a claim on the Certificate
Insurance Policy in an amount equal to any Coverage Deficit with respect to the
related Class of Class A Certificates on a Distribution Date (after taking into
account distributions in respect of Monthly Principal and Excess Cash from the
related Mortgage Loan Group and, if applicable, from the other Mortgage Loan
Group) and apply the portion of the Insured Amount related to such Coverage
Deficit to reduce the Class A Certificate Principal Balance of such Class on
such Distribution Date by the amount of such Coverage Deficit. Any Insured
Amount distributed in respect of the Class A-1 Certificates to make up any
Coverage Deficit shall be distributed first to Class A-1A Certificateholders, in
reduction of the Class A-1A Certificate Principal
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Balance, until such Class A-1A Certificate Principal Balance is reduced to zero
and then to Class A-1B Certificateholders, in reduction of the Class A-1B
Certificate Principal Balance, until such Class A-1B Certificate Principal
Balance is reduced to zero and thereafter to the Class A-1C Certificateholders,
in reduction of the Class A-1C Certificate Principal Balance until such Class
A-1C Certificate Principal Balance is reduced to zero.]
In no event will the aggregate distributions of principal to holders of the
Class A-1A Certificates, Class A-1B Certificates, Class A-1C Certificates or
Class A-2 Certificates exceed the Original Class A-1A Certificate Principal
Balance, the Original Class A-1B Certificate Principal Balance, the Original
Class A-1C Certificate Principal Balance or the Original Class A-2 Certificate
Principal Balance, respectively.
Distributions of principal and interest on the Certificates will be made by
the Trustee (in such capacity, the "Paying Agent") on each Distribution Date
commencing in [ ] to holders of record of the related Class of
Certificates as of the related Record Date. The Pooling and Servicing Agreement
establishes the Pass-Through Rate for each Class of Certificates as set forth in
the Summary of Terms herein. On each Distribution Date, the Paying Agent will
distribute Monthly Interest and the Principal Distribution Amounts in the
amounts and orders of priority set forth below.
INTEREST
On each Distribution Date, interest distributions will be made in the
following order of priority:
First, with respect to the Adjustable Rate Group, if the Financial Guaranty
Insurer has not defaulted on its obligations under the Financial Guaranty
Insurance Policy or any such default is not continuing, to the Financial
Guaranty Insurer the amount of any unreimbursed payments of Insured Amounts
(together with interest accrued on any unreimbursed payments of Insured Amounts
with respect to any prior Distribution Date) and any accrued and unpaid
Financial Guaranty Insurer Premium.
Second, to the Fixed Rate Group Class A Certificateholders and Adjustable
Rate Group Certificateholders, Monthly Interest with respect to the related
Mortgage Loan Group on a pro rata basis based on the aggregate amount of Accrued
Certificate Interest due to the holders of the Certificates of each such Class
within the Fixed Rate Group Certificates or Adjustable Rate Group Certificates,
as the case may be, up to the amount of Accrued Certificate Interest with
respect to such Class plus any outstanding Interest Carry Forward Amount with
respect to such Class;
Third, to the Class M-1F Certificateholders, Monthly Interest with respect
to the Fixed Rate Group then remaining, up to the amount of Accrued Certificate
Interest with respect to such Class;
Fourth, to the Class M-2F Certificateholders, Monthly Interest with respect
to the Fixed Rate Group then remaining, up to the amount of Accrued Certificate
Interest with respect to such Class;
Fifth, to the Class B-1F Certificateholders, Monthly Interest with respect
to the Fixed Rate Group then remaining, up to the amount of Accrued Certificate
Interest with respect to such Class; and
Sixth, the related "Monthly Excess Cashflow Amount" shall be applied as
described below under "Credit Enhancement -- Application of Monthly Excess
Cashflow Amounts."
PRINCIPAL
Fixed Rate Group. With respect to the Fixed Rate Group and each
Distribution Date before the related Stepdown Date, the Fixed Rate Group Class A
Certificateholders will be entitled to receive payment of 100% of the Fixed Rate
Group Principal Distribution Amount for such Distribution Date as follows:
first, to the Class A-6F Certificateholders, the Class A-6F Lockout Distribution
Amount, and then to all Fixed Rate Group Class A Certificateholders, by Class in
sequential order until the Certificate Principal Balance of each such Class has
been reduced to zero.
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<PAGE> 45
With respect to the Fixed Rate Group and each Distribution Date on or after
the Stepdown Date, the Fixed Rate Group Certificateholders will be entitled to
receive payments of principal in the order of priority and amounts set forth
below up to the Principal Distribution Amount with respect to the Fixed Rate
Group:
First, the Fixed Rate Group Principal Distribution Amount, not to exceed
the Class A Principal Distribution Amount, shall be distributed to the Class
A-6F Certificateholders up to the Class A-6F Lockout Distribution Amount, and
any remaining amount thereof shall be distributed to the Fixed Rate Group Class
A Certificateholders, in sequential order by Class, until the Certificate
Principal Balance of each such Class has been reduced to zero;
Second, any remaining Fixed Rate Group Principal Distribution Amount, not
to exceed the related Class M-1F Principal Distribution Amount, shall be
distributed to the Class M-1F Certificateholders, until the Certificate
Principal Balance thereof has been reduced to zero;
Third, any remaining Fixed Rate Group Principal Distribution Amount, not to
exceed the Class M-2F Principal Distribution Amount, shall be distributed to the
Class M-2F Certificate holders, until the Certificate Principal Balance thereof
has been reduced to zero;
Fourth, any remaining Fixed Rate Group Principal Distribution Amount, not
to exceed the Class B-1F Principal Distribution Amount, shall be distributed to
the Class B-1F Certificateholders, until the Certificate Principal Balance
thereof has been reduced to zero; and
Fifth, any remaining Fixed Rate Group Principal Distribution Amount shall
be distributed as part of the Monthly Excess Cashflow Amount with respect to the
Fixed Rate Group as described herein under "Credit Enhancement -- Application of
Monthly Excess Cashflow Amounts."
The Fixed Rate Group Class A Certificates (other than the Class A-6F
Certificates) are "sequential pay" classes such that the Class A-5F
Certificateholders will receive no payments of principal until the Class A-4F
Certificate Principal Balance is reduced to zero, the Class A-4F
Certificateholders will receive no payments of principal until the Class A-3F
Certificate Principal Balance is reduced to zero, the Class A-3F
Certificateholders will receive no payments of principal until the Class A-2F
Certificate Principal Balance is reduced to zero and the Class A-2F
Certificateholders will receive no payments of principal until the Class A-1F
Certificate Principal Balance has been reduced to zero; provided, however, that
on any Distribution Date on which the sum of the Certificate Principal Balances
of the Subordinate Certificates and the related Overcollateralization Amount is
zero, any amounts of principal payable to the Fixed Rate Group Class A
Certificateholders on such Distribution Date shall instead be distributed pro
rata based on the outstanding Certificate Principal Balances of each such Class.
Adjustable Rate Group. On each Distribution Date, principal will be
distributed to the Adjustable Rate Group Certificateholders in an amount equal
to the Adjustable Rate Group Principal Distribution Amount, until the
Certificate Principal Balance on each such Class of Adjustable Rate Group
Certificates has been reduced to zero. The Adjustable Rate Group Certificates
are "concurrent pay" classes such that the Certificateholders of each such class
receives a fixed allocation percentage of the Adjustable Rate Group Principal
Distribution Amount until the Certificate Principal Balance of the Class A-1A
Certificates has been reduced to zero. Once the Class A-1A Certificates have
been reduced to zero, 100% of the Adjustable Rate Group Principal Distribution
Amount shall be paid to the Class A-2A Certificateholders. For the Class A-1A
Certificates, such allocated percentage (the "Class A-1A Percentage") shall be
(a) 50%, until the Class A-1A Certificate Principal Balance has been reduced to
zero and (b) thereafter will be zero. For the Class A-2A Certificates, such
allocated percentage (the "Class A-2A Principal Percentage") shall be 100% minus
the Class A-1A Principal Percentage. Any Adjustable Rate Group Principal
Distribution Amount remaining after the foregoing distribution shall be
distributed as part of the Monthly Excess Cash Flow Amount with respect to the
Adjustable Rate Group as described herein under "Credit Enhancement --
Application of Monthly Excess Cash Flow Amounts."
"LIBOR" shall mean the London interbank offered rate for one-month U.S.
dollar deposits. LIBOR for each Interest Period shall be determined on the
second business day preceding the first day of any Interest Period (each, a
"LIBOR Determination Date"), on the basis of the offered rates of the Reference
Banks for
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<PAGE> 46
one-month U.S. dollar deposits, as such rates appear on the Reuters Screen LIBO
Page, 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; "Reuters Screen
LIBO Page" means the display designated as page "LIBO" on the Reuters Monitor
Money Rates Service (or such other page as may replace the LIBO page on that
service for the purpose of displaying London interbank offered rates of major
banks); and "Reference Banks" means leading banks selected by the Trustee and
engaged in transactions in Eurodollar deposits in the international Eurocurrency
market (i) with an established place of business in London, (ii) whose
quotations appear on the Reuters Screen LIBO Page on the LIBOR Determination
Date in question, (iii) which have been designated as such by the Trustee and
(iv) not controlling, controlled by or under common control with the Sponsor or
any Originator.
On each LIBOR Determination Date, LIBOR will be established by the Trustee
as follows:
(a) If on such LIBOR Determination Date two or more Reference Banks
provide such offered quotations, LIBOR shall be the arithmetic mean
(rounded upwards if necessary to the nearest whole multiple of 0.0625%) of
such offered quotations.
(b) If on such LIBOR Determination Date fewer than two Reference Banks
provide such offered quotations, LIBOR shall be the greater of (x) LIBOR as
determined on the previous LIBOR Determination Date and (y) the Reserve
Interest Rate. The "Reserve Interest Rate" shall be the rate per annum that
the Trustee determines to be either (i) the arithmetic mean (rounded
upwards if necessary to the nearest whole multiple of 0.0625%) of the
one-month U.S. dollar lending rates which New York City banks selected by
the Trustee are quoting on the relevant LIBOR Determination Date to the
principal London offices of leading banks in the London interbank market
or, in the event that the Trustee can determine no such arithmetic mean,
(ii) the lowest one-month U.S. dollar lending rate which New York City
banks selected by the Trustee are quoting on such LIBOR Determination Date
to leading European banks.
The establishment of LIBOR on each LIBOR Determination Date by the Trustee
and the Trustee's calculation of the rate of interest applicable to the Class
A-2 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 [ ].
The "Class A-1 Certificate Principal Balance" will equal, as of any
Distribution Date, the sum of the Class A-1A Certificate Principal Balance for
such Distribution Date, Class A-1B Certificate Principal Balance for such
Distribution Date and Class A-1C Certificate Principal Balance for such
Distribution Date. The "Class A-1A Certificate Principal Balance" will equal, as
of any Distribution Date, the Original Class A-1A Certificate Principal Balance
less all Monthly Principal and Excess Cash from either Mortgage Loan Group
distributed to holders of Class A-1A Certificates on previous Distribution Dates
[(exclusive, for the sole purpose of effecting the Certificate Insurer's
subrogation rights, of payments made by the Certificate Insurer in respect of
any Coverage Deficit for the Class A-1 Certificates and paid to the Class A-1A
Certificates under the Certificate Insurance Policy, except to the extent
reimbursed to the Certificate Insurer pursuant to the Pooling and Servicing
Agreement)]. The "Class A-1B Certificate Principal Balance" will equal, as of
any Distribution Date, the Original Class A-1B Certificate Principal Balance
less all Monthly Principal and Excess Cash from either Mortgage Loan Group
distributed to holders of Class A-1B Certificates on previous Distribution Dates
[(exclusive, for the sole purpose of effecting the Certificate Insurer's
subrogation rights, of payments made by the Certificate Insurer in respect of
any Coverage Deficit for the Class A-1 Certificates and paid to the Class A-1B
Certificates under the Certificate Insurance Policy, except to the extent
reimbursed to the Certificate Insurer pursuant to the Pooling and Servicing
Agreement)]. The "Class A-1C Certificate Principal Balance" will equal, as of
any Distribution Date, the Original Class A-1C Certificate Principal Balance
less all Monthly Principal and Excess Cash from either Mortgage Loan Group
distributed to holders of Class A-1C Certificates on previous Distribution Dates
[(exclusive, for the sole purpose of effecting the Certificate Insurer's
subrogation rights, of payments made by the Certificate Insurer in respect of
any Coverage Deficit for the Class A-1 Certificates and paid to the Class A-1C
Certificates under the Certificate
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<PAGE> 47
Insurance Policy, except to the extent reimbursed to the Certificate Insurer
pursuant to the Pooling and Servicing Agreement)].
The "Class A-2 Certificate Principal Balance" will equal, as of any
Distribution Date, the Original Class A-2 Certificate Principal Balance less all
Monthly Principal and Excess Cash from either Mortgage Loan Group distributed to
holders of Class A-2 Certificates on previous Distribution Dates in reduction of
the Class A-2 Certificate Principal Balance [(exclusive, for the sole purpose of
effecting the Certificate Insurer's subrogation rights, of payments made by the
Certificate Insurer in respect of any Coverage Deficit for such Class under the
Certificate Insurance Policy, except to the extent reimbursed to the Certificate
Insurer pursuant to the Pooling and Servicing Agreement).]
The "Class A Certificate Principal Balance," as of any Distribution Date,
refers to either the Class A-1 Certificate Principal Balance for such
Distribution Date or the Class A-2 Certificate Principal Balance for such
Distribution Date, as applicable.
"Monthly Principal" with respect to each Class of Class A Certificates for
any Distribution Date will be an amount equal to (A) the aggregate of (i) any
Principal Payments received in respect of the Mortgage Loans in the related
Mortgage Loan Group during the related Collection Period, (ii) Net Liquidation
Proceeds (as defined herein) and Trust Insurance Proceeds (as defined herein)
allocable to principal recovered or collected in respect of the Mortgage Loans
in the related Mortgage Loan Group during the related Collection Period, (iii)
the aggregate of the amounts allocable to principal deposited in the Certificate
Account on the related Deposit Date by the Sponsor or the Servicer in connection
with a purchase, repurchase or substitution of any Mortgage Loans in the related
Mortgage Loan Group pursuant to the Pooling and Servicing Agreement, (iv) the
aggregate of amounts remitted by the Sponsor to the Trustee in connection with
the termination of the Trust upon liquidation of the remaining Mortgage Loans in
the related Mortgage Loan Group pursuant to the Pooling and Servicing Agreement,
and (v) with respect to the first Distribution Date, the amount, if any, of the
Prefunding Account Deposit allocated to the related Mortgage Loan Group to be
deposited in the Collection Account upon expiration of the Commitment Period,
reduced by (B) the amount of any Coverage Surplus for such Mortgage Loan Group
with respect to such Distribution Date. The "Principal Balance" of a Mortgage
Loan with respect to any Determination Date (as defined below) is the actual
outstanding principal balance thereof as of the close of business on the
Determination Date in the preceding month (or, in the case of the first
Distribution Date, as of the Cut-off Date), less (i) any Principal Payments
received in respect of such Mortgage Loan during the related Collection Period,
(ii) Net Liquidation Proceeds and Trust Insurance Proceeds allocable to
principal recovered or collected in respect of such Mortgage Loan during the
related Collection Period, (iii) the portion of the Purchase Price allocable to
principal remitted by the Sponsor or the Servicer to the Trustee on the next
succeeding Deposit Date in connection with a purchase, repurchase or
substitution of such Mortgage Loan pursuant to the Pooling and Servicing
Agreement, to the extent such amount is actually remitted on such Deposit Date,
(iv) the amount to be remitted by the Sponsor to the Trustee on the next
succeeding Deposit Date in connection with a substitution of a Qualified
Replacement Mortgage for such Mortgage Loan pursuant to the Pooling and
Servicing Agreement, to the extent such amount is actually remitted on such
Deposit Date and [(v) the amount to be remitted by the Certificate Insurer to
the Trustee on the next succeeding Deposit Date in connection with a purchase of
such Mortgage Loan pursuant to the Pooling and Servicing Agreement]; provided,
however, that Mortgage Loans that have become Liquidated Mortgage Loans since
the preceding Determination Date (or, in the case of the first Determination
Date, since the Cut-off Date) will be deemed to have a Principal Balance of zero
on the current Determination Date. "Determination Date" means, as to any
Distribution Date, the last day of the calendar month immediately preceding the
calendar month in which such Distribution Date occurs. "Principal Payment"
means, as to any Mortgage Loan and Collection Period, all amounts received or,
in the case of the principal portion of any Payment Ahead, deemed to have been
received by the Servicer from or on behalf of the related Mortgagor during such
Collection Period which, at the time of receipt or, in the case of any Payment
Ahead, at the time such Payment Ahead is deemed to have been received, were
applied or were required to be applied by the Servicer in reduction of the
Principal Balance of such Mortgage Loan. "Payment Ahead" means any payment of
one or more scheduled monthly payments remitted by a Mortgagor with respect to a
Mortgage Note in excess of the scheduled monthly
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<PAGE> 48
payment due during such Collection Period with respect to such Mortgage Note,
which sums the related Mortgagor has instructed the Servicer to apply to
scheduled monthly payments due in one or more subsequent Collection Periods.
"Principal Prepayment" means any Mortgagor payment or other recovery in respect
of principal on a Mortgage Loan (including Net Liquidation Proceeds) which, in
the case of a Mortgagor payment, is received in advance of its scheduled due
date and is not accompanied by an amount as to interest representing scheduled
interest for any month subsequent to the month of such payment, or that was
accompanied by instructions from the related Mortgagor directing the Servicer to
apply such payment to the Principal Balance of such Mortgage Loan currently.
"Liquidated Mortgage Loan" means, as to any Distribution Date, any Mortgage Loan
as to which the Servicer has determined during the related Collection Period, in
accordance with its customary servicing procedures, that all Liquidation
Proceeds which it expects to recover from or on account of such Mortgage Loan
have been recovered.
"Available Funds" with respect to any Mortgage Loan Group and any
Distribution Date will consist of the sum of the amounts described in clauses
(a) through (j) below in respect of the related Mortgage Loan Group, less (i)
the Servicing Fee in respect of such Mortgage Loan Group and the related
Collection Period, (ii) Advances previously made in respect of the related
Mortgage Loan Group that are reimbursable to the Servicer (other than those
included in Liquidation Expenses for any Liquidated Mortgage Loan and reimbursed
from the related Liquidation Proceeds) in such Collection Period to the extent
permitted by the Pooling and Servicing Agreement and (iii) the aggregate amounts
(A) deposited into the Collection Account or Certificate Account attributable to
the related Mortgage Loan Group that may not be withdrawn therefrom pursuant to
a final and nonappealable order of a United States bankruptcy court of competent
jurisdiction imposing a stay pursuant to Section 362 of the United States
Bankruptcy Code and that would otherwise have been included in Available Funds
for such Mortgage Loan Group on such Distribution Date and (B) received by the
Trustee that are recoverable and sought to be recovered from the Trustee as a
voidable preference by a trustee in bankruptcy pursuant to the United States
Bankruptcy Code in accordance with a final nonappealable order of a court of
competent jurisdiction:
(a) the total amount of interest payments on or in respect of the
Mortgage Loans in the related Mortgage Loan Group received by or on behalf
of the Servicer during the related Collection Period, plus any Compensating
Interest Payments made by the Servicer in respect of the related Mortgage
Loans and any net income from related REO Properties (as defined herein)
for such Collection Period;
(b) all Principal Payments received or deemed to be received during
the related Collection Period in respect of the Mortgage Loans in the
related Mortgage Loan Group;
(c) the aggregate of any proceeds from or in respect of any policy of
insurance covering a Mortgage Loan in such Mortgage Loan Group that are
received during the related Collection Period and applied by the Servicer
to reduce the Principal Balance of the related Mortgage Loan ("Trust
Insurance Proceeds") (which proceeds will not include any amounts applied
to the restoration or repair of the related Mortgaged Property or released
to the related Mortgagor in accordance with applicable law, the Servicer's
customary servicing procedures or the terms of the related Mortgage Loan);
(d) the aggregate of any other proceeds received by the Servicer
during the related Collection Period in connection with the liquidation of
any Mortgaged Property securing a Mortgage Loan in such Mortgage Loan
Group, whether through trustee's sale, foreclosure, condemnation, taking by
eminent domain or otherwise (including any insurance proceeds to the extent
not duplicative of amounts in clause (c) above) ("Liquidation Proceeds"),
less expenses incurred by the Servicer in connection with the liquidation
of such Mortgage Loan ("Net Liquidation Proceeds");
(e) the aggregate of the amounts received in respect of any Mortgage
Loans in such Mortgage Loan Group that are required or permitted to be
purchased, repurchased or substituted by the Sponsor or the Servicer, as
the case may be, during the related Collection Period as described in "
-- Assignment of Mortgage Loans" and "Origination and Servicing of the
Mortgage Loans -- Servicing of Mortgage Loans" herein, to the extent such
amounts are received by the Trustee on or before the related Deposit Date;
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<PAGE> 49
(f) the amount of any Monthly Advances made in respect of such
Mortgage Loan Group for such Distribution Date;
(g) the aggregate of amounts deposited in the Certificate Account by
the Servicer [or the Certificate Insurer, as the case may be,] during such
Collection Period in connection with a termination of the Trust as
described under " -- Termination; Retirement of the Certificates" herein;
(h) in the case of the [ ] Distribution Date, amounts, if
any, remaining in the Prefunding Account and the Capitalized Interest
Account immediately prior to such Distribution Date and attributable to the
related Mortgage Loan Group at the end of the Commitment Period (in each
case net of reinvestment income payable to the Sponsor); and
(i) in the case of the [ ] Distribution Date, amounts
deposited by the Sponsor representing 30 days of interest on each Mortgage
Loan that does not have a Monthly Payment due in the Collection Period
relating to such Distribution Date.
PREFUNDING ACCOUNT
On the Closing Date, cash in the aggregate amount of approximately
$[ ] (the "Prefunding Account Deposit") will be deposited by the
Sponsor in a Prefunding Account, which account will be part of the Trust and
will be maintained as an Eligible Account with the Trustee, in its corporate
trust department. Approximately $[ ] of the Prefunding Account Deposit
will be allocated for the purchase of Mortgage Loans bearing fixed rates of
interest that will be included in the Fixed Rate Group and approximately
$[ ] of the Prefunding Account Deposit will be allocated for the
purchase of Mortgage Loans bearing adjustable rates of interest that will be
included in the Adjustable Rate Group. All Mortgage Loans purchased by the Trust
through application of amounts on deposit in the Prefunding Account are referred
to herein as the "Subsequent Mortgage Loans." The Prefunding Account Deposit may
be increased by an amount equal to the aggregate of the principal balances of
any mortgage loans removed from the Mortgage Pool prior to the Closing Date,
provided that any such increase shall not exceed $5,000,000. During the period
(the "Commitment Period") from the Closing Date until the earlier of (i) the
date on which the Prefunding Account Deposit is reduced to zero, and (ii)
[ ], the Prefunding Account Deposit will be reduced by the amount
thereof used to purchase 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 [ ], the portion of the Prefunding Account Deposit
allocated to the Fixed Rate Group that is remaining at the end of the Commitment
Period (net of reinvestment income payable to the Sponsor) will be applied to
reduce the Class A-1 Certificate Principal Balance and the portion of the
Prefunding Account Deposit allocated to the Adjustable Rate Group that is
remaining at the end of the Commitment Period (net of reinvestment income
payable to the Sponsor) will be applied to reduce the Class A-2 Certificate
Principal Balance. Although it is intended that the principal amount of
Subsequent Mortgage Loans sold to the Trust will require application of
substantially all of the Prefunding Account Deposit and it is not currently
anticipated that there will be any material amount of principal distributions
from amounts remaining on deposit in the Prefunding Account in reduction of the
Class A Certificate Principal Balance of either Class of Class A Certificates,
no assurance can be given that such a distribution with respect to either Class
or both Classes of Class A Certificates will not occur on the Distribution Date
in [ ]. 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
Commitment Period will be distributed on the [ ] Distribution Date in
reduction of the Class A Certificate Principal Balances of the related Classes,
thereby reducing the weighted average lives of such Certificates.
Amounts remaining on deposit in the Prefunding Account after the purchase
of 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
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Loans on any Subsequent Transfer Date no later than the Business Day prior to
the related Subsequent Transfer Date, and in any case, no later than the
Business Day prior to the [ ] 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 [ ] Distribution Date. The
Prefunding Account will not be part of the REMIC Pool.
CAPITALIZED INTEREST ACCOUNT
On the Closing Date, cash will be deposited by the Sponsor in the
Capitalized Interest Account, which account will be part of the Trust and will
be maintained as an Eligible Account 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 Class A
Certificates that may arise as a result of the utilization of the Prefunding
Account for the purchase by the Trust of Subsequent Mortgage Loans after the
Cut-off Date and will be so applied by the Trustee on the [ ]
Distribution Date. In the unlikely event that the full amount allocated to cover
interest shortfalls in respect of a Class of Class A Certificates is not
required for such purpose, the amount remaining (net of reinvestment income
payable to the Sponsor) will be applied on the [ ] Distribution Date to
reduce the Certificate Principal Balance of the related Class of Class A
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 [ ] Distribution Date as specified in the Pooling and
Servicing Agreement. All interest and any other investment earnings on amounts
on deposit in the Capitalized Interest Account will be distributed to the
Sponsor on the [ ] Distribution Date. The Capitalized Interest Account
will not be part of the REMIC Pool.
OVERCOLLATERALIZATION FEATURE
Credit enhancement with respect to the Class A-1 Certificates is expected
to result from the application of Excess Cash on each Distribution Date to the
reduction of the Certificate Principal Balance of the Class A-1 Certificates so
that over time the Aggregate Principal Balance of the Mortgage Loans in the
Fixed Rate Group will exceed the aggregate of the Certificate Principal Balance
of the Class A-1 Certificates. Credit enhancement with respect to the Class A-2
Certificates initially will be provided in part by overcollateralization
resulting from the Aggregate Principal Balance of the Initial Mortgage Loans in
the Adjustable Rate Group as of the Cut-off Date and the Prefunding Account
Deposit attributable to such Adjustable Rate Group exceeding the Original Class
A-2 Certificate Principal Balance which is expected to be supplemented by the
application of Excess Cash on each Distribution Date so that over time such
overcollateralization will increase. In either case, such overcollateralization
is intended to result in receipts, collections and recoveries on the Mortgage
Loans in the related Mortgage Loan Group in excess of the amount necessary to
pay the related Class A Monthly Interest required to be distributed on the
related Class of Class A Certificates on any Distribution Date and to reduce the
Class A Certificate Principal Balances to zero no later than the respective
Final Scheduled Payment Date (as defined herein) of each such Class or subclass,
as applicable. Excess Cash attributable to a Mortgage Loan Group will be
distributed on the related Class of Class A Certificates on each Distribution
Date to the extent necessary to reduce the Class A Certificate Principal Balance
of such Class until the related Coverage Amount equals the Required Coverage
Amount for such Class. Any Excess Cash that is not distributed on the related
Class of Class A Certificates on a given Distribution Date will be distributed
on the other Class of Class A Certificates, first to cover any shortfall in the
Class A Monthly Interest for such Class and Distribution Date and then to the
extent necessary to reduce the Class A Certificate Principal Balance of such
Class until the related Coverage Amount equals the applicable Required Coverage
Amount. Once the then applicable Required Coverage Amount for each Class of
Class A Certificates is reached, and so long thereafter as such Required
Coverage Amount for such Class of Class A Certificates is maintained, Excess
Cash with respect to such Class of Class A Certificates shall be applied first,
[to reimburse the Certificate Insurer for amounts to which it then may be
entitled in respect of Insured Amounts for the other Class and to pay amounts of
any unpaid Certificate Insurer Premium on prior
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Distribution Dates; second,] to reimburse the Servicer for any amounts to which
it may then be entitled; and thereafter, any remaining amount shall be
distributed to the holder of the Class R Certificate. Amounts distributed to the
Class R Certificateholder on any Distribution Date will not be available to pay
amounts due to Class A Certificateholders on subsequent Distribution Dates.
The "Excess Cash" for each Class of Class A Certificates on any
Distribution Date will be equal to Available Funds for the related Mortgage Loan
Group and such Distribution Date, reduced by (i) the amount of the Class A
Monthly Interest for such Class and such Distribution Date, (ii) the Monthly
Principal for such Mortgage Loan Group and such Distribution Date, [(iii) the
Certificate Insurer Premium (as defined herein) with respect to such Class on
such Distribution Date and (iv) any amounts payable to the Certificate Insurer
for unreimbursed Insured Amounts attributable to such Class paid on prior
Distribution Dates and the amount of any unpaid Certificate Insurer Premium from
prior Distribution Dates for the related Class].
The "Coverage Amount" with respect to any Distribution Date and each Class
of Class A Certificates is the amount, if any, by which (x) the Aggregate
Principal Balance of the Mortgage Loans in the related Mortgage Loan Group as of
the end of the related Collection Period exceeds (y) the Class A Certificate
Principal Balance of the related Class of Class A Certificates as of such
Distribution Date after taking into account distributions of Monthly Principal
(disregarding any permitted reduction in Monthly Principal due to a Coverage
Surplus in respect of such Class of Class A Certificates) made on such
Distribution Date. The required level of the Coverage Amount with respect to any
Distribution Date (the "Required Coverage Amount") will be equal to the amount
specified as such in the Pooling and Servicing Agreement. With respect to the
Class A-1 Certificates and the Class A-2 Certificates, the Pooling and Servicing
Agreement will provide that the applicable Required Coverage Amount in respect
of the related Class of Class A Certificates may increase or decrease during the
period such Class A Certificates remain outstanding. With respect to the Class
A-2 Certificates, if on any Distribution Date occurring after [ ], the
amount of Excess Cash distributable on the Class A-2 Certificates is less than
an amount specified in the Pooling and Servicing Agreement, the Required
Coverage Amount for the Class A-2 Certificates will be increased (any such
Distribution Date, a "Class A-2 Trigger Event Date"); provided, however, that
upon the satisfaction of certain cash flow requirements in respect of the Class
A-2 Certificates for a period of six consecutive Distribution Dates as specified
in the Pooling and Servicing Agreement, such Required Coverage Amount will
return to its original level. Any increase in the applicable Required Coverage
Amount for a Class of Class A Certificates (including, in the case of the Class
A-2 Certificates, an increase required on a Class A-2 Trigger Event Date) may
result in an accelerated amortization of such Class until such Required Coverage
Amount is reached. Conversely, any decrease in the Required Coverage Amount with
respect to such Class will result in a decelerated amortization of such Class
until such Required Coverage Amount is reached.
The application of Excess Cash to reduce the Class A Certificate Principal
Balance of the related Class and thereafter to reduce the Class A Certificate
Principal Balance of the other Class on any Distribution Date will have the
effect of accelerating the amortization of the Class A Certificates relative to
the amortization of the Mortgage Loans in the related Mortgage Loan Group.
In the event that the Required Coverage Amount with respect to a Class of
Class A Certificates is permitted to decrease or "step down" on any Distribution
Date in the future, the Pooling and Servicing Agreement will provide that all or
a portion of the Excess Cash that would otherwise be distributed to the related
Class of Class A Certificates on any such Distribution Date in reduction of the
Class A Certificate Principal Balance of such Class will be distributed to the
other Class of Class A Certificates in reduction of the Class A Certificate
Principal Balance of such Class until the Required Coverage Amount with respect
to the other Class of Class A Certificates is reached, and thereafter applied to
reimburse [the Certificate Insurer and] the Servicer[, in that order,] for any
amounts to which they may then be entitled. Any remaining Excess Cash shall be
distributed to the holder of the Class R Certificate. This may have the effect
of decelerating the amortization of the Class A Certificates relative to the
amortization of the related Mortgage Loans, and of reducing the related Coverage
Amount. If, on any Distribution Date, the Coverage Surplus with respect to the
related Class of Class A Certificates is, or, after taking into account
distributions of Monthly Principal (without taking into account any reduction
thereof as a result of a Coverage Surplus on such Distribution Date), would be,
greater than zero (i.e., the Coverage Amount is or would be greater than the
then applicable
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Required Coverage Amount), then any amounts that would otherwise be distributed
to such Class on such Distribution Date as Monthly Principal will instead be
distributed to the other Class of Class A Certificates in reduction of the Class
A Certificate Principal Balance of such Class until the then applicable Required
Coverage Amount with respect to the other Class of Class A Certificates, is
reached, and thereafter applied to reimburse [the Certificate Insurer and] the
Servicer, in that order, for any amounts to which they may be then entitled. Any
remaining Excess Cash will be paid to the holder of the Class R Certificate, in
an amount equal to [the lesser of (x) the remaining amount of such Coverage
Surplus not used to reimburse the Certificate Insurer for such Mortgage Loan
Group and (y)] the amount of the Monthly Principal for such Distribution Date.
With respect to any Distribution Date and any Class of Class A Certificates, a
"Coverage Surplus" means, the amount, if any, by which (x) the Coverage Amount
for such Class and such Distribution Date exceeds (y) the then applicable
Required Coverage Amount for such Class and such Distribution Date. As a
technical matter, a Coverage Surplus may result even prior to the occurrence of
any decrease or "step down" in the related Required Coverage Amount because the
related Class of Class A Certificates will be entitled to receive 100% of
collected principal on the Mortgage Loans, even though the related Class A
Certificate Principal Balance will, as a result of the initial
overcollateralization and the accelerated amortization caused by the application
of the Excess Cash, be less than the Aggregate Principal Balance of the Mortgage
Loans in the related Mortgage Loan Group, in the absence of any Realized Losses
(as defined herein) on the Mortgage Loans.
The Pooling and Servicing Agreement will provide that, on any Distribution
Date, all amounts collected on the Mortgage Loans in the related Mortgage Loan
Group in respect of principal during the applicable Collection Period will be
distributed to holders of the related Class of Class A Certificates in reduction
of the Class A Certificate Principal Balance of such Class on such Distribution
Date, except as provided above with respect to any Distribution Date for which
there exists a Coverage Surplus. If any Mortgage Loan became a Liquidated
Mortgage Loan during such prior Collection Period, the Net Liquidation Proceeds
related thereto and allocated to principal may be less than the Principal
Balance of the related Mortgage Loan; the amount of any such deficiency is a
"Realized Loss." In addition, the Pooling and Servicing Agreement will provide
that the Principal Balance of any Mortgage Loan that becomes a Liquidated
Mortgage Loan shall equal zero. The Pooling and Servicing Agreement will not
require that the amount of any Realized Loss be distributed to Class A
Certificateholders on the Distribution Date following the event of loss.
However, the occurrence of a Realized Loss will reduce the Coverage Amount for
the related Class of Class A Certificates, and will result in more Excess Cash,
if any, being distributed on the related Class of Class A Certificates in
reduction of the Class A Certificate Principal Balance of such Class on
subsequent Distribution Dates than would be the case in the absence of such
Realized Loss. The effect of the foregoing is to allocate losses to the holder
of the Class R Certificate by reducing, or eliminating entirely, payments of
Excess Cash to which such Certificateholder would otherwise be entitled.
[Overcollateralization and the Certificate Insurance Policy. The Pooling
and Servicing Agreement will require the Trustee to make a claim for an Insured
Amount under the Certificate Insurance Policy not later than the second Business
Day prior to any Distribution Date as to which the Trustee has determined that a
Coverage Deficit with respect to a Class of Class A Certificates will occur for
the purpose of applying the proceeds of such Insured Amount as a payment of
principal to the related Class of Class A Certificateholders on such
Distribution Date. With respect to any Distribution Date and any Class of Class
A Certificates, a "Coverage Deficit" will mean the amount, if any, by which (x)
the related Class A Certificate Principal Balance, after taking into account all
distributions to be made on such Distribution Date in reduction thereof,
including any Excess Cash distributions in respect of the Mortgage Loan Group
relating to the other Class of Class A Certificates, exceeds (y) the Aggregate
Principal Balance of the Mortgage Loans in the related Mortgage Loan Group as of
the end of the applicable Collection Period. Accordingly, the Certificate
Insurance Policy is similar to the provisions described above insofar as the
Certificate Insurance Policy guarantees ultimate collection of the full amount
of the Class A Certificate Principal Balance of each Class of Class A
Certificates, rather than current payments of the amounts of any Realized Losses
to the holders of each Class of Class A Certificates. INVESTORS IN THE CLASS A
CERTIFICATES SHOULD REALIZE THAT, UNDER CERTAIN LOSS OR DELINQUENCY SCENARIOS
APPLICABLE TO THE MORTGAGE LOAN GROUPS, THEY MAY TEMPORARILY RECEIVE NO
DISTRIBUTIONS IN REDUCTION OF THE CLASS A CERTIFICATE PRINCIPAL BALANCE OF THEIR
RESPECTIVE CLASS.]
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[THE CERTIFICATE INSURANCE POLICY
The Certificate Insurer will issue a Certificate Insurance Policy in favor
of the Trustee for the benefit of the related Class A Certificateholders. The
Certificate Insurance Policy unconditionally and irrevocably guarantees payment
of the Class A Monthly Interest and any Coverage Deficit in respect of each
Class of Class A Certificates on each Distribution Date. Insured Amounts paid by
the Certificate Insurer under the Certificate Insurance Policy will not cover
any Interest Shortfalls for the related Distribution Date.
In the event that, on any Distribution Date, (i) the Available Funds for
any Mortgage Loan Group and any available Excess Cash from the other Mortgage
Loan Group are less than the full amount of the Class A Monthly Interest for the
related Class of Class A Certificates and such Distribution Date or (ii) a
Coverage Deficit exists for the related Class of Class A Certificates, the
Trustee will make a claim on the Certificate Insurance Policy for payment of:
(a) an amount equal to the amount necessary to pay the full amount of the Class
A Monthly Interest for such Class on such Distribution Date and (b) an amount
equal to any such Coverage Deficit (the amount of any shortfalls in the Class A
Monthly Interest, together with any Coverage Deficit for such Class with respect
to any Distribution Date is the "Insured Amount"). The Certificate Insurer will
be obligated to pay to the Trustee on each Distribution Date the full amount of
the Insured Amount under the Certificate Insurance Policy for such Distribution
Date. See "The Certificate Insurance Policy and the Certificate Insurer" herein.
Any portion of an Insured Amount distributed to the related Class of Class
A Certificateholders will be allocated first to make up any shortfall on such
Distribution Date in the related Class A Monthly Interest and second to make up
any Coverage Deficit on such Distribution Date. Any Insured Amount distributed
in respect of the Class A-1 Certificates to make up any shortfall in Class A
Monthly Interest shall be distributed pro rata to Class A-1A Certificateholders,
Class A-1B Certificateholders and Class A-1C Certificateholders in proportion to
the shortfalls in Class A-1A Monthly Interest, Class A-1B Monthly Interest and
Class A-1C Monthly Interest. Any Insured Amount distributed in respect of the
Class A-1 Certificates to make up any Coverage Deficit shall be distributed
first to Class A-1A Certificateholders, in reduction of the Class A-1A
Certificate Principal Balance, until the Class A-1A Certificate Principal
Balance is reduced to zero, then to Class A-1B Certificateholders, in reduction
of the Class A-1B Certificate Principal Balance, until the Class A-1B
Certificate Principal Balance is reduced to zero and thereafter to Class A-1C
Certificateholders, in reduction of the Class A-1C Certificate Principal
Balance, until the Class A-1C Certificate Principal Balance is reduced to zero.
The Certificate Insurer will be subrogated to the rights of holders of the
Class A Certificates to receive any payments on the related Class or subclass of
Class A Certificates for which the Certificate Insurer paid Insured Amounts that
were not subsequently reimbursed; provided, however, that the Certificate
Insurer is not entitled to reimbursement on any Distribution Date for previously
paid Insured Amounts unless the holders of the related Class or subclass of
Class A Certificates will receive the full amount of the applicable Class A
Monthly Interest on such Distribution Date and no Coverage Deficit exists with
respect to the related Class of Class A Certificates.]
[THE CERTIFICATE INSURER PREMIUM
The Certificate Insurer will be entitled to receive a monthly premium from
the Trust (the "Certificate Insurer Premium") payable out of Available Funds on
each Distribution Date in respect of the related Class of Class A Certificates.
The Certificate Insurer Premium as of any Distribution Date will equal
one-twelfth (1/12) of the product of the applicable Insurer Premium Rate and the
Class A Certificate Principal Balance of the related Class of Class A
Certificates for such Distribution Date. The "Insurer Premium Rate" will be
[ ]%; provided, however, that with respect to the Class A-2 Certificates and
each Distribution Date commencing on the Distribution Date after
[ ], if the Coverage Amount for the Class A-2 Certificates is less
than the then applicable Required Coverage Amount for such Class as of the
immediately preceding Distribution Date, the Insurer Premium Rate with respect
to the Class A-2 Certificates and such Distribution Date shall be equal to [ ]%
See "-- Distributions on the Certificates" herein.]
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<PAGE> 54
SUBORDINATION OF SUBORDINATE CERTIFICATES
The rights of the Subordinate Certificateholders and Retained
Certificateholders to receive distributions of interest and principal will be
subordinated to such rights of the Fixed Rate Group Class A Certificates, to the
extent described herein. This subordination is intended to enhance the
likelihood of regular receipt by such .
Certificateholders of the full amount of their scheduled monthly payments
of interest and principal and to afford them protection against Realized Losses
with respect to the Fixed Rate Group.
The protection afforded to the Fixed Rate Group Class A Certificates by
means of the subordination of the Subordinate Certificates, the Class C
Certificates and the Class R Certificates will be accomplished by the
preferential right of such Certificateholders to receive on each Distribution
Date, prior to any distribution being made to the Subordinate
Certificateholders, the Class C Certificateholders and the Class R
Certificateholders, the amounts of interest due them and principal available for
distribution to them on such Distribution Date and, if necessary, by the right
of such Certificateholders to receive future distributions of amounts that would
otherwise be payable to the Subordinate Certificateholders, the Class C
Certificateholders and the Class R Certificateholders.
Similarly, and for the same reasons, the rights of the Class C
Certificateholders, the Class R Certificateholders and of the Class M-2F and
Class B-1F Certificateholders to receive distributions will be subordinated, to
the extent described herein, to such rights of the Fixed Rate Group Class A and
Class M-1F Certificateholders. Also for the same reasons, the rights of the
Class C Certificateholders and the Class R Certificateholders, and the Class
B-1F Certificateholders to receive distributions will be subordinated in the
same manner to such rights of the Fixed Rate Group Class A and Class M
Certificateholders. Finally, the rights of the Class C Certificateholders and
the Class R Certificateholders to receive distributions will be subordinated in
the same manner to all such rights of all of the Certificateholders such that
such Class C Certificateholders and the Class R Certificateholders will receive
no distributions in respect of interest or principal until all holders of
Certificates relating to both Mortgage Loan groups have received all interest
and principal due them on each Distribution Date.
APPLICATION OF REALIZED LOSSES
If with respect to any Mortgage Loan that becomes a Liquidated Mortgage
Loan during a Collection Period, the Net Liquidation Proceeds relating thereto
and allocated to principal are less than the Principal Balance of such Mortgage
Loan, the amount of such insufficiency shall constitute a "Realized Loss". To
the extent that a Mortgage Loan Group experiences Realized Losses, such Realized
Losses will reduce the aggregate of the outstanding principal balances of the
Mortgage Loans in such Mortgage Loan Group and accordingly will reduce the
related Overcollateralization Amount. The application of related Monthly Excess
Interest Amounts to fund Extra Principal Distribution Amounts and thereby reduce
the Certificate Principal Balances of the related Certificates will increase the
related Overcollateralization Amount. Realized Losses which occur in a Mortgage
Loan Group will, in effect, be absorbed first, by the related Retained
Certificates, both through the application of the Monthly Excess Interest Amount
to fund such deficiency and through a reduction in the related
Overcollateralization Amount.
In the case of the Fixed Rate Group, if on any Distribution Date, after
taking into account the foregoing and (i) all Realized Losses experienced with
respect to a Mortgage Loan Group during the prior Collection Period, (ii) the
distribution of principal (including the Extra Principal Distribution Amount)
with respect to the Fixed Rate Group Certificates on such Distribution Date and
(iii) the application of any Excess Monthly Cashflow Amount available from the
Adjustable Rate Group to cover such Realized Losses to the extent described
herein, the related Overcollateralization Amount is negative, then the
Certificate Principal Balance of the Subordinate Certificates will be reduced
without a corresponding principal distribution until such Overcollateralization
Amount equals zero (the amount of such reduction, the "Applied Realized Loss
Amount") in reverse order of seniority (i.e., first, against the Class B-1F
Certificate Principal Balance until it is reduced to zero, second, against the
Class M-2F Certificate Principal Balance, until it is reduced to zero, and
third, against the Class M-1F Certificate Principal Balance until it is reduced
to zero). The Certificate
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Principal Balances of the Fixed Rate Group Class A Certificates and the
Adjustable Rate Group Certificates will not be so written down. Once the
Certificate Principal Balance of a Class of Subordinate Certificates has been
"written down," the amount of such write down will no longer bear interest, nor
will such amount thereafter be "reinstated" or "written up," although the amount
of such reductions may, on future Distribution Dates, be reimbursed to
Subordinate Certificateholders sequentially by Class (i.e., first, the Class
M-1F Certificates, second, the Class M-2F Certificates and, third, the Class
B-1F Certificates). Any such reimbursements will be made from any related
Monthly Excess Cashflow Amount remaining on a future Distribution Date after the
funding of any related Extra Principal Distribution Amount, any Interest Carry
Forward Amounts and any Realized Loss Amortization Amounts with respect to
related Subordinate Certificates of higher priority as described herein.
In the case of the Adjustable Rate Group, Realized Losses remaining after
such absorption by the Class R Certificates and Class C Certificates and the
application of the related Monthly Excess Interest Amount and through the
reduction of the related Overcollateralization Amount (including giving effect
to the cross-collateralization feature of the Trust) to the extent of any
Coverage Deficit will be covered by a draw on the Financial Guaranty Insurance
Policy in the amount of such remaining Realized Losses. With respect to the
Adjustable Rate Group only, the Financial Guaranty 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.
OVERCOLLATERALIZATION AND APPLICATION OF MONTHLY EXCESS CASHFLOW AMOUNTS
The weighted average net Coupon Rate for the Mortgage Loans in each
Mortgage Loan Group is generally expected to be higher than the weighted average
of the Pass-Through Rates on the related Offered Certificates, and to the extent
that there is overcollateralization, such Mortgage Loans will be generating
still further excess interest relative to the coupons payable on the related
Certificates. Any resulting excess interest collections (the "Monthly Excess
Interest Amount") will first be applied to cover interest distributions on the
related Certificates to the extent necessitated by losses or delinquencies. The
remainder will be applied to make accelerated payments of principal (the "Extra
Principal Distribution Amount") to the extent described herein. Any such
application will cause the aggregate of the related Certificate Principal
Balances to amortize more rapidly than the Mortgage Loans in such Mortgage Loan
Group, increasing the amount of collateralization.
The overcollateralization mechanics of the Trust result in a limited
acceleration of the Certificates relative to the amortization of the Mortgage
Loans in the related Mortgage Loan Group, generally in the early months of the
transaction. The accelerated amortization is achieved by the application of the
excess interest amounts described above and certain amounts released from the
other Mortgage Loan Group as described below, to the payment of the Certificate
Principal Balances of the related Certificates. These features are intended to
create overcollateralization equal to the excess of the aggregate Principal
Balances of the Mortgage Loans in the related Mortgage Loan Group over the
aggregate Certificate Principal Balance of the related Certificates. Once the
required level of overcollateralization is reached, and subject to the
provisions described in the next paragraph, such accelerated amortization
features will cease, unless necessary to maintain the required level of
overcollateralization.
The Pooling and Servicing Agreement provides that, based on the delinquency
and loss experience of each Mortgage Loan Group and Cumulative Loss Events
relating to loss experience with respect to the Adjustable Rate Group, the
required level of overcollateralization with respect to such Mortgage Loan Group
may increase or decrease over time. In addition, the Pooling and Servicing
Agreement provides that the required level of overcollateralization with respect
to the Adjustable Rate 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 Certificates to increase the
actual level of overcollateralization to its required level; a decrease would
result in a temporary period of decelerated amortization to reduce the actual
level of overcollateralization to its required level.
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As of the Closing Date, the Overcollateralization Amount with respect to
each Mortgage Loan Group is less than the related Targeted Overcollateralization
Amount. Absent Realized Losses, any Monthly Excess Interest Amounts will be paid
as Extra Principal Distribution Amounts increasing each related
Overcollateralization Amount up to the related Targeted Overcollateralization
Amount. On each Distribution Date as of which the related Targeted
Overcollateralization Amount has not been met (whether or not as a result of
Realized Losses), an Extra Principal Distribution Amount will be distributed
(subject to the availability of related Monthly Excess Interest Amounts). 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 Certificates on such
Distribution Date such that the new Targeted Overcollateralization Amounts are
not exceeded. The amortization of the related Certificates will accordingly be
decelerated.
Any Monthly Excess Cashflow Amount (i.e., the sum of the related Monthly
Excess Interest Amount and the related Overcollateralization Release Amount)
with respect to the Fixed Rate Group and any Distribution Date shall be applied
in the following order of priority on such Distribution Date:
(1) to fund any Interest Carry Forward Amount for the Fixed Rate Group
Class A Certificates;
(2) to fund the related Extra Principal Distribution Amount for such
Distribution Date;
(3) to fund any Interest Carry Forward Amount for the Class M-1F
Certificates;
(4) to fund any Class M-1F Realized Loss Amortization Amount;
(5) to fund any Interest Carry Forward Amount for the Class M-2F
Certificates;
(6) to fund any Class M-2F Realized Loss Amortization Amount;
(7) to fund any Interest Carry Forward Amount for the Class B-1F
Certificates;
(8) to fund any Class B-1F Realized Loss Amortization Amount;
(9) to the Servicer to the extent of any unreimbursed Monthly Advances
or Servicing Advances with respect to the Fixed Rate Group;
(10) to fund any amounts listed in clauses (1)through (5) below for
such Distribution Date with respect to the Adjustable Rate Group to the
extent such amounts have not been funded in full through the application of
the Monthly Excess Cashflow Amount with respect to the Adjustable Rate
Group on such Distribution Date;
(11) to fund a distribution to the Class C Certificateholders; and
(12) to fund a distribution to the Class R Certificateholders.
Any Monthly Excess Cashflow Amount with respect to the Adjustable Rate
Group shall be applied in the following order of priority on any Distribution
Date:
(1) to fund any Interest Carry Forward Amount for the Adjustable Rate
Group Certificates;
(2) if the Financial Guaranty Insurer has not defaulted on its
obligations under the Financial Guaranty Insurance Policy or any such
default is not continuing, to the Financial Guaranty Insurer the amount of
any unreimbursed payments of Insured Amounts (together with interest
accrued on any unreimbursed payments of Insured Amounts with respect to any
prior Distribution Date) and any accrued and unpaid Financial Guaranty
Insurer Premium;
(3) to fund the related Extra Principal Distribution Amount for such
Distribution Date;
(4) to reimburse the Financial Guaranty Insurer for any amounts due
and owing under the Financial Guaranty Insurance Policy;
(5) to the Servicer to the extent of any unreimbursed Monthly Advances
or Servicing Advances with respect to the Adjustable Rate Group;
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(6) to fund any amounts listed in clauses (2), (4), (6) and (8) above
for such Distribution Date with respect to the Fixed Rate Group, to the
extent such amounts have not been funded in full through the application of
Monthly Excess Cashflow Amount with respect to the Fixed Rate Group on such
Distribution Date; provided that any portion of the Monthly Excess Cashflow
Amount with respect to the Adjustable Rate Group Certificates that consists
of any payment by the Financial Guaranty Investor will be excluded from
such funding;
(7) to fund a distribution to the Class C Certificateholder or make a
payment of any Supplemental Interest Amount (which shall be made to the
Adjustable Rate Group Certificates on a pro rata basis based on the
outstanding Supplemental Interest Amounts due thereon), as the case may be;
and
(8) to fund a distribution to one or more of the Class R
Certificateholders.
The "Class A Certificate Principal Balance" of any Class of the Class A
Certificates is the original Certificate Principal Balance of such Class as
reduced by all Principal Distribution Amounts actually distributed to the Fixed
Rate Group Class A Certificateholders on all prior Distribution Dates.
"Class B-1F Certificate Principal Balance" means, as of any date of
determination, the original Class B-1F Certificate Principal Balance as reduced
by the sum of (x) all amounts actually distributed to the Class B-1F
Certificateholders on all prior Distribution Dates on account of principal and
(y) the aggregate cumulative amount of Class B-1F Applied Realized Loss Amounts
on all prior Distribution Dates.
"Class M-1F Certificate Principal Balance" means, as of any date of
determination, the original Class M-1F Certificate Principal Balance as reduced
by the sum of (x) all amounts actually distributed to the Class M-1F
Certificateholders on all prior Distribution Dates on account of principal and
(y) the aggregate, cumulative amount of related Class M-1F Applied Realized Loss
Amounts on all prior Distribution Dates.
"Class M-2F Certificate Principal Balance" means, as of any date of
determination, the Original Class M-2F Certificate Principal Balance as reduced
by the sum of (x) all amounts actually distributed to the Class M-2F
Certificateholders on all prior Distribution Dates on account of principal and
(y) the aggregate, cumulative amount of related Class M-2F Applied Realized Loss
Amounts on all prior Distribution Dates.
"Class B-1F Applied Realized Loss Amount" means, as to the Class B-1F
Certificates and as of any Distribution Date, the lesser of (x) the related
Class B-1F Certificate Principal Balance (after taking into account the
distribution of the related Principal Distribution Amount on such Distribution
Date, but prior to the application of the related Class B-1F Applied Realized
Loss Amount, if any, on such Distribution Date) and (y) the related Applied
Realized Loss Amount as of such Distribution Date.
"Class M-1F Applied Realized Loss Amount" means, as of any Distribution
Date, the lesser of (x) the related Class M-1F Certificate Principal Balance
(after taking into account the distribution of the related Principal
Distribution Amount on such Distribution Date, but prior to the application of
the related Class M-1F Applied Realized Loss Amount, if any, on such
Distribution Date) and (y) the excess of (i) the related Applied Realized Loss
Amount as of such Distribution Date over (ii) the sum of the related Class M-2F
Applied Realized Loss Amount and the related Class B-1F Applied Realized Loss
Amount, in each case as of such Distribution Date.
"Class M-2F Applied Realized Loss Amount" means, as of any Distribution
Date, the lesser of (x) the related Class M-2F Certificate Principal Balance
(after taking into account the distribution of the related Principal
Distribution Amount, but prior to the application of the related Class M-2F
Applied Realized Loss Amount, if any) and (y) the excess of (i) the related
Applied Realized Loss Amount over (ii) the Class B-1F Applied Realized Loss
Amount as of such Distribution Date.
"Class B-1F Realized Loss Amortization Amount" means, as of any
Distribution Date, the lesser of (x) the Class B-1F Unpaid Realized Loss Amount
as of such Distribution Date and (y) the related Monthly Excess Cashflow Amount
remaining after distributions of the Interest Carry Forward Amounts payable to
the Fixed Rate Group Class A Certificateholders, the related Extra Principal
Distribution Amount, the Class M-1F Realized Loss Amortization Amount, the Class
M-2F Realized Loss Amortization Amount, the
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Class M-1F Interest Carry Forward Amount, the Class M-2F Interest Carry Forward
Amount and the Class B-1F Interest Carry Forward Amount, in each case for such
Distribution Date.
"Class M-1F Realized Loss Amortization Amount" means, as of any
Distribution Date, the lesser of (x) the related Class M-1F Unpaid Realized Loss
Amount and (y) the related Monthly Excess Cashflow Amount remaining after
distributions of the Interest Carry Forward Amounts payable to Fixed Rate Group
Class A Certificateholders, the related Extra Principal Distribution Amount and
the related Class M-1F Interest Carry Forward Amount.
"Class M-2F Realized Loss Amortization Amount" means, as of any
Distribution Date, the lesser of (x) the related Class M-2F Unpaid Realized Loss
Amount and (y) the related Monthly Excess Cashflow Amount remaining after
distributions of the related Class A Interest Carry Forward Amounts payable to
Fixed Rate Group Class A Certificateholders, the related Extra Principal
Distribution Amount, the related Class M-1F Realized Loss Amortization Amount,
the related Class M-1F Interest Carry Forward Amount and the related Class M-2F
Interest Carry Forward Amount.
"Unpaid Realized Loss Amount" means for any Class of the Subordinate
Certificates and as to any Distribution Date, the excess of (x) the aggregate
cumulative amount of related Applied Realized Loss Amounts with respect to such
Class for all prior Distribution Dates over (y) the aggregate, cumulative amount
of related Realized Loss Amortization Amounts with respect to such Class for all
prior Distribution Dates.]
MONTHLY ADVANCES; SERVICING ADVANCES; COMPENSATING INTEREST AND INTEREST
SHORTFALLS
Not later than the close of business on the Deposit Date prior to each
Distribution Date, the Servicer will be required to remit a Monthly Advance, if
any, to the Trustee for deposit in the Certificate Account to be distributed on
the related Distribution Date. A "Monthly Advance" with respect to each Class of
Class A Certificates will be equal to the sum of the interest portions of the
aggregate amount of monthly payments (net of the related Servicing Fee) due on
the Mortgage Loans in the related Mortgage Loan Group during the related
Collection Period but delinquent as of the close of business on the last day of
the related Collection Period, plus, with respect to each Mortgaged Property in
the related Mortgage Loan Group which was acquired in foreclosure or similar
action (each, an "REO Property") during or prior to the related Collection
Period and as to which final sale did not occur during the related Collection
Period, an amount equal to the excess, if any, of interest on the Principal
Balance of the Mortgage Loan relating to such REO Property for the related
Collection Period at the related Mortgage Interest Rate (net of the Servicing
Fee) over the net income from the REO Property transferred to the Certificate
Account for such Distribution Date.
In the course of performing its servicing obligations during any Collection
Period with respect to each Mortgage Loan Group, the Servicer will pay all
reasonable and customary "out-of-pocket" costs and expenses incurred in the
performance of its servicing obligations as it deems appropriate and advisable
under the circumstances ("Servicing Advances" and together with Monthly
Advances, "Advances"), including, but not limited to, the cost of (i)
maintaining REO Properties; (ii) any enforcement or judicial proceedings,
including foreclosures; (iii) the management and liquidation of any Mortgaged
Property acquired in satisfaction of the related Mortgage Loan; and (iv)
payments in respect of real estate taxes and assessments [and insurance
premiums]. The Pooling and Servicing Agreement provides that the Servicer may
pay all or a portion of any Advance out of amounts on deposit in the Collection
Account which are being held for distribution on a subsequent Distribution Date
relating to such Collection Period; any such amounts so used are required to be
replaced by the Servicer by deposit to the Collection Account on or before the
Deposit Date relating to such subsequent Distribution Date.
The Servicer may recover Monthly Advances and Servicing Advances, if not
theretofore recovered from the Mortgagor on whose behalf such Servicing Advance
or Monthly Advance was made, from late collections on the related Mortgage Loan,
including Liquidation Proceeds, Trust Insurance Proceeds and such other amounts
as may be collected by the Servicer from the Mortgagor or otherwise relating to
the Mortgage Loan. To the extent the Servicer, in its good faith business
judgment, determines that any Servicing Advance will not be ultimately
recoverable from late collections, Trust Insurance Proceeds, Liquidation
Proceeds on the related
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Mortgage Loans or otherwise ("Nonrecoverable Advances"), the Servicer may
reimburse itself on the first Distribution Date thereafter on which Available
Funds remaining in the Certificate Account would otherwise be distributable to
the Class R Certificateholder.
The Servicer will not be required to make any Servicing Advance which it
determines would be a Nonrecoverable Advance.
With respect to each Mortgage Loan as to which a prepayment was received,
which became a Liquidated Mortgage Loan or was otherwise charged off during the
Collection Period related to a Distribution Date, the Servicer will be required
with respect to such Distribution Date to remit to the Trustee, from amounts
otherwise payable to the Servicer as the Servicing Fee for the related Mortgage
Loan Group and Collection Period, an amount equal to the excess, if any, of (a)
30 days' interest on the Principal Balance of each such Mortgage Loan
(immediately prior to such payment) at the related Mortgage Interest Rate, net
of the applicable Servicing Fee, less (b) the amount of interest actually
received on such Mortgage Loan during such Collection Period ("Compensating
Interest Payments") for distribution on the related Class of Class A
Certificates on such Distribution Date. The Servicer will not be entitled to be
reimbursed from collections on the Mortgage Loans or any assets of the Trust for
any Compensating Interest Payments made. If the Servicing Fee for the related
Mortgage Loan Group in respect of such Collection Period is insufficient to make
the entire required Compensating Interest Payment, the resulting shortfall (a
"Prepayment Interest Shortfall") will reduce the amount of interest due and
payable on the related Class of Class A Certificates on such Distribution Date
and such reduction will not be recoverable thereafter. In addition, the
application of the Soldiers' and Sailors' Civil Relief Act of 1940, as amended
(the "Relief Act"), or similar legislation to any Mortgage Loan may adversely
affect, for an indeterminate period of time, the ability of the Servicer to
collect full amounts of interest on such Mortgage Loan ("Relief Act Shortfalls";
Relief Act Shortfalls and Prepayment Interest Shortfalls are, collectively,
"Interest Shortfalls"). See "Risk Factors -- Limitations on Interest Payments
and Foreclosures" in the Prospectus. [Interest Shortfalls will not be covered by
the Certificate Insurance Policy.]
REPORTS TO CERTIFICATEHOLDERS
Concurrently with each distribution to Certificateholders, the Trustee will
mail a statement to each Class A-1A Certificateholder, Class A-1B
Certificateholder, Class A-1C Certificateholder and Class A-2 Certificateholder
in the form required by the Pooling and Servicing Agreement and setting forth
the following information:
(a) the amount of such distribution to Class A-1A Certificateholders,
Class A-1B Certificateholders, Class A-1C Certificateholders and Class A-2
Certificateholders allocable to (i) Monthly Principal and (ii) any Excess
Cash distribution;
(b) the amount of such distribution to Class A-1A Certificateholders,
Class A-1B Certificateholders, Class A-1C Certificateholders and Class A-2
Certificateholders allocable to Class A Monthly Interest;
(c) the amount of such distribution to Class A-1A Certificateholders,
Class A-1B Certificateholders and Class A-1C Certificateholders allocable
to any Excess Cash distribution attributable to the Adjustable Rate Group
and the amount of such distribution to Class A-2 Certificateholders
allocable to any Excess Cash distribution attributable to the Fixed Rate
Group;
(d) the Class A-1A Certificate Principal Balance, the Class A-1B
Certificate Principal Balance, the Class A-1C Certificate Principal Balance
and the Class A-2 Certificate Principal Balance of the related Class or
subclass after giving effect to the distribution of Monthly Principal and
any Excess Cash applied to reduce the related Certificate Principal Balance
on such Distribution Date with respect to such Class or subclass;
(e) the Aggregate Principal Balance of the related Mortgage Loan Group
and the Group Factor (as defined below) for the following Distribution
Date;
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(f) the amount of unreimbursed Monthly Advances and/or Servicing
Advances, if any, with respect to the related Mortgage Loan Group;
(g) the number and the aggregate of the Principal Balances of the
Mortgage Loans in the related Mortgage Loan Group delinquent (i) one month,
(ii) two months and (iii) three or more months as of the end of the related
Collection Period;
(h) the aggregate of the Principal Balances of the Mortgage Loans in
the related Mortgage Loan Group 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;
[(i) the Insured Amount, if any, relating to the related Class of
Class A Certificates and such Distribution Date;]
(j) the amount of the Servicing Fee paid to or retained by the
Servicer in respect of the related Mortgage Loan Group for the related
Collection Period; and
(k) the Coverage Amount, the then applicable Required Coverage Amount,
the Coverage Surplus, if any, and the Coverage Deficit, if any, in respect
of the related Mortgage Loan Group.
In the case of information furnished pursuant to clauses (a) through (c)
above, the amounts shall be expressed as a dollar amount per Class A-1A
Certificate, Class A-1B Certificate, Class A-1C Certificate and Class A-2
Certificate with a $1,000 principal denomination.
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 on the
Class A Certificates on such Distribution Date) by the Aggregate Principal
Balance of the related Mortgage Loan Group as of the Cut-off Date.
Within 90 days after the end of each calendar year, the Trustee will mail
to each person who at any time during such calendar year was a Class A-1A
Certificateholder, Class A-1B Certificateholder, Class A-1C Certificateholder
and Class A-2 Certificateholder and to the Underwriters a statement containing
the information set forth in clauses (a) through (c) above, aggregated for such
calendar year or, in the case of each person who was a Class A-1A
Certificateholder, Class A-1B Certificateholder, Class A-1C Certificateholder
and Class A-2 Certificateholder for a portion of such calendar year, setting
forth such information for each month thereof.
TERMINATION; RETIREMENT OF THE CERTIFICATES
The obligations created by the Pooling and Servicing Agreement will
terminate upon the payment to Certificateholders of all amounts held in the
Certificate Account or by or on behalf of the Servicer and required to be paid
to the Certificateholders pursuant to the Pooling and Servicing Agreement
following the earlier of (a) the purchase by the Servicer of all Mortgage Loans
and all property acquired in respect of any Mortgage Loan remaining in the Trust
at a price not less than the sum of (x) 100% of the Principal Balance of each
Mortgage Loan (other than any Mortgage Loan as to which title to the underlying
Mortgaged Property has been acquired and whose fair market value is included
pursuant to clause (y) below) as of the final Distribution Date, and (y) the
fair market value of each Mortgaged Property then held by the Trust (as
determined by the Servicer as of the close of business on the third Business Day
next preceding the date upon which notice of any such termination is furnished
to Certificateholders), plus one month's interest at the interest rate on each
Mortgage Loan (including any Mortgage Loan as to which title to the underlying
Mortgaged Property has been acquired by the Trust) less any payments of
principal and interest received during the related Collection Period in respect
of such Mortgage Loans; and (b) the final payment or other liquidation of the
Principal Balance of the last Mortgage Loan remaining in the Trust or the
disposition of all property remaining in the Trust acquired in respect of any
Mortgage Loan. In no event, however, will the Trust continue beyond the
expiration of 21 years from the death of the last survivor of certain persons
named in such Pooling and Servicing Agreement. Written notice of termination of
the Pooling and Servicing Agreement will
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be given to each Certificateholder, and the final distribution will be made only
upon surrender and cancellation of the Certificates at an office or agency
appointed by the Trustee which will be specified in the notice of termination.
The right of the Servicer to make the purchase described in clause (a) above is
conditioned upon the Pool Balance prior to such purchase being less than [ ]%
of the sum of the Pool Balance as of the Cut-off Date and the Prefunding Account
Deposit.
[In addition, the Certificate Insurer will have the option to purchase from
the Trust all Mortgage Loans and all property acquired in respect of any
Mortgage Loan then remaining in the Trust at the price set forth in the
immediately preceding paragraph plus the amount of any outstanding and unpaid
fees and expenses of the Trustee and the Servicer if, on any Distribution Date,
Mortgage Loans with aggregate Cut-off Date Principal Balances that equal or
exceed [ ]% of the sum of the Pool Balance as of the Cut-off Date and the
Prefunding Account Deposit have become Liquidated Mortgage Loans.]
The Pooling and Servicing Agreement will provide that notice of any
termination, specifying the final Distribution Date upon which the
Certificateholders may surrender their Certificates to the Trustee for payment
of the final distribution and cancellation, will be given promptly by the
Trustee by letter to Certificateholders specifying (a) the Distribution Date for
the final distribution, (b) the amount of any such final distribution and (c)
that the final distribution will be made only upon presentation and surrender of
the Certificates at the office or agency of the Trustee therein specified.
If the termination of the Trust is in connection with a purchase of the
assets of the Trust by the Servicer [or the Certificate Insurer] and the fair
market value of any acquired property is less than the Principal Balance of the
related Mortgage Loan, then the excess of such Principal Balance over such fair
market value shall be allocated in reduction of the amounts otherwise
distributable on the final Distribution Date in the following order of priority:
first, to the holder of the Class R Certificate and, second, to the holders of
the Class A Certificates. The distribution on the final Distribution Date in
connection with the purchase by the Servicer [or the Certificate Insurer] of the
assets of the Trust shall be in lieu of the distribution otherwise required to
be made on such Distribution Date in respect of the Class A Certificates.
Any such termination of the Trust by the Servicer [or the Certificate
Insurer] will be effected only pursuant to a "qualified liquidation" as defined
in Code Section 860F(a)(4)(A) and the receipt by the Trustee of a satisfactory
opinion of counsel that such purchase will not (i) result in the imposition of a
tax on "prohibited transactions" under Code Section 860F(a)(1) or (ii) cause the
REMIC Pool to fail to qualify as a REMIC.
THE TRUSTEE
[Name of Trustee] will be the Trustee under the Pooling and Servicing
Agreement. The Pooling and Servicing Agreement will provide that the Trustee is
entitled to certain fees and reimbursement of expenses. The Trustee may resign
at any time, in which event the Servicer will be obligated to appoint a
successor Trustee. The Servicer may also remove the Trustee if the Trustee
ceases to be eligible to continue as such under the Pooling and Servicing
Agreement or if the Trustee becomes insolvent. Upon becoming aware of such
circumstances, the Servicer will be obligated to appoint a successor Trustee.
Any resignation or removal of the Trustee and appointment of a successor Trustee
will not become effective until acceptance of the appointment by the successor
Trustee. See "The Pooling and Servicing Agreement -- The Trustee" in the
Prospectus.
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THE MORTGAGE LOANS
GENERAL
The following is a brief description of certain terms of the Initial
Mortgage Loans based on the Initial Mortgage Loans and each Mortgage Loan Group
as of the date of this Prospectus Supplement. Certain mortgage loans may be
removed, prior to the Closing Date, from the Mortgage Pool and each Mortgage
Loan Group as described herein, in which case an amount equal to the aggregate
principal balances of such mortgage loans, but in no event more than
$[ ] will be added to the Prefunding Account Deposit on the Closing
Date. As a result, the statistical information presented below regarding the
Initial Mortgage Loans and each Mortgage Loan Group set forth herein may vary in
certain limited respects from comparable information based on the actual
composition of the Mortgage Pool and each Mortgage Loan Group at the Closing
Date. In addition, the Mortgage Pool may vary from the description below due to
a number of factors, including prepayments and the purchase of Subsequent
Mortgage Loans. See "-- Conveyance of Subsequent Mortgage Loans" herein.
None of the Mortgage Loans is or will be insured or guaranteed by the
Sponsor, the Servicer, the Trustee, any Originator or any of their respective
affiliates, or by any governmental agency or other person.
A schedule of the Initial Mortgage Loans included in the Mortgage Loan
Group as of the Closing Date will be attached to the Pooling and Servicing
Agreement delivered to the Trustee upon delivery of the Certificates. A Current
Report on Form 8-K containing a description of the Mortgage Loans included in
the final Mortgage Pool as of the end of the Commitment Period in a form
comparable to the description of the Initial Mortgage Loans contained in "ANNEX
A: Description of the Mortgage Pool" will be filed with the Securities and
Exchange Commission within 15 days after the expiration of the Commitment
Period.
The term "Aggregate Principal Balance" means the aggregate of the Principal
Balances of the Mortgage Loans in the related Mortgage Loan Group or in the
Mortgage Pool, as specified. The information expressed as a percentage of the
Aggregate Principal Balance may not total 100% due to rounding. For a more
detailed description of certain characteristics of the Initial Mortgage Loans in
tabular form, see "ANNEX A: Description of the Mortgage Pool" at the end of this
Prospectus Supplement.
Each Mortgage Loan in the Trust will be assigned to one of two mortgage
loan groups (the "Fixed Rate Group" and the "Adjustable Rate Group," and each a
"Mortgage Loan Group") comprised of Mortgage Loans which bear fixed interest
rates only, in the case of the Fixed Rate Group, and Mortgage Loans which bear
adjustable interest rates only, in the case of the Adjustable Rate Group. The
Initial Mortgage Loans contained in the Fixed Rate Group are secured by first,
second and third liens with respect to the related Mortgaged Properties.
Substantially all of the Initial Mortgage Loans contained in the Adjustable Rate
Group are secured by first and second liens on the related Mortgaged Properties.
The Class A-1 Certificates represent undivided beneficial ownership interests in
all Mortgage Loans contained in the Fixed Rate Group, and the Class A-2
Certificates represent undivided beneficial ownership interests in all Mortgage
Loans contained in the Adjustable Rate Group.
Each Mortgage Loan will have the interest due thereon computed on an
actuarial basis. Each Mortgage Loan generally will provide for the payment of a
charge if the principal thereof is paid prior to its stated maturity date. Such
charge, however, will not be available to the Trust but will instead be paid to
the Servicer as additional servicing compensation. All of the Mortgage Loans
will be required to be covered by standard hazard insurance policies insuring
against certain losses.
In connection with the assignment of the Initial Mortgage Loans to the
Trust, the Sponsor will represent and warrant that, among other things, as of
the opening of business on the Cut-off Date, and excluding Mortgage Loans for
which a substitution is made prior to the Closing Date, no Mortgage Loan had
three or more monthly payments past due, not more than [ ]% of the Initial
Mortgage Loans (by Cut-off Date Principal Balance) had two or more monthly
payments past due and not more than [ ]% of the Initial Mortgage Loans (by
Cut-off Date Principal Balance) had one or more monthly payments past due.
However, investors in the Class A Certificates should be aware that only
approximately [ ]% and approximately [ ]%
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(by Cut-off Date Principal Balance) of the Mortgage Loans in the Fixed Rate
Group and the Adjustable Rate Group, respectively, had a first monthly payment
due on or before [ ] 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.
FIXED RATE GROUP
As of the Cut-off Date, the Aggregate Principal Balance of the Initial
Mortgage Loans in the Fixed Rate Group was $[ ]. Approximately [ ]%, [ ]%
and [ ]% of the related Mortgaged Properties (by Cut-off Date Principal
Balance) were single family residences, two-to four-family residences and units
in condominium developments, respectively, and no more than [ ]% 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.
The original weighted average Combined Loan-to-Value Ratio of all Initial
Mortgage Loans in the Fixed Rate Group was approximately [ ]%. The maximum and
average current balances as of the Cut-off Date were approximately $[ ] and
$[ ], respectively. The average appraised value of the Mortgaged Properties
securing Mortgage Loans in the Fixed Rate Group was approximately $[ ]. The
"Combined Loan-to-Value Ratio" is the sum of the outstanding principal balance
(at origination of each Mortgage Loan) of each mortgage loan, if any, senior to
such Mortgage Loan and the Original Principal Balance of such Mortgage Loan as a
percentage of the appraised valuation (or, if the Mortgage Loan was obtained in
connection with the purchase of the related Mortgaged Property, the purchase
price, if less) of the related Mortgaged Property determined by the Originator
at the time of origination of such Mortgage Loan. See "Risk Factors -- Risks
Associated with Underwriting Standards" herein.
The interest rates borne by the Initial Mortgage Loans (each, a "Mortgage
Interest Rate") in the Fixed Rate Group as of the Cut-off Date ranged from
approximately [ ]% per annum to [ ]% 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 [ ]% per annum.
The weighted average remaining term to stated maturity of the Initial
Mortgage Loans in the Fixed Rate Group was approximately [ ]months. The
weighted average original term to maturity of the Initial Mortgage Loans in the
Fixed Rate Group was approximately [ ] months. As of the Cut-off Date, the
weighted average seasoning of the Initial Mortgage Loans in the Fixed Rate Group
was less than [ ] months.
Based on the Aggregate Principal Balance of the Mortgage Loans in the Fixed
Rate Group as of the Cut-off Date, approximately [ ]% of the Mortgage Loans (by
Cut-off Date Principal Balance) provide for the payment of principal and
interest on a level basis to fully amortize such Mortgage Loan over its stated
term. The remaining approximately [ ]% 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 of 360 months that is longer than the related term to stated
maturity, with a "balloon" payment due at stated maturity that will be
significantly larger than the monthly payments. The Mortgage Loans in the Fixed
Rate Group have original terms to stated maturity of up to 30 years.
ADJUSTABLE RATE GROUP
As of the Cut-off Date, the Aggregate Principal Balance of the Initial
Mortgage Loans in the Adjustable Rate Group was $[ ]. Approximately [ ]%,
[ ]% and [ ]% of the related Mortgaged Properties (by Cut-off Date Principal
Balance) were single family residences, two-to four-family residences and units
in condominium developments, respectively, and no more than [ ]% of the
Mortgage Loans in the Adjustable Rate Group (by Cut-off Date Principal Balance)
were secured by Mortgaged Properties located in any single ZIP code.
The original weighted average Combined Loan-to-Value Ratio of all Initial
Mortgage Loans in the Adjustable Rate Group was approximately [ ]%. The maximum
and average current balances as of the
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Cut-off Date were approximately $[ ] and $[ ], respectively. The average
appraised value of the Mortgaged Properties securing Initial Mortgage Loans in
the Adjustable Rate Group was approximately $[ ].
The Initial Mortgage Loans in the Adjustable Rate Group bear interest rates
that, after a period of approximately six months, two years, three years or five
years following the related date of origination, adjust based on either (i) the
London interbank offered rate for six-month United States Dollar deposits (the
"six-month LIBOR index") based on quotations of major banks as published in The
Wall Street Journal or (ii) the one-year CMT index. The Initial Mortgage Loans
in the Adjustable Rate Group that have interest rates adjusted on the basis of
the six-month LIBOR index have semi-annual interest rate and payment adjustment
frequencies after the applicable next interest rate adjustment date. The Initial
Mortgage Loans that have interest rates adjusted on the basis of the one-year
CMT index have annual interest rate and payment adjustment frequencies after the
applicable next interest rate adjustment date. As of the Cutoff Date, not more
than [ ]% of the Mortgage Loans in the Adjustable Rate Group (by Cut-off Date
Principal Balance) have Mortgage Interest Rates that remain fixed for a period
of approximately two years, three years or five years from the related date of
origination and thereafter are adjustable semi-annually on the basis of the
six-month LIBOR index, subject to the initial and periodic rate adjustment caps
described below. As of the Cut-off Date, the weighted average remaining period
to the next interest rate adjustment date for the Initial Mortgage Loans was
approximately [ ] months.
Each Mortgage Loan in the Adjustable Rate Group that has its interest rate
adjusted on the basis of the six-month LIBOR index has a semi-annual rate
adjustment cap of [ ]% to [ ]% above the then current interest rate for such
Mortgage Loan. In addition, each Mortgage Loan in the Adjustable Rate Group that
has an initial rate adjustment date that is approximately two years, three years
or five years from its date of origination has or will have an initial rate
adjustment cap of [ ]% to [ ]% above the related initial Mortgage Interest
Rate. Each Mortgage Loan in the Adjustable Rate Group that has its interest rate
adjusted on the basis of the one-year CMT index has an annual rate adjustment
cap of [ ]% above the then current interest rate for such Mortgage Loan. The
Mortgage Loans in the Adjustable Rate Group have a weighted average periodic
rate adjustment cap as of the Cut-off Date equal to approximately [ ]%. As of
the Cut-off Date, the weighted average Mortgage Interest Rate was approximately
[ ]% per annum. The Mortgage Loans in the Adjustable Rate Group had a weighted
average gross margin as of the Cut-off Date of approximately [ ]%. The initial
gross margin for the Initial Mortgage Loans in the Adjustable Rate Group ranged
from approximately [ ]% to [ ]%. The interest rates borne by the Mortgage
Loans in the Adjustable Rate Group as of the Cut-off Date ranged from
approximately [ ]% per annum to approximately [ ]% per annum. As of the
Cut-off Date, the maximum rates at which interest may accrue on the Mortgage
Loans in the Adjustable Rate Group (the "Maximum Rates") ranged from [ ]% per
annum to [ ]% per annum. The Mortgage Loans in the Adjustable Rate Group had a
weighted average Maximum Rate as of the Cut-off Date of approximately [ ]% per
annum. As of the Cut-off Date, the minimum rates at which interest may accrue on
the Mortgage Loans in the Adjustable Rate Group after their respective first
interest adjustment dates (the "Minimum Rates") ranged from approximately [ ]%
per annum to approximately [ ]% per annum. As of the Cut-off Date, the weighted
average Minimum Rate was approximately [ ]% per annum.
The weighted average remaining term to stated maturity of the Initial
Mortgage Loans in the Adjustable Rate Group was approximately [ ] months. The
weighted average original term to maturity of the Initial Mortgage Loans in the
Adjustable Rate Group was approximately [ ] months. As of the Cut-off Date, the
weighted average seasoning of the Initial Mortgage Loans in the Adjustable Rate
Group was less than [ ] months.
Approximately [ ]% of the Initial Mortgage Loans in the Adjustable Rate
Group (by Cut-off Date Principal Balance) are Balloon Loans.
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CONVEYANCE OF SUBSEQUENT MORTGAGE LOANS
The obligation of the Trust to purchase the Subsequent Mortgage Loans on a
Subsequent Transfer Date for assignment to the Mortgage Pool is subject to the
following requirements: (i) no Subsequent Mortgage Loans may be 30 or more days
contractually delinquent as of the related Subsequent Cut-off Date, (ii) the
original term to stated maturity of such Subsequent Mortgage Loans may not
exceed 30 years; (iii) each Subsequent Mortgage Loan will have an interest rate
of not less than [ ]% if it is a fixed rate Mortgage Loan and an initial
interest rate of not less than [ ]% if it is an adjustable rate 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 weighted average Mortgage Interest
Rate of at least [ ]% with respect to the Mortgage Loans in the Fixed Rate
Group and an initial weighted average Mortgage Interest Rate of at least [ ]%
with respect to the Mortgage Loans in the Adjustable Rate Group; (b) will each
have a principal balance not in excess of $[ ]; and (c) may include Mortgage
Loans that bear interest based on the one-year CMT index, provided that the
aggregate Subsequent Cut-off Date Principal Balance of such Mortgage Loans does
not exceed [ ]% of the sum of the Aggregate Principal Balance of the Mortgage
Loans in the Adjustable Rate Group plus the portion of the Prefunding Account
Deposit that is attributable to the Adjustable Rate Group on the Closing Date.
See "Risk Factors -- The Subsequent Mortgage Loans and the Prefunding Account"
herein. [In addition, the transfer of Subsequent Mortgage Loans to the Trust on
any Subsequent Transfer Date is subject to the approval of the Certificate
Insurer.]
PREPAYMENT AND YIELD CONSIDERATIONS
The weighted average life of and, if purchased at other than par, the yield
to maturity on a Class A Certificate will be directly related to the rate of
payment of principal of the Mortgage Loans in the related Mortgage Loan Group,
including for this purpose voluntary payment in full of Mortgage Loans prior to
stated maturity, liquidations due to defaults, casualties and condemnations, and
repurchases of Mortgage Loans by the Sponsor or the Servicer [or purchases of
the Mortgage Loans by the Certificate Insurer]. The actual rate of principal
prepayments on the Mortgage Loans may be influenced by a variety of economic,
tax, geographic, demographic, social, 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.
Because all amounts available for distribution on each Class of Class A
Certificates after distributions in respect of the Class A Monthly Interest on
such Class, including all or a portion of the Excess Cash, are applied as
reductions of the Class A Certificate Principal Balance of the related Class,
the weighted average lives of such Certificates will be influenced by the amount
of Excess Cash so applied. Because Excess Cash attributable to the
overcollateralization feature is derived, in part, from interest collections on
the Mortgage Loans and will be applied to reduce the related Class A Certificate
Principal Balance of each Class, the aggregate payments in reduction of the
related Class A Certificate Principal Balance of each Class 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, Excess Cash available
for distribution in reduction of the Class A Certificate Principal Balance of a
Class will increase in proportion to the outstanding Class A Certificate
Principal Balance of the related Class over time in the absence of offsetting
Realized Losses on the Mortgage Loans in the related Mortgage Loan Group.
Excess Cash attributable to any Mortgage Loan Group will be distributed on
the related Class of Class A Certificates in reduction of the related Class A
Certificate Principal Balance of such Class on each
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Distribution Date to the extent the then applicable Required Coverage Amount
exceeds the Coverage Amount for such Class on such Distribution Date and, after
such Required Coverage Amount equals the Coverage Amount for such Class, any
remaining Excess Cash attributable to such Mortgage Loan Group will be
distributed on the other Class of Class A Certificates until the Coverage Amount
for that Class equals the then applicable Required Coverage Amount for such
Class (after application of Excess Cash to cover any Class A Monthly Interest
shortfall for such Class). If a Class A Certificate is purchased at other than
par, its yield to maturity will be affected by the rate at which Excess Cash is
distributed to Class A Certificateholders. If the actual rate of Excess Cash
distributions on the Class A Certificates applied in reduction of the related
Class A Certificate Principal Balance is slower than the rate anticipated by an
investor who purchases a Class A Certificate at a discount, the actual yield to
such investor will be lower than such investor's anticipated yield. If the
actual rate of Excess Cash distributions applied in reduction of the related
Class A Certificate Principal Balance is faster than the rate anticipated by an
investor who purchases a Class A Certificate at a premium, the actual yield to
such investor will be lower than such investor's anticipated yield. The amount
of Excess Cash on any Distribution Date will be affected by, among other things,
the actual amount of interest received, collected or recovered in respect of the
Mortgage Loans during the related Collection Period and such amount will be
influenced by changes in the weighted average of the Mortgage Interest Rates
resulting from prepayment and liquidations of Mortgage Loans, by adjustments of
adjustable Mortgage Interest Rates with respect to Mortgage Loans in the
Adjustable Rate Group and by adjustments in the Class A-2 Pass-Through Rate. The
amount of Excess Cash distributed to the Class A Certificateholders applied in
reduction of the related Class A Certificate Principal Balance on each
Distribution Date will be based on the Required Coverage Amount applicable to
the related Class of Class A Certificates, which may increase or decrease during
the period such Class remains outstanding. In this regard, the Pooling and
Servicing Agreement provides that on and after a Class A-2 Trigger Event Date,
the Required Coverage Amount in respect of the Class A-2 Certificates will be
increased for each Distribution Date thereafter; provided, however, that upon
the satisfaction of certain cash flow requirements in respect of the Class A-2
Certificates for a period of six consecutive Distribution Dates as specified in
the Pooling and Servicing Agreement, such Required Coverage Amount will return
to its original level. Any increase in the Required Coverage Amount for a Class
of Class A Certificates (including, in the case of the Class A-2 Certificates,
an increase required on a Class A-2 Trigger Event Date) may result in an
accelerated amortization of such Class until such Required Coverage Amount for
such Class is reached. Conversely, any decrease in the Required Coverage Amount
for a Class of Class A Certificates will result in a decelerated amortization of
such Class until such Required Coverage Amount for such Class is reached.
The timing of changes in the rate of prepayments may significantly affect
the actual yield to investors, even if the average rate of principal prepayments
is consistent with the expectations of investors. In general, the earlier the
payment of principal of the Mortgage Loans the greater the effect will be on an
investor's yield to maturity. As a result, the effect on an investor's yield of
principal prepayments occurring at a rate higher (or lower) than the rate
anticipated by the investor during the period immediately following the issuance
of the Class A Certificates will not be offset by a subsequent like reduction
(or increase) in the rate of principal prepayments. Investors must make their
own decisions as to the appropriate prepayment assumptions to be used in
deciding whether to purchase any of the Class A Certificates. The Sponsor makes
no representations or warranties as to the rate of prepayment or the factors to
be considered in connection with such determination.
If the aggregate Principal Balances of the Mortgage Loans in the Fixed Rate
Group is less than the Aggregate Certificate Principal Balance with respect to
the related Certificates, the yield to maturity on the Class B-1F Certificates
will be extremely sensitive to losses on the related Mortgage Loans (and the
timing thereof) to the extent such losses are not covered by the Monthly Excess
Cashflow Amount, because the entire amount of losses will be allocated to such
Certificates. Similarly, if the aggregate Principal Balances of the Mortgage
Loans in the Fixed Rate Group is less than the Aggregate Certificate Principal
Balance with respect to the related Certificates and the Certificate Principal
Balance of the Class B-1F Certificates has been reduced to zero, the yield to
maturity on the Class M Certificates then outstanding with the lowest payment
priority will be extremely sensitive to losses on the related Mortgage Loans
(and the timing thereof) to the extent such losses are not covered by the
Monthly Excess Cashflow Amount, because the entire amount of
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losses will be allocated to such Class M Certificates. Furthermore, because
interest and principal distributions are paid to certain Classes of the Fixed
Rate Group Certificates before other Classes, holders of Classes having a lower
priority of payment bear a greater risk with respect to Realized Losses than
holders of Classes having higher priorities for distributions of interest and
principal.
PROJECTED PREPAYMENTS AND YIELDS FOR THE CLASS A CERTIFICATES
If a Class A Certificate is purchased at other than par, its yield to
maturity will be affected by the rate of the payment of principal on the
Mortgage Loans 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 a Class A Certificate at a
discount, the actual yield to such investor will be lower than such investor's
anticipated yield. If the actual rate of payments on the Mortgage Loans in the
related Mortgage Loan Group is faster than the rate anticipated by an investor
who purchases a Class A Certificate at a premium, the actual yield to such
investor will be lower than such investor's anticipated yield.
The rate of prepayments with respect to conventional fixed rate mortgage
loans has fluctuated significantly in recent years. In general, if prevailing
interest rates fall significantly below the interest rates on fixed rate
mortgage loans, such mortgage loans are likely to be subject to higher
prepayment rates than if prevailing rates remain at or above the interest rate
on such mortgage loans. However, the monthly payment on a home equity loan is
often smaller than the monthly payment on a purchase money first mortgage loan.
Consequently, a decrease in the interest rate payable results in a smaller
reduction in the amount of the monthly payment on the smaller balance loan.
Conversely, if prevailing interest rates rise appreciably above the interest
rate on fixed rate mortgage loans, such mortgage loans are likely to experience
a lower prepayment rate than if prevailing rates remain at or below the interest
rates on such mortgage loans.
As is the case with conventional fixed rate mortgage loans, adjustable rate
mortgage loans may be subject to a greater rate of principal prepayments in a
declining interest rate environment. For example, if prevailing interest rates
fall significantly, adjustable rate mortgage loans 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 "Final Scheduled Payment Dates" for the Class A Certificates are set
forth in the "Summary of Terms" herein. For the Class A-1A Certificates and the
Class A-1B Certificates, the Final Scheduled Payment Date is the latest date on
which the Certificate Principal Balances of the Class A Certificates would be
reduced to zero, assuming (i) no prepayments are received on the Mortgage Loans;
(ii) scheduled monthly payments on the Mortgage Loans are timely received; and
(iii) Excess Cash will be used to make accelerated principal payments on the
Class A Certificates. The Final Scheduled Payment Date for the Class A-1C
Certificates and the Class A-2 Certificates is the Distribution Date two years
and two months after the latest scheduled maturity date of any Mortgage Loan in
the Mortgage Pool. The weighted average lives of the Class A Certificates are
likely to be shorter, and the actual final Distribution Date could occur
significantly earlier than the Final Scheduled Payment Dates because (i)
prepayments are likely to occur which shall be applied to the payment of the
Class A Certificate Principal Balances of the Class A Certificates, (ii)
distributions of Excess Cash may occur on each Distribution Date which will
accelerate the amortization of the Class A Certificates, (iii) the Servicer may
cause a termination of the Trust when the Aggregate Principal Balance of the
Mortgage Loans in the Trust has declined to less than 10% of the sum of the Pool
Balance as of the Cut-off Date and the Prefunding Account Deposit and [(iv) the
Certificate Insurer may cause a termination of the Trust on any Distribution
Date on which Mortgage Loans with aggregate Cut-off Date Principal Balances that
equal or exceed 25% of the sum of the Pool Balance as of the Cut-off Date and
the Prefunding Account Deposit have become Liquidated Mortgage Loans].
The tables entitled "Weighted Average Lives" have been prepared on the
basis of the following assumptions, except as set forth in the respective
tables: (i) the Class A Certificates are purchased on [ ]; (ii) the
Trustee on behalf of the Trust purchases Subsequent Mortgage Loans equal to the
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Prefunding Account Deposit; (iii) the Mortgage Interest Rate for each Mortgage
Loan in the Adjustable Rate Group is adjusted on its next Mortgage Interest Rate
change date (and on subsequent Mortgage Interest Rate change dates, if
necessary) to equal the sum of the applicable Gross Margin plus the applicable
Index (such sum being subject to the assumed periodic adjustment caps set forth
below and, in the case of Mortgage Loans with a six-month LIBOR index having
initial Mortgage Interest Rates that remain fixed for a period of approximately
two, three or five years from the related dates of origination, an assumed
initial interest rate adjustment cap of [ ]%; (iv) scheduled payments
are timely received on the first day of each month commencing in [ ]
([ ] with respect to the Subsequent Mortgage Loans); (v) distributions
on the Class A Certificates are received, in cash, on the 15th day of each
month, commencing in [ ]; (vi) no defaults or delinquencies in, or
modifications, waivers or amendments respecting, the payment by the Mortgagors
of principal and interest on the Mortgage Loans occur; (vii) prepayments
represent payment in full of individual Mortgage Loans and are received on the
last day of each month, commencing in [ ] ([ ] with respect to
the Subsequent Mortgage Loans) and include 30 days' interest thereon; (viii) the
Mortgage Loans prepay according to the indicated Prepayment Scenario as
described below; (ix) six-month LIBOR is [ ]% for the first month and
for each Interest Period thereafter remains constant at [ ]%, one-year
CMT is [ ]% for the first month and for each Interest Period thereafter
remains constant at [ ]% and, for Interest Periods on or prior to the
Distribution Date in [ ], the Class A-2 Pass-Through Rate
remains constant at [ ]% and for each Interest Period thereafter
remains constant at [ ]%; (x) early termination occurs in the manner set
forth in the respective tables; (xi) no Class A-2 Trigger Event Date occurs;
(xii) the initial overcollateralization step down referred to herein under the
caption "Description of the Certificates -- Overcollateralization Feature"
occurs at the earliest possible time on a single Distribution Date, whereas
under the Pooling and Servicing Agreement such initial step down would occur
over the succeeding 12 months; and (xiii) each Mortgage Loan Group consists of
Mortgage Loans having the following characteristics:
[INITIAL FIXED RATE GROUP
<TABLE>
<CAPTION>
REMAINING ORIGINAL
REMAINING TERM OF TERM OF
GROSS MORTGAGE TERM TO AMORTIZATION AMORTIZATION AMORTIZATION
PRINCIPAL BALANCE INTEREST RATE MATURITY (MONTHS) (MONTHS) (MONTHS) METHOD
- ----------------- -------------- ----------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
</TABLE>
SUBSEQUENT FIXED RATE GROUP
<TABLE>
<CAPTION>
REMAINING ORIGINAL
REMAINING TERM OF TERM OF
GROSS MORTGAGE TERM TO AMORTIZATION AMORTIZATION AMORTIZATION
PRINCIPAL BALANCE INTEREST RATE MATURITY (MONTHS) (MONTHS) (MONTHS) METHOD
- ----------------- -------------- ----------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
</TABLE>
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INITIAL ADJUSTABLE RATE GROUP
<TABLE>
<CAPTION>
MONTHS TO
MAXIMUM NEXT ORIGINAL
GROSS MORTGAGE GROSS MORTGAGE REMAINING TERM MORTGAGE TERM TO PERIODIC
PRINCIPAL INTEREST INTEREST OF AMORTIZATION GROSS RATE MATURITY AMORTIZATION ADJUSTMENT
BALANCE RATE RATE (MONTHS) MARGIN CHANGE (MONTHS) METHOD CAP
- --------- -------------- -------------- --------------- ------- ----------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
<CAPTION>
PRINCIPAL
BALANCE INDEX
- --------- -------
<S> <C>
</TABLE>
SUBSEQUENT ADJUSTABLE RATE GROUP
<TABLE>
<CAPTION>
MONTHS TO
MAXIMUM NEXT ORIGINAL
GROSS MORTGAGE GROSS MORTGAGE REMAINING TERM MORTGAGE TERM TO PERIODIC
PRINCIPAL INTEREST INTEREST OF AMORTIZATION GROSS RATE MATURITY AMORTIZATION ADJUSTMENT
BALANCE RATE RATE (MONTHS) MARGIN CHANGE (MONTHS) METHOD CAP
- --------- -------------- -------------- --------------- ------- ----------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
<CAPTION>
PRINCIPAL
BALANCE INDEX]
- --------- -------
<S> <C>
</TABLE>
"Weighted average life" refers to the average amount of time that will
elapse from the date of issuance of a security until each dollar of principal of
such security will be repaid to the investor. The weighted average lives of the
Class A Certificates will be influenced by the rate at which principal payments
on the Mortgage Loans in the related Mortgage Loan Group are made, which may be
in the form of scheduled amortization or prepayments (for this purpose, the term
"prepayment" includes prepayments and liquidations due to default). The weighted
average lives of the Class A Certificates also will be influenced by the
overcollateralization of the Class A-1 Certificates and the Class A-2
Certificates because collections otherwise payable to the Class R Certificate
are applied as principal prepayments to the Class A Certificates until the
outstanding Class A Certificate Principal Balance of the related Class is less
than the Aggregate Principal Balance of the related Mortgage Loan Group by the
Required Coverage Amount for such Mortgage Loan Group. These prepayments have
the effect of accelerating the amortization of the Class A Certificates, thereby
shortening their respective weighted average lives.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. A common model (the "Constant Prepayment Rate" or
"CPR") represents an assumed annualized rate of prepayment relative to the then
outstanding principal balance on a pool of new mortgage loans. The Class A
Certificates are priced at various Home Equity Prepayment ("HEP") assumptions.
HEP assumes that a pool of loans prepays in the first month at a constant
prepayment rate that corresponds in CPR to one-tenth ( 1/10) the given HEP
percentage and increases by an additional one-tenth ( 1/10) each month
thereafter until the tenth month, whereupon it remains at a CPR equal to the
given HEP percentage.
Neither the CPR or HEP nor any other prepayment model or assumption
purports to be an historical description of prepayment experience or a
prediction of the anticipated rate of prepayment of any pool of mortgage loans,
including the Mortgage Loans included in the Trust. Variations in the actual
prepayment experience and the balance of the Mortgage Loans that prepay may
increase or decrease each weighted average life shown in the following tables.
Such variations may occur even if the average prepayment experience of all such
Mortgage Loans equals any of the specified percentages of the CPR or HEP, as
applicable. The Sponsor is not aware of any existing statistics that provide a
reliable basis for prospective investors in the Class A Certificates to predict
the amount or timing of receipt of prepayments on the Mortgage Loans.
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The Prepayment Scenarios are defined as follows:
<TABLE>
<CAPTION>
PERCENTAGES OF HEP
------------------------------------------------------------------
SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V
---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Fixed Rate Group...............
Adjustable Rate Group..........
</TABLE>
WEIGHTED AVERAGE LIFE
CLASS A-1A CERTIFICATES
<TABLE>
<CAPTION>
WEIGHTED AVERAGE LIFE EARLIEST
PREPAYMENT SCENARIO (YEARS) RETIREMENT DATE(1)
------------------- --------------------- ------------------
<S> <C> <C>
I...................................................
II..................................................
III.................................................
IV..................................................
V...................................................
</TABLE>
- ---------------
(1) Assuming early termination of the Mortgage Loans when the Aggregate
Principal Balance of the Mortgage Loans declines to a level less than or
equal to 10% of the sum of the Aggregate Principal Balance of the Mortgage
Loans as of the Cut-off Date and the Prefunding Account Deposit.
CLASS A-1B CERTIFICATES
<TABLE>
<CAPTION>
WEIGHTED AVERAGE LIFE EARLIEST RETIREMENT
PREPAYMENT SCENARIO (YEARS) DATE(1)
------------------- --------------------- -------------------
<S> <C> <C>
I........................................................
II.......................................................
III......................................................
IV.......................................................
V........................................................
</TABLE>
- ---------------
(1) Assuming early termination of the Mortgage Loans when the Aggregate
Principal Balance of the Mortgage Loans declines to a level less than or
equal to 10% of the sum of the Aggregate Principal Balance of the Mortgage
Loans as of the Cut-off Date and the Prefunding Account Deposit.
CLASS A-1C CERTIFICATES
<TABLE>
<CAPTION>
WEIGHTED AVERAGE LIFE EARLIEST RETIREMENT
PREPAYMENT SCENARIO (YEARS) DATE(1)
------------------- --------------------- -------------------
<S> <C> <C>
I........................................................
II.......................................................
III......................................................
IV.......................................................
V........................................................
</TABLE>
- ---------------
(1) Assuming early termination of the Mortgage Loans when the Aggregate
Principal Balance of the Mortgage Loans declines to a level less than or
equal to 10% of the sum of the Aggregate Principal Balance of the Mortgage
Loans as of the Cut-off Date and the Purchase Account Deposit.
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<PAGE> 71
CLASS A-2 CERTIFICATES
<TABLE>
<CAPTION>
WEIGHTED AVERAGE LIFE EARLIEST RETIREMENT
PREPAYMENT SCENARIO (YEARS) DATE(1)
------------------- --------------------- -------------------
<S> <C> <C>
I........................................................
II.......................................................
III......................................................
IV.......................................................
V........................................................
</TABLE>
- ---------------
(1) Assuming early termination of the Mortgage Loans when the Aggregate
Principal Balance of the Mortgage Loans declines to a level less than or
equal to 10% of the sum of the Aggregate Principal Balance of the Mortgage
Loans as of the Cut-off Date and the Prefunding Account Deposit.
ORIGINATION AND SERVICING OF THE MORTGAGE LOANS
THE ORIGINATORS
Approximately [ ]% of the Initial Mortgage Loans (by Cut-off Date
Principal Balance) were originated by one or more affiliates of the Sponsor (the
"Affiliated Originators"). The remaining [ ]% of the Initial Mortgage Loans
were originated by entities not affiliated with the Sponsor (the "Unaffiliated
Originators" and, together with the Affiliated Originators, the "Originators")
and acquired by the Sponsor in arm's-length transactions. Certain of the
Subsequent Mortgage Loans may be originated by Unaffiliated Originators, but the
Sponsor does not anticipate 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 be materially different from the
proportion of Initial Mortgage Loans originated by Unaffiliated Originators. See
"The Originators" in the Prospectus.
UNDERWRITING OF MORTGAGE LOANS
The Mortgage Loans originated by Affiliated Originators were 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. The Mortgage Loans originated by Unaffiliated Originators are
re-underwritten in accordance with applicable Sponsor's Guidelines. See "The
Originators -- Underwriting Guidelines" in the Prospectus.
MORTGAGE LOAN DELINQUENCY AND FORECLOSURE EXPERIENCE
Certain information concerning the delinquency and foreclosure experience,
for the three year period ended [ ], with respect to home equity
mortgage loans serviced by affiliates of the Sponsor, including home equity
loans pooled and sold in the secondary market, is set forth under the caption
"The Sponsor -- Mortgage Loan Delinquency and Foreclosure Experience" in the
Prospectus. Such information includes delinquency and foreclosure experience
with respect to home equity mortgage loans originated by Affiliated Originators
or purchased by the Sponsor and, in each case, serviced by or on behalf of the
Sponsor as of the end of the period indicated.
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<PAGE> 72
The following table sets forth delinquency and foreclosure experience of
home equity loans included in the Sponsor's servicing portfolio for the
[ ] months ended [ ].
<TABLE>
<CAPTION>
[ ] MONTHS ENDED
[ ]
----------------
<S> <C>
Percentage of dollar amount of delinquent loans to loans
serviced
(period end)(1)(2)(3).....................................
One month................................................. [ ]%
Two months................................................ [ ]%
Three or more months:
Not foreclosed(4)...................................... [ ]%
Foreclosed(5).......................................... [ ]%
Percentage of dollar amount of loans foreclosed to loans
serviced (period end)(2)(3)............................... [ ]%
Number of loans foreclosed.................................. [ ]
Principal amount at time of foreclosure of foreclosed loans
(in thousands)(3)......................................... $[ ]
Losses on foreclosed loans originated or purchased and
serviced (in thousands)................................... $[ ]
</TABLE>
- ---------------
(1) Delinquent loans are loans for which more than one payment is due.
(2) The delinquency and foreclosure percentages are calculated on the basis of
the total dollar amount of home equity mortgage loans originated by
Affiliated Originators or purchased by the Sponsor and, in each case,
serviced by or on behalf of the Sponsor as of the end of the period
indicated. The total outstanding principal balance of such loans serviced by
the Sponsor as of the end of the period indicated includes many loans that
will not have been outstanding long enough to give rise to the indicated
periods of delinquency.
(3) Does not include loans for which only the servicing rights were purchased by
the Company.
(4) Loans for which foreclosure proceedings have not concluded.
(5) Properties acquired by the Sponsor or private investors following
foreclosure sale.
Affiliates of the Sponsor commenced the pooling and securitization of home
equity loans for sale in the secondary market in [ ] and the Sponsor
has been pooling and securitizing home equity loans for sale in the secondary
market on a quarterly basis since [ ]. During the period from
[ ] through [ ], the percentage of properties that secured
home equity loans pooled and sold in the secondary market which were acquired by
foreclosure to total home equity loans pooled and sold in the secondary market
by the Sponsor or its affiliates during such period based on the principal
balance of the foreclosed loans at foreclosure and the aggregate principal
balances of such pooled and sold home equity loans, was approximately
[ ]%. The number of such home equity loans foreclosed during such
period ending [ ] was [ ]; the aggregate outstanding principal
balances of such foreclosed loans at foreclosure was approximately $[ ]
million. The number of such foreclosed loans which became liquidated loans
during such period was [ ]; the aggregate outstanding principal
balances at foreclosure of such liquidated loans were approximately
$[ ]; and losses realized on such liquidated loans totaled
approximately $[ ]. The foregoing information excludes any gains
realized on such foreclosed properties during such period ending
[ ]. In addition, 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, foreclosures and losses.
There is no assurance that the delinquency, foreclosure and loss experience
with respect to any of the Mortgage Loans or with respect to either Mortgage
Loan Group will be comparable to the experience reflected above or in the
Prospectus. Because certain Mortgage Loans may have been underwritten pursuant
to standards that rely primarily on the value of the related Mortgaged
Properties rather than the creditworthiness of the related Mortgagor, the actual
rates of delinquencies, foreclosures and losses on such Mortgage Loans could be
higher than those historically experienced in the mortgage lending industry in
general, particularly in periods during which the values of the related
Mortgaged Properties decline. In addition, the rate of delinquencies,
foreclosures and losses with respect to the Mortgage Loans will also be affected
by, among other things, interest rate fluctuations and general and regional
economic conditions. See "Risk
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<PAGE> 73
Factors -- Nature of the Security for Mortgage Loans" and "The
Originators -- Underwriting Guidelines" in the Prospectus.
SERVICING OF MORTGAGE LOANS
The Servicer will service the Mortgage Loans in accordance with the
provisions of the Pooling and Servicing Agreement and the policies, procedures
and practices customarily employed by the Servicer in servicing other comparable
mortgage loans. Consistent with the foregoing, the Servicer may, in its
discretion (a) waive any assumption fees, late payment charges, charges for
checks returned for insufficient funds, or other fees which may be collected in
the ordinary course of servicing a Mortgage Loan, (b) arrange a schedule for the
payment of delinquent payments on the related Mortgage Loan, subject to
conditions set forth in the Pooling and Servicing Agreement if a Mortgagor is in
default or about to be in default because of such Mortgagor's financial
condition, or (c) modify monthly payments on Mortgage Loans in accordance with
the Servicer's general policy on mortgage loans subject to the Relief Act.
In any case in which the Servicer becomes aware that a Mortgaged Property
has been or is about to be conveyed by the related Mortgagor, the Pooling and
Servicing Agreement will require the Servicer to enforce any due-on-sale clause
contained in the related Mortgage Note or mortgage, to the extent permitted by
the related Mortgage Note and mortgage and applicable law or regulation, but
only to the extent such enforcement will not adversely affect or jeopardize
coverage under any related insurance policy or result in legal action by the
Mortgagor. Additionally, the Servicer may, [with the prior written consent of
the Certificate Insurer,] enter into an assumption and modification agreement
with the person to whom such Mortgaged Property has been or is about to be
conveyed, pursuant to which such person becomes liable under the related
promissory note and, to the extent permitted by applicable law, the Mortgagor
remains liable thereon or, if such person satisfies the Servicer's then current
underwriting standards for mortgage loans similar to the Mortgage Loans and the
Servicer finds it appropriate, the Mortgagor is released from liability thereon.
Any fees collected by the Servicer for entering into an assumption or
substitution of liability agreement will be retained by the Servicer as
additional servicing compensation. See "Certain Legal Aspects of the Mortgage
Loans and Related Matters -- Enforceability of Due-on-Sale Clauses" in the
Prospectus.
The Servicer, acting as agent for the Trust, will not consent to the
subsequent placement of a deed of trust or mortgage, as applicable, on any
Mortgaged Property that is of equal or higher priority to that of the lien
securing the related Mortgage Loan unless such Mortgage Loan is prepaid in full,
thereby removing such Mortgage Loan from the Trust. If, notwithstanding the
foregoing, the placement of a lien or liens of equal or higher priority to that
of the lien securing the related Mortgage Loan is consented to by the Servicer,
the Pooling and Servicing Agreement will require that the Servicer purchase such
Mortgage Loan at the applicable Purchase Price.
The procedures of the Servicer with respect to day to day servicing of the
Mortgage Loans may vary considerably depending on the particular Mortgage Loan,
the Mortgaged Property, the Mortgagor, the presence of an acceptable party to
assume a Mortgage Loan and the laws of the jurisdiction in which the Mortgaged
Property is located. Generally, it is the current practice of the Servicer to
send borrowers a monthly billing statement ten days prior to the monthly payment
due date. Although borrowers generally make loan payments within ten to fifteen
days after the due date, if a borrower fails to pay the monthly payment within
such time period, the Servicer will commence collection efforts by notifying the
borrower of the delinquency. Under the terms of each Mortgage Loan, the
Mortgagor agrees to pay a late charge (which the Servicer is entitled to retain
as additional servicing compensation under the Pooling and Servicing Agreement)
if a Monthly Payment on a Mortgage Loan is not received within the number of
days specified in the Mortgage Note after its due date. If the Mortgage Loan
remains delinquent, the Servicer will attempt to contact the Mortgagor to
determine the cause of the delinquency and to obtain a commitment to cure the
delinquency at the earliest possible time.
A a general matter, if efforts to obtain payment have not been successful
shortly after the due date of the next subsequently scheduled installment, a
pre-foreclosure notice will be sent to the Mortgagor providing 30 days' notice
of impending foreclosure action. During the 30 day notice period, collection
efforts continue.
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However, 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 prior
to the time when a loan is 90 days delinquent. If the Servicer determines that
purchasing a property securing a mortgage loan will minimize the loss associated
with such defaulted loan, the Servicer may bid at the foreclosure sale for such
property or accept a deed in lieu of foreclosure. After the Servicer acquires
title to a mortgaged property by foreclosure or deed in lieu of foreclosure, a
real estate broker is selected to list and advertise the property.
Servicing and collection practices may change over time in accordance with,
among other things, the Servicer's business judgment, changes in portfolio and
applicable laws and regulations.
Due to changes in interest rates, property appreciation, loan seasoning and
other factors, borrowers with mortgage loans serviced by the Servicer may be the
subject of solicitations from competitors of the Servicer to refinance their
loans (including the Mortgage Loans). In order to maintain an ongoing
relationship with such borrowers, the Servicer or an Affiliated Originator will
usually solicit the refinancing of such loans pursuant to criteria that are
applied to all loans then being serviced by the Servicer and not pursuant to
criteria that would specifically target the Mortgage Loans. Such solicitations
by the Servicer or an Affiliated Originator may include certain incentives (such
as reduced origination or closing costs or pre-approved applications). Any such
loans actually refinanced by the Servicer or an Affiliated Originator will
generate fee income to the refinancing lender. Any refinancing of the Mortgage
Loans, whether such refinancing is effected by the Servicer, an Affiliated
Originator or a competitor, will affect the rate of prepayment of the Mortgage
Loans.
SUB-SERVICING
The Servicer intends to 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 service certain Mortgage Loans on behalf of the Servicer.
Any such sub-servicing arrangements will provide that the Sub-Servicer will
service the Mortgage Loans specified therein in accordance with the provisions
and requirements of the Pooling and Servicing Agreement, but will not relieve
the Servicer of any liability associated with servicing the Mortgage Loans.
Compensation for the services of the Sub-Servicer will be paid by the Servicer.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
The Servicer will foreclose upon or otherwise comparably convert to
ownership Mortgaged Properties securing such of the Mortgage Loans as come into
default and as to which no satisfactory arrangements can be made for the
collection of delinquent payments; provided, however, that if the Servicer has
actual knowledge or reasonably believes that any Mortgaged Property is
contaminated by hazardous or toxic wastes or substances, the Servicer need not
cause the Trust to acquire title to such Mortgaged Property in a foreclosure or
similar proceeding. In connection with such foreclosure or other conversion, the
Servicer will follow such practices as it deems necessary or advisable and as
are in keeping with its general mortgage loan servicing activities; provided,
however, that the Servicer will not be required to expend its own funds in
connection with foreclosure or other conversion, correction of a default on a
senior deed of trust or restoration of any Mortgaged Property unless the
Servicer determines that such foreclosure, correction or restoration will
increase Net Liquidation Proceeds.
In the event that the Trust acquires any Mortgaged Property in connection
with a default or imminent default on a Mortgage Loan, such Mortgaged Property
will be disposed of by or on behalf of the Trust within two years after its
acquisition by the Trust, unless (i) the Servicer, on behalf of the Trust, has
applied for and received an extension of such two-year period pursuant to the
applicable Code provisions, in which case the Servicer shall sell such Mortgage
Property within the applicable extension period or (ii) at the request of the
Servicer, the Trustee shall have received a satisfactory opinion of counsel to
the effect that the holding by the Trust of such Mortgaged Property more than
two years after its acquisition will not result in a tax on prohibited
transactions imposed by the Code, otherwise subject the REMIC Pool to tax or
cause it to fail to qualify as a REMIC at any time any Certificates are
outstanding. The Servicer will further ensure that the
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Mortgaged Property is administered so that it constitutes "foreclosure property"
as defined in the Code, that the sale of such Mortgaged Property does not result
in the receipt by the REMIC Pool of any income from non-permitted assets as
described in the Code and that the REMIC Pool does not derive any "net income
from foreclosure property" as defined in the Code.
HAZARD INSURANCE
Each Mortgage Loan that is secured by a first- or second-lien mortgage or
deed of trust, as applicable, on the related Mortgaged Property requires the
Mortgagor to maintain a hazard insurance policy for the corresponding Mortgaged
Property. Hazard insurance policies generally insure against loss by fire and by
hazards included within the term "extended coverage" for the term of the
corresponding Mortgage Loan. Upon acquisition by the Sponsor of each Mortgage
Loan, the Sponsor will have confirmed the existence of such hazard insurance and
required that it be named as a joint loss-payee on the policy. In the event that
the Mortgagor did not obtain such hazard insurance prior to the close of escrow,
the Originator obtains a hazard insurance policy on behalf of the borrower and
deducts the cost of such policy from the net funds paid to the borrower.
However, if the Mortgagor obtains the necessary insurance within 30 days from
the close of escrow, the Originator will refund a prorated portion of the cost
of such Originator-obtained insurance to the Mortgagor. Such Originator-obtained
insurance insures only against loss by fire.
When a Mortgage Loan that is originated in California is secured by a
second or third priority deed of trust on the related Mortgaged Property, the
Originator will generally attempt to obtain, on the Mortgagor's behalf, a policy
of contingent dual insurance (a "CDI Policy") which insures the Mortgaged
Property against loss by fire in an amount equal to the original principal
amount of the Mortgage Loan, naming the Originator as joint loss-payee. Any
transfer of the related Mortgage Loan will include an assignment of the benefits
of such CDI Policy. The entire premium for such CDI Policy is deducted from the
net funds paid to the Mortgagor. In the event that the principal amount of such
Mortgage Loan exceeds $100,000, the Mortgagor must provide additional hazard
insurance to cover such amounts in excess thereof. In the event that the
Mortgagor declines to obtain a CDI Policy, he may provide an endorsement of an
existing hazard insurance policy or obtain new hazard insurance covering the
full amount of the Mortgage Loan. In addition, if a CDI Policy is obtained on
behalf of a Mortgagor who shows proof of the necessary insurance within 30 days
after the close of escrow, the Originator will refund the cost of such CDI
Policy to the Mortgagor. CDI Policies are generally not obtained with respect to
loans secured by Mortgaged Properties located outside of California.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements on the property by hazards
such as fire, lightning, explosion and smoke. Other hazards may be covered if
specified in the policy. Although the policies are underwritten by different
insurers and therefore do not contain identical terms and conditions, generally
such policies do not cover physical damage resulting from the following: war,
revolution, governmental actions, floods and other water-related causes, earth
movement (including earthquakes, landslides and mudflows), nuclear reactions,
pollution, wet or dry rot, vermin, rodents, insects or domestic animals, theft
and, in certain cases, vandalism. The foregoing list is merely indicative of
certain kinds of uninsured risks and is not intended to be all-inclusive. The
existence of a hazard insurance policy is verified upon origination of any
Mortgage Loan meeting the criteria set forth above and the Servicer will
maintain a record and monitor scheduled expirations of the related coverage,
except with respect to policies that have no stated scheduled expiration. In the
event the Servicer is made aware of any such expiration or cancellation, the
Servicer will generally force-place hazard insurance covering loss by fire in an
amount equal to 110% of the Principal Balance of the related Mortgage Loan.
The Servicer will be required under the Pooling and Servicing Agreement to
maintain on property acquired in foreclosure, or by deed in lieu of foreclosure,
hazard insurance with extended coverage in an amount which is at least equal to
the lesser of (a) the maximum insurable value of the improvements which are a
part of the Mortgaged Property or (b) the combined Principal Balance of such
Mortgage Loan and the principal balance of each senior mortgage loan plus
accrued interest and estimated Liquidation Expenses. The Pooling and Servicing
Agreement will provide that the Servicer may satisfy this obligation by
maintaining a blanket policy insuring against hazard losses on the Mortgage
Loans issued by an insurer acceptable to the Rating Agencies [and the
Certificate Insurer]. If such blanket policy contains a deductible clause, the
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Servicer will deposit in the Collection Account in respect of the related
Distribution Date amounts which would have been deposited therein but for such
clause. Generally, the Servicer will maintain no other policies of insurance on
the Mortgage Loans or the Mortgaged Properties.
SERVICING AND OTHER COMPENSATION; PAYMENT OF EXPENSES
The Servicing Fee will be the primary compensation to be paid to the
Servicer in respect of its servicing activities and will be paid to the Servicer
on each Deposit Date out of collections of interest received on or in respect of
the Mortgage Loans for the related Collection Period. The Servicing Fee will
equal one-twelfth (1/12) of the product of (a) the applicable Servicing Fee
Rate and (b) the Aggregate Principal Balance of the Mortgage Loans in the
related Mortgage Loan Group at the beginning of such Collection Period. The
"Servicing Fee Rate" for each Mortgage Loan Group will be [ ]% for each
Collection Period. In addition, the Servicer will retain the benefit, if any,
from any investment of funds in the Collection Account and the Certificate
Account. Assumption fees, late payment charges, prepayment charges, charges for
checks returned for insufficient funds, and extension and other administrative
charges, to the extent collected from Mortgagors, will be retained by the
Servicer as additional servicing compensation.
The Servicer will pay certain ongoing expenses associated with the Trust
and incurred by it in connection with its responsibilities as Servicer under the
Pooling and Servicing Agreement, including, among other things, the payment of
fees for any Sub-Servicers. In addition, the Servicer will be entitled to
reimbursement for certain expenses incurred by it in connection with Liquidated
Mortgage Loans and the restoration of Mortgaged Properties, such right of
reimbursement being prior to the rights of Certificateholders to receive any
related insurance proceeds or Net Liquidation Proceeds. See "Description of the
Certificates -- Monthly Advances; Servicing Advances; Compensating Interest and
Interest Shortfalls" herein.
CERTAIN MATTERS REGARDING SERVICER'S SERVICING OBLIGATIONS
The Pooling and Servicing Agreement will provide that the Servicer may not
resign from its obligations and duties as the Servicer thereunder, except upon
determination that its duties thereunder are no longer permissible under
applicable law or regulation or are in material conflict by reason of applicable
law or regulation with any other of its activities carried on as of the date of
the Pooling and Servicing Agreement. No such resignation will become effective
until the Trustee or a successor servicer has assumed the servicing obligations
and duties of the Servicer under the Pooling and Servicing Agreement.
The Pooling and Servicing Agreement will also provide that neither the
Servicer, nor any of its directors, officers, employees or agents, will be
liable to the Trustee, the Trust or the Certificateholders for any action taken
or for refraining from the taking of any action by the Servicer pursuant to the
Pooling and Servicing Agreement, or for errors in judgment; provided, however,
that neither the Servicer nor any such person will be protected against any
liability which would otherwise be imposed by reason of willful misfeasance, bad
faith or negligence in the performance of duties of the Servicer, or by reason
of reckless disregard of obligations and duties of the Servicer, thereunder.
In addition, the Pooling and Servicing Agreement will provide that the
Servicer will not be under any obligation to appear in, prosecute or defend any
legal action which is not incidental to its duties to service the Mortgage Loans
under the Pooling and Servicing Agreement and which in its opinion may involve
it in any expense or liability.
The Pooling and Servicing Agreement will provide that any corporation or
other entity (a) into which the Servicer may be merged or consolidated, (b)
which may result from any merger, conversion, or consolidation to which the
Servicer shall be a party, or (c) which may succeed to all or substantially all
of the business of the Servicer, will, in any case where an assumption is not
effected by operation of law, execute an agreement of assumption to perform
every obligation of the Servicer under the Pooling and Servicing Agreement, and
will be the successor to the Servicer thereunder without the execution or filing
of any document or any further act by any of the parties to the Pooling and
Servicing Agreement; provided, however, that if the Servicer in any of the
foregoing cases is not the surviving entity, the surviving entity shall execute
an agreement of assumption to perform every obligation of the Servicer
thereunder.
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[THE CERTIFICATE INSURANCE POLICY AND THE CERTIFICATE INSURER]
[THE CERTIFICATE INSURER
The information set forth in this section has been provided by
[ ] (the "Certificate Insurer"). No representation is made by
the Sponsor or any of its affiliates as to the accuracy or completeness of any
such information.
The Certificate Insurer is a monoline insurance company incorporated in
[ ] 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 [ ]
("[ ]"), a New York Stock Exchange listed company. Major shareholders of
[ ] include [ ], [ ] and [ ].
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
[ ], and its telephone number at that location is [ ].
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 operating insurance company
subsidiaries are 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.
Ratings of Claims-Paying Ability. The Certificate Insurer's claims-paying
ability is rated "[ ]" by [ ] and "[ ]" by
[ ]. 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.
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Capitalization. The following tables sets forth the capitalization of the
Certificate Insurer and its wholly owned subsidiaries on the basis of generally
accepted accounting principles as of [ ] (in thousands):
<TABLE>
<CAPTION>
[AS OF DATE]
------------
(Unaudited)
<S> <C>
Unearned Premium Reserve (net of prepaid reinsurance
premiums).................................................
Shareholder's Equity:
Common Stock..............................................
Additional Paid-In Capital................................
Unrealized Loss on Investments (net of deferred income
taxes)....................................................
Accumulated Earnings......................................
Total Shareholder's Equity.............................
Total Unearned Premium Reserve and Shareholder's
Equity...........................................
</TABLE>
For further information concerning the Certificate Insurer, see the
consolidated financial statements of the Certificate Insurer and its
subsidiaries, and the notes thereto, incorporated by reference herein. 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. The consolidated financial
statements of the Certificate Insurer and its subsidiaries for the year ended
[ ], included as an exhibit to the Annual Report on Form 10-K for the
year ended [ ], and the unaudited financial statements of the
Certificate Insurer and its subsidiaries for the three month period ended
[ ], included as an exhibit to the Quarterly Report on Form 10-Q for
the period ended [ ], each of which has been filed with the
Securities and Exchange Commission by Holdings, are hereby incorporated by
reference in this Prospectus Supplement. All financial statements of the
Certificate Insurer included in documents filed by [ ] pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as
amended, subsequent to the date of this Prospectus Supplement and prior to the
termination of the offering of the 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 of such documents.
Such consolidated financial statements of the Certificate Insurer and its
subsidiaries have been prepared on the basis of generally accepted accounting
principles. The New York State Insurance Department recognizes only statutory
accounting practices for determining and reporting the financial conditions and
results of operations of an insurance company, for determining solvency under
the New York Insurance Law, and for determining whether its financial condition
warrants the payment of a dividend to its stockholders. No consideration is
given by the New York State Insurance Department to financial statements
prepared in accordance with generally accepted principles in making such
determinations.
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 ("single risks") and the
volume of transactions ("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 liabilities for borrowings.]
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[THE CERTIFICATE INSURANCE POLICY
The Sponsor will obtain the Certificate Insurance Policy, issued by the
Certificate Insurer, in favor of the holders of the Class A Certificates. Under
the Certificate Insurance Policy, the Certificate Insurer shall unconditionally
and irrevocably guaranty to the Trustee for the benefit of each Class A
Certificateholder the full and complete payment of Class A Monthly Interest and
any Coverage Deficit in respect of the related Class or subclass, as applicable,
of Class A Certificates for the related Distribution Date. The Certificate
Insurance Policy does not insure final payment of the Class A Certificates on
any specific Distribution Date and does not cover Interest Shortfalls.
The Certificate Insurer is required to pay Insured Amounts to the Trustee
as paying agent following Receipt (as defined below) by the Certificate Insurer
of the appropriate notice 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 related Distribution
Date.
If payment of any amount avoided as a preference under applicable
bankruptcy, insolvency, receivership or similar law is required to be made under
the Certificate Insurance Policy, the Certificate Insurer shall cause such
payment to be made on the latter 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 (the "Order") of the court or other governmental
body which exercised jurisdiction to the effect that the relevant
Certificateholders are required to return principal or interest paid with
respect to such Certificates during the term of the Certificate Insurance Policy
because such payments were avoidable as preference payments under applicable
bankruptcy law, (B) a certificate of each relevant Certificateholder that the
Order has been entered and is not subject to any stay and (C) an assignment duly
executed and delivered by each relevant Certificateholder, in such form as is
reasonably required by the Certificate Insurer and provided to the relevant
Certificateholder by the Certificate Insurer, irrevocably assigning to the
Certificate Insurer all rights and claims of the Certificateholder relating to
or arising under the relevant Certificates held by such Certificateholder
against the debtor that 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) of
(i) 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 any Certificateholder directly (unless such Certificateholder has
previously paid such amount to the receiver, conservator, debtor-in-possession
or trustee in bankruptcy named in the Order in which such case 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 certain rights
of subrogation, as described in the Pooling and Servicing Agreement.
The terms "Receipt" and "Received," with respect to the Certificate
Insurance Policy, mean actual delivery to the Certificate Insurer and to the
Certificate Insurer's fiscal agent, if any, prior to 12:00 noon, New York City
time, on a Business Day; delivery either on a day that is not a Business Day or
after 12:00 noon, New York City time, shall be deemed to be Received on the next
succeeding Business Day. If any notice or certificate given under the
Certificate Insurance Policy by the 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 its fiscal agent shall promptly so
advise the Trustee and the Trustee may submit an amended notice.
Under the Certificate Insurance Policy, "Business Day" means any day other
than (i) a Saturday or Sunday or (ii) a day on which banking institutions in the
City of New York, New York are authorized or obligated by law or executive order
to be closed.
The Certificate Insurer has the right to terminate the Trust if Mortgage
Loans with aggregate original Principal Balances that equal or exceed 25% of the
sum of the Cut-off Date Pool Balance and the Prefunding Account Deposit have
become Liquidated Mortgage Loans. See "Description of the
Certificates -- Termination; Retirement of the Certificates" herein.
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The Certificate Insurance Policy is non-cancelable.
THE CERTIFICATE INSURANCE POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY
INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
The Certificate Insurer's obligation under the Certificate Insurance Policy
will be discharged to the extent that funds are disbursed by the Certificate
Insurer in accordance with the Certificate Insurance Policy, whether or not such
funds are properly distributed by the Trustee.
The Certificate Insurance Policy does not guarantee to the holders of
either Class of Class A Certificates any specific rate of prepayments of
principal of the Mortgage Loans in the related Mortgage Loan Group. Payments of
principal on the Class A Certificates are covered only to the extent of any
Coverage Deficit on a Distribution Date, but such coverage will result in
ultimate collection of the Certificate Principal Balance of each Class of Class
A Certificates.
Pursuant to the terms of the Pooling and Servicing Agreement, unless a
Certificate Insurer Default exists, the Certificate Insurer shall be deemed to
be the Certificateholders for all purposes (other than with respect to payment
on the Certificates), will be entitled to exercise all rights of the Class A
Certificateholders thereunder, without the consent of such Certificateholders,
and the Class A Certificateholders may exercise such rights only with the prior
written consent of the Certificate Insurer. In addition, the Certificate Insurer
will, as a third party beneficiary to the Pooling and Servicing Agreement, have
among others, the following rights: (i) the right to give notices of breach or
to terminate the rights and obligations of the Servicer under the Pooling and
Servicing Agreement in the event of an Event of Default by the Servicer; (ii)
the right to direct the actions of the Trustee during the continuation of a
Servicer default; (iii) the right to require the Sponsor to repurchase Mortgage
Loans for breach of representation and warranty or defect in documentation; and
(iv) the right to direct foreclosures upon the failure of the Servicer to do so
in accordance with the Pooling and Servicing Agreement. The Certificate
Insurer's consent will be required prior to, among other things, (i) the
appointment of any successor Trustee or Servicer or (ii) any amendment to the
Pooling and Servicing Agreement (which consent will not be unreasonably
withheld).]
[CREDIT ENHANCEMENT DOES NOT APPLY TO PREPAYMENT RISK
In general, the protection afforded by the Certificate Insurance Policy is
protection for credit risk and not for prepayment risk. A claim may not be made
under the Certificate Insurance Policy, in an attempt to guarantee or insure
that any particular rate of prepayment is experienced by the Trust.]
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
An election will be made to treat the Trust (other than the Prefunding
Account and the Capitalized Interest Account), and the Trust (other than the
Prefunding Account and the Capitalized Interest Account) will qualify, as a
REMIC for federal income tax purposes. The Class A-1A Certificates, Class A-1B
Certificates, Class A-1C Certificates and the Class A-2 Certificates will be
designated as regular interests in the REMIC, and the Class R Certificate will
be designated as the residual interest in the REMIC. See "Certain Federal Income
Tax Consequences" in the Prospectus.
The Class A Certificates generally will be treated as newly originated debt
instruments for federal income tax purposes. Beneficial owners of the Class A
Certificates will be required to report income on such Certificates in
accordance with the accrual method of accounting. It is anticipated that the
Class A Certificates will be issued without original issue discount for federal
income tax purposes. However, it is possible that the Internal Revenue Service
could treat a portion of the additional interest which would become payable on
the Class A-2 Certificates after the Distribution Date in [ ] as original
issue discount. Certificateholders are urged to consult their tax advisors with
respect to the tax consequences of holding the Class A Certificates.
The Prepayment Assumption (as defined in the Prospectus) that is to be used
in determining whether any Class of Class A Certificates is issued with original
issue discount and the rate of accrual of original issue discount is [ ]%
of HEP (as defined under "Prepayment and Yield Considerations -- Projected
Prepayments and Yields for the Class A Certificates"). No representation is made
as to the actual rate at which the Mortgage Loans will prepay. See "Certain
Federal Income Tax Consequences -- Taxation of Regular Certificates" in the
Prospectus.
SUPPLEMENTAL INTEREST AMOUNTS
The beneficial owners of the Adjustable Rate Group Certificates and the
related rights to receive Supplemental Interest Amounts will be treated for tax
purposes as owning two separate investments: (i) the respective Adjustable Rate
Group Certificates without the right to receive Supplemental Interest Amounts
and (ii) the right to receive the Supplemental Interest Amounts. The beneficial
owners of the respective Adjustable Rate Group Certificates must allocate the
purchase price of their Certificates between these two investments based on
their relative fair market values. The purchase price allocated to the first
investment will be the issue price of the respective Adjustable Rate Group
Certificates for calculating accruals of original issue discount. See "Certain
Federal Income Tax Consequences -- Discount and Premium" in the Prospectus.
A beneficial owner of an Adjustable Rate Group Certificate and the related
rights to receive Supplemental Interest Amounts will be treated for federal
income tax purposes as having entered into a notional principal contract on the
date that it purchases the Certificate. Treasury Regulations under Section 446
of the Code relating to notional principal contracts (the "Notional Principal
Contract Regulations") provide that taxpayers, regardless of their method of
accounting, generally must recognize the ratable daily portion of a period
payment for the taxable year to which that portion relates. Any Supplemental
Interest Amounts will be periodic payments. Income with respect to periodic
payments under a notional principal contract for a taxable year should
constitute ordinary income. The purchase price allocated to the right to receive
the related Supplemental Interest Amounts will be treated as a nonperiodic
payment under the Notional Principal Contract Regulations. Such a nonperiodic
payment may be amortized using several methods, including the level payment
method described in the Notional Principal Contract Regulations.
The right to receive the Supplemental Interest Amounts will not constitute:
(i) a "real estate asset" within the meaning of section 858(c)(5)(A) of the Code
if held by a real estate investment trust; (ii) a "qualified mortgage" within
the meaning of section 860G(a)(3) of the Code or a "permitted investment" within
the meaning of section 860G(a)(5) of the code if held by a REMIC; or (iii)
assets described in section 7701(a)(19)(C)(xi) of the Code if held by a thrift.
Moreover, other special rules may apply to certain investors, including dealers
in securities and dealers in notional principal contracts.
S-80
<PAGE> 82
If the Servicer, acting directly or through a permitted designee, exercises
its right to an Optional Termination, any Supplemental Interest Amount may not
be paid in full.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and the Code impose certain requirements on employee benefit plans and certain
other retirement plans and arrangements, as well as on collective investment
funds and separate accounts in which such plans or arrangements are invested
(all of which are hereinafter referred to as a "Plan") and on persons who are
fiduciaries with respect to such Plans. Any Plan fiduciary which proposes to
cause a Plan to acquire any of the Class A Certificates will be required to
determine whether such an investment is permitted under the governing Plan
instruments and is prudent and appropriate for the Plan in view of its overall
investment policy and the composition and diversification of its portfolio. In
addition, ERISA and the Code prohibit certain transactions involving the assets
of a Plan and "disqualified persons" (within the meaning of the Code) and
certain specified relationships to the Plan. Therefore, a Plan fiduciary
considering an investment in the Class A Certificates should also consider
whether such an investment might constitute or give rise to a prohibited
transaction under ERISA or the Code. Any Plan fiduciary which proposes to cause
a Plan to acquire any of the Class A Certificates should consult with its
counsel with respect to the potential consequences under ERISA and the Code of
the Plan's acquisition and ownership of Class A Certificates.
The U.S. Department of Labor has granted to [ ] an administrative
exemption (Prohibited Transaction Exemption [ ], as amended; Exemption
Application No. [ ], [ ] Fed. Reg. [ ] ([ ])) (the
"Exemption") from certain of the prohibited transaction rules of ERISA and the
related excise tax provisions of Section 4975 of the Code with respect to the
initial purchase, the holding and the subsequent resale by Plans of certificates
in pass-through trusts that consist of certain receivables, loans and other
obligations that meet the conditions and requirements of the Exemption. The
loans covered by the Exemption include mortgage loans such as the Mortgage
Loans.
Among the conditions that must be satisfied for the Exemption to apply are
the following:
(1) the acquisition of the certificates by a Plan is on terms
(including the price for the certificates) that are at least as favorable
to the Plan as they would be in an arm's-length transaction with an
unrelated party;
(2) the rights and interests evidenced by the certificates acquired by
the Plan are not subordinated to the rights and interests evidenced by
other certificates of the trust;
(3) the certificates acquired by the Plan have received a rating at
the time of such acquisition that is one of the three highest generic
rating categories from Moody's Investors Service ("Moody's"), Standard &
Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P" and, together
with Moody's, the "Rating Agencies"), Duff & Phelps Credit Rating Co.
("D&P") or Fitch Investors Service, Inc. ("Fitch");
(4) the trustee must not be an affiliate of any other member of the
Restricted Group (as defined below);
(5) the sum of all payments made to and retained by the underwriters
in connection with the distribution of the certificates represents not more
than reasonable compensation for underwriting the certificates; the sum of
all payments made to and retained by the sponsor pursuant to the assignment
of the mortgage loans to the trust represents not more than the fair market
value of such mortgage loans; the sum of all payments made to and retained
by the servicer and any other servicer represents not more than reasonable
compensation for such person's services under the pooling and servicing
agreement and reimbursement of such person's reasonable expenses in
connection therewith;
(6) the Plan investing in the certificates is an "accredited investor"
as defined in Rule 501(a)(1) of Regulation D of the Securities and Exchange
Commission under the Securities Act of 1933, as amended; and
S-81
<PAGE> 83
(7) the trust must also meet the following requirements:
(i) the corpus of the trust must consist solely of assets of the
type that have been included in other investment pools;
(ii) certificates in such investment pools must have been rated in
one of the three highest rating categories of Moody's, S&P, D&P or Fitch
for at least one year prior the Plan's acquisition of certificates; and
(iii) certificates evidencing interest in such other investment
pools must have been purchased by investors other than Plans for at
least one year prior to any Plan's acquisition of certificates.
Moreover, the Exemption provides relief from certain self-dealing/conflict
of interest prohibited transactions that may occur when the Plan fiduciary
causes a Plan to acquire certificates in a trust in which the fiduciary (or its
affiliate) is an obligor on the receivables held in the trust provided that,
among other requirements, (i) in the case of an acquisition in connection with
the initial issuance of certificates, at least fifty percent of each class of
certificates in which Plans have invested is acquired by persons independent of
the Restricted Group (as defined herein); (ii) such fiduciary (or its affiliate)
is an obligor with respect to 5% or less of the fair market value of the
obligations contained in the trust; (iii) the Plan's investment in certificates
of any class does not exceed 25% of all of the certificates of that class
outstanding at the time of the acquisition; and (iv) immediately after the
acquisition, no more than 25% of the assets of the Plan with respect to which
such person is a fiduciary are invested in certificates representing an interest
in one or more trusts containing assets sold or served by the same entity. The
Exemption does not apply to Plans sponsored by the Sponsor, the Underwriters,
the Trustee, the Servicer, [the Certificate Insurer], any obligor with respect
to mortgage loans included in the trust constituting more than 5% of the
aggregate unamortized principal balance of the assets in the trust, or any
affiliate of such parties (the "Restricted Group").
It is believed that the Exemption will apply to the acquisition and holding
of Class A Certificates by Plans and that all conditions of the Exemptions as
they relate to the acquisition and holding by Plans of Class A Certificates
other than those within the control of the investors will be met after such
time, provided that either the Subsequent Mortgage Loans are identified as of
the Closing Date or the Subsequent Mortgage Loans have been acquired by the
Trust on the Closing Date. The Sponsor expects to satisfy one or both of these
conditions.
USE OF PROCEEDS
The Sponsor intends to use the net proceeds to be received from the sale of
the Class A Certificates to pay off certain indebtedness incurred in connection
with the acquisition of the Initial Mortgage Loans, to fund the Prefunding
Account and the Capitalized Interest Account and to pay other expenses
associated with the pooling of the Mortgage Loans and the issuance of the
Certificates.
LEGAL INVESTMENT CONSIDERATIONS
The Class A Certificates will not constitute "mortgage related securities"
for purposes of SMMEA. Accordingly, many institutions with legal authority to
invest in comparably rated securities may not be legally authorized to invest in
the Class A Certificates. No representation is made herein as to whether the
Class A Certificates constitute legal investments for any entity under any
applicable statute, law, rule, regulation or order. Prospective purchasers are
urged to consult with their counsel concerning the status of the Class A
Certificates as legal investments for such purchasers prior to investing in the
Class A Certificates.
S-82
<PAGE> 84
UNDERWRITING
Under the terms set forth in the Underwriting Agreement and the related
Pricing Agreement, (collectively, the "Underwriting Agreement") for the sale of
the Class A Certificates, dated [ ], the Sponsor has agreed to sell and
[ ] (collectively, the "Underwriters") have severally agreed to purchase
the respective principal amounts of Class A Certificates set forth opposite
their respective names. In the Underwriting Agreement, the Underwriters have
agreed, subject to the terms and conditions set forth therein, to purchase the
entire principal amount of the Class A Certificates.
<TABLE>
<CAPTION>
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT OF
CLASS A-1A CLASS A-1B CLASS A-1C CLASS A-2
UNDERWRITER CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES
----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Total.............................................
</TABLE>
The Underwriters have informed the Sponsor that they propose to offer the
Class A Certificates for sale from time to time in one or more negotiated
transactions, or otherwise, at varying prices to be determined, in each case, at
the time of the related sale. The Underwriters may effect such transactions by
selling the Class A Certificates to or through dealers, and such dealers may
receive compensation in the form of underwriting discounts, concessions or
commissions from the Underwriters. In connection with the sale of the Class A
Certificates, the Underwriters may be deemed to have received compensation from
the Sponsor in the form of underwriting compensation. The Underwriters and any
dealers that participate with the Underwriters in the distribution of the Class
A Certificates may be deemed to be underwriters and any commissions received by
them and any profit on the resale of the Class A Certificates by them may be
deemed to be underwriting discounts and commissions under the Securities Act.
The Sponsor has agreed to indemnify the Underwriters against certain
liabilities including liabilities under the Securities Act.
The Sponsor has been advised by the Underwriters that the Underwriters
intend to make a market in the Class A Certificates, as permitted by applicable
laws and regulations. The Underwriters are not obligated, however, to make a
market in the Class A Certificates and such market-making may be discontinued at
any time at the sole discretion of the Underwriters. Accordingly, no assurance
can be given as to the liquidity of, or trading markets for, the Class A
Certificates.
[ ], a United Kingdom broker-dealer and a member of the
Securities and Futures Authority Limited, has agreed that, as part of the
distribution of the Class A Certificates offered hereby and subject to certain
exceptions, it will not offer or sell any Class A Certificates within the United
States, its territories or possessions or to persons who are citizens thereof or
residents therein. The Underwriting Agreement does not limit sales of Class A
Certificates offered hereby outside of the United States.
Each of the Underwriters has further represented that: (i) it has not
offered or sold and will not offer or sell, prior to the date six months after
their date of issuance, any Class A Certificates to persons in the United
Kingdom, except to persons whose activities involve them in acquiring, holding,
managing or disposing of investments (as principal or agent) for the purposes of
their businesses or otherwise in circumstances which have not resulted in and
will not result in an offer to the public in the United Kingdom within the
meaning of the Public Offers of Securities Regulations 1995; (ii) it has
complied and will comply with all applicable
S-83
<PAGE> 85
provisions of the Financial Services Act 1986 with respect to anything done by
it in relation to the Class A Certificates in, from or otherwise involving the
United Kingdom; and (iii) it has only issued or passed on and will only issue or
pass on in the United Kingdom any document received by it in connection with the
issuance of the Class A Certificates to a person who is of a kind described in
Article 11(3) of the Financial Services Act 1986 (Investment Advertisements)
(Exemptions) Order 1997 or is a person to whom the document can lawfully be
issued or passed on.
[REPORT OF EXPERTS
The consolidated balance sheets of the Certificate Insurer and its
subsidiaries as of [ ] and [ ] and the related consolidated
statements of income, changes in shareholder's equity and cash flows for each of
the [ ] years in the period ended [ ] incorporated by reference in
this Prospectus Supplement, have been incorporated herein in reliance on the
report of [ ], 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 [ ]. [ ] will act as counsel for the
Underwriters. [Certain legal matters relating to the Certificate Insurer and the
Certificate Insurance Policy will be passed upon by inside counsel to the
Certificate Insurer.]
RATING OF THE CLASS A CERTIFICATES
It is a condition to the issuance of each of the Class A-1A Certificates,
the Class A-1B Certificates, the Class A-1C Certificates and the Class A-2
Certificates that each shall be rated "[ ]" by [ ] and "[ ]"
by [ ].
Explanations of the significance of such ratings may be obtained from
[ ] and [ ]. Each rating will be the view only of the assigning
Rating Agency.
[The ratings on the Class A Certificates are based in substantial part on
the claims-paying ability of the Certificate Insurer. Any change in the ratings
of the Certificate Insurer by the Rating Agencies may result in a change in the
ratings of the Class A Certificates.]
There is no assurance that any rating assigned to the Class A Certificates
will continue for any period of time or that such ratings will not be revised or
withdrawn. Any such revision or withdrawal of such ratings may have an adverse
effect on the market price or liquidity of the Class A Certificates.
The ratings of the Class A Certificates should be evaluated independently
from similar ratings on other types of securities. A security rating is not a
recommendation to buy, sell or hold securities.
There can be no assurance as to whether any other rating agency will rate
the Class A Certificates, or, if one does, what rating will be assigned by such
other rating agency. A rating on the Class A Certificates by another rating
agency, if assigned at all, may be lower than the ratings assigned to the Class
A Certificates by [ ] and [ ].
S-84
<PAGE> 86
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, prior to the
Closing Date, from the Mortgage Pool and each Mortgage Loan Group as described
herein, in which case an amount equal to the aggregate principal balances of
such mortgage loans, but in no event more than $5,000,000, will be added to the
Prefunding Account Deposit on the Closing Date. As a result, the statistical
information presented below regarding the Initial Mortgage Loans and each
Mortgage Loan Group as of the Cut-off Date may vary in certain limited respects
from comparable information based on the actual composition of the Mortgage Pool
and each Mortgage Loan Group at the Closing Date. In addition, the actual
Mortgage Pool may vary from the description below due to a number of factors,
including the purchase of Subsequent Mortgage Loans on the Closing Date and
prepayments of the Initial Mortgage Loans. See "-- Conveyance of Subsequent
Mortgage Loans" herein.
The term "Aggregate Principal Balance" means the aggregate Principal
Balance of the Mortgage Loans in the specified Mortgage Loan Group. The
information expressed as a percentage of the Aggregate Principal Balance may not
total 100% due to rounding.
Each Mortgage Loan in the Trust will be assigned to one of two mortgage
loan groups (the "Fixed Rate Group" and the "Adjustable Rate Group," and each a
"Mortgage Loan Group"). The Initial Mortgage Loans comprising the Fixed Rate
Group will be secured by first, second and third liens with respect to the
related Mortgaged Properties and will bear fixed rates of interest.
Substantially all of the Initial Mortgage Loans comprising the Adjustable Rate
Group will be secured by first liens on the related Mortgaged Properties and
will bear interest at rates that adjust based on the index described in the
related mortgage notes. The Class A-1 Certificates represent undivided ownership
interests in all Mortgage Loans contained in the Fixed Rate Group, and the Class
A-2 Certificates represent undivided ownership interests in all Mortgage Loans
contained in the Adjustable Rate Group.
A-1
<PAGE> 87
FIXED RATE GROUP
TYPE OF MORTGAGED PROPERTY
[INSERT TABLE HERE]
FIXED RATE GROUP
OCCUPANCY STATUS
[INSERT TABLE HERE]
A-2
<PAGE> 88
FIXED RATE GROUP
PRIORITY OF LIEN
[INSERT TABLE HERE]
FIXED RATE GROUP
TYPE OF LOAN BY AMORTIZATION METHOD
[INSERT TABLE HERE]
A-3
<PAGE> 89
FIXED RATE GROUP
COMBINED LOAN-TO-VALUE RATIOS
[INSERT TABLE HERE]
FIXED RATE GROUP
ORIGINAL TERM TO MATURITY
[INSERT TABLE HERE]
A-4
<PAGE> 90
FIXED RATE GROUP
REMAINING TERM TO MATURITY
[INSERT TABLE HERE]
FIXED RATE GROUP
RANGE OF MORTGAGE INTEREST RATES
[INSERT TABLE HERE]
A-5
<PAGE> 91
FIXED RATE GROUP
CUT-OFF DATE PRINCIPAL BALANCE
[INSERT TABLE HERE]
FIXED RATE GROUP
GEOGRAPHICAL DISTRIBUTION OF MORTGAGED PROPERTIES
[INSERT TABLE HERE]
A-6
<PAGE> 92
FIXED RATE GROUP
ORIGINATORS OF THE MORTGAGE LOANS
[insert Table here]
ADJUSTABLE RATE GROUP
TYPE OF MORTGAGED PROPERTY
[insert Table here]
A-7
<PAGE> 93
ADJUSTABLE RATE GROUP
OCCUPANCY STATUS
[insert Table here]
ADJUSTABLE RATE GROUP
PRIORITY OF LIEN
[insert Table here]
A-8
<PAGE> 94
ADJUSTABLE RATE GROUP
TYPE OF LOAN BY AMORTIZATION METHOD
[insert Table here]
ADJUSTABLE RATE GROUP
COMBINED LOAN-TO-VALUE RATIOS
[insert Table here]
ADJUSTABLE RATE GROUP
ORIGINAL TERM TO MATURITY
[insert Table here]
A-9
<PAGE> 95
ADJUSTABLE RATE GROUP
REMAINING TERM TO MATURITY
[insert Table here]
ADJUSTABLE RATE GROUP
RANGE OF MORTGAGE INTEREST RATES
AS OF CUT-OFF DATE
[insert Table here]
A-10
<PAGE> 96
ADJUSTABLE RATE GROUP
CUT-OFF DATE PRINCIPAL BALANCE
[INSERT TABLE HERE]
ADJUSTABLE RATE GROUP
RANGE OF GROSS MARGINS
[INSERT TABLE HERE]
A-11
<PAGE> 97
ADJUSTABLE RATE GROUP
RANGE OF MAXIMUM MORTGAGE INTEREST RATES
[INSERT TABLE HERE]
ADJUSTABLE RATE GROUP
RANGE OF MINIMUM MORTGAGE RATES
[INSERT TABLE HERE]
A-12
<PAGE> 98
ADJUSTABLE RATE GROUP
GEOGRAPHICAL DISTRIBUTION OF MORTGAGED PROPERTIES
[INSERT TABLE HERE]
ADJUSTABLE RATE GROUP
ORIGINATORS OF THE MORTGAGE LOANS
[INSERT TABLE HERE]
A-13
<PAGE> 99
ANNEX B
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Mortgage
Pass-Through Certificates, Series 199[ ]-[ ] (the "Global
Securities") will be available only in book-entry form. Investors in the Global
Securities may hold such Global Securities through DTC, Cedel or Euroclear. The
Global Securities will be tradeable as home market instruments in both the
European and U.S. domestic markets. Initial settlement and all secondary trades
will settle in same-day funds.
Secondary market trading between investors holding Global Securities
through Cedel and Euroclear will be conducted in the ordinary way in accordance
with their normal rules and operating procedures and in accordance with
conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedure applicable to
U.S. corporate debt obligations and prior Mortgage Pass-Through Certificates
issues.
Secondary cross-market trading between participants of Cedel or Euroclear
and DTC Participants holding Certificates will be effected on a
delivery-against-payment basis through the Relevant Depositaries of Cedel and
Euroclear (in such capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
Cede, as nominee of DTC. Investors' interests in the Global Securities will be
represented through financial institutions acting on their behalf as direct and
indirect participants in DTC. As a result, Cedel and Euroclear will hold
positions on behalf of their participants through their Relevant Depositaries,
which in turn will hold such positions in accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will follow
DTC settlement practice. Investor securities custody accounts will be credited
with their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Cedel or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Because the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Second market trading between DTC
Participants will be settled using the procedures applicable to prior mortgage
pass-through certificates issues in same-day funds.
Trading between Cedel and/or Euroclear Participants. Secondary market
trading between Cedel Participants or Euroclear Participants will be settled
using the Procedures applicable to conventional eurobonds in same-day funds.
Trading between DTC Seller and Cedel or Euroclear Participants. When Global
Securities are to be transferred from the account of a DTC Participant to the
account of a Cedel Participant or a Euroclear Participant, the purchaser will
send instructions to Cedel or Euroclear through a Cedel Participant or Euroclear
Participant at least one business day prior to settlement. Cedel or Euroclear
will instruct the 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
B-1
<PAGE> 100
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 DTC Participant's account against delivery of the
Global Securities. After settlement has been completed, the Global Securities
will be credited to the respective clearing system and by the clearing system,
in accordance with its usual procedures, to the Cedel Participant's or Euroclear
Participant's account. The securities credit will appear the next day (European
time) and the cash debt will be back-valued to, and the interest on the Global
Securities will accrue from, the value date (which would be the preceding day
when settlement occurred in New York). If settlement is not completed on the
intended value date (i.e., the trade fails), the Cedel or Euroclear cash debt
will be valued instead as of the actual settlement date.
Cedel Participants and Euroclear Participants will need to make available
to the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within Cedel or Euroclear. Under this approach,
they may take on credit exposure to Cedel or Euroclear until the Global
Securities are credited to their accounts one day later.
As an alternative, if Cedel or Euroclear has extended a line of credit to
them, Cedel Participants or Euroclear Participants can elect not to preposition
funds and allow that credit line to be drawn upon to finance settlement. Under
this procedure, Cedel Participants or Euroclear Participants purchasing Global
Securities would incur overdraft charges for one day, assuming they clear the
overdraft when the Global Securities are credited to their accounts. However,
interest on the Global Securities would accrue from the value date. Therefore,
in many cases the investment income on the Global Securities earned during that
one-day period may substantially reduce or offset the amount of such overdraft
charges, although this result will depend on each Cedel Participants or
Euroclear Participant's particular cost of funds.
Because the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Securities to
the respective European Depositary for the benefit of Cedel Participants or
Euroclear Participants. The sale proceeds will be available to the DTC seller on
the settlement date. Thus, to the DTC Participants a cross-market transaction
will settle no differently than a trade between two DTC Participants.
Trading between Cedel or Euroclear Seller and DTC Purchaser. Due to time
zone differences in their favor, Cedel Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Securities are to be transferred by the respective clearing system, through the
respective Depositary, to a DTC Participant. The seller will send instructions
to Cedel or Euroclear through a Cedel Participant or Euroclear Participant at
least one business day prior to settlement. In these cases, Cedel or Euroclear
will instruct the Relevant Depositary, as appropriate, to deliver the Global
Securities to the DTC Participant's account against payment. Payment will
include interest accrued on the Global Securities from and including the last
coupon payment to and excluding the settlement date on the basis of the actual
number of days in such accrual period and a year assumed to consist of 360 days.
For transactions settling on the 31st of the month, payment will include
interest accrued to and excluding the first day of the following month. The
payment will then be reflected in the account of the Cedel Participant or
Euroclear Participant the following day, and receipt of the cash proceeds in the
Cedel Participant's or Euroclear Participant's account would be back-valued to
the value date (which would be the preceding day, when settlement occurred in
New York). Should the Cedel Participant or Euroclear Participant have a line of
credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the back valuation
will extinguish any overdraft incurred over that one-day period. If settlement
is not completed on the intended value date (i.e., the trade fails), receipt of
the cash proceeds in the Cedel Participant's or Euroclear Participant's account
would instead be valued as of the actual settlement date.
B-2
<PAGE> 101
Finally, day traders that use Cedel or Euroclear and that purchase Global
Securities from DTC Participants for delivery to Cedel Participants or Euroclear
Participants should note that these trades would automatically fail on the sale
side unless affirmative action were taken. At least three techniques should be
readily available to eliminate this potential problem:
(a) borrowing though Cedel or Euroclear for one day (until the
purchase side of the day trade is reflected in their Cedel or Euroclear
accounts) in accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant
no later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their Cedel or Euroclear
account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at
least one day prior to the value date for the sale to the Cedel Participant
or Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through Cedel or
Euroclear (or through DTC if the holder has an address outside the U.S.) will be
subject to the 30% U.S. withholding tax that generally applies to payments of
interest (including original issue discount) on registered debt issued by U.S.
Persons, unless (i) each clearing system, bank or other financial institution
that holds customers' securities in the ordinary course of its trade or business
in the chain of intermediaries between such beneficial owner and the U.S. entity
required to withhold tax complies with applicable certification requirements and
(ii) such beneficial owner takes one of the following steps to obtain an
exemption or reduced tax rate:
Exemption for non-U.S. Persons (Form W-8). Beneficial owners of Global
Securities that are Non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of such change.
Exemption for non-U.S. Persons with effectively connected income (Form
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States).
Exemption or reduced rate for non-U.S. Persons resident in treaty countries
(Form 1001). Non-U.S. Persons residing in a country that has a tax treaty with
the United States can obtain an exemption or reduced tax rate depending on the
treaty terms) by filing Form 1001 (Ownership, Exemption or Reduced Rate
Certificate). If the treaty provides only for a reduced rate, withholding tax
will be imposed at that rate unless the filer alternatively files Form W-8. Form
1001 may be filed by the Certificate Owners or their agents.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Certificate Owner of a
Global Security or, in the case of a Form 1001 or a Form 4224 filer, his agent,
files by submitting the appropriate form to the person though whom it holds (the
clearing agency, in the case of persons holding directly on the books of the
clearing agency). Form W-8 and Form 1001 are effective for three calendar years,
and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation or partnership organized in or under the laws of the
United States or any political subdivision thereof or (iii) an estate or trust
that is subject to United States federal income tax, regardless of the source of
its income. The term "Non-U.S. Person" means any person who is not a U.S.
Person. This summary does not deal with all aspects of U.S. federal income tax
withholding that may be relevant to foreign holders of Global Securities.
Investors are advised to consult their own tax advisors for specific tax advice
concerning their holding and disposing of Global Securities.
B-3
<PAGE> 102
[This form of Prospectus Supplement for Asset-Backed Bonds is for illustrative
purposes only. A Prospectus Supplement in definitive form reflecting the terms
of each Series of Bonds will be filed with the Commission under the Securities
Act of 1933, as amended, pursuant to Rule 424(b) promulgated thereunder.]
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED [ ])
[$ ]
AAMES CAPITAL ACCEPTANCE CORP.
TRANSFEROR
AAMES CAPITAL CORPORATION
SERVICER
AAMES CAPITAL OWNER TRUST [ ]
------------------------
The Aames Capital Owner Trust [ ] (the "Bond Issuer") is hereby
offering [$ ] aggregate principal amount of its --Asset-Backed Bonds,
Series [ ] (the "Bonds"). The Bonds will be issued pursuant to an indenture,
dated as of [ ] (the "Indenture"), between the Bond Issuer (described
herein) and Bankers Trust Company of California, N.A., as trustee (the
"Indenture Trustee"), and will be secured by a trust estate (the "Trust Estate")
consisting primarily of (i) a pool (the "Mortgage Pool") of adjustable rate
mortgage loans secured by first liens on one- to four-family residential
properties, including units in condominium and planned unit developments (the
"Mortgage Loans"), [(ii) funds on deposit in the Prefunding Account and
Capitalized Interest Account and (iii) the Financial Guaranty Insurance Policy,
as described herein.]
(continued on following page)
[LOGO]
------------------------
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION APPEARING UNDER THE
CAPTION "RISK FACTORS" BEGINNING ON PAGE 16 HEREOF AND ON PAGE 19 OF THE
PROSPECTUS BEFORE PURCHASING ANY BONDS.
------------------------
THE BONDS WILL CONSTITUTE NON-RECOURSE OBLIGATIONS OF THE BOND ISSUER ONLY, AND
THE PROCEEDS OF THE ASSETS IN THE TRUST ESTATE WILL BE THE SOLE SOURCE OF
PAYMENTS ON THE BONDS. THE BONDS WILL NOT REPRESENT AN INTEREST IN OR RECOURSE
OBLIGATION OF THE BOND ISSUER AND WILL NOT REPRESENT AN INTEREST IN OR
OBLIGATION OF ANY OTHER PERSON OR ENTITY. NEITHER THE BONDS NOR THE MORTGAGE
LOANS WILL BE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY OR
INSTRUMENTALITY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The Bonds will be offered by the Underwriters named below (the
"Underwriters") from time to time to the public in negotiated transactions or
otherwise at varying prices to be determined at the time of the related sale.
Proceeds from the sale of the Bonds are anticipated to be approximately
[$ ], before deducting expenses payable by the Bond Issuer, which are
estimated to be [$ ]. The Bonds are offered by the Underwriters, when,
as and if issued and delivered to and accepted by them, subject to prior sale
and to approval of certain legal matters by counsel for the Underwriters. The
Underwriters reserve the right to withdraw, cancel or modify any offer and to
reject orders in whole or in part. It is expected that the Bonds will be
delivered in book-entry form only through the Same-Day Funds Settlement System
of The Depository Trust Company, Cedel Bank, societe anonyme and the Euroclear
System on or about [ ]. The Bonds will be offered in Europe and the
United States of America.
[UNDERWRITERS]
------------------------
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS [ ].
<PAGE> 103
(continued from front cover)
The Mortgage Loans identified for inclusion in the Mortgage Pool as of the
date of issuance of the Bonds will be collectively referred to herein as the
"[Initial] Mortgage Loans." The aggregate of the principal balances of the
[Initial] Mortgage Loans, determined as of the Statistical Calculation Date,
totaled approximately [$ ] (the "[Initial] Pool Balance"). The
Transferor expects the Aggregate Principal Balance of the [Initial] Mortgage
Loans as of the applicable Cut-off Dates to be approximately [$ ],
after application of all payments of principal received in respect of the
[Initial] Mortgage Loans before the applicable Cut-off Dates. [Other Mortgage
Loans satisfying the criteria described herein that are acquired during the
Funding Period through the application of amounts on deposit in the Prefunding
Account will be collectively referred to herein as the "Additional Mortgage
Loans." As more fully described herein, the final Mortgage Pool will be
comprised entirely of Mortgage Loans bearing interest at rates that are subject
to periodic adjustment.] The Mortgage Loans will have been originated or
acquired by Aames Capital Corporation ("ACC"), a California corporation and a
wholly owned subsidiary of Aames Financial Corporation ("AFC"). On or prior to
the date the Bonds are issued, ACC will convey its interest in each Mortgage
Loan to Aames Capital Acceptance Corp. (the "Transferor"), a Delaware
corporation that is also a wholly owned subsidiary of AFC, who in turn will
convey such interests to the Bond Issuer. The Bond Issuer will then pledge all
of its interest in the Mortgage Loans, without recourse, to the Indenture
Trustee pursuant to the Indenture as collateral for the Bonds.
The Bonds will constitute non-recourse obligations of the Bond Issuer. ACC
will have limited obligations arising in respect of certain representations and
warranties on the Mortgage Loans in connection with the conveyance thereof to
the Transferor. ACC will also act as servicer of the Mortgage Loans (in such
capacity, the "Servicer") and, in such capacity, will have limited obligations
that arise pursuant to certain representations and warranties and to its
contractual servicing obligations under that certain agreement (the "Servicing
Agreement") to be entered into among the Servicer, the Bond Issuer and the
Indenture Trustee, including any obligation it may have to advance delinquent
interest payments on the Mortgage Loans.
[The Bonds will be unconditionally and irrevocably guaranteed as to payment
of interest due to Bondholders and as to ultimate collection of the Bond
Balance, in each case pursuant to the terms of the Financial Guaranty Insurance
Policy issued by Financial Security Assurance Inc. See "Description of the
Bonds -- The Financial Guaranty Insurance Policy" herein.]
The stated maturity for the Bonds (determined on the basis of the
assumptions described herein under "Prepayment and Yield Considerations") is the
Payment Date occurring in [ ] (the "Final Maturity Date").
The yield to maturity on the Bonds will be affected by, among other things,
the rate of payment of principal (including by reason of prepayments, defaults
and liquidations) of the Mortgage Loans and the timing and receipt of such
payments as described herein and in the Prospectus. See "Risk Factors -- Yield,
Maturity and Prepayment Considerations" and "Maturity, Prepayment and Yield
Considerations" in the Prospectus and "Risk Factors -- Risks Associated with
Prepayment of the Mortgage Loans" and "-- Yield Considerations Relating to
Excess Cash" and "Prepayment and Yield Considerations" herein.
The Bonds are subject to optional redemption in full by the Bond Issuer
after the Bond Balance is less than 20% of the Original Bond Balance. [In
addition, the Servicer and the Financial Guaranty Insurer will have rights,
under the limited circumstances described herein, to acquire all of the Mortgage
Loans from the Indenture Trustee and thereby effect a redemption of the Bonds.
See "Description of the Bonds -- Redemption of the Bonds" herein.]
No election will be made to treat the Trust Estate as a "real estate
mortgage investment conduit" (a "REMIC") for federal income tax purposes.
There is currently no secondary market for the Bonds. The Underwriters
intend to make a secondary market for the Bonds, but has no obligation to do so.
There can be no assurance that a secondary market for the Bonds will develop or,
if one does develop, that it will provide investors with a satisfactory level of
liquidity or that it will continue.
2
<PAGE> 104
It is a condition to the issuance of the Bonds that they be rated "Aaa" by
Moody's Investors Service, Inc. and "AAA" by Standard and Poor's, a division of
The McGraw-Hill Companies, Inc.
THE BONDS OFFERED BY THIS PROSPECTUS SUPPLEMENT CONSTITUTE A SEPARATE
SERIES OF SECURITIES BEING OFFERED PURSUANT TO THE PROSPECTUS OF ACC AND THE
TRANSFEROR, DATED [ ], OF WHICH THIS PROSPECTUS SUPPLEMENT IS A PART
AND THAT ACCOMPANIES THIS PROSPECTUS SUPPLEMENT. THE PROSPECTUS CONTAINS
IMPORTANT INFORMATION REGARDING THIS OFFERING THAT IS NOT CONTAINED HEREIN, AND
PROSPECTIVE INVESTORS ARE URGED TO READ THE PROSPECTUS AND THIS PROSPECTUS
SUPPLEMENT IN FULL. SALES OF BONDS MAY NOT BE CONSUMMATED UNLESS THE PROSPECTIVE
INVESTOR HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS.
Reference is made to the Index of Principal Terms herein for the location
in this Prospectus Supplement of the definitions of certain capitalized terms
used herein, and reference is also made to the Index of Principal Terms in the
Prospectus for the location in the Prospectus of the definitions of certain
capitalized terms used but not otherwise defined herein.
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE BONDS, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND THE RELATED
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS ACTING AS
UNDERWRITERS TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
FOR UNITED KINGDOM PURCHASERS: THE BONDS MAY NOT BE OFFERED OR SOLD IN THE
UNITED KINGDOM PRIOR TO THE EXPIRY OF THE PERIOD OF SIX MONTHS FROM THIS ISSUE
DATE OF SUCH BONDS AND MAY NOT BE OFFERED OR SOLD IN THE UNITED KINGDOM OTHER
THAN TO PERSONS WHOSE ORDINARY ACTIVITIES ARE ACQUIRING, HOLDING, MANAGING OR
DISPOSING OF INVESTMENTS, WHETHER AS PRINCIPAL OR AGENT (EXCEPT IN CIRCUMSTANCES
THAT DO NOT CONSTITUTE AN OFFER TO THE PUBLIC IN THE UNITED KINGDOM WITHIN THE
MEANING OF THE PUBLIC OFFERS OF SECURITIES REGULATION 1995), AND THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS MAY ONLY BE ISSUED OR PASSED ON TO ANY PERSON IN
THE UNITED KINGDOM IF THAT PERSON IS OF THE KIND DESCRIBED IN ARTICLE 11(3) OF
THE FINANCIAL SERVICES ACT 1986 (INVESTMENT ADVERTISEMENTS) (EXEMPTIONS) ORDER
1997.
3
<PAGE> 105
REPORTS TO BONDHOLDERS
Monthly and annual reports concerning the Bonds and the assets included in
the Trust Estate will be sent by the Indenture Trustee to all Bondholders. See
"Description of the Mortgage Loans -- Reports to Bondholders" herein. So long as
any Bond is in book-entry form, such reports will be sent to Cede & Co., as the
nominee of The Depository Trust Company ("DTC") and as the Bondholder of record
pursuant to the Indenture described herein. DTC will supply such reports to all
persons acquiring beneficial ownership interests in the Bonds. See "Description
of the Bonds -- BookEntry Registration and Definitive Bonds" herein and
"Description of the Securities -- Form of Securities -- Book-Entry Registration"
in the Prospectus.
AVAILABLE INFORMATION
ACC and the Transferor have filed a Registration Statement under the
Securities Act of 1933, as amended (the "Securities Act"), with the Securities
and Exchange Commission (the "Commission") pursuant to which the Bonds are being
offered. The Registration Statement and amendments thereof and the exhibits
thereto may be inspected at the Public Reference Room of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional
offices at Seven World Trade Center, 13th Floor, New York, New York 10048, and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such materials can also be obtained at prescribed rates from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Electronic filings made through the Electronic Data
Gathering, Analysis, and Retrieval System are publicly available through the
Commission's Web Site (http://www.sec.gov).
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
Certain documents filed with the Commission by or on behalf of the Bond
Issuer are incorporated by reference herein. See "Incorporation of Certain
Documents by Reference" in the Prospectus. [In addition, the consolidated
financial statements of the Financial Guaranty Insurer and Subsidiaries for the
year ended [ ], included as an exhibit to the Annual Report on Form
10-K for the year ended [ ], and the unaudited consolidated financial
statements of the Financial Guaranty Insurer and Subsidiaries for the quarterly
periods ended [ ], [ ] and [ ], included as an
exhibit to the Quarterly Report on Form 10-Q for the periods ended [ ],
[ ] and [ ], respectively, each of which has been filed with
the Commission by [ ], are hereby incorporated by reference in this
Prospectus Supplement. All financial statements of the Financial Guaranty
Insurer and Subsidiaries included in documents filed by [ ] pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as
amended, after the date of this Prospectus Supplement and prior to the
termination of the offering of the Bonds shall be deemed to be incorporated by
reference in this Prospectus Supplement and to be part of this Prospectus
Supplement from the respective dates of the filing of such documents.]
The Bond Issuer will provide to any person, including any person acquiring
a beneficial ownership interest in the Bonds, to whom this Prospectus Supplement
is delivered a copy of the above-referenced financial statements incorporated by
reference herein without charge upon written or oral request to: Aames Capital
Owner Trust [ ] c/o Aames Capital Acceptance Corp., 350 South Grand
Avenue, Los Angeles, California 90071, (323) 210-5000.
4
<PAGE> 106
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
REPORTS TO BONDHOLDERS................. 4
AVAILABLE INFORMATION.................. 4
INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE............................ 4
SUMMARY OF TERMS....................... 6
RISK FACTORS........................... 16
Limited Sources of Credit
Enhancement....................... 16
Risk of Limitations on Adjustments of
the Bond Interest Rate............ 16
Risks Associated with Underwriting
Standards......................... 17
Risks Associated with Geographic
Concentration of Mortgaged
Properties........................ 17
Risks Associated with Damaged
Mortgaged Properties.............. 17
Risks Associated with Junior Loans... 18
Risks Associated with Prepayment of
the Mortgage Loans................ 19
The Additional Mortgage Loans and the
Prefunding Account................ 20
Yield Considerations Relating to
Excess Cash....................... 21
Other Yield Considerations........... 21
Environmental Statutes Affecting
Security Interests................ 21
Risks Associated with Certain
Origination Fees.................. 22
Dissolution of Bond Issuer from
Insolvency of Transferor.......... 22
Book-Entry Registration.............. 22
DESCRIPTION OF THE BONDS............... 23
General.............................. 23
Book-Entry Registration and
Definitive Bonds.................. 23
Assignment of Mortgage Loans......... 27
Payments on the Bonds................ 29
Bond Account......................... 33
Prefunding Account................... 34
Capitalized Interest Account......... 35
Overcollateralization Feature........ 35
Reports to Bondholders............... 37
The Financial Guaranty Insurance
Policy............................ 37
The Financial Guaranty Insurer
Premium........................... 38
Redemption of the Bonds.............. 38
Payments to the Bond Issuer.......... 38
The Indenture Trustee................ 39
Voting............................... 39
Bond Events of Default............... 39
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
THE BOND ISSUER........................ 39
THE MORTGAGE LOANS..................... 40
General.............................. 40
Conveyance of Additional Mortgage
Loans............................. 42
PREPAYMENT AND YIELD CONSIDERATIONS.... 42
Projected Prepayments and Yields for
the Bonds......................... 43
ORIGINATION AND SERVICING OF THE
MORTGAGE LOANS....................... 46
The Originators...................... 46
Underwriting of Mortgage Loans....... 46
Servicing of the Mortgage Loans...... 46
Customary Servicing Procedures....... 47
The Servicing Agreement.............. 47
Sub-Servicers........................ 52
Hazard Insurance..................... 52
Servicing and Other Compensation;
Payment of Expenses............... 54
Servicer's Mortgage Loan Delinquency
and Foreclosure Experience........ 54
THE FINANCIAL GUARANTY INSURANCE POLICY
AND THE FINANCIAL GUARANTY INSURER... 55
The Financial Guaranty Insurer....... 55
The Financial Guaranty Insurance
Policy............................ 57
Credit Enhancement Does Not Apply to
Prepayment Risk................... 59
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES......................... 60
ERISA CONSIDERATIONS................... 60
USE OF PROCEEDS........................ 61
LEGAL INVESTMENT CONSIDERATIONS........ 61
UNDERWRITING........................... 61
REPORT OF EXPERTS...................... 62
LEGAL MATTERS.......................... 62
RATING OF THE BONDS.................... 62
INDEX OF PRINCIPAL TERMS............... 64
ANNEX A: DESCRIPTION OF THE MORTGAGE
POOL................................. A-1
ANNEX B: GLOBAL CLEARANCE, SETTLEMENT
AND TAX DOCUMENTATION PROCEDURES..... B-1
</TABLE>
5
<PAGE> 107
SUMMARY OF TERMS
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus Supplement and the
accompanying Prospectus.
Securities Offered......... - Asset-Backed Bonds, Series [ ] (the
"Bonds"). The Bonds represent nonrecourse
obligations of the Bond Issuer. Proceeds of the
assets in the Trust Estate will be the sole source
of payments on the Bonds.
Original Bond Balance...... [$ ]
Bond Issuer................ Aames Capital Owner Trust [ ], a Delaware
business trust established by the Transferor
pursuant to a trust agreement, dated as of
[ ] (the "Trust Agreement"), between the
Transferor and Wilmington Trust Company as owner
trustee. After the Closing Date, substantially all
of the beneficial ownership interest in the Bond
Issuer will be held by Aames Capital Corporation
("ACC"), a California corporation and a wholly
owned subsidiary of Aames Financial Corporation
("AFC"). The Transferor will retain only a
negligible interest in the Bond Issuer after the
Closing Date, but will have primary responsibility
for managing the affairs and operations of the Bond
Issuer. The principal office of the Bond Issuer is
located in Los Angeles, California. The Bond Issuer
does not have, nor is it expected in the future to
have, any significant assets, other than the assets
included in the Trust Estate. See "The Bond Issuer"
herein.
The Transferor............. Aames Capital Acceptance Corp., a Delaware
corporation and a wholly owned limited purpose
finance subsidiary of AFC. The principal office of
the Transferor is located in Los Angeles,
California.
The Mortgage Loans were originated or acquired by
ACC. On or prior to the date the Bonds are issued,
ACC will convey its interest in each Mortgage Loan
to the Transferor who in turn will convey such
interests to the Bond Issuer. See "Aames Capital
Acceptance Corp." and "Aames Capital Corporation"
in the Prospectus.
The Servicer............... ACC will act as servicer of the Mortgage Loans (in
such capacity, the "Servicer") under the terms of
that certain agreement, dated as of [ ] (the
"Servicing Agreement"), among the Servicer, the
Bond Issuer and the Indenture Trustee. See "The
Servicer" in the Prospectus and "Servicing of the
Mortgage Loans" herein.
The Servicer will appoint one or more mortgage
servicing institutions (each, a "Sub-Servicer"),
which may be affiliates of the Servicer, to service
and administer certain Mortgage Loans on behalf of
the Servicer. See "Servicing of the Mortgage
Loans -- Sub-Servicers" herein.
The Indenture Trustee...... Bankers Trust Company of California, N.A., a
national banking association, duly organized and
existing under and by virtue of the laws of the
United States. See "The Indenture" in the
Prospectus and "Description of the Bonds -- The
Indenture Trustee" herein.
Cut-off Dates.............. With respect to the Mortgage Loans owned by ACC as
of [ ] and designated for inclusion in the
Mortgage Pool as of the date hereof (the "Original
Mortgage Loans"), the Cut-off Date is [ ].
[With respect to the Mortgage Loans acquired by ACC
by bulk purchase after [ ] but prior to the
date hereof and designated for inclusion in the
6
<PAGE> 108
Mortgage Pool as of the date hereof (the "Bulk
Purchase Mortgage Loans" and, together with the
Original Mortgage Loans, the "[Initial] Mortgage
Loans"), the Cut-off Date is [ ]. With
respect to the Mortgage Loans satisfying the
criteria described herein that are acquired during
the Funding Period through the application of
amounts on deposit in the Prefunding Account (the
"Additional Mortgage Loans"), the Cutoff Date is
the date specified as such in the related
subsequent transfer agreement for the Additional
Mortgage Loans transferred pursuant thereto.
Closing Date............... On or about [ ].
Description of the Bonds... The Bonds represent non-recourse obligations of the
Bond Issuer and will be issued pursuant to an
indenture to be dated as of [ ] (the
"Indenture"), entered into between the Bond Issuer
and the Indenture Trustee. The assets included in
the trust estate created by the Indenture (the
"Trust Estate") and pledged to secure the Bonds
will be the sole source of payments on the Bonds.
The Bonds will be issued in a single class.
Initially, the assets of the Trust Estate will
consist of (i) a pool (the "Mortgage Pool") of the
[Initial] Mortgage Loans, which are adjustable rate
home equity mortgage loans secured by first lien
mortgages or deeds of trust on one- to four-family
residential properties, including units in
condominium, planned unit developments and
manufactured housing units (the "Mortgaged
Properties"), and including any note or other
instrument of indebtedness (each, a "Mortgage
Note"); (ii) all payments in respect of principal
of the [Initial] Mortgage Loans received on or
after the applicable Cut-off Dates; (iii) all
payments in respect of interest accrued on the
[Initial] Mortgage Loans from and after the
applicable Cut-off Dates, irrespective of when
received; (iv) security interests in the Mortgaged
Properties; (v) amounts to be deposited in the
Prefunding Account that will be available for the
acquisition of the Additional Mortgage Loans during
the Funding Period; (vi) amounts to be deposited in
the Capitalized Interest Account; [(vii) the
insurance policy (the "Financial Guaranty Insurance
Policy") issued by (the Financial Guaranty
Insurer)] and (viii) certain other property.
Denominations and
Registration............... The Bonds will be issued in minimum denominations
of $1,000 principal amount and in integral
multiples of $1 in excess thereof. No person
acquiring a beneficial ownership interest in any
Bond (any such person, a "Bond Owner") will be
entitled to receive such Bond in fully registered,
certificated form (a "Definitive Bond"), except
under the limited circumstances described herein
under "Description of the Bonds -- Book-Entry
Registration and Definitive Bonds." Instead, Bond
Owners will hold their Bonds through The Depository
Trust Company ("DTC"), in the United States, or
Cedel Bank, societe anonyme ("Cedel") or the
Euroclear System ("Euroclear") in Europe, each of
which will effect payments and transfers in respect
of the Bonds by means of electronic record keeping
services, acting through certain participating
organizations. Transfers within DTC, Cedel or
Euroclear, as the case may be, will be in
accordance with the usual rules and operating
procedures of the relevant system. So long as the
Bonds are in book-entry form, the Bonds will be
represented by one or more global certificates
registered in the
7
<PAGE> 109
name of Cede & Co., as nominee of DTC, or Citibank
N.A. or Morgan Guaranty Trust Company of New York,
the relevant depositaries of Cedel and Euroclear,
respectively, and each a participating member of
DTC. This may result in certain delays in receipt
of payments by an investor and may restrict an
investor's ability to pledge its Bonds. See "Risk
Factors -- Book-Entry Registration" and
"Description of the Bonds -- Book-Entry
Registration and Definitive Bonds" herein, "ANNEX
B: Global Clearance, Settlement and Tax
Documentation Procedures" hereto and "Description
of the Securities -- Form of
Securities -- Book-Entry Registration" in the
Prospectus. Unless and until Definitive Bonds are
issued, it is anticipated that the only
"Bondholder" will be Cede & Co., as nominee of DTC.
Bond Owners will not be Bondholders as that term is
used in the Indenture and the Servicing Agreement.
Bond Owners are permitted to exercise their rights
only indirectly through DTC and its Participants
(including Cedel and Euroclear).
Payments on the Bonds
A. General................. Payments on the Bonds will be made on the 15th day
of each month, or if such day is not a business
day, on the next succeeding business day (each, a
"Payment Date"), commencing in [ ], to each
Bondholder of record on the related Record Date.
Unless otherwise specified elsewhere in this
Prospectus Supplement, the term "business day"
means any day other than (i) a Saturday or Sunday
or (ii) a day on which banking institutions in the
State of California or the State of New York are
authorized or obligated by law, regulation,
executive order or governmental decree to be
closed. The "Record Date" for the Bonds with
respect to any Payment Date will be the last
business day of the immediately preceding calendar
month, except that the final payment in redemption
of any Definitive Bond will be made only upon
presentation and surrender of such Definitive Bond
at the office or agency designated by the Indenture
Trustee for that purpose. See "Description of the
Bonds" herein.
On each Payment Date, payments of principal and
interest will be made to Bondholders as of the
immediately preceding Record Date out of Available
Funds for such Payment Date. The "Available Funds"
for any Payment Date will generally consist of the
aggregate of the following amounts:
(i) amounts collected, received or otherwise
recovered by or on behalf of the Servicer on or
with respect to the Mortgage Loans during the
calendar month immediately preceding the month in
which such Payment Date occurs or, in the case of
the first Payment Date, during the period from the
applicable Cutoff Date for each Mortgage Loan
through the end of [ ] (each, a "Collection
Period"), net of amounts representing interest
accrued on such Mortgage Loans in respect of any
period prior to the applicable Cut-off Date, the
related Servicing Fee and any additional servicing
compensation paid to the Servicer in respect to the
related Collection Period, Payments Ahead and
reimbursements for certain advances (other than
those included in liquidation expenses reimbursed
from related Liquidation Proceeds); and
(ii) the amount of any Monthly Advances and
Compensating Interest Payments made by the Servicer
for such Payment Date, any amounts
8
<PAGE> 110
deposited in the Bond Account in respect of the
release, removal or substitution of Mortgage Loans
during the related Collection Period, amounts
deposited in the Bond Account in respect of
interest for the first two Collection Periods and
any amounts deposited in the Bond Account during
such Collection Period from the Prefunding Account
and the Capitalized Interest Account or in
connection with the redemption of the Bonds, all as
more fully described under "Description of the
Bonds -- Payments on the Bonds" herein.
B. Bond Interest Rate...... The Bond Interest Rate for the [Initial] Interest
Period will be a per annum rate equal to [ ]
and will be determined on [ ]. The Bond
Interest Rate for each subsequent Interest Period
will be a per annum rate equal to the lesser of (i)
for each Interest Period ending prior to the Pool
Redemption Date, [ ] and, for each Interest
Period ending thereafter, [ ] and (ii) the
Adjustable Rate Cap. The "Adjustable Rate Cap" will
be, with respect to any Payment Date and the Bonds,
the per annum rate equal to the percentage obtained
by (I) dividing (x) an amount equal to the
aggregate of the interest portions of each of the
monthly payments due on the Mortgage Loans during
the related Collection Period, reduced by the sum
of (i) the Servicing Fee with respect to the
Mortgage Loans for such Collection Period, [(ii)
the Financial Guaranty Insurer Premium for such
Payment Date,] and (iii) in the case of each
Payment Date occurring after the Payment Date in
[ ], an amount equal to one-twelfth (1/12)
of 100 basis points multiplied by the Aggregate
Principal Balance of the Mortgage Loans as of the
end of such Collection Period, by (y) the product
of (i) the then outstanding aggregate principal
balance of the Bonds (the "Bond Balance") as of the
first day of such Interest Period and (ii) the
actual number of days elapsed during such Interest
Period divided by 360 and (II) multiplying the
result by 100. See "Description of the
Bonds -- Payments on the Bonds" herein.
The "Interest Period" in respect of any Payment
Date will be the period from and including the
Closing Date, in the case of the [Initial] Payment
Date, or the immediately preceding Payment Date, as
applicable, to but excluding the related Payment
Date. All calculations of interest on the Bonds
will be computed on the basis of the actual number
of days elapsed in the related Interest Period in a
year of 360 days.
C. Payments of Interest.... On each Payment Date, Bonds will be entitled to
payments in respect of interest on the Bonds ("Bond
Interest"). Bond Interest for any Payment Date will
be an amount equal to (a) with respect to the
[Initial] Interest Period, interest for the number
of days in the period commencing on the Closing
Date and ending on the day prior to such Payment
Date at the Bond Interest Rate on the Original Bond
Balance, and (b) with respect to any subsequent
Interest Period, interest for the number of days in
such Interest Period at the Bond Interest Rate on
the Bond Balance as of the preceding Payment Date
(after giving effect to the payment, if any, in
reduction of principal made on the Bonds on such
preceding Payment Date). See "Description of the
Bonds -- Payments on the Bonds" herein.
[If, with respect to any Payment Date, funds are
not available from Available Funds to pay the full
amount of the interest due on the Bonds, the
deficiency will be covered by payments made
pursuant to the
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Financial Guaranty Insurance Policy for such
Payment Date. See "Description of the Bonds -- The
Financial Guaranty Insurance Policy" herein.]
D. Payments of Principal... On each Payment Date, Bonds will be entitled to
Monthly Principal in reduction of the Bond Balance.
"Monthly Principal" with respect to any Payment
Date will be equal to the aggregate of amounts
collected, received or otherwise recovered in
respect of principal on the Mortgage Loans during
or in respect of the related Collection Period,
subject to reduction for any Coverage Surplus with
respect to the related Payment Date as described
herein.
E. Payments of Excess
Cash.................... On each Payment Date with respect to which the
Coverage Amount for the Bonds is less than the
Required Coverage Amount for such Payment Date,
Excess Cash derived from Available Funds, if any,
will be paid on the Bonds in reduction of the Bond
Balance, up to the amount necessary for the related
Coverage Amount to equal the applicable Required
Coverage Amount. "Excess Cash" on any Payment Date
will be equal to Available Funds on such Payment
Date, reduced by the sum of (i) Bond Interest for
the related Payment Date, (ii) the Monthly
Principal for the related Payment Date, [(iii) the
Financial Guaranty Insurer Premium attributable to
the related Payment Date, (iv) any amounts payable
to the Financial Guaranty Insurer for Insured
Amounts paid on prior Payment Dates and not yet
reimbursed and (v) any amounts payable to the
Financial Guaranty Insurer for unpaid Financial
Guaranty Insurer Premiums from prior Payment
Dates.] Any Excess Cash remaining after making
required payments on the Bonds on any Payment Date
will be released to the Bond Issuer on such Payment
Date, free from the lien of the Indenture, and such
amounts will not be available to make payments on
the Bonds on any subsequent Payment Date.
F. Overcollateralization
Feature................. Credit enhancement with respect to the Bonds
initially will be provided in part by
overcollateralization resulting from the sum of the
Aggregate Principal Balances of the [Initial]
Mortgage Loans as of their respective Cut-off Dates
(the "[Initial] Cut-off Date Pool Balance") [and
the Prefunding Account Deposit exceeding the
Original Bond Balance, which is expected to be
supplemented by the application of Excess Cash on
each Payment Date so that over time such
overcollateralization will increase.] Such
overcollateralization is intended to result in
receipts, collections and recoveries on the
Mortgage Loans in excess of the amount necessary to
pay Bond Interest and the Monthly Principal
required to be paid on the Bonds on any Payment
Date and to reduce the Bond Balance to zero prior
to the Final Maturity Date. Excess Cash will be
paid in reduction of the Bond Balance on each
Payment Date up to the amount necessary for the
related Coverage Amount to equal the Required
Coverage Amount for such Payment Date.
The "Coverage Amount" for the Bonds on any Payment
Date will be equal to the amount by which the sum
of the Aggregate Principal Balance of the Mortgage
Loans in the Mortgage Pool as of the end of the
related Collection Period (plus, in the case of the
[ ] Payment Date, the aggregate of the
Principal Balances of any Additional Mortgage Loans
added to the Mortgage Pool after [ ] but
prior to the end of the Funding Period) exceeds the
Bond Balance for such Payment
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<PAGE> 112
Date after taking into account payments of Monthly
Principal (disregarding any permitted reduction in
Monthly Principal due to a Coverage Surplus) made
on such Payment Date. The "Required Coverage
Amount" for the Bonds on any Payment Date will be
equal to the amount specified as such in the
Indenture. The "Coverage Surplus" for the Bonds on
any Payment Date will be the amount, if any, by
which the Coverage Amount on such Payment Date
exceeds the then applicable Required Coverage
Amount. The "Coverage Deficit" for the Bonds on any
Payment Date will be the amount, if any, by which
the Bond Balance on such Payment Date (after taking
into account the Monthly Principal and Excess Cash
to be paid on such Payment Date in reduction of the
Bond Balance) exceeds the sum of the Aggregate
Principal Balance of the Mortgage Loans at the end
of the related Collection Period (plus, in the case
of the [ ] Payment Date, the aggregate of the
Principal Balances of any Additional Mortgage Loans
added to the Mortgage Pool after [ ] but
prior to the end of the Funding Period).
On the Closing Date, the [Initial] Coverage Amount
for the Bonds will be approximately [ ] of
the sum of the [Initial] Cut-off Date Pool Balance
[and the Prefunding Account Deposit.] The [Initial]
Coverage Amount for the Bonds is not indicative of
the quality of the Mortgage Loans nor is it
intended to reflect the loss, default or
delinquency experience anticipated on the Mortgage
Loans.
The Indenture may provide that the Required
Coverage Amount for the Bonds may increase or
decrease during the period the Bonds remain
outstanding. If on any Payment Date occurring after
[ ], the amount of Excess Cash payable on the
Bonds is less than an amount specified in the
Indenture, the Required Coverage Amount for the
Bonds will be increased (any such Payment Date, a
"Trigger Event Date"); provided, however, that upon
the satisfaction of certain cash flow requirements
in respect of the Bonds for the period specified in
the Indenture, such Required Coverage Amount will
return to its original level. Any increase in the
Required Coverage Amount may result in an
accelerated amortization of the Bonds until such
Required Coverage Amount is reached, and any
decrease in the Required Coverage Amount will
result in a decelerated amortization of the Bonds
until such Required Coverage Amount is reached. See
"Description of the Bonds -- Overcollateralization
Feature" herein.
[G. Financial Guaranty
Insurance Policy....... The Financial Guaranty Insurance Policy will be
issued on the Closing Date by the Financial
Guaranty Insurer in favor of the Indenture Trustee
for the benefit of the Bondholders. If, with
respect to any Payment Date, sufficient funds are
not available from Available Funds to pay Bond
Interest on such Payment Date, or if a Coverage
Deficit exists with respect to such Payment Date
(after taking into account any payments in
reduction of the Bond Balance on such Payment
Date), the Indenture Trustee will make a draw on
the Financial Guaranty Insurance Policy in an
amount equal to the amount necessary to pay the
full amount of such Bond Interest and the amount of
any such Coverage Deficit, as more fully described
under "Description of the Bonds -- The Financial
Guar-
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<PAGE> 113
anty Insurance Policy" herein. See also "The
Financial Guaranty Insurance Policy and the
Financial Guaranty Insurer" herein.]
H. Maturity of the Bonds... The final maturity date of the Bonds is the Payment
Date occurring in [ ] (the "Final Maturity
Date").
[Forward Commitment;
Prefunding Account......... On the Closing Date, the Bond Issuer will make a
deposit (the "Prefunding Account Deposit") in the
amount of approximately [$ ] to a
segregated account (the "Prefunding Account") in
the name of the Indenture Trustee to be allocated
for the acquisition of Additional Mortgage Loans.
The Prefunding Account Deposit may be increased by
an amount equal to the aggregate of the principal
balances of any mortgage loans removed from the
Mortgage Pool prior to the Closing Date as
described herein, provided that any such increase
shall not exceed $10,000,000. See "The Mortgage
Loans -- General" herein. During the period (the
"Funding Period") from the Closing Date until the
earlier of (i) the date on which the amount on
deposit in the Prefunding Account is reduced to
zero and (ii) [ ], the amount on deposit in
the Prefunding Account will be allocated for the
acquisition of Additional Mortgage Loans in
accordance with the applicable provisions of the
Indenture. The Additional Mortgage Loans will be
acquired or originated by ACC and conveyed to the
Transferor from time to time during the Funding
Period. The Transferor will in turn convey the
Additional Mortgage Loans to the Bond Issuer, which
will pledge such Additional Mortgage Loans under
the Indenture. Additional Mortgage Loans acquired
and added to the Mortgage Pool on any Subsequent
Transfer Date must be approved by the Financial
Guaranty Insurer. Any date on which such Additional
Mortgage Loans are acquired is a "Subsequent
Transfer Date." On the Payment Date in [ ],
any amount remaining on deposit in the Prefunding
Account and not applied to acquire Additional
Mortgage Loans during the Funding Period will be
paid in reduction of the Bond Balance. Although it
is intended that the principal amount of Additional
Mortgage Loans acquired 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 payments from
amounts remaining on deposit in the Prefunding
Account in reduction of the Bond Balance, no
assurance can be given that such a payment will not
occur on the Payment Date in [ ]. In any
event, it is unlikely that the Bond Issuer will be
able to acquire Additional Mortgage Loans with
aggregate principal balances that exactly equal the
Prefunding Account Deposit. Any portion of the
Prefunding Account Deposit that is not applied to
acquire Additional Mortgage Loans during the
Funding Period will be paid on the [ ]
Payment Date in reduction of the Bond Balance. See
"Description of the Bonds -- Prefunding Account"
herein.
All Additional Mortgage Loans acquired from
application of amounts on deposit in the Prefunding
Account shall be part of the Trust Estate from and
after the date of acquisition thereof.]
[Capitalized Interest
Account.................... On the Closing Date, the Bond Issuer will deposit
cash in the name of the Indenture Trustee in a
segregated account (the "Capitalized Interest
Account"). The Capitalized Interest Account will be
maintained with the Indenture Trustee in its
corporate trust department. The amount on
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<PAGE> 114
deposit in the Capitalized Interest Account will be
specifically allocated to cover shortfalls in
interest on the Bonds that may arise as a result of
the utilization of the Prefunding Account for the
acquisition of Additional Mortgage Loans during the
Funding Period and will be so applied by the
Indenture Trustee on the [ ] Payment Date.
See "Description of the Bonds -- Capitalized
Interest Account" herein.]
Monthly Advances........... The Servicer is required to make an advance (each,
a "Monthly Advance") on each Payment Date (i) in
respect of delinquent payments of interest on the
Mortgage Loans for the related Collection Period,
subject to certain limitations described herein and
(ii) to cover interest at the Mortgage Interest
Rate on each Mortgage Loan that is not delinquent
as of the close of business on the last day of the
related Collection Period for the period from and
including the due date of the related monthly
payment to the end of such Collection Period
preceding such Payment Date. See "Servicing of the
Mortgage Loans -- The Servicing
Agreement -- Monthly Advances" herein.
Compensating Interest...... With respect to any Mortgage Loan (i) as to which a
prepayment in whole or in part was received, (ii)
that became a Liquidated Mortgage Loan or (iii)
that was otherwise charged off during a Collection
Period, the Servicer will be required to remit to
the Indenture Trustee, from amounts otherwise
payable to the Servicer as the Servicing Fee for
the related Collection Period, an amount generally
calculated to ensure that a full month's interest
on each such Mortgage Loan (less the applicable
Servicing Fee attributable to such Mortgage Loan)
is available for payment to the Bondholders on the
applicable Payment Date (each such amount, a
"Compensating Interest Payment"). See "Servicing of
the Mortgage Loans -- The Servicing
Agreement -- Compensating Interest Payments"
herein.
[Financial Guaranty Insurer
Premium.................... The Financial Guaranty Insurer will be entitled to
receive a monthly premium (the "Financial Guaranty
Insurer Premium") payable out of Available Funds on
each Payment Date from amounts on deposit in the
Bond Account after reimbursement to the Financial
Guaranty Insurer of certain Insured Amounts. The
Financial Guaranty Insurer Premium as of any
Payment Date will equal onetwelfth ( 1/12) of the
product of the applicable Insurer Premium Rate and
the Bond Balance for such Payment Date (before
giving effect to any reductions thereof on such
Payment Date). The "Insurer Premium Rate" will be
[ %]; provided, however, that with respect to
each Payment Date commencing with the Payment Date
immediately following the Pool Redemption Date, if
the Coverage Amount is less than the then
applicable Required Coverage Amount as of the
immediately preceding Payment Date, the Insurer
Premium Rate applicable to such Payment Date will
be [ ]. See "Description of the Bonds -- The
Financial Guaranty Insurer Premium" herein.]
Servicing Fee.............. The primary compensation payable to the Servicer on
each Payment Date in respect of the related
Collection Period (the "Servicing Fee") will equal
onetwelfth ( 1/12) of the product of (a) the
applicable Servicing Fee Rate and (b) the Aggregate
Principal Balance of the Mortgage Loans at the
beginning of such Collection Period. The "Servicing
Fee Rate" will be 0.50% for each Collection Period.
The Servicer will also be
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<PAGE> 115
entitled to retain late fees, prepayment charges
and certain other amounts and charges as additional
servicing compensation. See "Servicing of the
Mortgage Loans -- Servicing and Other Compensation;
Payment of Expenses" herein.
The Mortgage Loans......... The statistical information presented in this
Prospectus Supplement regarding the Mortgage Pool
is based on the [Initial] Mortgage Loans as of
[ ] (the "Statistical Calculation Date"). As
of the Statistical Calculation Date, the [Initial]
Mortgage Loans had an Aggregate Principal Balance
totaling approximately [ ] (the "[Initial]
Pool Balance"). The Transferor expects the
Aggregate Principal Balance of the [Initial]
Mortgage Loans as of the applicable Cut-off Dates
to be approximately [ ], after application of
all payments of principal received in respect of
any such [Initial] Mortgage Loan before the
applicable Cut-off Dates. The statistical
information presented in this Prospectus Supplement
does not take into account any amortization of the
[Initial] Mortgage Loans prior to the Closing Date,
[or any Additional Mortgage Loans that may be added
to the Mortgage Pool during the Funding Period
through application of amounts on deposit in the
Prefunding Account.] Certain mortgage loans may
prepay in full or be removed, prior to the Closing
Date, from the Mortgage Pool as described herein.
[In such event, an amount equal to the aggregate
principal balances of such mortgage loans, but in
no event more than $10,000,000, would be added to
the Prefunding Account Deposit on the Closing
Date.] As a result, the statistical information
presented herein regarding the [Initial] Mortgage
Loans as of the Statistical Calculation Date may
vary in certain limited respects from comparable
information based on the actual composition of the
Mortgage Pool on the Closing Date.
As of the Closing Date, the Mortgage Pool is
expected to consist of a total of [ ]
[Initial] Mortgage Loans, bearing interest at rates
that are subject to periodic adjustment. See "The
Mortgage Loans -- General" herein and "ANNEX A:
Description of the Mortgage Pool" hereto for
detailed information about the [Initial] Mortgage
Loans. As used herein, the term "Aggregate
Principal Balance" means the aggregate of the
Principal Balances of the Mortgage Loans in the
Mortgage Pool at the related date of determination.
The Mortgage Loans are closed-end, adjustable rate,
home equity mortgage loans originated by ACC or
acquired by ACC from certain affiliates of ACC (the
"Affiliated Originators") and institutions not
affiliated with ACC (the "Unaffiliated Originators"
and, together with the Affiliated Originators, the
"Originators"). See "Origination of the Mortgage
Loans" herein.
Approximately [ ]% of the [Initial] Mortgage
Loans (by [Initial] Pool Balance) are secured by
Mortgaged Properties located in California and
approximately [ ]% of the Mortgage Loans (by
[Initial] Pool Balance) are secured by Mortgaged
Properties located in [ ]. See "Risk
Factors -- Risks Associated with Geographic
Concentration of the Mortgaged Properties" herein.
Optional Redemption........ The Bonds may be redeemed in full at the option of
the Bond Issuer after the Bond Balance is less than
[ ] of the Original Bond Balance. In
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<PAGE> 116
addition, the Servicer [and the Financial Guaranty
Insurer] will have rights, under the limited
circumstances described herein, to acquire all of
the Mortgage Loans from the Indenture Trustee and
thereby effect a redemption of the Bonds. See
"Description of the Bonds -- Redemption of Bonds"
herein.
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 Prospectus.
No election will be made to treat the Trust Estate
or any portion thereof as a "real estate mortgage
investment conduit" (a "REMIC") for federal income
tax purposes.
For federal income tax purposes, the Bonds will be
treated as debt obligations of the Bond Issuer. A
Bond Owner will not be required to report income
with respect to the Bonds under an accrual method
unless the Bond Owner otherwise uses the accrual
method.
The Bonds will not represent "real estate assets"
for purposes of Section 856(c)(4)(A) of the
Internal Revenue Code of 1986, as amended (the
"Code"), or "[l]oans principally secured by an
interest in real property" within the meaning of
Section 7701(a)(19)(C)(v) of the Code.
ERISA Considerations....... Subject to the considerations discussed under
"ERISA Considerations" herein and in the
Prospectus, the Bonds may be acquired and held by a
pension or other employee benefit plan subject to
the provisions of Title I of the Employee
Retirement Income Security Act of 1974, as amended
("ERISA") and/or Section 4975 of the Internal
Revenue Code of 1986, as amended. See "ERISA
Considerations" herein and in the Prospectus.
Legal Investment
Considerations............. The Bonds will NOT constitute "mortgage related
securities" for purposes of the Secondary Mortgage
Market Enhancement Act of 1984 ("SMMEA"). See
"Legal Investment Considerations -- SMMEA" in the
Prospectus and "Legal Investment Considerations"
herein.
Rating..................... It is a condition to the issuance of the Bonds that
they be rated "Aaa" by Moody's Investors Service,
Inc. ("Moody's") and "AAA" by Standard and Poor's,
a division of The McGraw-Hill Companies, Inc.
("S&P" and, together with Moody's, the "Rating
Agencies"). A security rating is not a
recommendation to buy, sell or hold securities and
may be subject to revision or withdrawal at any
time by the assigning Rating Agency. See "Rating of
the Bonds" herein.
Risk Factors............... For a discussion of certain factors that should be
considered by prospective investors in the Bonds,
including certain yield and prepayment risks, see
"Risk Factors" herein and in the Prospectus.
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<PAGE> 117
RISK FACTORS
Prospective investors in the Bonds should consider the following risk
factors (as well as the factors set forth under "Risk Factors" in the
Prospectus) in connection with the purchase of the Bonds. Any statistical
information presented below is based upon the characteristics of the [Initial]
Mortgage Loans as of the Statistical Calculation Date. Such information does not
take into account any amortization of the [Initial] Mortgage Loans prior to the
Closing Date and may vary as a result of the possibility that certain mortgage
loans may prepay in full or be removed from the Mortgage Pool prior to the
Closing Date.
LIMITED SOURCES OF CREDIT ENHANCEMENT
The assets of the Trust Estate, excluding the Financial Guaranty Insurance
Policy, are the sole source of funds for distributions on the Bonds. The
overcollateralization and cross-collateralization features of the Trust are the
sole sources of protection against losses on the Mortgage Loans and other
shortfalls in available funds in the case of the Bonds. Compensating Interest
Payments, the overcollateralization and limited cross-collateralization features
of the Trust and the Financial Guaranty Insurance Policy are the sole sources of
protection against losses on the Mortgage Loans and other shortfalls in
available funds in the case of the [ ] Bonds. If losses or other
shortfalls exceed the protection afforded by such mechanisms, Bondholders will
bear their proportionate share of such losses and shortfalls. The Bonds
represent interests only in the Trust and do not represent interests in, or
obligations of ACC, the Transferor, the Servicer, the Indenture Trustee, the
Bond Issuer or any of their respective affiliates.
RISK OF LIMITATIONS ON ADJUSTMENTS OF THE BOND INTEREST RATE
The Mortgage Pool will contain Mortgage Loans that, after a period of
approximately six months, one year, eighteen months, two years, three years,
five years or seven years following the date of origination, adjust either
semi-annually based upon the London interbank offered rate for six-month United
States dollar deposits (the "six-month London Interbank Offered Rate") or
annually based on the weekly average yield on United States Treasury securities
adjusted to a constant maturity of one year, as made available by the Federal
Reserve Board (the "one-year CMT index"), in each case subject to periodic caps
on such adjustment, whereas the Bond Interest Rate adjusts monthly based upon
the London interbank offered rate for one-month United States dollar deposits,
subject to the Adjustable Rate Cap. Consequently, the interest due on such
Mortgage Loans (reduced by the sum of (i) the Servicing Fee, (ii) the Financial
Guaranty Insurer Premium, and (iii) after the Payment Date in [ ], an amount
equal to one-twelfth (1/12) of 100 basis points multiplied by the Aggregate
Principal Balance of the Mortgage Loans as of the end of the immediately
preceding Collection Period) during any Collection Period may not equal the
amount of interest that would accrue at LIBOR plus the applicable margin on the
Bonds during the related Interest Period. In particular, because the interest
rates of the Mortgage Loans adjust less frequently than the Bond Interest Rate,
the amount of Bond Interest paid on the Bonds on any Payment Date may be limited
(as a result of being determined on the basis of the Adjustable Rate Cap) to an
amount that is less than the amount of interest that would be due on the Bond
Balance for such Payment Date at a rate equal to [ ], as applicable, for
extended periods in a rising interest rate environment.
Approximately [ ]% (by [Initial] Pool Balance) of the [Initial] Mortgage
Loans have [Initial] Mortgage Interest Rates that will remain fixed for one year
or more from the Statistical Calculation Date before [Initial] adjustment,
approximately [ ]% (by [Initial] Pool Balance) of the [Initial] Mortgage Loans
have [Initial] Mortgage Interest Rates that will remain fixed for two years or
more from the Statistical Calculation Date before [Initial] adjustment and
approximately [ ]% (by [Initial] Pool Balance) of the [Initial] Mortgage Loans
have [Initial] Mortgage Interest Rates that will remain fixed for three years or
more from the Statistical Calculation Date before [Initial] adjustment. The
inclusion of such Mortgage Loans in the Mortgage Pool may increase the
likelihood that the Bond Interest Rate will be determined based on the
Adjustable Rate Cap rather than on the basis [ ]%, as applicable, if LIBOR
increases appreciably prior to the time that such Mortgage Loans have reached
their respective dates of first adjustment.
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<PAGE> 118
If the Bond Interest Rate is determined on the basis of the Adjustable Rate
Cap, the value of the Bonds may be temporarily or permanently reduced.
RISKS ASSOCIATED WITH UNDERWRITING STANDARDS
All of the [Original] Mortgage Loans will have been underwritten and
originated or, in the case of [Original] Mortgage Loans acquired by ACC from
Unaffiliated Originators, re-underwritten, in either case pursuant to the Aames
Guidelines (as described in the Prospectus under the caption "The Originators --
Underwriting Guidelines"), which in most cases, rely on the value and adequacy
of the related Mortgaged Property as collateral and, to a lesser extent, on the
creditworthiness and repayment ability of the Mortgagor.
No assurance can be given that the values of the Mortgaged Properties will
not decline from those on the dates the related Mortgage Loans were originated
and any such decline could render the information set forth herein with respect
to the Loan-to-Value Ratios of such Mortgage Loans an unreliable measure of
security for the related debt. If the residential real estate market should
experience an overall decline in property values such that the outstanding
Principal Balances of the Mortgage Loans become equal to or greater than the
values of such Mortgaged Properties, the actual rate of delinquencies,
foreclosures and losses on the related Mortgage Loans could be higher than those
now generally experienced in the mortgage lending industry. Even assuming that
the Mortgaged Properties provide adequate security for the Mortgage Loans,
substantial delays could be encountered in connection with the foreclosure and
liquidation of defaulted Mortgage Loans and corresponding delays in the receipt
of related proceeds by Bondholders could occur. In the event that any Mortgaged
Properties fail to provide adequate security for the related Mortgage Loans, any
resulting losses will be covered by funds made available through operation of
the overcollateralization feature described herein[, or, if necessary, by
amounts paid under the Financial Guaranty Insurance Policy to the extent of Bond
Interest due to the Bondholders on the related Payment Date and the amount of
any Coverage Deficit (including consideration of the realization of Realized
Losses) with respect to such Payment Date.] See "Certain Legal Aspects of the
Mortgage Loans and Related Matters -- Foreclosure/Repossession," and "-- Rights
of Redemption" in the Prospectus and "Servicing of the Mortgage Loans -- The
Servicing Agreement -- Realization upon Defaulted Mortgage Loans" herein.
In general, a prospective borrower applying for a Mortgage Loan is required
to fill out a detailed application designed to provide the related Originator
pertinent information. As part of the description of the borrower's financial
condition, the borrower generally is required to provide a current list of
assets and liabilities and a statement of income and expenses, as well as an
authorization to apply for a credit report that summarizes the borrower's credit
history. The Originator obtains a credit report from one or more credit
reporting agencies. In many cases, the borrower's credit history will include
major derogatory credit items such as credit write-offs, outstanding judgments
and prior bankruptcies. The Originator generally verifies the borrower's
employment, but in many cases does not verify the borrower's income. Because
certain Mortgage Loans may have been underwritten pursuant to standards that
rely to a greater extent on the value of the related Mortgaged Properties than
on the creditworthiness of the related Mortgagor, the actual rates of
delinquencies, foreclosures and losses on such Mortgage Loans could be higher
than those historically experienced in the mortgage lending industry in general,
particularly in periods during which the values of the related Mortgaged
Properties decline. See "The Originators -- Underwriting Guidelines" in the
Prospectus.
RISKS ASSOCIATED WITH GEOGRAPHIC CONCENTRATION OF MORTGAGED PROPERTIES
Approximately [ ]% of the [Initial] Mortgage Loans (by [Initial] Pool
Balance) are secured by Mortgaged Properties located in California. The
California residential real estate market has experienced a sustained decline
over the last several years. In general, declines in the California residential
real estate market may adversely affect the values of the Mortgaged Properties
securing such Mortgage Loans such that the Aggregate Principal Balance of such
Mortgage Loans will equal or exceed the value of such Mortgaged Properties.
Approximately [ ]% of the Mortgage Loans (by Pool Balance) are secured by
Mortgage Properties located in [ ]. In addition, adverse economic
conditions in California (which may or may not affect real property values) may
affect the timely payment by borrowers of scheduled payments of principal and
interest on such Mortgage Loans and, accordingly, the actual rates of
delinquencies, foreclosures
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<PAGE> 119
and losses on such Mortgage Loans could be higher than those currently
experienced in the mortgage lending industry in general.
RISKS ASSOCIATED WITH DAMAGED MORTGAGED PROPERTIES
Generally, the standard form of hazard insurance policy required to be
maintained under the terms of each Mortgage Loan does not cover physical damage
resulting from floods and other water-related causes or from earth movement
(including earthquakes, landslides and mudflows). See "Origination and Servicing
of the Mortgage Loans -- Hazard Insurance" herein. Accordingly, to the extent a
Mortgaged Property has been materially damaged since the applicable Cut-off Date
due to flooding or other water-related causes or due to an earthquake or other
earth movement and such damage results in losses on the related Mortgage Loan,
such losses will be covered by funds made available through operation of the
overcollateralization feature described herein, or, if necessary, by amounts
paid under the Financial Guaranty Insurance Policy to the extent of Bond
Interest due to the Bondholders on the related Payment Date and the amount of
any Coverage Deficit with respect to such Payment Date. See "Description of the
Bonds -- Overcollateralization Feature -- Overcollateralization and the
Financial Guaranty Insurance Policy" and "-- The Financial Guaranty Insurance
Policy" herein.
Certain [Initial] Mortgage Loans are secured, and certain Additional
Mortgage Loans may be secured, by Mortgaged Properties located in areas that
have been affected by other natural disasters not covered by standard hazard
insurance policies. However, under the Indenture, ACC will represent that, as of
the Cut-off Date, each Mortgaged Property is free of substantial damage and is
in good repair. In the event that any uncured breach of such representation
materially and adversely affects the interest of Bondholders in the related
Mortgage Loan, ACC will be required to repurchase the Mortgage Loan or deliver a
substitute Mortgage Loan therefore. To the extent ACC repurchases such Mortgage
Loan, such repurchase will accelerate the timing of principal distributions with
respect to the related Mortgage Loan Group and may thereby affect the yields and
weighted average lives of the realted Bonds. See "The Pooling and Servicing
Agreement -- Maintenance of Hazard Insurance" in the Prospectus. [During the
latter part of 1996 and the early part of 1997, major flooding occurred in parts
of Ohio, Kentucky and Indiana that may have damaged some of the Mortgaged
Properties securing Mortgage Loans included in the Trust Estate. Approximately
[ ]% of the [Initial] Mortgage Loans (by [Initial] Pool Balance) are secured by
Mortgaged Properties located in the states of Ohio, Kentucky and Indiana, but
there can be no assurance as to the number of Mortgaged Properties securing
[Initial] Mortgage Loans, if any, that may have been damaged by such flooding or
the extent of any such damage.]
RISKS ASSOCIATED WITH JUNIOR LOANS
Because a portion of the Mortgage Loans in the [ ] are secured by
junior liens ("Junior Loans") subordinate to the rights of the beneficiary under
each related senior lien, the proceeds from any liquidation, insurance or
condemnation proceedings will be available to satisfy the principal balance of a
Mortgage Loan only to the extent that the claims, if any, of each such senior
beneficiary are satisfied in full, including any related foreclosure costs. In
addition, a beneficiary of a junior lien may not foreclose on the Mortgaged
Property securing such lien unless it forecloses subject to the related senior
lien(s), in which case it must either make payments on each senior lien in the
event of default thereunder or pay the entire amount of each senior lien to the
applicable beneficiary prior to the foreclosure sale. In servicing home equity
mortgage loans in its portfolio, it is the practice of the Servicer to satisfy
each such senior lien at or prior to the foreclosure sale only to the extent
that it determines any amounts so paid will be recoverable from future payments
and collections on the related home equity mortgage loan or otherwise. The Trust
will have no source of funds to satisfy any such senior lien or make payments
due to each related senior beneficiary. See "Risk Factors -- Nature of the
Security for Mortgage Loans -- Risks Associated with Junior Liens" and "Certain
Legal Aspects of the Mortgage Loans and Related
Matters -- Foreclosure/Repossession" in the Prospectus.
Even assuming that the Mortgaged Properties provide adequate security for
the related Mortgaged Loans, substantial delays could be encountered in
connection with the foreclosure and liquidation of defaulted Mortgage Loans and
corresponding delays in the receipt of related proceeds by Bondholders could
occur. An
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action to foreclose on a Mortgaged Property securing a Mortgage Loan is
regulated by state statutes and rules and is subject to many of the same delays
and expenses as other lawsuits if defenses or counter-claims are interposed,
sometimes requiring several years to complete. Furthermore, an action to obtain
a deficiency judgment is generally not permitted following a non-judicial
foreclosure of a Mortgaged Property. In the event of a default by a Mortgagor,
these restrictions, among other things, may impede the ability of the Servicer
to foreclose on and sell the Mortgaged property or to obtain Net Liquidation
Proceeds sufficient to repay all amounts due on the related Mortgage Loan. In
the event that any Mortgaged Properties fail to provide adequate security for
the related Mortgage Loans, any resulting losses will be covered by funds made
available through operation of the overcollateralization or
cross-collateralization features described herein. See "Credit Enhancement,"
"Certain Legal Aspects of the Mortgage Loans and Related Matters -- Foreclosure/
Repossession," "-- Certain Provisions of California Deeds of Trust,"
"-- Anti-deficiency Legislation and other Limitations on Lenders" and "The
Pooling and Servicing Agreement -- Realization upon Defaulted Mortgage Loans" in
the Prospectus.
In addition, other factors may affect the prepayment rate of Junior Loans
such as the amounts of, and interest rates on, the underlying senior mortgage
loans, if any, and the use of first lien mortgage loans as long-term financing
for home purchase and Junior Loans as shorter-term financing for a variety of
purposes, including home improvement, education expenses and purchases of
consumer durables such as automobiles. Accordingly, Junior Loans may experience
a higher rate of prepayments than traditional first lien mortgage loans. In
addition, any future limitations on the right of borrowers to deduct interest
payments on Junior Loans for federal income tax purposes may further increase
the rate of prepayments of such Junior Loans. See "Maturity, Prepayment and
Yield Considerations" in the Prospectus.
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 Mortgage Properties rather than the creditworthiness of the related
Mortgagor, the actual rates of delinquencies, foreclosures and losses on such
Mortgage Loans could be higher than those historically experienced in the
mortgage lending industry in general, particularly in periods during which the
values of the related Mortgaged Properties decline. In addition, the rate of
delinquencies, foreclosures and losses with respect to the Mortgage Loans will
also be affected by, among other things, interest rate fluctuations and general
and regional economic conditions. See "Risk Factors -- Nature of the Security
for Mortgage Loans" and "The Originators -- Underwriting Guidelines" in the
Prospectus.
RISKS ASSOCIATED WITH PREPAYMENT OF THE MORTGAGE LOANS
All of the Mortgage Loans may be prepaid in full or in part at any time,
generally upon the payment to the Servicer of a prepayment charge. The rate of
prepayments of the Mortgage Loans cannot be predicted and may be affected by a
wide variety of general economic, social, competitive and other factors,
including state and federal income tax policies (including possible future
changes affecting the deductibility for federal income tax purposes of interest
payments on mortgage loans), interest rates, the availability of alternative
financing and homeowner mobility. Therefore, no assurance can be given as to the
level of prepayments that the Mortgage Loans will experience. A number of
factors suggest that the prepayment behavior of the Mortgage Pool may be
significantly different from that of a pool of conventional first lien
residential mortgage loans with equivalent interest rates and maturities. One
such factor is that the Principal Balance of the average Mortgage Loan is
smaller than that of the average conventional first lien mortgage loan. A
smaller Principal Balance may be easier for a borrower to refinance or otherwise
prepay than a larger balance and, therefore, a higher prepayment rate may result
for the Mortgage Pool than for a pool of conventional first lien mortgage loans,
irrespective of the relative average interest rates and the general interest
rate environment. Accordingly, the Mortgage Loans may experience higher rates of
prepayment than conventional first lien mortgage loans. Conversely, a borrower
with a Mortgage Loan having a small Principal Balance may view refinancing such
Mortgage Loan at a lower interest rate as less attractive because the impact to
the borrower of lower interest rates on the size of the related monthly payment
may be perceived as insignificant. Moreover, borrowers under the Mortgage Loans
may have limited access to alternative financing, which may limit refinancing
options, or
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may be required to incur relatively higher origination costs than borrowers
under conventional first lien mortgage loans, which may discourage refinancing
activity. As a result, the Mortgage Loans may prepay at slower rates than those
of conventional first lien loans. See "Risk Factors -- Yield, Maturity and
Prepayment Considerations" and "Maturity, Prepayment and Yield Considerations"
in the Prospectus.
Prepayments may result from voluntary early payments by borrowers
(including payments in connection with refinancing of any related senior
mortgage loans), sales of Mortgaged Properties subject to "due-on-sale" clauses
as to which the Servicer exercises its rights thereunder and liquidations due to
default, as well as the receipt of proceeds from hazard, credit life and
disability insurance policies. In addition, removals or releases of Mortgage
Loans from the Trust Estate required or permitted to be made by ACC, the
Servicer, the Bond Issuer and, under certain limited circumstances, the
Financial Guaranty Insurer under the Indenture will have the same effect on the
Bondholders as a prepayment of the related Mortgage Loans. In addition, certain
of the Mortgage Loans that have initial interest rate adjustment dates one or
more years after the Statistical Calculation Date have an initial rate
adjustment cap that will allow a significant increase in the Mortgage Interest
Rate on the first interest rate adjustment date. As a result, in connection with
the initial rate adjustment, borrowers under Mortgage Loans with higher initial
rate adjustment caps may be more likely either to prepay voluntarily or to
default due to higher payments following such initial adjustment. Prepayments
and such removals and releases will accelerate the receipt of distributions of
Monthly Principal on the Bonds. See "Description of the Bonds -- Assignment of
Mortgage Loans" and "-- Redemption of the Bonds" herein and "Certain Legal
Aspects of the Mortgage Loans and Related Matters -- Enforceability of
Due-on-Sale Clauses" in the Prospectus. The Servicer, or affiliates of the
Servicer, may solicit refinancings from existing borrowers under loans
originated by Affiliated Originators, which may have the effect of increasing
the rate of prepayment, due to refinancings, on the Mortgage Loans. See
"Origination and Servicing of the Mortgage Loans" herein.
Prepayments, liquidations, removals and releases of the Mortgage Loans will
result in payments to Bondholders of principal amounts that would otherwise be
paid over the remaining terms of the Mortgage Loans. The extent to which the
yield to maturity of a Bond may vary from the anticipated yield will depend upon
the degree to which it is purchased at a premium or discount and the degree to
which the timing of payments thereon is sensitive to prepayments, liquidations,
removals and releases of Mortgage Loans. In the case of any Bonds purchased at a
discount, an investor should consider the risk that a slower than anticipated
rate of principal payments on the Mortgage Loans could result in an actual yield
to such investor that is lower than the anticipated yield and, in the case of
any Bond purchased at a premium, the risk that a faster than anticipated rate of
prepayments, liquidations, removals and releases could result in an actual yield
to such investor that is lower than the anticipated yield. Further, there can be
no assurance that Bondholders will be able to reinvest payments made in respect
of prepayments, liquidations, removals and releases of the Mortgage Loans in
securities or other instruments that have a yield comparable to that of the
Bonds.
[THE ADDITIONAL MORTGAGE LOANS AND THE PREFUNDING ACCOUNT]
During the Funding Period, Additional Mortgage Loans may be purchased using
the monies on deposit in the Prefunding Account and added to the Mortgage Pool.
Each conveyance of Additional Mortgage Loans is subject to the following
conditions, among others: (i) each Additional Mortgage Loan must satisfy the
representations and warranties specified in the agreement pursuant to which the
Additional Mortgage Loans are conveyed by ACC to the Transferor; (ii) ACC will
not select such Additional Mortgage Loans in a manner that it believes is
adverse to the interests of the Transferor or its assignees; and (iii) the
Additional Mortgage Loans will have been approved by the Financial Guaranty
Insurer. Following the transfer of Additional Mortgage Loans to the Mortgage
Pool, the aggregate characteristics of the Mortgage Loans then held in the
Mortgage Pool may vary from those of the [Initial] Mortgage Loans included in
the Mortgage Pool as of the Cut-off Date. A Current Report on Form 8-K
containing a description of the Mortgage Loans included in the final Mortgage
Pool as of the end of the Funding Period in a form comparable to the description
of the [Initial] Mortgage Loans contained in "ANNEX A: Description of the
Mortgage Pool" will be filed with the Commission within 15 days after expiration
of the Funding Period. See "The Mortgage Loans -- Conveyance of Additional
Mortgage Loans" herein.
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If, by the end of the Funding Period, amounts on deposit in the Prefunding
Account have not been fully applied to the purchase of Additional Mortgage
Loans, the portions of the Prefunding Account Deposit relating to such Mortgage
Loan Group, if any, that remain at the end of the Funding Period will be
distributed in reduction of the Bond Balance. Although it is intended that the
principal amount of Additional Mortgage Loans will require application of
substantially all of the Prefunding Account Deposit and it is not currently
anticipated that there will be any material amount of principal distributions
from amounts remaining on deposit in the Prefunding Account, no assurance can be
given that such a distribution will not occur on the Payment Date in
[ ]. In any event, it is unlikely that the Bond Issuer will be able to
acquire Additional Mortgage Loans with aggregate principal balances that exactly
equal the Prefunding Account Deposit. Any portion of the Prefunding Account
Deposit that is not applied to acquire Additional Mortgage Loans during the
Funding Period will be paid on the [ ] Payment Date in reduction of the
Bond Balance.]
YIELD CONSIDERATIONS RELATING TO EXCESS CASH
Excess Cash will be paid in reduction of the Bond Balance on each Payment
Date to the extent the then applicable Required Coverage Amount exceeds the
Coverage Amount on such Payment Date. If purchased at a premium or a discount,
the yield to maturity on a Bond will be affected by the rate at which Excess
Cash is paid to Bondholders in reduction of the Bond Balance. If the actual rate
of such Excess Cash payments is slower than the rate anticipated by an investor
who purchases a Bond at a discount, the actual yield to such investor will be
lower than such investor's anticipated yield. If the actual rate of such Excess
Cash payments is faster than the rate anticipated by an investor who purchases a
Bond at a premium, the actual yield to such investor will be lower than such
investor's anticipated yield. The amount of Excess Cash on any Payment Date will
be affected by the actual amount of interest received, collected or recovered in
respect of the Mortgage Loans during the related Collection Period and such
amount will be influenced by changes in the weighted average of the Mortgage
Interest Rates resulting from prepayments and liquidations of Mortgage Loans as
well as from adjustments of Mortgage Interest Rates. The amount of Excess Cash
payments applied in reduction of the Bond Balance on each Payment Date will be
based on the then applicable Required Coverage Amount, which may increase or
decrease during the period the Bonds remain outstanding. If on any Payment Date
occurring after April 1997, the amount of Excess Cash payable on the Bonds is
less than an amount specified in the Indenture, the Required Coverage Amount
will be increased (any such Payment Date, a "Trigger Event Date"); provided,
however, that upon the satisfaction of certain cash flow requirements for the
period specified in the Indenture, such Required Coverage Amount will return to
its original level. Any increase in a Required Coverage Amount (including an
increase required on a Trigger Event Date) may result in an accelerated rate of
amortization of the Bonds until the Coverage Amount equals such Required
Coverage Amount and any decrease in a Required Coverage Amount will result in a
decelerated rate of amortization of the Bonds until the Coverage Amount equals
such Required Coverage Amount.
OTHER YIELD CONSIDERATIONS
The Bonds are subject to optional redemption in full by the Bond Issuer
after the Bond Balance is less than [ ]% of the Original Bond Balance. In
addition, the Servicer [and the Financial Guaranty Insurer] will have rights,
under the limited circumstances described herein, to acquire all the Mortgage
Loans from the Indenture Trustee and thereby effect a redemption of the Bonds.
See "Description of the Bonds -- Redemption of the Bonds" herein. Any such
redemption of the Bonds may affect the yield and weighted average lives of the
Bonds.
ENVIRONMENTAL STATUTES AFFECTING SECURITY INTERESTS
A substantial portion of the [Initial] Mortgage Loans are secured by
Mortgaged Properties located in states that may impose a statutory lien for
associated costs on property that is the subject of a clean-up action by the
state on account of hazardous wastes or hazardous substances released or
disposed of on the property. Such a lien generally will have priority over all
subsequent liens on the property, although in some states, including California,
it will not have priority over prior recorded liens, including the lien of a
mortgage. In
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addition, under environmental legislation and case law applicable in various
states, including California, a secured party that takes a deed in lieu of
foreclosure, acquires a mortgaged property at a foreclosure sale or, prior to
foreclosure, has been involved in decisions or actions that may lead to
contamination of a property, may be liable for the costs of cleaning up a
contaminated site. See "Certain Legal Aspects of the Mortgage Loans and Related
Matters -- Environmental Considerations" in the Prospectus. Any such liens or
costs imposed in connection with a clean-up action by the state may impede the
ability of the Servicer to foreclose on or sell the related Mortgaged Property
or to obtain Net Liquidation Proceeds sufficient to repay all amounts due on the
related Mortgage Loan. Any resulting losses will be covered by funds made
available through operation of the overcollateralization feature described
herein or the 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 ACC 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 ACC 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.
DISSOLUTION OF BOND ISSUER FROM INSOLVENCY OF TRANSFEROR
On the Closing Date, the Transferor will hold a 1% equity interest in the
Bond Issuer. The Trust Agreement will provide that if any of certain events
(each, an "Insolvency Event") of voluntary corporate dissolution or insolvency,
readjustment of debt, marshaling of assets and liabilities, commencement of
bankruptcy proceedings under the United States Bankruptcy Code or similar
applicable state laws ("Insolvency Laws") or similar proceedings with respect to
the Transferor indicating its insolvency or inability to pay its obligations
occurs, subject to certain conditions (including a default of the Financial
Guaranty Insurer in the payment of any Insured Amount), the Bond Issuer will
dissolve. ACC and the Transferor have taken certain steps in structuring the
transactions contemplated hereby that are intended to help ensure that an
Insolvency Event with respect to the Transferor will not occur. These steps
include the formation of the Transferor as a separate limited-purpose entity
pursuant to formation documents that contain certain limitations (including
restrictions on the nature of the Transferor's business and restrictions on the
Transferor's ability to commence a voluntary case or proceeding under the
Insolvency Laws). However, there can be no assurance that the activities of the
Transferor would not result in an Insolvency Event.
If the Bond Issuer is dissolved, the Indenture Trustee will promptly sell,
dispose of or otherwise liquidate the Mortgage Loans in a commercially
reasonable manner on commercially reasonable terms, except under certain limited
circumstances. The proceeds from any such sale, disposition or liquidation of
the Mortgage Loans will be treated as collections on the Mortgage Loans,
deposited in the Bond Account and paid to the holders of the Bonds in accordance
with the terms described herein.
BOOK-ENTRY REGISTRATION
Issuance of the Bonds in book-entry form may reduce the liquidity of the
Bonds in the secondary trading market because investors may be unwilling to
purchase Bonds for which they cannot obtain physical certificates.
Because transactions in the Bonds can be effected only through DTC, Cedel,
Euroclear, participating organizations, indirect participants and certain banks,
the ability of a Bond Owner to pledge a Bond to persons or entities that do not
participate in the DTC, Cedel or Euroclear system, or otherwise to take actions
in respect of such Bond, may be limited due to lack of a physical certificate
representing such Bond.
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Bond Owners may experience some delay in their receipt of payments of
interest of and principal on the Bonds because such payments will be forwarded
by the Indenture Trustee to DTC and DTC will credit such payments to the
accounts of its Participants, which will thereafter credit them to the accounts
of Bond Owners either directly or indirectly through indirect participants. See
"Description of the Bonds -- Book-Entry Registration and Definitive Bonds"
herein, "ANNEX B: Global Clearance, Settlement and Tax Documentation Procedures"
hereto and "Description of the Securities, -- Form of Securities -- Book-Entry
Registration" in the Prospectus.
DESCRIPTION OF THE BONDS
The Bonds will be issued pursuant to the Indenture. The summaries of
certain provisions of the Indenture set forth below and under the caption "The
Indenture" in the Prospectus, while complete in material respects, do not
purport to be exhaustive. For more details regarding the terms of the Indenture,
prospective investors in the Bonds are advised to review the Indenture, a copy
of which the Bond Issuer will provide (without exhibits) without charge upon
written request addressed to: Aames Capital Owner Trust [ ] c/o Aames
Capital Acceptance Corp., 350 South Grand Avenue, Los Angeles, California 90071.
GENERAL
The Bonds will be secured by the Trust Estate created by the Indenture. The
Bonds represent non-recourse obligations of the Bond Issuer, and proceeds of the
assets in the Trust Estate will be the sole source of payments on the Bonds. The
Bonds will not represent an interest in or obligation of the Transferor, the
Servicer, AFC, the Indenture Trustee, the Underwriters, any of their respective
affiliates or any other entity, and will not represent an interest in or
recourse obligation of the Bond Issuer.
Initially, the assets of the Trust Estate will consist of (i) the Mortgage
Pool, which is comprised of the [Initial] Mortgage Loans secured by first lien
mortgages or deeds of trust on the Mortgaged Properties; (ii) all payments in
respect of principal of the [Initial] Mortgage Loans received on or after the
applicable Cut-off Dates; (iii) all payments in respect of interest accrued on
the [Initial] Mortgage Loans from and after the applicable Cut-off Dates,
irrespective of when received; (iv) security interests in the Mortgaged
Properties; [(v) amounts to be deposited in the Prefunding Account that will be
available for the acquisition of the Additional Mortgage Loans during the
Funding Period; (vi) amounts to be deposited in the Capitalized Interest
Account; (vii) the Financial Guaranty Insurance Policy issued by the Financial
Guaranty Insurer;] and (viii) certain other property.
All payments on the Bonds will be made by or on behalf of the Indenture
Trustee to each Bondholder of record on the related Record Date for the related
Payment Date. Payments on Bonds issued in book-entry form will be made by or on
behalf of the Indenture Trustee to DTC. Payments on Definitive Bonds generally
will be made either (i) by check mailed to the address of each Bondholder as it
appears in the register maintained by the Indenture Trustee or (ii) by wire
transfer of immediately available funds to the account of a Bondholder, if such
Bondholder (a) is the registered holder of Definitive Bonds having an [Initial]
principal amount of at least $1,000,000 and (b) has provided the Indenture
Trustee with wiring instructions in writing five days prior to the related
Record Date or has provided the Indenture Trustee with such instructions for any
previous Payment Date. A fee may be charged by the Indenture Trustee to a
Bondholder of Definitive Bonds for any payment made by wire transfer.
Notwithstanding the above, the final payment in redemption of any Definitive
Bond will be made only upon presentation and surrender of such Definitive Bond
at the office or agency designated by the Indenture Trustee for that purpose.
The Bonds will be issued in denominations of not less than $1,000 principal
amount and in integral dollar multiples of $1 in excess thereof.
BOOK-ENTRY REGISTRATION AND DEFINITIVE BONDS
The Bonds Initially will be book-entry Bonds (the "Book-Entry Bonds"). Bond
Owners will hold such Bonds through DTC, in the United States, or Cedel or
Euroclear, in Europe, if they are participants of such
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systems, or indirectly through organizations that are participants in such
systems. The Book-Entry Bonds Initially will be registered in the name of Cede &
Co., the nominee of DTC. Cedel and Euroclear will hold omnibus positions on
behalf of Cedel Participants and Euroclear Participants, respectively, through
customers' securities accounts in Cedel's and Euroclear's names on the books of
their respective depositaries which in turn will hold such positions in
customers' securities accounts in the depositaries' names on the books of DTC.
Citibank N.A. ("Citibank") will act as depositary for Cedel and Morgan Guaranty
Trust Company of New York ("Morgan") will act as depositary for Euroclear
(Citibank and Morgan, in such capacities, individually the "Relevant Depositary"
and, collectively, the "European Depositaries"). Except as described below, no
person acquiring a Book-Entry Bond will be entitled to receive a Definitive
Bond. Unless and until Definitive Bonds are issued, it is anticipated that the
only "Bondholder" will be Cede & Co., as nominee of DTC. Bond Owners will not be
Bondholders as that term is used in the Indenture. Bond Owners are permitted to
exercise their rights only indirectly through DTC and its Participants
(including Cedel and Euroclear).
The beneficial ownership of a Book-Entry Bond will be recorded on the
records of the brokerage firm, bank, thrift institution or other financial
intermediary (each, a "Financial Intermediary") that maintains the Bond Owner's
account for such purpose. In turn, the Financial Intermediary's ownership of
such Book-Entry Bond will be recorded on the records of DTC (or of a
participating firm that acts as agent for the Financial Intermediary, whose
interest will in turn be recorded on the records of DTC, if the beneficial
owner's Financial Intermediary is not a Participant and on the records of Cedel
or Euroclear, as appropriate).
Bond Owners will receive all payments of principal of, and interest on, the
Bonds from the Indenture Trustee through DTC and its Participants (including
Cedel and Euroclear). While the Bonds 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 Bonds and is required to receive and transmit payments of
principal of, and interest on, such Bonds. Participants and indirect
participants with whom Bond Owners have accounts with respect to Book-Entry
Bonds are similarly required to make book-entry transfers and receive and
transmit such payments on behalf of their respective Bond Owners. Accordingly,
although Bond Owners will not possess certificates, the Rules provide a
mechanism by which Bond Owners will receive payments and will be able to
transfer their interests.
Bond Owners will not receive or be entitled to receive certificates
representing their respective interests in the Bonds, except under the limited
circumstances described below. Unless and until Definitive Bonds are issued,
Bond Owners who are not Participants may transfer ownership of Bonds only
through Participants and indirect participants by instructing such Participants
and indirect participants to transfer Bonds, by book-entry transfer, through DTC
for the account of the purchasers of such Bonds, which account is maintained
with their respective Participants. Under the Rules and in accordance with DTC's
normal procedures, transfers of ownership of Bonds 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 Bond Owners.
Because of time zone differences, credits of securities received in Cedel
or Euroclear as a result of a transaction with a Participant will be made during
subsequent securities settlement processing and dated the business day following
the DTC settlement date. Such credits or any transactions in such securities
settled during such processing will be reported to the relevant Euroclear
Participants or Cedel Participants on such business day. Cash received in Cedel
or Euroclear as a result of sales of securities by or through a Cedel
Participant or Euroclear Participant to a Participant will be received with
value on the DTC settlement date but will be available in the relevant Cedel or
Euroclear cash account only as of the business day following settlement in DTC.
For information with respect to tax documentation procedures relating to the
Bonds, see "Certain Federal Income Tax Consequences -- Taxation of Bonds,"
"-- Miscellaneous Tax Aspects" and "--Tax Treatment of Foreign Investors" in the
Prospectus and "-- Information Reporting and Backup Withholding" in "ANNEX B:
Global Clearance, Settlement and Tax Documentation Procedures -- Certain U.S.
Federal Income Tax Documentation Requirements" hereto.
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Transfers between Participants will occur in accordance with DTC rules.
Transfers between Cedel Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedel
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. Cedel Participants and Euroclear Participants may not deliver instructions
directly to the European Depositaries.
DTC, which is a New York-chartered limited purpose trust company, performs
services for its participants ("Participants"), some of which (and/or their
representatives) own DTC. In accordance with its normal procedures, DTC is
expected to record the positions held by each Participant in the Book-Entry
Bonds, whether held for its own account or as a nominee for another person. In
general, beneficial ownership of Book-Entry Bonds will be subject to the rules,
regulations and procedures governing DTC and its Participants as in effect from
time to time.
Cedel is incorporated under the laws of Luxembourg as a professional
depository. Cedel holds securities for its participating organizations ("Cedel
Participants") and facilitates the clearance and settlement of securities
transactions between Cedel Participants through electronic book-entry changes in
accounts of Cedel Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in Cedel in any of 28
currencies, including United States dollars. Cedel provides to its Cedel
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Cedel interfaces with domestic markets in several
countries. As a professional depository, Cedel is subject to regulation by the
Luxembourg Monetary Institute. Cedel Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to Cedel is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Cedel Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for its participants
("Euroclear Participants") and to clear and settle transactions between
Euroclear Participants, through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may be settled through Euroclear in any of 32 currencies,
including United States dollars. Euroclear provides various other services,
including securities lending and borrowing, and interfaces with domestic markets
in several countries generally similar to the arrangements for cross-market
transfers with DTC described above. Euroclear is operated by the Brussels,
Belgium office of Morgan Guaranty Trust Company of New York (the "Euroclear
Operator"), under contract with Euroclear Clearance Systems S.C., a Belgian
cooperative corporation (the "Cooperative"). All operations are conducted by the
Euroclear Operator, and all Euroclear securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear Operator, not the
Cooperative. The Cooperative establishes policy for Euroclear on behalf of
Euroclear Participants. Euroclear Participants include banks (including central
banks), securities brokers and dealers and other professional financial
intermediaries. Indirect access to Euroclear is also available to other firms
that clear through or maintain a custodial relationship with a Euroclear
Participant, either directly or indirectly.
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
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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.
Payments on the Book-Entry Bonds will be made on each Payment Date by the
Indenture Trustee to DTC. DTC will be responsible for crediting the amount of
such payments to the accounts of the applicable Participants in accordance with
DTC's normal procedures. Each Participant will be responsible for disbursing
such payments to the Bond 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 Bond Owners that it represents.
Under a book-entry format, Bond Owners may experience some delay in their
receipt of payments because such payments will be forwarded by the Indenture
Trustee to Cede. Payments with respect to Bonds held through Cedel or Euroclear
will be credited to the cash accounts of Cedel Participants or Euroclear
Participants in accordance with the relevant system's rules and procedures, to
the extent received by the Relevant Depositary. Such payments will be subject to
tax reporting in accordance with relevant United States tax laws and
regulations. See "Certain Federal Income Tax Consequences -- Taxation of Bonds,"
"-- Miscellaneous Tax Aspects" and "-- Tax Treatment of Foreign Investors" in
the Prospectus and "-- Information Reporting and Backup Withholding" in "ANNEX
B: Global Clearance, Settlement and Tax Documentation Procedures -- Certain U.S.
Federal Income Tax Documentation Requirements" hereto. Because DTC has indicated
that it will act only on behalf of Financial Intermediaries, the ability of Bond
Owners to pledge Book-Entry Bonds to persons or entities that do not participate
in the depository system or otherwise take actions in respect of such Book-Entry
Bonds may be limited due to the lack of physical certificates representing such
Book-Entry Bonds. In addition, issuance of the Book-Entry Bonds in book-entry
form may reduce the liquidity of such Bonds in the secondary market because
certain potential investors may be unwilling to purchase Bonds for which they
cannot obtain physical certificates.
Monthly and annual reports on the Mortgage Loans and the Trust Estate will
be provided to Cede & Co., as nominee of DTC, and may be made available by such
entity to Bond Owners upon request, in accordance with the Rules, and to the
Financial Intermediaries to whose DTC accounts the related Book-Entry Bonds are
credited.
DTC has advised the Indenture Trustee that, unless and until Definitive
Bonds are issued, DTC will take any action permitted to be taken by a Bondholder
under the Indenture only at the direction of one or more Financial
Intermediaries to whose DTC accounts the Book -Entry Bonds are credited, to the
extent that such actions are taken on behalf of Financial Intermediaries whose
holdings include such Book-Entry Bonds. Cedel or the Euroclear Operator, as the
case may be, will take any other action permitted to be taken by a Bondholder
under the Indenture on behalf of a Cedel Participant or Euroclear Participant
only in accordance with its relevant rules and procedures and subject to the
ability of the Relevant Depositary to effect such actions on its behalf through
DTC. DTC may take actions, at the direction of the related Participants, with
respect to some Bonds that conflict with actions taken with respect to other
Bonds.
Definitive Bonds will be issued in registered form to Bond Owners, or their
nominees, rather than to DTC, only if (i) DTC or the Bond Issuer advises the
Indenture Trustee in writing that DTC is no longer willing or able to discharge
properly its responsibilities as nominee and depositary with respect to the
Bonds and the Bond Issuer or the Indenture Trustee is unable to locate a
qualified successor, (ii) the Bond Issuer, at its option, advises the Indenture
Trustee that it elects to terminate the book-entry system through DTC, or (iii)
after a Bond Event of Default under the Indenture, the Bond Owners representing
not less than 51% of
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the Bond Balance of the Book-Entry Bonds advise the Indenture Trustee and DTC
that the book-entry system is no longer in the best interests of such Bond
Owners. Upon issuance of Definitive Bonds to Bond Owners, such Bonds will be
transferable directly (and not exclusively on a book entry basis) and registered
holders will deal directly with the Indenture Trustee with respect to transfers,
notices and payments. See "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 Indenture Trustee will be required to notify all Bond
Owners of the occurrence of such event and the availability through DTC of
Definitive Bonds. Upon surrender by DTC of the global certificates representing
the Book-Entry Bonds and instructions for reregistration, the Indenture Trustee
will issue Definitive Bonds and thereafter the Indenture Trustee will recognize
the holders of such Definitive Bonds as Bondholders under the Indenture.
Although DTC, Cedel and Euroclear have agreed to the foregoing procedures
in order to facilitate transfer of Bonds among participants of DTC, Cedel and
Euroclear, they are under no obligation to perform or continue to perform such
procedures and such procedures may be discontinued at any time.
ASSIGNMENT OF MORTGAGE LOANS
The Mortgage Loans were originated by ACC or acquired by ACC, as more fully
described herein under the caption "The Originators." On or prior to the date
the Bonds are issued, ACC will convey each Mortgage Loan to the Transferor who
in turn will convey each such Mortgage Loan to the Bond Issuer.
At the time of issuance of the Bonds, the Bond Issuer will pledge all of
its right, title and interest in and to the [Initial] Mortgage Loans, including
all principal received on or after the applicable Cut-off Dates and all interest
accrued from and including the applicable Cut-off Dates, together with its
right, title and interest in and to the proceeds of any related insurance
policies received on and after the applicable Cut-off Dates, without recourse,
to the Indenture Trustee pursuant to the Indenture as collateral for the Bonds.
The Indenture Trustee, concurrently with such assignment, will authenticate
and deliver the Bonds at the direction of the Bond Issuer in exchange for, among
other things, the [Initial] Mortgage Loans, [the Prefunding Account Deposit and
the amount deposited in the Capitalized Interest Account]. Each [Initial]
Mortgage Loan will be identified in a schedule appearing as an exhibit to the
Indenture (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, the
applicable Cut-off Date, its Principal Balance as of the applicable Cut-off
Date, its interest rate as of the applicable Cut-off Date, the manner in which
the interest rate is to be determined and its monthly payment as of the
applicable Cut-off Date.
[Following the Closing Date, and from time to time on or before
[ ], Additional Mortgage Loans consisting of closed-end, adjustable
rate, home equity mortgage loans may be added to the Mortgage Pool. In
connection with each acquisition of Additional Mortgage Loans, the Indenture
Trustee will remit from the Prefunding Account Deposit an amount of not more
than 100% of the principal balance thereof; the Indenture Trustee may remit an
amount less than 100% for the purpose of increasing the Coverage Amount, but in
no event less than the fair market value of the Additional Mortgage Loans. Each
such Additional Mortgage Loan will be pledged to the Indenture Trustee as of the
applicable Cutoff Date as provided above with respect to the [Initial] Mortgage
Loans and will be identified in a schedule that conforms to the Mortgage Loan
Schedule.]
The Indenture will require the Bond Issuer to deliver to the Indenture
Trustee the Mortgage Loans, the related Mortgage Notes endorsed without recourse
to the Indenture Trustee, the related mortgages or deeds of trust with evidence
of recording thereon, 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"). The Bond
Issuer additionally will be required to cause to be prepared and recorded,
within the time period specified in the Indenture (or, if original recording
information is unavailable, within
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such later period as is permitted by the Indenture) assignments of the mortgages
from the Bond Issuer to the Indenture Trustee, in the appropriate jurisdictions
in which such recordation is necessary to perfect the lien thereof as against
creditors of or purchasers from the Bond Issuer; provided, however, that if the
Bond Issuer furnishes to the Indenture Trustee an opinion of counsel, or other
documentation acceptable to the Indenture Trustee, to the effect that no such
recording is necessary to perfect the Indenture Trustee's interests in the
Mortgage Loans with respect to one or more jurisdictions, then such recording
will not be required with respect to such jurisdictions.
Because certain of the assignments by the Bond Issuer to the Indenture
Trustee of Mortgage Loans will not be recorded, it may be possible for the Bond
Issuer to transfer such Mortgage Loans to bona fide purchasers for value without
notice, notwithstanding the rights of the Indenture Trustee. However, in most
instances, the Bond Issuer would not be able to deliver the original documents
evidencing the Mortgage Notes or the mortgages because, under the terms of the
Indenture, such documents will be retained in the possession of the Indenture
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 Indenture Trustee in a
Mortgage Loan so long as such evidence of indebtedness remained in the
possession of the Indenture Trustee.
The Indenture Trustee will review the Mortgage Files delivered to it within
45 days following such delivery, and if any document required to be included in
any Mortgage File is found to be missing or to be defective in any material
respect and such defect is not cured within 60 days following notification
thereof to the Bond Issuer, the Transferor and ACC by the Indenture Trustee, the
Indenture Trustee will require either that the related Mortgage Loan be removed
from the Mortgage Pool or that a Qualified Replacement Mortgage be substituted
for the related Mortgage Loan in the manner described below.
In connection with the transfer of the Mortgage Loans to the Transferor,
ACC 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, ACC 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 first priority lien, that, as of the
applicable 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
ACC had good title to each Mortgage Loan prior to such transfer and that the
Originator was authorized to originate each Mortgage Loan. The rights of the
Transferor to enforce remedies for breaches of such representations and
warranties against ACC will be assigned to the Indenture Trustee pursuant to the
Indenture.
If with respect to any Mortgage Loan (1) a defect in any document
constituting a part of the related Mortgage File remains uncured and materially
and adversely affects the value of any such Mortgage Loan or (2) a breach of any
representation or warranty made by ACC relating to such Mortgage Loan occurs and
such breach materially and adversely affects the value of any such Mortgage
Loan, the Indenture Trustee will enforce the remedies for such defects or
breaches against ACC by requiring ACC to remove the related Mortgage Loan (any
such Mortgage Loan, a "Defective Mortgage Loan") from the Trust Estate by
remitting to the Indenture Trustee an amount equal to its Principal Balance
together with interest accruing at the Mortgage Interest Rate (net of the
applicable Servicing Fee Rate) on such Defective Mortgage Loan from the date
interest was last paid by the related Mortgagor to the end of the Collection
Period immediately preceding the related Deposit Date, less any payments
received during the related Collection Period in respect of such Defective
Mortgage Loan (the "Release Price"). ACC will also have the option, but not the
obligation, to substitute for such Defective Mortgage Loan a Mortgage Loan
conforming to the requirements of the Indenture (a "Qualified Replacement
Mortgage"). Upon delivery of a Qualified Replacement Mortgage and deposit of
certain amounts in the Bond Account as set forth in the Indenture, or deposit of
the Release Price in the Bond Account and receipt by the Indenture Trustee of
written notification of any such substitution or removal, as the case may be,
the Indenture Trustee shall execute and deliver an instrument of transfer or
assignment necessary to vest legal and beneficial ownership of such Defective
Mortgage Loan
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(including any property acquired in respect thereof or proceeds of any insurance
policy with respect thereto) in ACC and release such Defective Mortgage Loan
from the Trust Estate.
The obligation of ACC to cure, remove or substitute any Mortgage Loan as
described above will constitute the sole remedy available to Bondholders or the
Indenture Trustee for a Defective Mortgage Loan.
PAYMENTS ON THE BONDS
Payments on the Bonds will be made by the Indenture Trustee (in such
capacity, the "Paying Agent") on each Payment Date, commencing with the Payment
Date in [ ] to Bondholders as of the Record Date in an amount equal to
the product of such Bondholders' Percentage Interest and the amount paid in
respect of the Bonds. The "Percentage Interest" represented by any Bond will be
equal to the percentage obtained by dividing the aggregate principal balance of
such Bond by the Bond Balance.
On each Payment Date, the Paying Agent will be required to pay the
following amounts, in the following order of priority, out of Available Funds:
[(a) to the Financial Guaranty Insurer, an amount equal to the
Financial Guaranty Insurer Premium for such Payment Date and the aggregate
amount necessary to reimburse the Financial Guaranty Insurer for any
unreimbursed payments of Insured Amounts (together with interest thereon)
in respect of the Bonds on prior Payment Dates and the amount of any unpaid
Financial Guaranty Insurer Premium for prior Payment Dates (together with
interest thereon); provided, however, that the Financial Guaranty Insurer
shall be paid such amounts only after Bondholders have received Bond
Interest and any Coverage Deficit with respect to such Payment Date;]
(b) to the Bondholders, Bond Interest;
(c) to the Bondholders, the amount of Monthly Principal for the Bonds,
in reduction of the Bond Balance until such Bond Balance is reduced to
zero; and
(d) to the Bondholders, the amount, if any, of Excess Cash in
reduction of the Bond Balance, up to an amount equal to the lesser of (1)
the amount necessary for the Coverage Amount to equal the Required Coverage
Amount on such Payment Date and (2) the amount necessary to reduce the Bond
Balance to zero.
Any Available Funds remaining after application in the manner specified
above will be released to the Bond Issuer.
[In the event that, with respect to a particular Payment Date, Available
Funds on such date are not sufficient to pay any portion of Bond Interest, the
Indenture Trustee will make a claim on the Financial Guaranty Insurance Policy
in an amount equal to such deficiency and apply the Insured Amount received in
respect of such claim to the payment of the deficiency in such Bond Interest. In
addition, the Indenture Trustee will make a claim on the Financial Guaranty
Insurance Policy in an amount equal to any Coverage Deficit on a Payment Date
(after taking into account payments in respect of Monthly Principal and Excess
Cash on such Payment Date) and apply the portion of the Insured Amount related
to such Coverage Deficit to reduce the Bond Balance on such Payment Date by the
amount of such Coverage Deficit. Any Insured Amount paid in respect of the Bonds
to make up any Coverage Deficit shall be paid to the Bondholders, in reduction
of the Bond Balance, until such Bond Balance is reduced to zero.]
In no event will the aggregate payments of principal to Bondholders exceed
the Original Bond Balance.
"Bond Interest" for any Payment Date will be an amount equal to (a) with
respect to the [Initial] Interest Period, interest for the number of days in the
period commencing on the Closing Date and ending on the day prior to such
Payment Date at the Bond Interest Rate on the Original Bond Balance, and (b)
with respect to any subsequent Interest Period, interest for the number of days
in such Interest Period at the Bond Interest Rate on the Bond Balance as of the
preceding Payment Date (after giving effect to the payment, if any, in reduction
of principal made on the Bonds on such preceding Payment Date).
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All calculations of interest on the Bonds will be computed on the basis of
the actual number of days elapsed in the related Interest Period and in a year
of 360 days.
The "Bond Interest Rate" (i) for the [Initial] Interest Period will be a
per annum rate equal to [ ] and will be determined on [ ], and
(ii) for each subsequent Interest Period will be a per annum rate equal to the
lesser of (x) for each Interest Period ending prior to the Pool Redemption Date,
[ ]%, and, for each Interest Period thereafter, [ ]% and (y) the Adjustable
Rate Cap. The "Adjustable Rate Cap" will be, with respect to any Payment Date,
the per annum rate equal to the percentage obtained by (I) dividing (x) an
amount equal to the aggregate of the interest portions of each of the monthly
payments due on the Mortgage Loans during the related Collection Period, reduced
by the sum of (i) the Servicing Fee with respect to the Mortgage Loans for such
Collection Period, [(ii) the Financial Guaranty Insurer Premium for such Payment
Date,] and (iii) in the case of each Payment Date occurring after the Payment
Date in [ ], an amount equal to one-twelfth ( 1/12) of 100 basis points
multiplied by the Aggregate Principal Balance of the Mortgage Loans as of the
end of such Collection Period, by (y) the product of (i) the Bond Balance as of
the first day of such Interest Period and (ii) the actual number of days elapsed
during such Interest Period divided by 360 and (II) multiplying the result by
100.
"LIBOR" shall mean the London interbank offered rate for one-month United
States dollar deposits. LIBOR for each Interest Period shall be determined on
the second business day preceding the first day of any Interest Period (each, a
"LIBOR Determination Date"), on the basis of the offered rates of the Reference
Banks for one-month United States dollar deposits, as such rates appear on the
Reuters Screen LIBO Page, as of 11:00 a.m. (London time) on such LIBOR
Determination Date. As used in this paragraph, "business day" means a day on
which banks are open for dealing in foreign currency and exchange in London and
New York City; "Reuters Screen LIBO Page" means the display designated as page
"LIBO" on the Reuters Monitor Money Rates Service (or such other page as may
replace the LIBO page on that service for the purpose of displaying London
interbank offered rates of major banks); and "Reference Banks" means leading
banks selected by the Indenture Trustee and engaged in transactions in
Eurodollar deposits in the international Eurocurrency market (i) with an
established place of business in London, (ii) whose quotations appear on the
Reuters Screen LIBO Page on the LIBOR Determination Date in question, (iii)
which have been designated as such by the Indenture Trustee and (iv) not
controlling, controlled by or under common control with the Bond Issuer or any
Originator.
On each LIBOR Determination Date, LIBOR will be established by the
Indenture Trustee as follows:
(a) If on such LIBOR Determination Date two or more Reference Banks
provide such offered quotations, LIBOR shall be the arithmetic mean
(rounded upwards if necessary to the nearest whole multiple of 0.0625%) of
such offered quotations.
(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 Indenture Trustee determines to be either (i) the arithmetic mean
(rounded upwards if necessary to the nearest whole multiple of 0.0625%) of
the one-month U.S. dollar lending rates which New York City banks selected
by the Indenture 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 Indenture Trustee can determine
no such arithmetic mean, (ii) the lowest one-month U.S. dollar lending rate
which New York City banks selected by the Indenture Trustee are quoting on
such LIBOR Determination Date to leading European banks.
The establishment of LIBOR on each LIBOR Determination Date by the
Indenture Trustee and the Indenture Trustee's calculation of the Bond Interest
Rate 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
Indenture Trustee at (800) 735-7777.
The "Bond Balance" will equal, as of any Payment Date, the Original Bond
Balance less all Monthly Principal and Excess Cash paid to the Bondholders on
previous Payment Dates in reduction of the Bond
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Balance [(exclusive, for the sole purpose of effecting the Financial Guaranty
Insurer's subrogation rights, of payments made by the Financial Guaranty Insurer
in respect of any Coverage Deficit under the Financial Guaranty Insurance
Policy, except to the extent reimbursed to the Financial Guaranty Insurer
pursuant to the Indenture).]
"Monthly Principal" for any Payment Date will be an amount equal to (A) the
aggregate of (i) any Principal Payments received in respect of the Mortgage
Loans during or in respect of the related Collection Period, (ii) Net
Liquidation Proceeds and Insurance Proceeds allocable to principal recovered or
collected in respect of the Mortgage Loans during the related Collection Period,
(iii) the aggregate of the amounts allocable to principal deposited in the Bond
Account on the related Deposit Date by the Bond Issuer, the Transferor, the
Servicer [or the Financial Guaranty Insurer] in connection with a release,
removal or substitution of any Mortgage Loans pursuant to the Indenture, and
(iv) with respect to the first Payment Date, the amount, if any, of the
Prefunding Account Deposit that is not applied for the acquisition of Additional
Mortgage Loans during the Funding Period, reduced by (B) the amount of any
Coverage Surplus with respect to such Payment Date.
The "Principal Balance" of a Mortgage Loan with respect to any
Determination Date is the actual outstanding principal balance thereof as of the
close of business on the Determination Date in the preceding month (or, in the
case of the first Payment Date, as of the applicable Cut-off Date), less (i) any
Principal Payments received in respect of such Mortgage Loan during the related
Collection Period, (ii) Net Liquidation Proceeds and Insurance Proceeds
allocable to principal recovered or collected in respect of such Mortgage Loan
during the related Collection Period, (iii) the portion of the Release Price
allocable to principal remitted by the Bond Issuer, the Transferor, the Servicer
or the Financial Guaranty Insurer to the Indenture Trustee on the next
succeeding Deposit Date in connection with a release, removal or substitution of
such Mortgage Loan pursuant to the Indenture, to the extent such amount is
actually remitted on such Deposit Date, (iv) the amount to be remitted by the
Bond Issuer to the Indenture Trustee on the next succeeding Deposit Date in
connection with a substitution of a Qualified Replacement Mortgage for such
Mortgage Loan pursuant to the Indenture, to the extent such amount is actually
remitted on such Deposit Date [and (v) the amount to be remitted by the
Financial Guaranty Insurer to the Indenture Trustee on the next succeeding
Deposit Date in connection with obtaining a release to the Financial Guaranty
Insurer of such Mortgage Loan pursuant to the Indenture;] provided, however,
that Mortgage Loans that have become Liquidated Mortgage Loans since the
preceding Determination Date (or, in the case of the first Determination Date,
since the applicable Cut-off Dates) will be deemed to have a Principal Balance
of zero on the current Determination Date.
"Determination Date" means, as to any Payment Date, the last day of the
calendar month immediately preceding the calendar month in which such Payment
Date occurs.
"Principal Payment" means, as to any Mortgage Loan and Collection Period,
all amounts received or, in the case of the principal portion of any Payment
Ahead, deemed to have been received by the Servicer from or on behalf of the
related Mortgagor during such Collection Period which, at the time of receipt
or, in the case of any Payment Ahead, at the time such Payment Ahead is deemed
to have been received, were applied or were required to be applied by the
Servicer in reduction of the Principal Balance of such Mortgage Loan.
"Payment Ahead" means any payment of one or more scheduled monthly payments
remitted by a Mortgagor with respect to a Mortgage Note in excess of the
scheduled monthly payment due during such Collection Period with respect to such
Mortgage Note, which sums the related Mortgagor has instructed the Servicer to
apply to scheduled monthly payments due in one or more subsequent Collection
Periods.
"Principal Prepayment" means any Mortgagor payment or other recovery in
respect of principal on a Mortgage Loan (including Net Liquidation Proceeds)
which, in the case of a Mortgagor payment, is received in advance of its
scheduled due date and is not accompanied by an amount as to interest
representing scheduled interest for any month subsequent to the month of such
payment, or that was accompanied by instructions from the related Mortgagor
directing the Servicer to apply such payment to the Principal Balance of such
Mortgage Loan currently.
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"Liquidated Mortgage Loan" means, as to any Payment Date, any Mortgage Loan
as to which the Servicer has determined during the related Collection Period, in
accordance with its customary servicing procedures, that all Liquidation
Proceeds which it expects to recover from or on account of such Mortgage Loan
have been recovered.
"Available Funds" with respect to any Payment Date will consist of the sum
of the amounts described in clauses (a) through (j) below, less (i) the
Servicing Fee in respect of the related Collection Period, (ii) Monthly Advances
and Servicing Advances previously made that are reimbursable to the Servicer
(other than those included in liquidation expenses for any Liquidated Mortgage
Loan and reimbursed from the related Liquidation Proceeds) in such Collection
Period to the extent permitted by the Indenture and (iii) the aggregate amounts
(A) deposited into the Collection Account or Bond Account that may not be
withdrawn therefrom pursuant to a final and nonappealable order of a United
States bankruptcy court of competent jurisdiction imposing a stay pursuant to
Section 362 of the United States Bankruptcy Code and that would otherwise have
been included in Available Funds on such Payment Date and (B) received by the
Indenture Trustee that are recoverable and sought to be recovered from the Bond
Issuer as a voidable preference by a trustee in bankruptcy pursuant to the
United States Bankruptcy Code in accordance with a final nonappealable order of
a court of competent jurisdiction:
(a) the total amount of interest payments on or in respect of the
Mortgage Loans received by or on behalf of the Servicer during the related
Collection Period, net of amounts representing interest accrued on such
Mortgage Loans in respect of any period prior to the applicable Cut-off
Dates, plus any Compensating Interest Payments made by the Servicer in
respect of the related Mortgage Loans and any net income from related REO
Properties for such Collection Period;
(b) all Principal Payments received or deemed to be received during
the related Collection Period in respect of the Mortgage Loans;
(c) the aggregate of any proceeds from or in respect of any policy of
insurance covering a Mortgage Loan that are received during the related
Collection Period and applied by the Servicer to reduce the Principal
Balance of the related Mortgage Loan ("Insurance Proceeds") (which proceeds
will not include any amounts applied to the restoration or repair of the
related Mortgaged Property or released to the related Mortgagor in
accordance with applicable law, the Servicer's customary servicing
procedures or the terms of the related Mortgage Loan);
(d) the aggregate of any other proceeds received by the Servicer
during the related Collection Period in connection with the liquidation of
any Mortgaged Property securing a Mortgage Loan, whether through trustee's
sale, foreclosure, condemnation, taking by eminent domain or otherwise
(including any insurance proceeds to the extent not duplicative of amounts
in clause (c) above) ("Liquidation Proceeds"), less expenses incurred by
the Servicer in connection with the liquidation of such Mortgage Loan ("Net
Liquidation Proceeds");
(e) the aggregate of the amounts received in respect of any Mortgage
Loans that are required or permitted to be released, removed or substituted
by ACC or the Servicer, as the case may be, during the related Collection
Period as described in "-- Assignment of Mortgage Loans" and "Servicing of
the Mortgage Loans" herein, to the extent such amounts are received by the
Indenture Trustee on or before the related Deposit Date;
(f) the amount of any Monthly Advances made for such Payment Date;
(g) the aggregate of amounts deposited in the Bond Account by the Bond
Issuer, the Servicer [or the Financial Guaranty Insurer], as the case may
be, during such Collection Period in connection with redemption of the
Bonds as described under "-- Redemption of the Bonds" herein;
[(h) in the case of the [ ] Payment Date, amounts, if any,
remaining in the Prefunding Account and the Capitalized Interest Account
immediately prior to such Payment Date (in each case net of reinvestment
income payable to the Bond Issuer);]
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(i) in the case of the [ ] Payment Date, amounts deposited by
the Bond Issuer representing 30 days of interest, computed at the related
Mortgage Interest Rate, on each [Initial] Mortgage Loan that does not have
a monthly payment due in the Collection Period relating to such Payment
Date; and
(j) in the case of the [ ] Payment Date, amounts deposited by
the Bond Issuer representing 30 days of interest, computed at the related
Mortgage Interest Rate, on each Mortgage Loan that does not have a monthly
payment due in the Collection Period relating to such Payment Date.
BOND ACCOUNT
Pursuant to the Indenture, the Indenture Trustee shall establish and
maintain an account (the "Bond Account") from which all payments with respect to
the Bonds will be made. As described below, not later than the Deposit Date, the
Servicer will be required pursuant to the Servicing Agreement to wire transfer
to the Indenture Trustee for deposit in the Bond Account the sum (without
duplication) of all amounts on deposit in the Collection Account that constitute
any portion of Available Funds for the related Payment Date. See "Description of
Securities -- Distributions and Payments on Securities -- Available Funds" in
the Prospectus.
All amounts held in the Bond Account will be required to be in Permitted
Investments that mature not later than the date which is one business day prior
to the Deposit Date for the related Payment Date next succeeding the date of
investment. See "-- Investment of Bond Account" and "-- Permitted Investments"
below. Investment income on monies on deposit in the Bond Account will not be
available for payment to Bondholders or otherwise subject to any claims or
rights of the Bondholders and will be released from the Trust Estate and paid to
Bond Issuer. The Bond Issuer will be liable for any losses resulting from such
investments.
Investment of Bond Account. All or a portion of the Bond Account may be
invested and reinvested in one or more Permitted Investments bearing interest or
sold at a discount. The Indenture Trustee or any affiliate thereof may be the
obligor on any investment in the Bond Account which otherwise qualifies as a
Permitted Investment. No investment in the Bond Account may mature later than
the business day preceding the Payment Date.
The Indenture Trustee will not in any way be held liable by reason of any
insufficiency in any Bond Account resulting from any loss on any Permitted
Investment included therein (except to the extent the Indenture Trustee is the
obligor thereon).
All income or other gain from investments in the Bond Account will be held
in the Bond Account for the benefit of the Bond Issuer and will be subject to
withdrawal from time to time as permitted by the Indenture. Any loss resulting
from such investments will be for the account of the Bond Issuer. The Bond
Issuer will be required to deposit the amount of any such loss immediately upon
the realization of such loss to the extent such loss will not be offset by other
income or gain from investments in the Bond Account and then available for such
application.
Permitted Investments. The Indenture 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.
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(d) Federal National Mortgage Association senior debt obligations, but
excluding any such securities whose terms do not provide for payment of a
fixed dollar amount upon maturity or call for redemption.
(e) Federal funds, certificates of deposit, time and demand deposits,
and bankers' acceptances (having original maturities of not more than 365
days) of any domestic bank or trust company, the short-term debt
obligations of which have been assigned a minimum rating specified in the
Indenture 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 $50,000,000
which deposits are not in excess of the applicable limits insured by the
Bank Insurance Fund or the Savings Association Insurance Fund of the
Federal Deposit Insurance Corporation, provided that the long-term deposits
of such bank or savings and loan association are assigned a minimum rating
specified in the Indenture by the applicable Rating Agency.
(g) Commercial paper (having original maturities of not more than 180
days) assigned a minimum rating specified in the Indenture by the
applicable Rating Agency.
(h) Investments in money market funds assigned a minimum rating
specified in the Indenture by the applicable Rating Agency.
(i) Other investments acceptable to the applicable Rating Agency [and
the Financial Guaranty Insurer].
No instrument described above is permitted to evidence either the right to
receive (a) only interest with respect to obligations underlying such instrument
or (b) both principal and interest payments derived from obligations underlying
such instrument and the interest and principal payments with respect to such
instrument provided a yield to maturity at par greater than 120% of the yield to
maturity at par of the underlying obligations, and no instrument described above
may be purchased at a price greater than par if such instrument may be prepaid
or called at a price less than its purchase price prior to stated maturity.
[PREFUNDING ACCOUNT
On the Closing Date, the Bond Issuer will deposit cash in the aggregate
amount of approximately [$ ] (the "Prefunding Account Deposit") in the
Prefunding Account, which account will be part of the Trust Estate and will be
maintained with the Indenture Trustee in its corporate trust. The Prefunding
Account Deposit may be increased by an amount equal to the aggregate of the
principal balances of any mortgage loans removed from the Mortgage Pool prior to
the Closing Date, provided that any such increase shall not exceed $10,000,000.
During the Funding Period, the amount on deposit in the Prefunding Account will
be allocated for the acquisition of Additional Mortgage Loans from the Bond
Issuer in accordance with the applicable provisions of the Indenture. The
Additional Mortgage Loans will be acquired or originated by ACC and conveyed to
the Transferor from time to time during the Funding Period. The Transferor will
in turn convey the Additional Mortgage Loans to the Bond Issuer, which will
pledge such Additional Mortgage Loans under the Indenture. Additional Mortgage
Loans acquired and added to the Trust Estate on any Subsequent Transfer Date
must be approved by the Financial Guaranty Insurer. On the Payment Date in
[ ], any amount remaining on deposit in the Prefunding Account and not
applied to acquire Additional Mortgage Loans during the Funding Period will be
paid in reduction of the Bond Balance. Although it is intended that the
principal amount of Additional Mortgage Loans transferred to the Mortgage Pool
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 payments from amounts remaining on deposit in the Prefunding Account
in reduction of the Bond Balance, no assurance can be given that such a payment
will not occur on the Payment Date in [ ]. In any event, it is unlikely
that the Bond Issuer will be able to acquire Additional Mortgage Loans with
aggregate principal balances that exactly equal the Prefunding Account Deposit.
Any portion of the Prefunding Account Deposit that is not applied to acquire
Additional Mortgage Loans during the Funding Period will be paid on the
[ ] Payment Date in reduction of the Bond Balance, thereby reducing the
weighted average lives of such Bonds.
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Amounts remaining on deposit in the Prefunding Account after the
acquisition of the Additional Mortgage Loans will be invested in Permitted
Investments as defined in the Indenture. Permitted Investments are required to
mature as may be necessary for the acquisition of Additional Mortgage Loans on
any Subsequent Transfer Date no later than the business day prior to the related
Subsequent Transfer Date and, in any case, no later than the business day prior
to the [ ] Payment Date. All interest and any other investment earnings on
amounts on deposit in the Prefunding Account will be released to the Bond Issuer
on the [ ] Payment Date. The Bond Issuer will be liable for any losses
resulting from such investments.
All Additional Mortgage Loans acquired from application of amounts on
deposit in the Prefunding Account shall be part of the Trust Estate from and
after the date of acquisition thereof.]
[CAPITALIZED INTEREST ACCOUNT
On the Closing Date, the Bond Issuer will deposit cash into the Capitalized
Interest Account, which account will be part of the Trust Estate and will be
maintained with the Indenture Trustee in its corporate trust department. The
amount on deposit in the Capitalized Interest Account will be specifically
allocated to cover shortfalls in interest on the Bonds that may arise as a
result of the utilization of the Prefunding Account for the acquisition of
Additional Mortgage Loans during the Funding Period and will be so applied by
the Indenture Trustee on the [ ] Payment Date. In the unlikely event that
the full amount allocated to cover interest shortfalls in respect of the Bonds
is not required for such purpose, the amount remaining (net of reinvestment
income payable to the Bond Issuer) will be deposited in the Bond Account and
will be part of Available Funds.
Amounts on deposit in the Capitalized Interest Account will be invested in
Permitted Investments as defined in the Indenture. All such Permitted
Investments are required to mature no later than the business day prior to the
[ ] Payment Date as specified in the Indenture. All interest and any other
investment earnings on amounts on deposit in the Capitalized Interest Account
will be released to the Bond Issuer on the [ ] Payment Date. The Bond
Issuer will be liable for any losses resulting from such investments.]
[OVERCOLLATERALIZATION FEATURE
Credit enhancement with respect to the Bonds Initially will be provided in
part by overcollateralization resulting from the sum of the Initial Cut-off Date
Pool Balance and the Prefunding Account Deposit exceeding the Original Bond
Balance, which is expected to be supplemented by the application of Excess Cash
on each Payment Date so that over time such overcollateralization will increase.
Such overcollateralization is intended to result in receipts, collections and
recoveries on the Mortgage Loans in excess of the amount necessary to pay Bond
Interest required to be paid on the Bonds on any Payment Date and to reduce the
Bond Balance to zero no later than the Final Maturity Date of the Bonds. Excess
Cash will be paid in reduction of the Bond Balance on each Payment Date up to
the amount necessary for the related Coverage Amount to equal the Required
Coverage Amount for such Payment Date.
The "Excess Cash" on any Payment Date will be equal to Available Funds for
such Payment Date, reduced by (i) the amount of Bond Interest for such Payment
Date, (ii) the Monthly Principal for such Payment Date, (iii) the Financial
Guaranty Insurer Premium with respect to such Payment Date, (iv) any amounts
payable to the Financial Guaranty Insurer for unreimbursed Insured Amounts paid
on prior Payment Dates and (v) any amounts payable to the Financial Guaranty
Insurer for unpaid Financial Guaranty Insurer Premiums from prior Payment Dates.
The "Coverage Amount" with respect to any Payment Date is the amount, if
any, by which (x) the Aggregate Principal Balance of the Mortgage Loans as of
the end of the related Collection Period (plus, in the case of the [ ]
Payment Date, the aggregate of the Principal Balances of any Additional Mortgage
Loans added to the Mortgage Pool after [ ] but prior to the end of the
Funding Period) exceeds (y) the Bond Balance as of such Payment Date after
taking into account payments of Monthly Principal (disregarding any permitted
reduction in Monthly Principal due to a Coverage Surplus) made on such Payment
Date. The required level of the Coverage Amount with respect to any Payment Date
(the "Required Coverage Amount") will be equal to the amount specified as such
in the Indenture. The Indenture will provide that the
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applicable Required Coverage Amount may increase or decrease during the period
the Bonds remain outstanding. If on any Payment Date occurring after [ ],
the amount of Excess Cash payable on the Bonds is less than an amount specified
in the Indenture, the Required Coverage Amount will be increased (any such
Payment Date, a "Trigger Event Date"); provided, however, that upon the
satisfaction of certain cash flow requirements in respect of the Bonds as
specified in the Indenture, such Required Coverage Amount will return to its
original level. Any increase in the applicable Required Coverage Amount
(including an increase required on a Trigger Event Date) may result in an
accelerated amortization of the Bonds until such Required Coverage Amount is
reached. Conversely, any decrease in the Required Coverage Amount will result in
a decelerated amortization of the Bonds until such Required Coverage Amount is
reached.
The application of Excess Cash to reduce the Bond Balance on any Payment
Date will have the effect of accelerating the amortization of the Bonds relative
to the amortization of the Mortgage Loans in the Trust Estate.
In the event that the Required Coverage Amount is permitted to decrease or
"step down" on any Payment Date in the future, the Indenture will provide that
all or a portion of the Excess Cash that would otherwise be paid to the Bonds on
any such Payment Date in reduction of the Bond Balance will be released to the
Bond Issuer. This may have the effect of decelerating the amortization of the
Bonds relative to the amortization of the related Mortgage Loans, and of
reducing the related Coverage Amount.
With respect to any Payment Date, a "Coverage Surplus" means, the amount,
if any, by which (x) the Coverage Amount for such Payment Date exceeds (y) the
then applicable Required Coverage Amount for such Payment Date. As a technical
matter, a Coverage Surplus may result even prior to the occurrence of any
decrease or "step down" in the Required Coverage Amount because the Bonds will
be entitled to receive 100% of collected principal on the Mortgage Loans, even
though the Bond Balance will, as a result of the [Initial] overcollateralization
and the accelerated amortization caused by the application of the Excess Cash,
be less than the Aggregate Principal Balance of the Mortgage Loans, in the
absence of any Realized Losses on the Mortgage Loans.
The Indenture will provide that, on any Payment Date, all amounts collected
on the Mortgage Loans in respect of principal during the applicable Collection
Period will be paid to Bondholders in reduction of the Bond Balance on such
Payment Date, except as provided above with respect to any Payment Date for
which there exists a Coverage Surplus. If any Mortgage Loan became a Liquidated
Mortgage Loan during such prior Collection Period, the Net Liquidation Proceeds
related thereto and allocated to principal may be less than the Principal
Balance of the related Mortgage Loan; the amount of any such deficiency is a
"Realized Loss." In addition, the Indenture will provide that the Principal
Balance of any Mortgage Loan that becomes a Liquidated Mortgage Loan shall equal
zero. The Indenture will not require that the amount of any Realized Loss be
paid to Bondholders on the Payment Date following the event of loss. However,
the occurrence of a Realized Loss will reduce the Coverage Amount for the Bonds,
and will result in more Excess Cash, if any, being paid on the Bonds in
reduction of the Bond Balance on subsequent Payment Dates than would be the case
in the absence of such Realized Loss.
Overcollateralization and the Financial Guaranty Insurance Policy. The
Indenture will require the Indenture Trustee to make a claim for an Insured
Amount under the Financial Guaranty Insurance Policy not later than 12:00 noon
(New York City time) on the second business day prior to any Payment Date as to
which the Indenture Trustee has determined that a Coverage Deficit with respect
to the Bonds will occur for the purpose of applying the proceeds of such Insured
Amount as a payment of principal to the Bondholders on such Payment Date. With
respect to any Payment Date, a "Coverage Deficit" will mean the amount, if any,
by which (x) the Bond Balance, after taking into account all payments to be made
on such Payment Date in reduction thereof, including any Excess Cash payments,
exceeds (y) the sum of Aggregate Principal Balance of the Mortgage Loans as of
the end of the applicable Collection Period (plus, in the case of the [ ]
Payment Date, the aggregate of the Principal Balances of any Additional Mortgage
Loans added to the Mortgage Pool after [ ] but prior to the end of the
Funding Period). Accordingly, the Financial Guaranty Insurance Policy is similar
to the provisions described above insofar as the Financial Guaranty Insurance
Policy guarantees ultimate collection of the full amount of the Bond Balance,
rather than current
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payments of the amounts of any Realized Losses to the Bondholders. INVESTORS IN
THE BONDS SHOULD REALIZE THAT, UNDER CERTAIN LOSS OR DELINQUENCY SCENARIOS, THEY
MAY TEMPORARILY RECEIVE NO PAYMENTS IN REDUCTION OF THE BOND BALANCE.]
REPORTS TO BONDHOLDERS
Concurrently with each payment to Bondholders, the Indenture Trustee will
mail a statement to each Bondholder in the form required by the Indenture and
setting forth the following information:
(a) the amount of such payment to the Bondholders allocable to (i)
Monthly Principal and (ii) any Excess Cash payment;
(b) the amount of such payment to the Bondholders allocable to Bond
Interest;
(c) the Bond Balance after giving effect to the payment of Monthly
Principal and any Excess Cash applied to reduce the Bond on such Payment
Date;
(d) the Aggregate Principal Balance of the Mortgage Loans as of the
end of the related Collection Period;
(e) the amount of unreimbursed Monthly Advances and/or Servicing
Advances, if any;
(f) the number and the aggregate of the Principal Balances of the
Mortgage Loans delinquent (i) one month, (ii) two months and (iii) three or
more months as of the end of the related Collection Period;
(g) the aggregate of the Principal Balances of the Mortgage Loans in
foreclosure or other similar proceedings and the book value of any real
estate acquired through foreclosure or grant of a deed in lieu of
foreclosure;
(h) the Insured Amount, if any, relating to the Bonds and such Payment
Date;
(i) the amount of the Servicing Fee paid to or retained by the
Servicer for the related Collection Period; and
(j) the Coverage Amount, the then applicable Required Coverage Amount,
the Coverage Surplus, if any, and the Coverage Deficit, if any.
In the case of information furnished pursuant to clauses (a) and (b) above,
the amounts shall be expressed as a dollar amount per Bond with a $1,000
principal denomination.
Within 90 days after the end of each calendar year, the Indenture Trustee
will mail to each person who at any time during such calendar year was a
Bondholder and to the Underwriters a statement containing the information set
forth in clauses (a) and (b) above, aggregated for such calendar year or, in the
case of each person who was a Bondholder for a portion of such calendar year,
setting forth such information for each month thereof.
[THE FINANCIAL GUARANTY INSURANCE POLICY
The Financial Guaranty Insurer will issue a Financial Guaranty Insurance
Policy in favor of the Indenture Trustee for the benefit of the Bondholders. The
Financial Guaranty Insurance Policy unconditionally and irrevocably guarantees
payment of Bond Interest and any Coverage Deficit in respect of the Bonds on
each Payment Date.
In the event that, on any Payment Date, (i) Available Funds are less than
the full amount of Bond Interest for such Payment Date or (ii) a Coverage
Deficit exists for the Bonds, the Indenture Trustee will make a claim on the
Financial Guaranty Insurance Policy for payment of: (a) an amount equal to the
amount necessary to pay the full amount of Bond Interest on such Payment Date
and (b) an amount equal to any such Coverage Deficit (the amount of any
shortfalls in Bond Interest, together with any Coverage Deficit with respect to
any Payment Date, is the "Insured Amount"). The Financial Guaranty Insurer will
be obligated to pay to the Indenture Trustee on each Payment Date the full
amount of the Insured Amount under the
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Financial Guaranty Insurance Policy for such Payment Date. See "The Financial
Guaranty Insurance Policy and the Financial Guaranty Insurer" herein.
Any portion of an Insured Amount paid to the Bondholders will be allocated
first to make up any shortfall on such Payment Date in Bond Interest and second
to make up any Coverage Deficit on such Payment Date. Any Insured Amount paid in
respect of the Bonds to make up any shortfall in Bond Interest shall be paid pro
rata to the Bondholders in proportion to the shortfall in Bond Interest payable
to such Bondholders. Any Insured Amount paid in respect of the Bonds to make up
any Coverage Deficit shall be paid pro rata to the Bondholders in proportion to
their Bond Balance in reduction of the Bond Balance until the Bond Balance is
reduced to zero.
The Financial Guaranty Insurer will be subrogated to the rights of
Bondholders to receive any payments on the Bonds for which the Financial
Guaranty Insurer paid Insured Amounts that were not subsequently reimbursed
together with interest thereon; provided, however, that the Financial Guaranty
Insurer is not entitled to reimbursement on any Payment Date for previously paid
Insured Amounts or to interest thereon unless the Bondholders will receive the
full amount of the applicable Bond Interest on such Payment Date and no Coverage
Deficit exists with respect to the Bonds.
THE FINANCIAL GUARANTY INSURER PREMIUM
The Financial Guaranty Insurer will be entitled to receive a monthly
premium (the "Financial Guaranty Insurer Premium") payable out of Available
Funds on each Payment Date. The Financial Guaranty Insurer Premium as of any
Payment Date will equal one-twelfth (1/12) of the product of the applicable
Insurer Premium Rate and the Bond Balance for such Payment Date. The "Insurer
Premium Rate" will be [ %]; provided, however, that with respect to each
Payment Date commencing with the Payment Date immediately following the Pool
Redemption Date, if the Coverage Amount is less than the then applicable
Required Coverage Amount as of the immediately preceding Payment Date, the
Insurer Premium Rate with respect to such Payment Date shall be equal to
[ %]. See " -- Payments on the Bonds" herein.
REDEMPTION OF THE BONDS
The Bonds will be subject to redemption, in whole but not in part, at the
option of the Bond Issuer, on or after the Payment Date on which the Bond
Balance is less than [ ] of the Original Bond Balance. The Servicer may also
cause the redemption of the Bonds by exercising its right to purchase all
Mortgage Loans from the Indenture Trustee on or after the Payment Date on which
the Aggregate Principal Balance of the Mortgage Loans in the Mortgage Pool has
declined to less than 10% of the sum of the [Initial] Cut-off Date Pool Balance
[and the Prefunding Account Deposit] (the "Pool Redemption Date").
[In addition, the Financial Guaranty Insurer may effect a redemption of the
Bonds by exercising its right to purchase all Mortgage Loans from the Indenture
Trustee on any Payment Date on which Mortgage Loans having Principal Balances as
of the applicable Cut-off Dates aggregating an amount equal to or in excess of
25% of the sum of the [Initial] Cut-off Date Pool Balance and the Prefunding
Account Deposit have become Liquidated Mortgage Loans.]
The Bonds will be redeemed at a redemption price of 100% of the then
outstanding Bond Balance thereof plus accrued but unpaid interest thereon
through the end of Interest Period immediately preceding the related Payment
Date. There will be no prepayment premium in connection with such a redemption.
Notice of an optional redemption of the Bonds must be mailed by the Indenture
Trustee to the Bondholders at least ten days prior to the Payment Date set for
such redemption.
The payment on the final Payment Date in connection with the redemption of
the Bonds shall be in lieu of the payment otherwise required to be made on such
Payment Date in respect of the Bonds.
PAYMENTS TO THE BOND ISSUER
On each Payment Date, any portion of Available Funds remaining after making
payments of interest and principal due on the Bonds and other distributions
required on such Payment Date will be released to the Bond
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Issuer, free of the lien of the Indenture. Such amounts will not be available to
make payments on the Bonds on any subsequent Payment Date.
THE INDENTURE TRUSTEE
Bankers Trust Company of California, N.A., a national banking association,
will be the Indenture Trustee under the Indenture. The Indenture will provide
that the Indenture Trustee is entitled to certain fees and reimbursement of
expenses.
The Indenture also will provide that the Indenture Trustee may resign at
any time, upon notice to the Bond Issuer, the Servicer and any Rating Agency, in
which event the Bond Issuer will be obligated to appoint a successor Indenture
Trustee. The Bond Issuer may remove the Indenture Trustee if the Indenture
Trustee ceases to be eligible to continue as such under the Indenture or if the
Indenture Trustee becomes insolvent. Any resignation or removal of the Indenture
Trustee and appointment of a successor Indenture Trustee will not become
effective until acceptance of the appointment by the successor Indenture
Trustee. The Indenture will provide that the Indenture Trustee is under no
obligation to exercise any of the rights or powers vested in it by the Indenture
at the request or direction of any of the Bondholders, unless such Bondholders
shall have offered to the Indenture 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 Indenture Trustee may execute any
of the rights or powers granted by the Indenture or perform any duties
thereunder either directly or by or through agents or attorneys, and the
Indenture 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 Indenture, the Indenture 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 Indenture. The Indenture Trustee and any director, officer, employee
or agent of the Indenture 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
Indenture.
VOTING
Unless otherwise specified in the Indenture, with respect to any provisions
of the Indenture providing for the action, consent or approval of the
Bondholders evidencing specified "Voting Interests", each Bondholder will have a
Voting Interest equal to the Percentage Interest represented by such
Bondholder's Bond. Any Bond registered in the name of the Bond Issuer 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 Voting Interests necessary to take any such
action, or effect any such consent, has been obtained.
BOND EVENTS OF DEFAULT
See "The Indenture -- Bond Events of Default" in the Prospectus for a
description of the circumstances under which a default on the Bonds may occur.
In addition to those Bond Events of Default specified in the Prospectus, a
default on the Bonds may also occur if on any Payment Date, after taking into
account all payments made in respect of principal on the Bonds and the payment
of any Insured Amounts on such Payment Date, a Coverage Deficit exists with
respect to the Bonds. See "The Indenture -- Rights upon Bond Events of Default"
in the Prospectus for a description of the rights of Bondholders in connection
with any Bond Event of Default. In the absence of a failure by the Financial
Guaranty Insurer to pay Insured Amounts, no acceleration of the maturity of the
Bonds shall be permitted without the consent of the Financial Guaranty Insurer.
THE BOND ISSUER
The Bond Issuer is a Delaware business trust established by the Transferor
pursuant to the Trust Agreement. After the Closing Date, substantially all of
the beneficial ownership interest in the Bond Issuer will be held by ACC. The
Transferor will retain only a negligible interest in the Bond Issuer after the
Closing
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Date, but will have primary responsibility for managing the affairs and
operations of the Bond Issuer. The principal office of the Bond Issuer is
located in Los Angeles, California. The Bond Issuer does not have, nor is it
expected in the future to have, any significant assets, other than the assets
included in the Trust Estate.
THE MORTGAGE LOANS
GENERAL
The following is a brief description of certain terms of the [Initial]
Mortgage Loans based on the [Initial] Mortgage Loans as of the Statistical
Calculation Date. Certain mortgage loans may prepay in full or be removed, prior
to the Closing Date, from the Mortgage Pool as described herein, in which case
an amount equal to the aggregate principal balances of such mortgage loans, [but
in no event more than $10,000,000, will be added to the Prefunding Account
Deposit on the Closing Date.] The statistical information presented below does
not take into account any amortization of the [Initial] Mortgage Loans prior to
the Closing Date [or any Additional Mortgage Loans that may be added to the
Mortgage Pool during the Funding Period.] As a result, the statistical
information presented below regarding the [Initial] Mortgage Loans set forth
herein may vary from comparable information based on the actual composition of
the Mortgage Pool at the Closing Date.
The information expressed below as a percentage of the [Initial] Pool
Balance may not total 100% due to rounding.
None of the Mortgage Loans is or will be insured or guaranteed by the Bond
Issuer, ACC, AFC, the Transferor, the Servicer, the Indenture Trustee, any
Originator or any of their respective affiliates, or by any governmental agency
or other person.
A schedule of the [Initial] Mortgage Loans as of the Closing Date will be
attached to the Indenture delivered to the Indenture Trustee upon delivery of
the Bonds. [A Current Report on Form 8-K containing a description of the
Mortgage Loans included in the final Mortgage Pool as of the end of the Funding
Period in a form comparable to the description of the [Initial] Mortgage Loans
contained in "ANNEX A: Description of the Mortgage Pool" will be filed with the
Commission within 15 days after the expiration of the Funding Period.]
For a more detailed description of certain characteristics of the [Initial]
Mortgage Loans as of the Statistical Calculation Date in tabular form, see
"ANNEX A: Description of the Mortgage Pool" at the end of this Prospectus
Supplement.
All of the [Initial] Mortgage Loans are secured by first liens with respect
to the related Mortgaged Properties. All of the Mortgage Loans will be required
to be covered by standard hazard insurance policies insuring against certain
losses.
Each Mortgage Loan in the Mortgage Pool will bear interest that is
adjustable at regular periodic intervals. Each Mortgage Loan will have the
interest due thereon computed on an actuarial basis.
Each Mortgage Loan generally will provide for the payment of a charge if
the principal thereof is paid prior to its stated maturity date. Such charge,
however, will not be included in Available Funds for the related Collection
Period but will instead be paid to the Servicer as additional servicing
compensation.
In connection with the transfer by ACC of the [Initial] Mortgage Loans to
the Transferor, ACC will make representations regarding the percentages of the
[Initial] Mortgage Loans (by [Initial] Cut-off Date Pool Balance) that had two
monthly payments and one monthly payment past due as of the applicable Cut-off
Dates. [Such percentages must be satisfactory to the Financial Guaranty
Insurer.] No Mortgage Loan will have three or more monthly payments past due as
of the applicable Cut-off Date.
The [Initial] Pool Balance is approximately [$ ]. Approximately
[ %], [ %], [ %] and [ %] of the related Mortgaged Properties
(by [Initial] Pool Balance) were single family residences, two- to four-family
residences, units in condominium and planned unit developments and manufactured
housing units, respectively, and no more than 0.31% of the Mortgage Loans (by
[Initial] Pool Balance) were secured by Mortgaged Properties located in any
single zip code.
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<PAGE> 142
As of the Statistical Calculation Date, the original weighted average
Loan-to-Value Ratio of all [Initial] Mortgage Loans was approximately [ ]%.
The maximum and average current balances as of the applicable Statistical
Calculation Date were approximately [$ ] and [$ ],
respectively. The average appraised value of the Mortgaged Properties securing
[Initial] Mortgage Loans as of the Statistical Calculation Date was
approximately [$ ] at the time of origination of such Mortgage Loans.
The "Loan-to-Value Ratio" is the original Principal Balance of such Mortgage
Loan as a percentage of the appraised valuation (of, if the Mortgage Loan was
obtained in connection with the purchase of the related Mortgaged Property, the
purchase price, if less) of the related Mortgaged Property determined by the
Originator at the time of origination of such Mortgage Loan. See "Risk
Factors -- Risks Associated with Underwriting Standards" herein.
The [Initial] Mortgage Loans bear interest rates that, after a period of
approximately six months, one year, eighteen months, two years, three years,
five years or seven years following the related date of origination, adjust
based on the six-month London Interbank Offered Rate based on quotations of
major banks as published in The Wall Street Journal. The [Initial] Mortgage
Loans that have interest rates adjusted on the basis of the six-month London
Interbank Offered Rate have semi-annual interest rate and payment adjustment
frequencies after the first interest rate adjustment date. Approximately
[ %] (by [Initial] Pool Balance) of the [Initial] Mortgage Loans have
[Initial] interest rates ("Mortgage Interest Rates") that will remain fixed for
one year or more from the Statistical Calculation Date before [Initial]
adjustment, approximately [ %] (by [Initial] Pool Balance) of the [Initial]
Mortgage Loans have [Initial] Mortgage Interest Rates that will remain fixed for
two years or more from the Statistical Calculation Date before [Initial]
adjustment and approximately [ %] (by [Initial] Pool Balance) of the
[Initial] Mortgage Loans have [Initial] Mortgage Interest Rates that will remain
fixed for three years or more from the Statistical Calculation Date before
[Initial] adjustment. As of the Statistical Calculation Date, the weighted
average remaining period to the next interest rate adjustment date for the
[Initial] Mortgage Loans was approximately 14 months.
As of the Statistical Calculation Date, approximately [ %] of the
[Initial] Mortgage Loans (by [Initial] Pool Balance) have the interest rate
thereof adjusted on the basis of the six-month London Interbank Offered Rate and
approximately 21.03% of the [Initial] Mortgage Loans (by [Initial] Pool Balance)
have the interest rate thereof adjusted on the basis of the one-year CMT index.
As of the Statistical Calculation Date, each [Initial] Mortgage Loan 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 [ %] to [ %] above
the then current interest rate for such [Initial] Mortgage Loan. The [Initial]
Mortgage Loans have a weighted average [Initial] periodic rate adjustment cap as
of the Statistical Calculation Date equal to approximately [ %]. As of the
Statistical Calculation Date, the weighted average Mortgage Interest Rate was
approximately [ %] per annum. The [Initial] Mortgage Loans had a weighted
average gross margin as of the Statistical Calculation Date of approximately
[ %]. The [Initial] gross margin for the [Initial] Mortgage Loans as of the
Statistical Calculation Date ranged from approximately [ %] to [ %]. The
interest rates borne by the [Initial] Mortgage Loans as of the Statistical
Calculation Date ranged from approximately [ %] per annum to approximately
[ %] per annum. As of the Statistical Calculation Date, the maximum rates at
which interest may accrue on the [Initial] Mortgage Loans (the "Maximum Rates")
ranged from [ %] per annum to [ %] per annum. The [Initial] Mortgage
Loans had a weighted average Maximum Rate as of the Statistical Calculation Date
of approximately [ %] per annum. As of the Statistical Calculation Date, the
minimum rates at which interest may accrue on the Mortgage Loans after their
respective first interest adjustment dates (the "Minimum Rates") ranged from
approximately [ %] per annum to approximately [ %] per annum. As of the
Statistical Calculation Date, the weighted average Minimum Rate was
approximately [ %] per annum.
The weighted average remaining term to stated maturity of the [Initial]
Mortgage Loans was approximately [ ] months as of the Statistical
Calculation Date. The weighted average original term to maturity of the
[Initial] Mortgage Loans as of the Statistical Calculation Date was
approximately [ ] months. As of the Statistical Calculation Date, the
weighted average seasoning of the [Initial] Mortgage Loans was approximately
[ ] months.
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<PAGE> 143
[CONVEYANCE OF ADDITIONAL MORTGAGE LOANS
The obligation of the Bond Issuer to purchase the Additional Mortgage Loans
on a Subsequent Transfer Date for inclusion in the Mortgage Pool is subject to
the following requirements: (i) no Additional Mortgage Loans may be 60 or more
days contractually delinquent as of the related Cut-off Dates, (ii) the original
term to stated maturity of such Additional Mortgage Loans may not exceed 30
years, (iii) each Additional Mortgage Loan will have an adjustable rate of
interest determined on the basis of either the six-month London Interbank
Offered Rate or one-year CMT index; (iv) each Additional Mortgage Loan will have
an [Initial] interest rate of not less than [ %], (v) such Additional
Mortgage Loans will be underwritten or re-underwritten, as applicable, in
accordance with the criteria set forth under "The Originators -- Underwriting
Guidelines" in the Prospectus, and (vi) following the acquisition of such
Additional Mortgage Loans, the Mortgage Loans (including the Additional Mortgage
Loans) (a) will have an [Initial] weighted average Mortgage Interest Rate of at
least [ %]; (b) will each have a principal balance not in excess of
[$ ]; and (c) may include mortgage loans that bear interest based on
the one-year CMT index, provided that the aggregate principal balance of such
mortgage loans at the date of the acquisition thereof does not exceed [ %]
of the sum of the [Initial] Cut-off Date Pool Balance plus the Prefunding
Account Deposit. See "Risk Factors -- The Additional Mortgage Loans and the
Prefunding Account" herein. In addition, the transfer of Additional Mortgage
Loans to the Mortgage Pool on any Subsequent Transfer Date is subject to the
approval of the Financial Guaranty Insurer and, in instances deemed appropriate
by the Financial Guaranty Insurer, the requirements for Additional Mortgage
Loans specified above may be waived or modified.]
PREPAYMENT AND YIELD CONSIDERATIONS
The weighted average life of and, if purchased at other than par, the yield
to maturity on a Bond will be directly related to the rate of payment of
principal of the Mortgage Loans, including for this purpose voluntary payment in
full of Mortgage Loans prior to stated maturity, liquidations due to defaults,
casualties and condemnations, and removals of Mortgage Loans from the Trust
Estate or releases of the Mortgage Loans obtained by the Financial Guaranty
Insurer. The actual rate of principal prepayments on the Mortgage Loans may be
influenced by a variety of economic, tax, geographic, demographic, social,
competitive, legal and other factors and has fluctuated considerably in recent
years.
Because all amounts available for payment on the Bonds after payments in
respect of Bond Interest, including all or a portion of the Excess Cash, are
applied as reductions of the Bond Balance, the weighted average life of such
Bonds will be influenced by the amount of Excess Cash so applied. Because Excess
Cash attributable to the overcollateralization feature is derived, in part, from
interest collections on the Mortgage Loans and will be applied to reduce the
Bond Balance, the aggregate payments in reduction of the Bond Balance on a
Payment Date will usually be greater than the aggregate amount of principal
payments (including prepayments) on the Mortgage Loans payable on such Payment
Date. As a consequence, Excess Cash available for payment in reduction of the
Bond Balance will increase in proportion to the outstanding Bond Balance over
time in the absence of offsetting Realized Losses on the Mortgage Loans.
Excess Cash will be paid on the Bonds in reduction of the Bond Balance on
each Payment Date to the extent the then applicable Required Coverage Amount
exceeds the Coverage Amount on such Payment Date. Any remaining Excess Cash will
be released to the Bond Issuer. If a Bond is purchased at other than par, its
yield to maturity will be affected by the rate at which Excess Cash is paid to
Bondholders. If the actual rate of Excess Cash payments on the Bonds applied in
reduction of the Bond Balance is slower than the rate anticipated by an investor
who purchases a Bond at a discount, the actual yield to such investor will be
lower than such investor's anticipated yield. If the actual rate of Excess Cash
payments applied in reduction of the Bond Balance is faster than the rate
anticipated by an investor who purchases a Bond at a premium, the actual yield
to such investor will be lower than such investor's anticipated yield. The
amount of Excess Cash on any Payment Date will be affected by, among other
things, the actual amount of interest received, collected or recovered in
respect of the Mortgage Loans during the related Collection Period and such
amount will be influenced by changes in the weighted average of the Mortgage
Interest Rates resulting from prepayment and liquidations of Mortgage Loans, by
the relationship between the six-month London Interbank Offered Rate or
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<PAGE> 144
the one-year CMT index and LIBOR, by adjustments of Mortgage Interest Rates and
by adjustments in the Bond Interest Rate. The amount of Excess Cash paid to the
Bondholders applied to the Bond Balance on each Payment Date will be based on
the Required Coverage Amount, which may increase or decrease during the period
the Bonds remain outstanding. In this regard, the Indenture provides that on and
after a Trigger Event Date, the Required Coverage Amount will be increased for
each Payment Date thereafter; provided, however, that upon the satisfaction of
certain cash flow requirements in respect of the Bonds for a period of six
consecutive Payment Dates as specified in the Indenture, such Required Coverage
Amount will return to its original level. Any increase in the Required Coverage
Amount (including an increase required on a Trigger Event Date) may result in an
accelerated amortization until such Required Coverage Amount is reached.
Conversely, any decrease in the Required Coverage Amount will result in a
decelerated amortization of the Bonds until such Required Coverage Amount is
reached.
The timing of changes in the rate of prepayments may significantly affect
the actual yield to investors, even if the average rate of principal prepayments
is consistent with the expectations of investors. In general, the earlier the
payment of principal of the Mortgage Loans the greater the effect will be on an
investor's yield to maturity. As a result, the effect on an investor's yield of
principal prepayments occurring at a rate higher (or lower) than the rate
anticipated by the investor during the period immediately following the issuance
of the Bonds 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 Bonds. The Bond Issuer makes no representations or
warranties as to the rate of prepayment or the factors to be considered in
connection with such determination.
PROJECTED PREPAYMENTS AND YIELDS FOR THE BONDS
If a Bond is purchased at other than par, its yield to maturity will be
affected by the rate of the payment of principal on the Mortgage Loans. If the
actual rate of payments on the Mortgage Loans is slower than the rate
anticipated by an investor who purchases a Bond at a discount, the actual yield
to such investor will be lower than such investor's anticipated yield. If the
actual rate of payments on the Mortgage Loans is faster than the rate
anticipated by an investor who purchases a Bond 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 adjustable rate mortgage loans has
fluctuated significantly in recent years and, in fact, may be subject to a
greater rate of principal prepayments in a declining interest rate environment
than conventional fixed rate mortgage loans. 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 Final Maturity Date of the Bonds is the Payment Date occurring in
[ ], which is the Payment Date two years and two months after the latest
scheduled maturity date of any Mortgage Loan in the Mortgage Pool. The weighted
average life of the Bonds are likely to be shorter, and the actual final Payment
Date could occur significantly earlier than the Final Maturity Date because (i)
prepayments are likely to occur which shall be applied to the payment of the
Bond Balance, (ii) payments of Excess Cash may occur on each Payment Date which
will accelerate the amortization of the Bonds, (iii) the Bonds may be redeemed
at the option of the Bond Issuer on any Payment Date after the Bond Balance is
less than [ %] of the Original Bond Balance, (iv) the Servicer may cause a
redemption of the Bonds by exercising its right to purchase all of the Mortgage
Loans from the Indenture Trustee when the Aggregate Principal Balance of the
Mortgage Loans in the Mortgage Pool has declined to less than [ %] of the
sum of the [Initial] Cut-off Date Pool Balance [and the Prefunding Account
Deposit and (v) the Financial Guaranty Insurer] may effect a redemption of the
Bonds by exercising its rights to purchase all of the Mortgage Loans from the
Indenture Trustee on any Payment Date on which Mortgage Loans with Principal
Balances as of the applicable Cut-off Dates aggregating an amount equal to or in
excess of 25% of the sum of the [Initial] Cut-off Date Pool Balance [and the
Prefunding Account Deposit] have become Liquidated Mortgage Loans.
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<PAGE> 145
The table entitled "Weighted Average Life of the Bonds" has been prepared
on the basis of the following assumptions, except as set forth in the respective
tables: (i) the Bonds are purchased on [ ]; (ii) the [Initial] Mortgage
Loans have an aggregate principal balance equal to the [Initial] Pool Balance;
[(iii) the Bond Issuer acquires Additional Mortgage Loans with Aggregate
Principal Balances equal to the Prefunding Account Deposit;] (iv) the Mortgage
Interest Rate for each Mortgage Loan is adjusted on its next Mortgage Interest
Rate change date (and on subsequent Mortgage Interest Rate change dates, if
necessary) to equal the sum of the applicable Gross Margin plus the applicable
index (such sum being subject to the assumed periodic adjustment caps set forth
below; (v) 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 Estate; (vi) scheduled payments are timely received on
the first day of each month commencing in [ ] ([ ] with respect to
the Additional Mortgage Loans); (vii) payments on the Bonds are received, in
cash, on the 15th day of each month, commencing in [ ]; (viii) 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;
(ix) prepayments represent payment in full of individual Mortgage Loans and are
received on the last day of each month, commencing in [ ] ([ ] with
respect to the Additional Mortgage Loans) and include 30 days' interest thereon;
(x) the Mortgage Loans prepay according to the indicated Prepayment Scenario as
described below; (xi) the sixmonth London Interbank Offered Rate remains
constant at [ %], the one-year CMT index remains constant at [ %] and,
for Interest Periods ending prior to the Pool Redemption Date, the Bond Interest
Rate remains constant at [ %]; (xii) for Interest Periods ending after the
Pool Redemption Date, Bond Interest Rate remains constant at [ %]; (xiii)
early redemption occurs on the Pool Redemption Date only as specified in the
manner set forth in the respective tables; (xiv) no Trigger Event Date occurs;
(xv) Excess Cash will be applied to build overcollateralization to the levels
specified in the Indenture; and (xvi) the Mortgage Loans have the following
characteristics:
[INITIAL] MORTGAGE LOANS
<TABLE>
<CAPTION>
REMAINING REMAINING MONTHS TO ORIGINAL PERIODIC
MORTGAGE AMORTIZATION TERM TO NEXT TERM TO RATE
PRINCIPAL INTEREST TERM MATURITY GROSS MORTGAGE MATURITY ADJUSTMENT
INDEX BALANCE RATE (MONTHS) (MONTHS) MARGIN RATE CHANGE (MONTHS) CAP
----- --------- -------- ------------ --------- ------ ----------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One-year CMT Index................ $
Six-Month London Interbank
Offered Rate....................
One-year CMT Index................
Six-Month London Interbank
Offered Rate....................
Six-Month London Interbank
Offered Rate....................
Six-Month London Interbank
Offered Rate....................
One-year CMT Index................
Six-Month London Interbank
Offered Rate....................
One-year CMT Index................
Six-Month London Interbank
Offered Rate....................
One-year CMT Index................
Six-Month London Interbank
Offered Rate....................
One-year CMT Index................
Six-Month London Interbank
Offered Rate....................
One-year CMT Index................
Six-Month London Interbank
Offered Rate....................
One-year CMT Index................
Six-Month London Interbank
Offered Rate....................
One-year CMT Index................
Six-Month London Interbank
Offered Rate....................
Six-Month London Interbank
Offered Rate....................
Six-Month London Interbank
Offered Rate....................
<CAPTION>
MAXIMUM MINIMUM
MORTGAGE MORTGAGE
INTEREST INTEREST
INDEX RATE RATE
----- -------- --------
<S> <C> <C>
One-year CMT Index................
Six-Month London Interbank
Offered Rate....................
One-year CMT Index................
Six-Month London Interbank
Offered Rate....................
Six-Month London Interbank
Offered Rate....................
Six-Month London Interbank
Offered Rate....................
One-year CMT Index................
Six-Month London Interbank
Offered Rate....................
One-year CMT Index................
Six-Month London Interbank
Offered Rate....................
One-year CMT Index................
Six-Month London Interbank
Offered Rate....................
One-year CMT Index................
Six-Month London Interbank
Offered Rate....................
One-year CMT Index................
Six-Month London Interbank
Offered Rate....................
One-year CMT Index................
Six-Month London Interbank
Offered Rate....................
One-year CMT Index................
Six-Month London Interbank
Offered Rate....................
Six-Month London Interbank
Offered Rate....................
Six-Month London Interbank
Offered Rate....................
</TABLE>
ADDITIONAL MORTGAGE LOANS
<TABLE>
<CAPTION>
REMAINING REMAINING MONTHS TO ORIGINAL PERIODIC
MORTGAGE AMORTIZATION TERM TO NEXT TERM TO RATE
PRINCIPAL INTEREST TERM MATURITY GROSS MORTGAGE MATURITY ADJUSTMENT
INDEX BALANCE RATE (MONTHS) (MONTHS) MARGIN RATE CHANGE (MONTHS) CAP
----- --------- -------- ------------ --------- ------ ----------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Six-Month London Interbank
Offered Rate....................
<CAPTION>
MAXIMUM MINIMUM
MORTGAGE MORTGAGE
INTEREST INTEREST
INDEX RATE RATE
----- -------- --------
<S> <C> <C>
Six-Month London Interbank
Offered Rate....................
</TABLE>
44
<PAGE> 146
"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
Bonds will be influenced by the rate at which principal payments on the Mortgage
Loans are made, which may be in the form of scheduled amortization or
prepayments (for this purpose, the term "prepayment" includes prepayments and
liquidations due to default). The weighted average life of the Bonds also will
be influenced by the overcollateralization of the Bonds because collections are
applied as principal prepayments to the Bonds until the outstanding Bond Balance
is less than the Aggregate Principal Balance of the Mortgage Loans by an amount
equal to the Required Coverage Amount. These prepayments have the effect of
accelerating the amortization of the Bonds, thereby shortening their respective
weighted average life.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. A common model (the "Constant Prepayment Rate" or
"CPR") represents an assumed annualized rate of prepayment relative to the then
outstanding principal balance on a pool of new mortgage loans. The prepayment
model used in this Prospectus Supplement assumes a fixed rate of CPR. CPR 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 Bond Issuer is not aware of any statistics
that provide a reliable basis for predicting the amount or the timing of receipt
of prepayments on the related mortgage loans.
The Prepayment Scenarios are defined as follows:
<TABLE>
<CAPTION>
SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V SCENARIO VI
------------ ------------- -------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Percentage of CPR...........
</TABLE>
WEIGHTED AVERAGE LIFE OF THE BONDS
<TABLE>
<CAPTION>
TO MATURITY TO POOL REDEMPTION DATE
---------------------------------- ----------------------------------
PREPAYMENT WEIGHTED AVERAGE EXPECTED FINAL WEIGHTED AVERAGE EXPECTED FINAL
SCENARIO LIFE (YEARS)(1) PAYMENT(1) LIFE (YEARS)(2) PAYMENT(2)
---------- ---------------- -------------- ---------------- --------------
<S> <C> <C> <C> <C>
I..........................
II.........................
III........................
IV.........................
V..........................
VI.........................
</TABLE>
- ---------------
(1) Assuming no early redemption.
(2) Assuming early redemption by the Servicer exercising its right to purchase
the Mortgage Loans on the Pool Redemption Date.
45
<PAGE> 147
ORIGINATION AND SERVICING OF THE MORTGAGE LOANS
THE ORIGINATORS
Approximately [ %] of the [Initial] Mortgage Loans (by [Initial] Pool
Balance) were originated by one or more Affiliated Originators. The remaining
[ %] of the [Initial] Mortgage Loans (by [Initial] Pool Balance) were
acquired by ACC, either directly or indirectly through one of the Affiliated
Originators, in arm's-length transactions from Unaffiliated Originators.
[Certain of the Additional 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 Additional Mortgage Loans)
that have been originated by Unaffiliated Originators will not be materially
different from the proportion of [Initial] Mortgage Loans originated by
Unaffiliated Originators. See The "Originators" in the Prospectus.]
UNDERWRITING OF MORTGAGE LOANS
Mortgage Loans originated by Affiliated Originators have been underwritten
in accordance with standard guidelines (the "Aames' Guidelines") developed by
AFC 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 the applicable Aames Guidelines. See "The
Originators -- Underwriting Guidelines" in the Prospectus.
SERVICING OF THE MORTGAGE LOANS
The Servicer will service the Mortgage Loans, either directly or through
Sub-Servicers, in accordance with the policies, procedures and practices
customarily employed by the Servicer in servicing other comparable mortgage
loans and pursuant to the provisions of the Servicing Agreement. Consistent with
the foregoing, the Servicer, in its discretion, may (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 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.
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 or prepayment of the Mortgage
Loans.
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 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 the economic value of such
mortgage or if the Servicer considers such action likely to result in legal
action by the mortgagor. Additionally, the Servicer may 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
46
<PAGE> 148
then current underwriting standards for mortgage loans similar to the Mortgage
Loans and the Servicer finds it appropriate, the mortgagor is released from
liability thereon. Any fees collected by the Servicer for entering into an
assumption or substitution of liability agreement will be retained by the
Servicer as additional servicing compensation. See "Certain Aspects of the
Mortgage Loans and Related Matters -- Enforceability of Due-on-Sale Clauses" in
the Prospectus.
The Servicer, acting as agent for the Indenture Trustee, 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 Mortgage Pool. If, notwithstanding
the foregoing, the placement of a lien or liens of equal or higher priority to
that of the lien securing the related Mortgage Loan is consented to by the
Servicer, the Servicing Agreement will require that the Servicer release such
Mortgage Loan at the applicable Release Price.
CUSTOMARY SERVICING PROCEDURES
The procedures of the Servicer with respect to day to day servicing of the
Mortgage Loans may vary considerably depending on the particular Mortgage Loan,
the Mortgaged Property, the Mortgagor, the presence of an acceptable party to
assume a Mortgage Loan and the laws of the jurisdiction in which the Mortgaged
Property is located. Generally, it is the current practice of the Servicer to
send borrowers a monthly billing statement ten days prior to the monthly payment
due date. Although borrowers generally make loan payments within ten to fifteen
days after the due date, if a borrower fails to pay the monthly payment within
such time period, the Servicer will commence collection efforts by notifying the
borrower of the delinquency. In case of Mortgage Loans Credit graded "C" or "D,"
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 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 (five
days after the initial due date for Mortgage Loans credit graded "C" or "D"), 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 Loans, including accepting a deed of trust
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 prior
to the time when a loan is 45-100 days delinquent, depending on credit grade.
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.
THE SERVICING AGREEMENT
The summaries of certain provisions of the Servicing Agreement set forth
below and in other places in this Prospectus Supplement, while complete in
material respects, do not purport to be exhaustive. For more details regarding
the terms of the Servicing Agreement, prospective investors in the Bonds are
advised to review the Servicing Agreement, a copy of which the Servicer will
provide (without exhibits) without charge upon written request addressed to:
Aames Capital Corporation, 350 South Grand Avenue, Los Angeles, California
90071.
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Generally, the Servicer, in its own name or in the name of any
Sub-Servicer, will be authorized and empowered pursuant to the 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 Indenture 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 Indenture Trustee.
Payments on Mortgage Loans and Establishment of Collection Account. The
Servicer shall establish and maintain one or more accounts 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") at one or more institutions into which all collections on or with
respect to the Mortgage Loans will be deposited from which all payments with
respect to the Bonds shall be made. The Collection Account, and all amounts
deposited therein from time to time, shall be part of the Trust Estate. 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 the Mortgage Loans. On the date in each month specified in
the Servicing Agreement, which date shall be no later than three business days
prior to the related Payment Date (the "Deposit Date"), funds to be paid in
respect of Bond Interest, Monthly Principal and any Excess Cash will be
transferred from the Collection Account to the Bond 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 applicable Cut-off Dates, fees, late payment charges,
prepayment charges, charges for checks returned for insufficient funds,
extension or other administrative charges or other amounts received for
application towards the payment of taxes, insurance premiums, assessments and
similar items) will not be required to be deposited into the Collection Account.
The Servicer may make withdrawals from the Collection Account only for the
following purposes: (a) to make deposits into the Bond Account as described
below; (b) to pay itself any monthly Servicing Fees to the extent permitted by
the Servicing Agreement; (c) to make any Servicing Advance or to reimburse
itself for any Servicing Advance or Monthly Advance previously made to the
extent permitted by the Servicing Agreement; (d) to withdraw amounts that have
been deposited to the Collection Account in error; and (e) to clear and
terminate the Collection Account.
Investment of Collection Account. All or a portion of the Collection
Account may be invested and reinvested in one or more Permitted Investments
bearing interest or sold at a discount. The Indenture Trustee or any affiliate
thereof may be the obligor on any investment in any Collection 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 Indenture Trustee will not in any way be held liable by reason of any
insufficiency in the Collection Account resulting from any loss on any Permitted
Investment included therein (except to the extent the Indenture Trustee is the
obligor thereon).
All income or other gain from investments in the Collection Account will be
held in the Collection Account for the benefit of the Servicer and will be
subject to withdrawal from time to time as permitted by the 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 will not
be offset by other income or gain from investments in the Collection Account and
then available for such application.
Monthly Advances. In order to maintain a regular flow of scheduled interest
to Bondholders (rather than to guarantee or insure against losses), the
Servicing Agreement will require that, not later than the close of business on
the Deposit Date prior to each Payment Date, the Servicer will remit or cause to
be remitted a Monthly Advance, if any, to the Indenture Trustee for deposit in
the Bond Account to be paid on the related Payment Date. A "Monthly Advance"
will be equal to the sum of (i) the interest portions of the aggregate amount of
monthly payments (net of the related Servicing Fee) due on the Mortgage Loans
during the related Collection Period (or, in the case of the first two
Collection Periods, the interest portions of such monthly
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payments that represent interest accrued from and including the applicable
Cut-off Dates) but delinquent as of the close of business on the last day of the
related Collection Period, (ii) interest on each Mortgage Loan that is not
delinquent as of the close of business on the last day of the related Collection
Period at the related Mortgage Interest Rate for the period from and including
the due date of the monthly payment in the related Collection Period to the end
of such Collection Period and (iii) with respect to each Mortgaged Property that
was acquired in foreclosure or similar action (each, an "REO Property") during
or prior to the related Collection Period and as to which final sale did not
occur during the related Collection Period, an amount equal to the excess, if
any, of interest on the Principal Balance of the Mortgage Loan relating to such
REO Property for the related Collection Period at the related Mortgage Interest
Rate (net of the Servicing Fee) over the net income from the REO Property
transferred to the Bond Account for such Payment Date.
The Servicing Agreement provides that the Servicer may pay all or a portion
of any Monthly Advance out of amounts on deposit in the Collection Account which
are being held for payment on a subsequent Payment Date relating to such
Collection Period; any such amounts so used are required to be replaced by the
Servicer by deposit to the Collection Account on or before the Deposit Date
relating to such subsequent Payment Date.
The Servicer may recover Monthly Advances, if not theretofore recovered
from the Mortgagor on whose behalf such Monthly Advance was made, from
subsequent collections on the related Mortgage Loan, 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 subsequent collections,
Insurance Proceeds, Liquidation Proceeds on the related Mortgage Loans or
otherwise ("Nonrecoverable Advances"), the Servicer may reimburse itself on the
first Payment Date thereafter.
The Servicer will not be required to make any Monthly Advance that it
determines would be a Nonrecoverable Advance.
Compensating Interest Payments. 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 Payment Date, the Servicer will be required with
respect to such Payment Date to remit to the Indenture Trustee, from amounts
otherwise payable to the Servicer as the Servicing Fee for the related
Collection Period, an amount equal to the excess, if any, of (a) 30 days'
interest on the Principal Balance of each such Mortgage Loan (immediately prior
to such payment) at the related Mortgage Interest Rate, net of the applicable
Servicing Fee, less (b) the amount of interest actually received on such
Mortgage Loan during such Collection Period (each such amount, a "Compensating
Interest Payment") for payment on the Bonds on such Payment 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.
Realization upon Defaulted Mortgage Loans. The Servicing Agreement will
require the Servicer to foreclose upon or otherwise comparably convert to
ownership in the name of the Servicer, on behalf of the Indenture Trustee,
Mortgaged Properties securing such of the Mortgage Loans as come into default,
as to which no satisfactory arrangements can be made for the collection of
delinquent payments and as to which the Servicer has not reacquired pursuant to
the option described below; 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 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 it own funds in connection with foreclosure or
other conversion, correction of a default on a senior deed of trust or
restoration of any Mortgaged Property unless the Servicer determines that such
foreclosure, correction or restoration will increase Net Liquidation Proceeds.
In servicing the Mortgage Loans, the Servicer will be required to
determine, with respect to each defaulted Mortgage Loan, when it has recovered,
whether through Indenture Trustee's sale, foreclosure sale or
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otherwise, all amounts, if any, it expects to recover from or on account of such
defaulted Mortgage Loan, whereupon such Mortgage Loan will be charged off and
will become a Liquidated Mortgage Loan.
The Servicer may have the right and the option under the Servicing
Agreement, but not the obligation, to reacquire for its own account any Mortgage
Loan which becomes delinquent, in whole or in part, as to three consecutive
monthly installments or any Mortgage Loan as to which enforcement proceedings
have been brought by the Servicer. Any such Mortgage Loan so reacquired will be
withdrawn from the Mortgage Pool on a Deposit Date at the Release Price thereof.
Enforcement of Due-on-Sale Clauses. In any case in which the Servicer
becomes aware that a Mortgaged Property has been or is about to be voluntarily
conveyed by the related Mortgagor, the Servicing Agreement will require the
Servicer to enforce the rights of the Indenture 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 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 (i) adversely
affect or jeopardize coverage under any related insurance policy, (ii) result in
legal action by the Mortgagor or (iii) materially increase the risk of default
or delinquency on, or materially decrease the security for, such Mortgage Loan.
In any such event, the Servicer may, [with the prior written consent of the
Financial Guaranty Insurer,] 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 related promissory note
and, to the extent permitted by applicable law or the mortgage documents, the
Mortgagor remains liable thereon. In addition, the Servicer may, [with the prior
written consent of the Financial Guaranty Insurer,] 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 Servicing Agreement will prohibit
the Servicer from entering into an assumption or substitution of liability
agreement unless permitted by applicable law and unless such assumption or
substitution of liability agreement would not materially increase the risk of
default or delinquency on, or materially decrease the security for, such
Mortgage Loan. 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.
Evidence as to Compliance. The Servicing Agreement provides that on or
before a specified date in each year, a firm of independent public accountants
will furnish a statement to the Indenture Trustee to the effect that on the
basis of certain procedures substantially in conformance with the Uniform Single
Attestation Program for Mortgage Bankers (to the extent the procedures are
applicable to the servicing obligations set forth in the 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 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 Servicing Agreement which, in the opinion of such firm, are
material, except for such exceptions as will be referred to in the report. The
Servicing Agreement will provide that the Servicer will be required to deliver
to the Indenture 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 Servicing Agreement throughout
the preceding year.
Certain Matters Regarding Servicer's Servicing Obligations. The Servicing
Agreement will provide that the Servicer may not resign from its obligations and
duties as the Servicer thereunder, except upon determination that its duties
thereunder are no longer permissible under applicable law or regulation or are
in material conflict by reason of applicable law or regulation with any other of
its activities carried on as of the date of the Servicing Agreement. No such
resignation will become effective until the Indenture Trustee or a successor
servicer approved by the Financial Guaranty Insurer has assumed the servicing
obligations and duties of the Servicer under the Servicing Agreement.
The Servicing Agreement will also provide that neither the Servicer, nor
any of its directors, officers, employees or agents, will be liable to the
Indenture Trustee, the Trust or the Bondholders for any action taken or for
refraining from the taking of any action by the Servicer pursuant to the
Servicing Agreement, or for errors in judgment; provided, however, that neither
the Servicer nor any such person will be protected against
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any liability which would otherwise be imposed by reason of willful misfeasance,
bad faith or negligence in the performance of duties of the Servicer, or by
reason of reckless disregard of obligations and duties of the Servicer,
thereunder.
In addition, the Servicing Agreement will provide that the Servicer will
not be under any obligation to appear in, prosecute or defend any legal action
which is not incidental to its duties to service the Mortgage Loans under the
Servicing Agreement and which in its opinion may involve it in any expense or
liability.
The 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 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 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.
Servicer Events of Default. Events of default (each, a "Servicer Event of
Default") under the Servicing Agreement will include (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 Bond Account any amount (other than an
amount representing a Monthly Advance) required to be so deposited under the
Servicing Agreement, which failure continues unremedied for one business day
after the giving of written notice of such failure to the Servicer by the
Indenture Trustee or the Financial Guaranty Insurer or to the Servicer, the
Financial Guaranty Insurer and the Indenture Trustee by Bondholders evidencing
Voting Interests represented by all Bonds aggregating not less than 51%; (c) the
payment of an Insured Amount by the Financial Guaranty Insurer on any Payment
Date; (d) any failure by the Servicer to duly observe or perform in any material
respect any other of its covenants or agreements in the Servicing Agreement
which materially and adversely affects the rights of Bondholders and continues
unremedied for 30 days after the giving of written notice of such failure to the
Servicer by the Indenture Trustee or the Financial Guaranty Insurer or the
Bondholders evidencing Voting Interests represented by all Bonds aggregating not
less than 51%; (e) 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; and (f) the occurrence of delinquencies and/or
losses in respect of the Mortgage Loans in excess of a level, and for a period
of time, as specified in the Servicing Agreement.
Rights Upon Servicer Events of Default. Upon the occurrence of a Servicer
Event of Default, [the Financial Guaranty Insurer or, with the consent of the
Financial Guaranty Insurer,] Bondholders evidencing Voting Interests represented
by all Bonds aggregating not less than 51% or the Indenture Trustee may
terminate all of the rights and obligations of the Servicer under the Servicing
Agreement, whereupon the Indenture Trustee will succeed to all the
responsibilities, duties and liabilities of the Servicer under the Servicing
Agreement and will be entitled to such compensation as the Servicer would have
been entitled to under the Servicing Agreement. In the event that the Indenture
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 Servicing Agreement, provided that
the appointment of any such successor Servicer (other than the Indenture
Trustee) shall be [acceptable to the Financial Guaranty Insurer and] will not
result in the qualification, reduction or withdrawal of the rating assigned to
the Bonds by the Rating Agencies. Pending appointment of a successor Servicer,
unless the Indenture Trustee is prohibited by law from so acting, the Indenture
Trustee shall be obligated to act as Servicer. The Indenture 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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No Bondholder, solely by virtue of its status as a Bondholder, will have
any right under the Servicing Agreement to institute any action, suit or
proceeding with respect to the Servicing Agreement unless the Financial Guaranty
Insurer shall have consented thereto, unless such Bondholder previously has
given to the Indenture Trustee written notice of default and unless Bondholders
evidencing Voting Interests represented by all Bonds aggregating not less than
51% have made written request upon the Indenture Trustee to institute such
action, suit or proceeding in its own name as Indenture Trustee thereunder and
have offered to the Indenture Trustee reasonable indemnity for costs, expenses
and liabilities to be incurred, and the Indenture Trustee for 60 days has
neglected or refused to institute any such action, suit or proceeding. However,
the Indenture Trustee will be under no obligation to exercise any of the rights
or powers vested in it by the 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 Bondholders, unless such Bondholders have offered to the
Indenture Trustee reasonable security or indemnity against the costs, expenses
and liabilities which may be incurred therein or thereby.
Amendments. At any time and from time to time, without the consent of the
Bondholders, the Indenture Trustee, the Bond Issuer and the Servicer may amend
the 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 or (b) complying with
the requirements of the Code; provided, however, that such action shall not, as
evidenced by an opinion of counsel delivered to the Indenture Trustee,
materially and adversely affect the interests of any Bondholder.
The Servicing Agreement may also be amended by the Indenture Trustee, the
Bond Issuer and the Servicer, at any time and from time to time, with the prior
written approval of the Financial Guaranty Insurer and not less than a majority
of the Voting Interests represented by the Bonds 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
Bondholders thereunder; provided, however, that no such amendment shall (a)
reduce in any manner the amount of, or delay the timing of, payments which are
required to be paid to the Bond Account without the consent of all Bondholders
or (b) reduce the aforesaid percentages of Voting Interests which are required
to consent to any such amendments, without the consent of the Bondholders
affected.
The Indenture Trustee will be required to furnish a copy of any such
amendment to each Bondholder in the manner set forth in the Servicing Agreement.
SUB-SERVICERS
As permitted under the Servicing Agreement, the Servicer will enter into
sub-servicing arrangements with other mortgage servicing institutions, which may
include affiliates of the Servicer and the Bond Issuer, meeting the requirements
of the Servicing Agreement (each, a "Sub-Servicer") to [Initial]ly 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 Servicing Agreement, but will not relieve the Servicer of
any liability associated with servicing the Mortgage Loans.
Compensation for the services of the Sub-Servicer will be paid by the
Servicer as a general corporate obligation of the Servicer. 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 that the Servicer would otherwise be entitled to collect or
retain as servicing compensation under the Servicing Agreement. In addition, 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 Servicing Agreement. See "-- Servicing and Other
Compensation; Payment of Expenses" below.
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
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corresponding Mortgaged Property. Hazard insurance policies generally insure
against loss by fire and by hazards included within the term "extended coverage"
for the term of the corresponding Mortgage Loan. Upon acquisition by the Sponsor
of each Mortgage Loan, the Sponsor will have confirmed the existence of such
hazard insurance and required that it be named as a joint loss-payee on the
policy. In the event that the mortgagor did not obtain such hazard insurance
prior to the close of escrow, the Originator obtains a hazard insurance policy
on behalf of the borrower and deducts the cost of such policy from the net funds
paid to the borrower. However, if the mortgagor obtains the necessary insurance
within 30 days from the close of escrow, the Originator will refund a prorated
portion of the cost of such Originator-obtained insurance to the mortgagor. Such
Originator-obtained insurance insures only against loss by fire.
When a Mortgage Loan that is originated in California is secured by a
second or third priority deed of trust on the related Mortgaged Property, the
Originator will generally attempt to obtain, on the mortgagor's behalf, a policy
of contingent dual insurance (a "CDI Policy") which insures the Mortgaged
Property against loss by fire in an amount equal to the original principal
amount of the Mortgage Loan, naming the Originator as joint loss-payee. Any
transfer of the related Mortgage Loan will include an assignment of the benefits
of such CDI Policy. The entire premium for such CDI Policy is deducted from the
net funds paid to the mortgagor. In the event that the principal amount of such
Mortgage Loan exceeds $100,000, the mortgagor must provide additional hazard
insurance to cover such amounts in excess thereof. In the event that the
mortgagor declines to obtain a CDI Policy, he may provide an endorsement of an
existing hazard insurance policy or obtain new hazard insurance protecting the
full amount of the Mortgage Loan. In addition, if a CDI Policy is obtained on
behalf of a mortgagor who shows proof of the necessary insurance within 30 days
after the close of escrow, the Originator will refund the cost of such CDI
Policy to the mortgagor. CDI Policies are generally not obtained with respect to
loans secured by Mortgaged Properties located outside of California.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements on the property by hazards
such as fire, lightning, explosion and smoke. Other hazards may be covered if
specified in the policy. Although the policies are underwritten by different
insurers and therefore do not contain identical terms and conditions, generally
such policies do not cover physical damage resulting from the following: war,
revolution, governmental actions, floods and other water-related causes, earth
movement (including earthquakes, landslides and mudflows), nuclear reactions,
pollution, wet or dry rot, vermin, rodents, insects or domestic animals, theft
and, in certain cases, vandalism. The foregoing list is merely indicative of
certain kinds of uninsured risks and is not intended to be all-inclusive. The
existence of a hazard insurance policy is verified upon origination of any
Mortgage Loan meeting the criteria set forth above and the Servicer will
maintain a record and monitor scheduled expirations of the related coverage,
except with respect to policies that have no stated scheduled expiration. In the
event the Servicer is made aware of any such expiration or cancellation, the
Servicer will generally force-place hazard insurance covering loss by fire in an
amount necessary to protect the Principal Balance of the related Mortgage Loan.
If the Mortgaged Property securing a Mortgage Loan is located in a federally
designated special flood area, the Servicer will require the mortgagor to obtain
and maintain flood insurance.
The Servicer will be required under the Servicing Agreement to maintain on
property acquired in foreclosure, or by deed in lieu of foreclosure, hazard
insurance with extended coverage in an amount which is at least equal to the
lesser of (a) the maximum insurable value of the improvements which are a part
of the Mortgaged Property or (b) the combined Principal Balance of such Mortgage
Loan and the principal balance of each senior mortgage loan plus accrued
interest and estimated liquidation expenses. The 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. If such blanket policy contains a deductible
clause, the Servicer will deposit in the Collection Account in respect of the
related Distribution Date amounts which would have been deposited therein but
for such clause. Generally, the Servicer will maintain no other policies of
insurance on the Mortgage Loans or the Mortgaged Properties.
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SERVICING AND OTHER COMPENSATION; PAYMENT OF EXPENSES
The Servicing Fee will be the primary compensation to be paid to the
Servicer in respect of its servicing activities under the Servicing Agreement
and will be paid to the Servicer on each Deposit Date out of collections of
interest received on or in respect of the Mortgage Loans for the related
Collection Period. The Servicing Fee will equal one-twelfth (1/12) of the
product of (a) the applicable Servicing Fee Rate and (b) the Aggregate Principal
Balance of the Mortgage Loans at the beginning of such Collection Period. The
"Servicing Fee Rate" will be 0.50% for each Collection Period. In addition, the
Servicer will retain the benefit, if any, from any investment of funds in the
Collection Account and the Bond Account. Assumption fees, late payment charges,
prepayment charges, charges for checks returned for insufficient funds, and
extension and other administrative charges, to the extent collected from
Mortgagors, will be retained by the Servicer as additional servicing
compensation.
The Servicer will 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 payment of fees for the
Sub-Servicer and 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 delinquent property taxes and upkeep and maintenance of the Mortgaged
Property if it is acquired through foreclosure and similar types of expenses.
The Servicing Agreement provides that the Servicer may pay all or a portion
of any Servicing Advance out of amounts on deposit in the Collection Account
which are being held for payment on a subsequent Payment Date relating to such
Collection Period; any such amounts so used are required to be replaced by the
Servicer by deposit to the Collection Account on or before the Deposit Date
relating to such subsequent Payment Date.
The Servicer may recover Servicing Advances, if not theretofore recovered
from the Mortgagor on whose behalf such Servicing Advance was made, from
subsequent collections on the related Mortgage Loan, 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
Servicing Advance will be a Nonrecoverable Advance, the Servicer may reimburse
itself on the first Payment Date thereafter.
The Servicer will not be required to make any Servicing Advance that it
determines would be a Nonrecoverable Advance.
SERVICER'S MORTGAGE LOAN DELINQUENCY AND FORECLOSURE EXPERIENCE
Certain information concerning the delinquency and foreclosure experience,
for the three year period ended [ ], with respect to home equity
mortgage loans serviced by the Servicer, including home equity loans pooled and
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 or purchased by the Servicer or Affiliated
Originators and included in the servicing portfolio of the Servicer of its
affiliates for the periods indicated.
The following table sets forth the Servicer's delinquency and foreclosure
experience with respect to home equity mortgage loans originated or purchased by
the Servicer or Affiliated Originators and included in the servicing portfolio
of the Servicer of its affiliates for the six months ended [ ], except
that the
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information with respect to losses on foreclosed loans does not include any
mortgage loans not sold by the Servicer in connection with a securitization even
if serviced and foreclosed upon during the indicated period.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
[ ]
--------------
<S> <C>
Percentage of dollar amount of delinquent loans to loans
serviced (period end)(1)(2)...............................
One month.................................................
Two months................................................
Three or more months:
Not foreclosed(3)......................................
Foreclosed(4)..........................................
Total.............................................
Percentage of dollar amount of loans foreclosed to loans
serviced (period end)(2)..................................
Number of loans foreclosed..................................
Principal amount at time of foreclosure of foreclosed loans
(in thousands)............................................
Losses on foreclosed loans included in pools of loans
securitized (in thousands)................................
</TABLE>
- ---------------
(1) Delinquent loans are loans for which more than one payment is due.
(2) The delinquency and foreclosure percentages are calculated on the basis of
the total dollar amount of mortgage loans originated or purchased by ACC
and, in each case, serviced by the Servicer, or the Servicer and any
subservicers, as applicable, as of the end of the periods indicated.
(3) Represents loans which are in foreclosure but as to which foreclosure
proceedings have not concluded.
(4) Represents properties acquired following a foreclosure sale and still
serviced by the Servicer at period end.
There is no assurance that the delinquency, foreclosure and loss experience
with respect to any of the Mortgage Loans will be comparable to the experience
reflected above or in the Prospectus. Because certain Mortgage Loans may have
been underwritten pursuant to standards that rely primarily on the value of the
related Mortgaged Properties rather than the creditworthiness of the related
Mortgagor, the actual rates of delinquencies, foreclosures and losses on such
Mortgage Loans could be higher than those historically experienced in the
mortgage lending industry in general, particularly in periods during which the
values of the related Mortgaged Properties decline. In addition, the rate of
delinquencies, foreclosures and losses with respect to the Mortgage Loans will
also be affected by, among other things, interest rate fluctuations and general
and regional economic conditions. See "Risk Factors -- Nature of the Security
for Mortgage Loans" and "The Originators -- Underwriting Guidelines" in the
Prospectus.
[THE FINANCIAL GUARANTY INSURANCE POLICY AND
THE FINANCIAL GUARANTY INSURER]
[THE FINANCIAL GUARANTY INSURER
The information set forth in this section has been provided by Financial
Security Assurance Inc. (the "Financial Guaranty Insurer"). No representation is
made by the Bond Issuer or any of its affiliates as to the accuracy or
completeness of any such information.
The Financial Guaranty Insurer is a monoline insurance company incorporated
in [ ] under the laws of the [ ]. [The Financial Guaranty
Insurer is licensed to engage in financial guaranty insurance business in all 50
states, the District of Columbia and Puerto Rico.]
55
<PAGE> 157
The Financial Guaranty 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
Financial Guaranty 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 Financial Guaranty Insurer insures both newly issued
securities sold in the primary market and outstanding securities sold in the
secondary market that satisfy the Financial Guaranty Insurer's underwriting
criteria.
The Financial Guaranty Insurer is a wholly owned subsidiary of
[ ]. No shareholder of Holdings is obligated to pay any debt of the
Financial Guaranty Insurer or any claim under any insurance policy issued by the
Financial Guaranty Insurer or to make any additional contribution to the capital
of the Financial Guaranty Insurer.
The principal executive offices of the Financial Guaranty Insurer are
located at [ ], and its telephone number at that location is
[ ].
Reinsurance. Pursuant to an intercompany agreement, liabilities on
financial guaranty insurance written or reinsured from third parties by the
Financial Guaranty Insurer or any of its domestic operating insurance company
subsidiaries are 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 Financial
Guaranty 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 Financial Guaranty Insurer as a risk management device and to
comply with certain statutory and rating agency requirements; it does not alter
or limit the Financial Guaranty Insurer's obligations under any financial
guaranty insurance policy.
Ratings of Claims-Paying Ability. The Financial Guaranty Insurer's
claims-paying ability is rated "Aaa" by Moody's and "AAA" by S&P, Nippon
Investors Service Inc. and Standard & Poor's (Australia) Pty. Ltd. 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.
Capitalization. The following tables sets forth the capitalization of the
Financial Guaranty Insurer and its wholly owned subsidiaries on the basis of
generally accepted accounting principles as of [ ](in thousands):
<TABLE>
<CAPTION>
[ ]
--------------
(UNAUDITED)
<S> <C>
Deferred Premium Revenue (net of prepaid reinsurance
premiums)................................................. $
Shareholder's Equity:
Common Stock...........................................
Additional Paid-In Capital.............................
Unrealized Gain on Investments (net of deferred income
taxes)...............................................
Accumulated Earnings...................................
Total Shareholder's Equity..................................
Total Deferred Premium Revenue Equity and Shareholder's..... $
==========
</TABLE>
For further information concerning the Financial Guaranty Insurer, see the
consolidated financial statements of the Financial Guaranty Insurer and its
subsidiaries, and the notes thereto, incorporated by reference herein. Copies of
the statutory quarterly and annual statements filed with the State of New York
56
<PAGE> 158
Insurance Department by the Financial Guaranty Insurer are available upon
request to the State of New York Insurance Department.
Incorporation of Certain Documents by Reference. The consolidated financial
statements of the Financial Guaranty Insurer and Subsidiaries for the year ended
[ ], included as an exhibit to the Annual Report on Form 10-K for the
year ended [ ], and the unaudited financial statements of the Financial
Guaranty Insurer and its subsidiaries for the quarterly periods ended
[ ], [ ] and [ ], included as an exhibit to the
Quarterly Report on Form 10-Q for the periods ended [ ], [ ]
and [ ], respectively, each of which has been filed with the Commission
by Holdings, are hereby incorporated by reference in this Prospectus Supplement.
All financial statements of the Financial Guaranty Insurer and Subsidiaries
included in documents filed by Holdings pursuant to Section 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934, as amended, subsequent to the date
of this Prospectus Supplement and prior to the termination of the offering of
the Bonds shall be deemed to be incorporated by reference into this Prospectus
Supplement and to be a part hereof from the respective dates of filing of such
documents.
Such consolidated financial statements of the Financial Guaranty Insurer
and its subsidiaries have been prepared on the basis of generally accepted
accounting principles. The New York State Insurance Department recognizes only
statutory accounting practices for determining and reporting the financial
conditions and results of operations of an insurance company, for determining
solvency under the New York Insurance Law, and for determining whether its
financial condition warrants the payment of a dividend to its stockholders. No
consideration is given by the New York State Insurance Department to financial
statements prepared in accordance with generally accepted principles in making
such determinations.
Insurance Regulation. The Financial Guaranty 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 Financial
Guaranty 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 Financial Guaranty 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 ("single risks")
and the volume of transactions ("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 Financial Guaranty Insurer, regulate,
among other things, permitted investments, payment of dividends, transactions
with affiliates, mergers, consolidations, acquisitions or sales of assets and
incurrence of liabilities for borrowings.
THE FINANCIAL GUARANTY INSURANCE POLICY
The Bond Issuer will obtain the Financial Guaranty Insurance Policy, issued
by the Financial Guaranty Insurer, in favor of the Bondholders. Under the
Financial Guaranty Insurance Policy, the Financial Guaranty Insurer shall
unconditionally and irrevocably guaranty to the Indenture Trustee for the
benefit of each Bondholder the full and complete payment of Bond Interest and
any Coverage Deficit for the related Payment Date. The Financial Guaranty
Insurance Policy does not insure final payment of the Bonds on any specific
Payment Date.
The Financial Guaranty Insurer is required to pay Insured Amounts to the
Indenture Trustee as paying agent following Receipt by the Financial Guaranty
Insurer of the appropriate notice 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 related
Payment Date.
If payment of any amount avoided as a preference under applicable
bankruptcy, insolvency, receivership or similar law is required to be made under
the Financial Guaranty Insurance Policy, the Financial Guaranty Insurer shall
cause such payment to be made on the latter 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
57
<PAGE> 159
Financial Guaranty Insurer from the Indenture Trustee of (A) a certified copy of
the order (the "Order") of the court or other governmental body that exercised
jurisdiction to the effect that the relevant Bondholders are required to return
principal or interest paid with respect to such Bonds during the term of the
Financial Guaranty Insurance Policy because such payments were avoidable as
preference payments under applicable bankruptcy law, (B) a certificate of each
relevant Bondholder that the Order has been entered and is not subject to any
stay and (C) an assignment duly executed and delivered by each relevant
Bondholder, in such form as is reasonably required by the Financial Guaranty
Insurer and provided to the relevant Bondholder by the Financial Guaranty
Insurer, irrevocably assigning to the Financial Guaranty Insurer all rights and
claims of the Bondholder relating to or arising under the relevant Bonds held by
such Bondholder against the debtor that made such preference payment or
otherwise with respect to such preference payment or (ii) the date of Receipt by
the Financial Guaranty Insurer from the Indenture Trustee of the items referred
to in clauses (A), (B) and (C) of (i) above if, at least four business days
prior to such date of Receipt, the Financial Guaranty Insurer shall have
Received written notice from the Indenture 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 Indenture Trustee or any
Bondholder directly (unless such Bondholder has previously paid such amount to
the receiver, conservator, debtor-in-possession or Indenture Trustee in
bankruptcy named in the Order in which such case payment shall be disbursed to
the Indenture Trustee for payment to such Bondholder upon proof of such payment
reasonably satisfactory to the Financial Guaranty Insurer). In connection with
the foregoing, the Financial Guaranty Insurer shall have certain rights of
subrogation, as described in the Indenture.
The terms "Receipt" and "Received," with respect to the Financial Guaranty
Insurance Policy, mean actual delivery to the Financial Guaranty Insurer and to
the Financial Guaranty Insurer's fiscal agent, if any, prior to 12:00 noon, New
York City time, on a business day; delivery either on a day that is not a
business day or after 12:00 noon, New York City time, shall be deemed to be
Received on the next succeeding business day. If any notice or certificate given
under the Financial Guaranty Insurance Policy by the Indenture 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 Financial Guaranty Insurer or its
fiscal agent shall promptly so advise the Indenture Trustee and the Indenture
Trustee may submit an amended notice.
Under the Financial Guaranty Insurance Policy, "business day" means any day
other than (i) a Saturday or Sunday or (ii) a day on which banking institutions
in the City of New York, New York are authorized or obligated by law or
executive order to be closed.
The Financial Guaranty Insurer may effect a redemption of the Bonds by
exercising its right to purchase all of the Mortgage Loans from the Indenture
Trustee if Mortgage Loans with aggregate original Principal Balances that equal
or exceed 25% of the sum of the [Initial] Pool Balance and the Prefunding
Account Deposit have become Liquidated Mortgage Loans. See "Description of the
Bonds -- Redemption of the Bonds" herein.
The Financial Guaranty Insurance Policy is non-cancelable.
THE FINANCIAL GUARANTY INSURANCE POLICY IS NOT COVERED BY THE
PROPERTY/CASUALTY INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW
YORK INSURANCE LAW.
The Financial Guaranty Insurer's obligation under the Financial Guaranty
Insurance Policy will be discharged to the extent that funds are disbursed by
the Financial Guaranty Insurer in accordance with the Financial Guaranty
Insurance Policy, whether or not such funds are properly paid by the Indenture
Trustee.
The Financial Guaranty Insurance Policy does not guarantee to the
Bondholders any specific rate of prepayments of principal of the Mortgage Loans.
Payments of principal on the Bonds are covered only to the extent of any
Coverage Deficit on a Payment Date, but such coverage will result in ultimate
collection of the Bond Balance.
Pursuant to the terms of the Indenture and the Servicing Agreement and
notwithstanding anything to the contrary herein, unless a default by the
Financial Guaranty Insurer exists, the Financial Guaranty Insurer shall
58
<PAGE> 160
be deemed to be the Bondholders for all purposes (other than with respect to
payment on the Bonds), will be entitled to exercise all rights of the
Bondholders thereunder, without the consent of such Bondholders, and the
Bondholders may exercise such rights only with the prior written consent of the
Financial Guaranty Insurer. In addition, the Financial Guaranty Insurer will, as
a third party beneficiary to the Servicing Agreement, have among others, the
following rights: (i) the right to give notices of breach or to terminate the
rights and obligations of the Servicer under the Servicing Agreement in the
event of a Servicer Event of Default; (ii) the right to direct the actions of
the Indenture Trustee during the continuation of a Servicer Event of Default;
(iii) the right to require the Bond Issuer to remove Mortgage Loans for breach
of representation and warranty or defect in documentation; and (iv) the right to
direct foreclosures upon the failure of the Servicer to do so in accordance with
the Servicing Agreement. The Financial Guaranty Insurer's consent (which consent
will not be unreasonably withheld) will be required prior to, among other
things, (i) the appointment of any successor Indenture Trustee or Servicer or
(ii) any amendment to the Indenture or the Servicing Agreement.
CREDIT ENHANCEMENT DOES NOT APPLY TO PREPAYMENT RISK
In general, the protection afforded by the Financial Guaranty Insurance
Policy is protection for credit risk and not for prepayment risk. A claim may
not be made under the Financial Guaranty Insurance Policy, in an attempt to
guarantee or insure that any particular rate of prepayment is experienced by the
Trust.
59
<PAGE> 161
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
No election will be made to treat the Trust Estate or any portion thereof
as a REMIC for federal income tax purposes.
The Bonds will be treated as newly originated debt instruments for federal
income tax purposes. It is anticipated that the Bonds will be issued without
original issue discount for federal income tax purposes. However, it is possible
that the Internal Revenue Service could treat a portion of the additional
interest which would become payable on the Bonds after the Pool Redemption Date
as original issue discount. Bondholders are urged to consult their tax advisors
with respect to the tax consequences of holding the Bonds.
The Prepayment Assumption that is to be used in determining whether the
Bonds are issued with original issue discount and the rate of accrual of
original issue discount is a CPR of [ ]%. No representation is made as to
the actual rate at which the Mortgage Loans will prepay. See "Certain Federal
Income Tax Consequences -- Taxation of Bonds" in the Prospectus.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and the Code impose certain requirements on employee benefit plans and certain
other retirement plans and arrangements, as well as on collective investment
funds and separate accounts in which such plans or arrangements are invested
(all of which are hereinafter referred to as a "Plan") and on persons who are
fiduciaries with respect to such Plans. Any Plan fiduciary that proposes to
cause a Plan to acquire any of the Bonds 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 Bonds should also
consider whether such an investment might constitute or give rise to a
prohibited transaction under ERISA or the Code. Any Plan fiduciary which
proposes to cause a Plan to acquire any of the Bonds should consult with its
counsel with respect to the potential consequences under ERISA and the Code of
the Plan's acquisition and ownership of the Bonds.
PLAN ASSET REGULATIONS
A Plan's investment in the Securities may cause the Mortgage Loans included
in a Mortgage Pool to be deemed Plan assets. The U.S. Department of Labor (the
"DOL") has promulgated regulations (the "DOL Regulations") describing whether or
not a Plan's assets will be deemed to include an interest in the underlying
assets of an entity (such as a Trust), for purposes of applying the general
fiduciary responsibility provisions of ERISA and the prohibited transaction
provisions of ERISA and the Code, when a Plan acquires an "equity interest"
(such as a Certificate) in such entity. Because of the factual nature of certain
of the rules set forth in the DOL Regulations, an investing Plan's assets either
may be deemed to include an interest in the underlying assets included in a
Trust or Trust Estate, as applicable, or a Transferor (or a Bond Issuer, if
applicable) or may be deemed merely to include its interest in the Securities.
Bonds treated as indebtedness under applicable local law and that have no
substantial equity features do not constitute equity interests.
The prohibited transaction provisions of Section 406 of ERISA and Section
4975 of the Code may apply to a Trust or a Transferor (or a Bond Issuer, if
applicable) and cause the related Transferor (or a Bond Issuer, if applicable),
the Servicer, any Sub-Servicer, the Trustee, the obligor under any credit
enhancement mechanism or certain affiliates thereof, to be considered or become
Parties in Interest or Disqualified Persons with respect to an investing Plan.
If so, the acquisition or holding of Securities by or on behalf of the investing
Plan could also give rise to a prohibited transaction under ERISA and the Code,
unless some statutory or administrative exemption is available. Securities
acquired by a Plan would be assets of that Plan. Special caution should be
exercised before the assets of a Plan are used to acquire a Security in such
circumstances, especially if, with respect to such assets, the related
Transferor (or a Bond Issuer, if applicable), the Servicer,
60
<PAGE> 162
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.
USE OF PROCEEDS
The Bond Issuer intends to use the net proceeds to be received from the
sale of the Bonds to acquire the [Initial] Mortgage Loans from the Transferor,
[to fund the Prefunding Account and the Capitalized Interest Account] and to pay
other expenses associated with the pooling of the Mortgage Loans and the
issuance of the Bonds.
LEGAL INVESTMENT CONSIDERATIONS
The Bonds will not constitute "mortgage related securities" for purposes of
SMMEA. Accordingly, many institutions with legal authority to invest in
comparably rated securities may not be legally authorized to invest in the
Bonds. No representation is made herein as to whether the Bonds 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 Bonds as legal investments for such purchasers
prior to investing in the Bonds.
UNDERWRITING
Under the terms set forth in the Underwriting Agreement and the related
Pricing Agreement for the sale of the Bonds, dated [ ] (collectively,
the "Underwriting Agreement"), the Transferor has agreed to cause the Bond
Issuer to sell, and the Underwriters have severally agreed to purchase, the
respective principal amount of Bonds set forth opposite their respective names.
In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase the entire principal amount
of the Bonds.
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
UNDERWRITER OF BONDS
----------- ----------------
<S> <C>
.............................................. $
.............................................. $
.............................................. $
.............................................. $
---------
Total............................................. $ []
=========
</TABLE>
The Underwriters have informed the Transferor that they propose to offer
the Bonds for sale from time to time in one or more negotiated transactions, or
otherwise, at varying prices to be determined, in each case, at the time of the
related sale. The Underwriters may effect such transactions by selling the Bonds
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 Bonds, the Underwriters may be
61
<PAGE> 163
deemed to have received compensation from the Transferor in the form of
underwriting compensation. The Underwriters and any dealers that participate
with the Underwriters in the distribution of the Bonds may be deemed to be
underwriters and any commissions received by them and any profit on the resale
of the Bonds by them may be deemed to be underwriting discounts and commissions
under the Securities Act of 1933, as amended (the "Securities Act").
The Transferor has agreed to indemnify the Underwriters against certain
liabilities including liabilities under the Securities Act.
The Transferor has been advised by the Underwriters that the Underwriters
intend to make a market in the Bonds, as permitted by applicable laws and
regulations. The Underwriters are not obligated, however, to make a market in
the Bonds and such market-making may be discontinued at any time at the sole
discretion of the Underwriters. Accordingly, no assurance can be given as to the
liquidity of, or trading markets for, the Bonds.
The Underwriters have represented that: (i) they have not offered or sold
and will not offer or sell, prior to the date six months after their date of
issuance, any Bonds to persons in the United Kingdom, except to persons whose
activities involve them in acquiring, holding, managing or disposing of
investments (as principal or agent) for the purposes of their businesses or
otherwise in circumstances which have not resulted in and will not result in an
offer to the public in the United Kingdom within the meaning of the Public
Offers of Securities Regulations 1995; (ii) they have 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 Bonds in, from or otherwise involving
the United Kingdom; and (iii) they have 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 Bonds to a person who is of a kind described in Article
11(3) of the Financial Services Act 1986 (Investment Advertisements)
(Exemptions) Order 1997 or is a person to whom the document can lawfully be
issued or passed on.
REPORT OF EXPERTS
[The consolidated balance sheets of the Financial Guaranty Insurer and
Subsidiaries as of [ , ] and [ , ] and
the related consolidated statements of income, changes in shareholder's equity
and cash flows for each of the three years in the period ended [
, ], incorporated by reference in this Prospectus Supplement, have been
incorporated herein in reliance on the report of Coopers & Lybrand L.L.P.,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
LEGAL MATTERS
Certain legal matters with respect to the Bonds will be passed upon for the
Bond Issuer by O'Melveny & Myers LLP, Washington, D.C. Stroock & Stroock & Lavan
LLP will act as counsel for the Underwriters. [Certain legal matters relating to
the Financial Guaranty Insurer and the Financial Guaranty Insurance Policy will
be passed upon by inside counsel to the Financial Guaranty Insurer.]
RATING OF THE BONDS
It is a condition to the issuance of the Bonds that each shall be rated
"Aaa" by Moody's and "AAA" by S&P.
Explanations of the significance of such ratings may be obtained from
Moody's, 99 Church Street, New York, New York 10007, and S&P, 25 Broadway, New
York, New York 10004. Each rating will be the view only of the assigning Rating
Agency.
[The ratings on the Bonds are based in substantial part on the
claims-paying ability of the Financial Guaranty Insurer. Any change in the
ratings of the Financial Guaranty Insurer by the Rating Agencies may result in a
change in the ratings of the Bonds.]
62
<PAGE> 164
There is no assurance that any rating assigned to the Bonds 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 Bonds.
The ratings of the Bonds 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 Bonds, or, if one does, what rating will be assigned by such other rating
agency. A rating on the Bonds by another rating agency, if assigned at all, may
be lower than the ratings assigned to the Bonds by Moody's or S&P.
63
<PAGE> 165
INDEX OF PRINCIPAL TERMS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Aames' Guidelines........................S-43
ACC...................................ii, S-3
Additional Mortgage Loans.............ii, S-4
Adjustable Rate Cap.................S-6, S-26
AFC...................................ii, S-3
Affiliated Originators...................S-11
Aggregate Principal Balance..............S-11
Aggregate Risks..........................S-52
Available Funds.....................S-5, S-28
Bond Account.............................S-29
Bond Balance........................S-6, S-26
Bond Interest.......................S-6, S-25
Bond Interest Rate..................S-6, S-26
Bond Issuer........................cover, S-3
Bond Owner................................S-4
Bondholder..........................S-5, S-20
Bonds..............................cover, S-3
Book-Entry Bonds.........................S-20
Bulk Purchase Mortgage Loans..............S-4
Business day..............................S-5
Capitalized Interest Account..............S-9
Cedel.....................................S-4
Cedel Participants.......................S-21
Citibank.................................S-20
Closing Date..............................S-4
Code.....................................S-12
Collection Account.......................S-44
Collection Period.........................S-5
Commission................................S-1
Compensating Interest Payment......S-10, S-46
Constant Prepayment Rate.................S-42
Cooperative..............................S-21
Coverage Amount.....................S-7, S-31
Coverage Deficit....................S-8, S-32
Coverage Surplus....................S-8, S-32
CPR......................................S-42
Cut-off Dates.............................S-3
Defective Mortgage Loan..................S-24
Definitive Bond...........................S-4
Deposit Date.............................S-44
Determination Date.......................S-27
Disqualified Persons.....................S-55
DTC..................................S-1, S-4
ERISA..............................S-12, S-55
Euroclear.................................S-4
Euroclear Operator.......................S-21
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Euroclear Participants...................S-21
European Depositaries....................S-20
Excess Cash.........................S-7, S-31
Federal Reserve Board....................S-22
Final Maturity Date...................ii, S-9
Financial Guaranty Insurance Policy.......S-4
Financial Guaranty Insurer..........S-4, S-51
Financial Guaranty Insurer Premium......S-10,
S-34
Financial Intermediary...................S-20
Funding Period............................S-9
Holdings.................................S-51
Indenture..........................cover, S-4
Indenture Trustee..................cover, S-3
[Initial] Cut-off Date Pool Balance.......S-7
[Initial] Mortgage Loans..............ii, S-4
[Initial] Pool Balance............cover, S-11
Insolvency Event.........................S-18
Insolvency Laws..........................S-18
Insurance Proceeds.......................S-28
Insured Amount...........................S-33
Insurer Premium Rate...............S-10, S-34
Interest Period...........................S-6
LIBOR....................................S-26
LIBOR Determination Date.................S-26
Liquidated Mortgage Loan.................S-28
Liquidation Proceeds.....................S-28
Loan-to-Value Ratios.....................S-37
Maximum Rates............................S-37
Minimum Rates............................S-37
Monthly Advance....................S-10, S-45
Monthly Principal...................S-7, S-27
Moody's..................................S-12
Morgan...................................S-20
Mortgage Files...........................S-24
Mortgage Interest Rates..................S-37
Mortgage Loan Schedule...................S-23
Mortgage Loans..........................cover
Mortgage Note.............................S-4
Mortgage Pool......................cover, S-4
Mortgaged Properties......................S-4
Net Liquidation Proceeds.................S-28
Nonrecoverable Advances..................S-45
One-year CMT index.......................S-13
Order....................................S-53
Original Bond Balance.....................S-3
Original Mortgage Loans...................S-3
</TABLE>
64
<PAGE> 166
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Originators..............................S-11
Participants.............................S-21
Parties-in-Interest......................S-55
Paying Agent.............................S-25
Payment Ahead............................S-27
Payment Date..............................S-5
Percentage Interest......................S-25
Permitted Investments....................S-29
Plan.....................................S-55
Plan Assets Regulation...................S-55
Pool Redemption Date.....................S-34
Prefunding Account........................S-9
Prefunding Account Deposit..........S-9, S-30
Principal Balance........................S-27
Principal Payment........................S-27
Principal Prepayment.....................S-27
PTCE.....................................S-55
Qualified Replacement Mortgage ..........S-24
Rating Agencies..........................S-12
Realized Loss............................S-32
Receipt..................................S-53
Received.................................S-53
Record Date...............................S-5
Reference Banks..........................S-26
Release Price............................S-24
Relevant Depositary......................S-20
REMIC................................ii, S-12
REO Property.............................S-45
Required Coverage Amount............S-8, S-31
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Reserve Interest Rate....................S-26
Reuters Screen LIBO Page.................S-26
Rules....................................S-20
S&P......................................S-12
Securities Act...........................S-56
Servicer..............................ii, S-3
Servicer Event of Default................S-47
Servicing Advance........................S-49
Servicing Agreement...................ii, S-3
Servicing Fee............................S-10
Servicing Fee Rate.................S-10, S-49
Similar Law..............................S-55
Single risks.............................S-52
Six-month London Interbank Offered Rate..S-13
SMMEA....................................S-12
Statistical Calculation Date.............S-11
Sub-Servicer........................S-3, S-49
Subsequent Transfer Date..................S-9
Terms and Conditions.....................S-22
Transferor............................ii, S-3
Trigger Event Date............S-8, S-17, S-32
Trust Agreement...........................S-3
Trust Estate.......................cover, S-4
Unaffiliated Originators.................S-11
Underwriters............................cover
Underwriting Agreement...................S-56
Voting Interests.........................S-35
Weighted average life....................S-42
</TABLE>
65
<PAGE> 167
ANNEX A
DESCRIPTION OF THE MORTGAGE POOL
The following is a brief description of certain terms of the [Initial]
Mortgage Loans as of the Statistical Calculation Date. Certain mortgage loans
may prepay in full or be removed, prior to the Closing Date, from the Mortgage
Pool as described herein, in which case an amount equal to the aggregate
principal balances of such mortgage loans[, but in no event more than
$10,000,000, will be added to the Prefunding Account Deposit on the Closing
Date. The statistical information presented below does not take into account any
amortization of the [Initial] Mortgage Loans prior to the Closing Date or any
Additional Mortgage Loans that may be added to the Mortgage Pool during the
Funding Period.] As a result, the statistical information presented below
regarding the [Initial] Mortgage Loans may vary in certain limited respects from
comparable information based on the actual composition of the Mortgage Pool at
the Closing Date.
The information expressed as a percentage of the [Initial] Pool Balance may
not total 100% due to rounding.
All of the [Initial] Mortgage Loans will be secured by first liens with
respect to the related Mortgaged Properties and will bear interest at rates that
adjust based on the index described in the related Mortgage Notes. Payments on
the Bonds will be derived primarily from amounts received, collected or
recovered from the Mortgage Loans in the Mortgage Pool.
COMPOSITION OF [INITIAL] MORTGAGE LOANS
<TABLE>
<CAPTION>
AGGREGATE UNPAID PERCENTAGE OF
NUMBER OF PRINCIPAL [INITIAL] POOL
MORTGAGE LOANS BALANCE BALANCE
[INITIAL] MORTGAGE LOAN CATEGORY -------------- ---------------- ---------------
<S> <C> <C> <C>
Original Mortgage Loans................. $ 0
---- ------ ----
Bulk Purchase Mortgage Loans Total...... $
==== ======
</TABLE>
[INITIAL] POOL BALANCE
<TABLE>
<CAPTION>
AGGREGATE UNPAID PERCENTAGE OF
RANGE OF NUMBER OF PRINCIPAL [INITIAL] POOL
PRINCIPAL BALANCES MORTGAGE LOANS BALANCE BALANCE
------------------ -------------- ---------------- ---------------
<S> <C> <C> <C>
0.00 to 25,000.00.......................
25,000.01 to 50,000.00..................
50,000.01 to 75,000.00..................
75,000.01 to 100,000.00.................
100,000.01 to 125,000.00................
125,000.01 to 150,000.00................
150,000.01 to 175,000.00................
175,000.01 to 200,000.00................
200,000.01 to 225,000.00................
225,000.01 to 250,000.00................
250,000.01 to 275,000.00................
275,000.01 to 300,000.00................
300,000.01 to 325,000.00................
325,000.01 to 350,000.00................
350,000.01 to 400,000.00................
Above 400,000.00........................
Total..............................
</TABLE>
A-1
<PAGE> 168
ORIGINAL TERM TO MATURITY
<TABLE>
<CAPTION>
PERCENTAGE OF
ORIGINAL TERMS TO NUMBER OF AGGREGATE UNPAID [INITIAL] POOL
MATURITY (MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
----------------- -------------- ----------------- ---------------
<S> <C> <C> <C>
60.........................................
180.........................................
360.........................................
Total.......................................
</TABLE>
REMAINING TERM TO MATURITY
<TABLE>
<CAPTION>
PERCENTAGE OF
RANGE OF REMAINING NUMBER OF AGGREGATE UNPAID [INITIAL] POOL
TERMS TO MATURITY MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
------------------ -------------- ----------------- --------------
(MONTHS)
<C> <S> <C> <C>
0 to 120...............................
121 to 180.............................
301 to 360.............................
Total..................................
</TABLE>
RANGE OF MORTGAGE INTEREST RATES
<TABLE>
<CAPTION>
PERCENTAGE OF
RANGE OF MORTGAGE NUMBER OF AGGREGATE UNPAID [INITIAL] POOL
INTEREST RATES MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
----------------- -------------- ----------------- --------------
<S> <C> <C> <C>
5.000 to 5.999.......................
6.000 to 6.999.......................
7.000 to 7.999.......................
8.000 to 8.999.......................
9.000 to 9.999.......................
10.000 to 10.999.....................
11.000 to 11.999.....................
12.000 to 12.999.....................
13.000 to 13.999.....................
14.000 to 14.999.....................
15.000 to 15.999.....................
Total.............................
</TABLE>
A-2
<PAGE> 169
RANGE OF MAXIMUM MORTGAGE INTEREST RATES
<TABLE>
<CAPTION>
RANGE OF NUMBER OF AGGREGATE UNPAID PERCENTAGE OF
MAXIMUM RATES MORTGAGE LOANS PRINCIPAL BALANCE [INITIAL] POOL BALANCE
------------- -------------- ----------------- ----------------------
<S> <C> <C> <C>
8.001 to 9.000.................
12.001 to 13.000...............
13.001 to 14.000...............
14.001 to 15.000...............
15.001 to 16.000...............
16.001 to 17.000...............
17.001 to 18.000...............
18.001 to 19.000...............
19.001 to 20.000...............
20.001 to 21.000...............
21.001 to 22.000...............
Total.....................
</TABLE>
RANGE OF MINIMUM MORTGAGE RATES
<TABLE>
<CAPTION>
AGGREGATE UNPAID
RANGE OF MINIMUM NUMBER OF PRINCIPAL PERCENTAGE OF
MORTGAGE RATES MORTGAGE LOANS BALANCE [INITIAL] BALANCE POOL
- ----------------------------- --------------- ----------------- -----------------------
<S> <C> <C> <C>
4.001 to 5.000...............
5.001 to 6.000...............
6.001 to 7.000...............
7.001 to 8.000...............
8.001 to 9.000...............
9.001 to 10.000..............
10.001 to 11.000.............
11.001 to 12.000.............
12.001 to 13.000.............
13.001 to 14.000.............
14.001 to 15.000.............
15.001 to 16.000.............
Total...................
</TABLE>
RANGE OF GROSS MARGINS
<TABLE>
<CAPTION>
PERCENTAGE OF
RANGE OF NUMBER OF AGGREGATE UNPAID [INITIAL] POOL
GROSS MARGINS MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- ---------------------------------------- -------------- ----------------- --------------
<S> <C> <C> <C>
3.000 to 3.999.........................
4.000 to 4.999.........................
5.000 to 5.999.........................
6.000 to 6.999.........................
7.000 to 7.999.........................
8.000 to 8.999.........................
9.000 to 9.999.........................
10.000 to 10.999........................
14.000 to 14.999........................
Total.........................
</TABLE>
A-3
<PAGE> 170
MORTGAGE INTEREST RATE ADJUSTMENT FREQUENCY
<TABLE>
<CAPTION>
PERCENTAGE OF
FREQUENCY OF NUMBER OF AGGREGATE UNPAID [INITIAL] POOL
ADJUSTMENT MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- ---------------------------------------- -------------- ----------------- --------------
<S> <C> <C> <C>
6......................................
12......................................
Total.........................
</TABLE>
PERIODS TO NEXT ADJUSTMENT OF MORTGAGE INTEREST RATE
<TABLE>
<CAPTION>
RANGE OF PERCENTAGE OF
PERIODS TO NEXT NUMBER OF AGGREGATE UNPAID [INITIAL] POOL
ADJUSTMENT MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- ---------------------------------------- -------------- ----------------- --------------
<S> <C> <C> <C>
0 to 1.................................
2 to 12................................
13 to 24................................
25 to 36................................
37 to 48................................
------- ------- ---
Total
======= ======= ===
</TABLE>
INDEX USED TO DETERMINE MORTGAGE INTEREST RATE
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF AGGREGATE UNPAID [INITIAL] POOL
INDEX MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
----- -------------- ----------------- --------------
<S> <C> <C> <C>
One-year CMT index......................
Six-month London Interbank Offered
Rate..................................
------- ------- ---
Total.........................
======= ======= ===
</TABLE>
LOAN-TO-VALUE RATIOS
<TABLE>
<CAPTION>
PERCENTAGE OF
RANGE OF NUMBER OF AGGREGATE UNPAID [INITIAL] POOL
LOAN-TO-VALUE RATIOS MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- ---------------------------------------- -------------- ----------------- --------------
<S> <C> <C> <C>
10.01 to 15.00..........................
15.01 to 20.00..........................
20.01 to 25.00..........................
25.01 to 30.00..........................
30.01 to 35.00..........................
35.01 to 40.00..........................
40.01 to 45.00..........................
45.01 to 50.00..........................
50.01 to 55.00..........................
55.01 to 60.00..........................
60.01 to 65.00..........................
65.01 to 70.00..........................
70.01 to 75.00..........................
75.01 to 80.00..........................
80.01 to 85.00..........................
85.01 to 90.00..........................
90.01 to 95.00..........................
Over 100.01.............................
------- ------- --
Total.........................
======= ======= ==
</TABLE>
A-4
<PAGE> 171
TYPE OF MORTGAGED PROPERTY
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF AGGREGATE UNPAID [INITIAL] POOL
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
------------- -------------- ----------------- --------------
<S> <C> <C> <C>
Manufactured Housing....................
Two- to Four-Family Residences..........
Condominiums and Planned Unit...........
Developments............................
Single Family Residence.................
------- ------- --
Total.........................
======= ======= ==
</TABLE>
OCCUPANCY STATUS
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF AGGREGATE UNPAID [INITIAL] POOL
OCCUPANCY STATUS MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
---------------- -------------- ----------------- --------------
<S> <C> <C> <C>
Not Owner Occupied/Investment...........
Owner Occupied/2nd Home.................
------- ------- --
Total.........................
======= ======= ==
</TABLE>
GEOGRAPHICAL DISTRIBUTION OF MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF AGGREGATE UNPAID [INITIAL] POOL
STATE MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- ---------------------------------------- -------------- ----------------- --------------
<S> <C> <C> <C>
Alaska..................................
Arizona.................................
Arkansas................................
California..............................
Colorado................................
Connecticut.............................
Delaware................................
Florida.................................
Georgia.................................
Hawaii..................................
Idaho...................................
Illinois................................
Indiana.................................
Iowa....................................
Kansas..................................
Kentucky................................
Louisiana...............................
Maine...................................
Maryland................................
Massachusetts...........................
Michigan................................
Minnesota...............................
Mississippi.............................
Missouri................................
Montana.................................
Nebraska................................
</TABLE>
A-5
<PAGE> 172
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF AGGREGATE UNPAID [INITIAL] POOL
STATE MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- ---------------------------------------- -------------- ----------------- --------------
<S> <C> <C> <C>
Nevada..................................
New Hampshire...........................
New Jersey..............................
New Mexico..............................
New York................................
North Carolina..........................
Ohio....................................
Oklahoma................................
Oregon..................................
Other...................................
Pennsylvania............................
Rhode Island............................
South Carolina..........................
South Dakota............................
Tennessee...............................
Texas...................................
Utah....................................
Vermont.................................
Virginia................................
Washington..............................
Washington DC...........................
West Virginia...........................
Wisconsin...............................
Wyoming.................................
------- ------- --
Total.........................
======= ======= ==
</TABLE>
TYPE OF LOAN BY AMORTIZATION METHOD
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF AGGREGATE UNPAID [INITIAL] POOL
AMORTIZATION METHOD MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
------------------- -------------- ----------------- --------------
<S> <C> <C> <C>
Fully Amortizing........................
Balloon.................................
------- ------- --
Total.........................
======= ======= ==
</TABLE>
ORIGINATORS OF THE MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF AGGREGATE UNPAID [INITIAL] POOL
ORIGINATOR MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
---------- -------------- ----------------- --------------
<S> <C> <C> <C>
Affiliated..............................
Unaffiliated............................
------- ------- --
Total.........................
======= ======= ==
</TABLE>
A-6
<PAGE> 173
ANNEX B
GLOBAL CLEARANCE, SETTLEMENT AND
TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Adjustable
Rate Asset-Backed Bonds, Series 1997-1 (the "Global Securities") will be
available only in book-entry form. Investors in the Global Securities may hold
such Global Securities through DTC, Cedel or Euroclear. The Global Securities
will be tradeable as home market instruments in both the European and U.S.
domestic markets. [Initial] settlement and all secondary trades will settle in
same-day funds.
Secondary market trading between investors holding Global Securities
through Cedel and Euroclear will be conducted in the ordinary way in accordance
with their normal rules and operating procedures and in accordance with
conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedure applicable to
U.S. corporate debt obligations.
Secondary cross-market trading between participants of Cedel or Euroclear
and Participants holding Bonds will be effected on a delivery-against-payment
basis through the Relevant Depositaries of Cedel and Euroclear (in such
capacity) and as Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
[INITIAL] SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
Cede, as nominee of DTC. Investors' interests in the Global Securities will be
represented through financial institutions acting on their behalf as direct and
indirect participants in DTC. As a result, Cedel and Euroclear will hold
positions on behalf of their participants through their Relevant Depositaries,
which in turn will hold such positions in accounts as Participants.
Investors electing to hold their Global Securities through DTC will follow
DTC settlement practice. Investor securities custody accounts will be credited
with their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Cedel or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Because the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between Participants. Second market trading between Participants
will be settled using the procedures applicable to prior asset-backed bond
issues in same-day funds.
Trading between Cedel and/or Euroclear Participants. Secondary market
trading between Cedel Participants or Euroclear Participant will be settled
using the Procedures applicable to conventional eurobonds in same-day funds.
Trading between DTC Seller and Cedel or Euroclear Participants. When Global
Securities are to be transferred from the account of a Participant to the
account of a Cedel Participant or a Euroclear Participant, the purchaser will
send instructions to Cedel or Euroclear through a Cedel Participant or Euroclear
B-1
<PAGE> 174
Participant at least one business day prior to settlement. Cedel or Euroclear
will instruct the respective Depositary, as the case may be, to receive the
Global Securities against payment. Payment will include interest accrued on the
Global Securities from and including the last coupon payment date to and
excluding the settlement date, on the basis of the actual number of days in such
accrual period and a year assumed to consist of 360 days. For transactions
settling on the 31st of the month, payment will include interest accrued to and
excluding the first day of the following month. Payment will then be made by the
respective Depositary to the Participant's account against delivery of the
Global Securities. After settlement has been completed, the Global Securities
will be credited to the respective clearing system and by the clearing system,
in accordance with its usual procedures, to the Cedel Participant's or Euroclear
Participant's account. The securities credit will appear the next day (European
time) and the cash debt will be back-valued to, and the interest on the Global
Securities will accrue from, the value date (which would be the preceding day
when settlement occurred in New York). If settlement is not completed on the
intended value date (i.e., the trade fails), the Cedel or Euroclear cash debt
will be valued instead as of the actual settlement date.
Cedel Participant and Euroclear Participant will need to make available to
the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within Cedel or Euroclear. Under this approach,
they may take on credit exposure to Cedel or Euroclear until the Global
Securities are credited to their accounts one day later.
As an alternative, if Cedel or Euroclear has extended a line of credit to
them, Cedel Participants or Euroclear Participants can elect not to preposition
funds and allow that credit line to be drawn upon to finance settlement. Under
this procedure, Cedel Participants or Euroclear Participants purchasing Global
Securities would incur overdraft charges for one day, assuming they clear the
overdraft when the Global Securities are credited to their accounts. However,
interest on the Global Securities would accrue from the value date. Therefore,
in many cases the investment income on the Global Securities earned during that
one-day period may substantially reduce or offset the amount of such overdraft
charges, although this result will depend on each Cedel. Participants or
Euroclear Participant's particular cost of funds.
Because the settlement is taking place during New York business hours,
Participant can employ their usual procedures for sending Global Securities to
the respective European Depositary for the benefit of Cedel Participants or
Euroclear Participants. The sale proceeds will be available to the DTC seller on
the settlement date. Thus, to the Participants a cross-market transaction will
settle no differently than a trade between two Participants.
Trading between Cedel or Euroclear Seller and DTC Purchaser. Due to time
zone differences in their favor, Cedel Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Securities are to be transferred by the respective clearing system, through the
respective Depositary, to a Participant. The seller will send instructions to
Cedel or Euroclear through a Cedel Participant or Euroclear Participant at least
one business day prior to settlement. In these cases, Cedel or Euroclear will
instruct the Relevant Depositary, as appropriate, to deliver the Global
Securities to the Participant's account against payment. Payment will include
interest accrued on the Global Securities from and including the last coupon
payment to and excluding the settlement date on the basis of the actual number
of days in such accrual period and a year assumed to consist of 360 days. For
transactions settling on the 31st of the month, payment will include interest
accrued to and excluding the first day of the following month. The payment will
then be reflected in the account of the Cedel Participant or Euroclear
Participant the following day, and receipt of the cash proceeds in the Cedel
Participant's or Euroclear Participant's account would be back-valued to the
value date (which would be the preceding day, when settlement occurred in New
York). Should the Cedel Participant or Euroclear Participant have a line of
credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the back valuation
will extinguish any overdraft incurred over that one-day period. If settlement
is not completed on the intended value date (i.e., the trade fails), receipt of
the cash proceeds in the Cedel Participant's or Euroclear Participant's account
would instead be valued as of the actual settlement date.
B-2
<PAGE> 175
Finally, day traders that use Cedel or Euroclear and that purchase Global
Securities from Participants for delivery to Cedel Participants or Euroclear
Participants should note that these trades would automatically fail on the sale
side unless affirmative action were taken. At least three techniques should be
readily available to eliminate this potential problem:
(a) borrowing though Cedel or Euroclear for one day (until the
purchase side of the day trade is reflected in their Cedel or Euroclear
accounts) in accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a Participant no
later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their Cedel or Euroclear
account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the Participant is at least
one day prior to the value date for the sale to the Cedel Participant or
Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through Cedel or
Euroclear (or through DTC if the holder has an address outside the U.S.) will be
subject to the 30% U.S. withholding tax that generally applies to payments of
interest (including original issue discount) on registered debt issued by U.S.
Persons, unless (i) each clearing system, bank or other financial institution
that holds customers' securities in the ordinary course of its trade or business
in the chain of intermediaries between such beneficial owner and the U.S. entity
required to withhold tax complies with applicable certification requirements and
(ii) such beneficial owner takes one of the following steps to obtain an
exemption or reduced tax rate:
Exemption for non-U.S. Persons (Form W-8). Beneficial owners of Global
Securities that are Non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of such change.
Exemption for non-U.S. Persons with effectively connected income (Form
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States).
Exemption or reduced rate for non-U.S. Persons resident in treaty countries
(Form 1001). Non-U.S. Persons residing in a country that has a tax treaty with
the United States can obtain an exemption or reduced tax rate depending on the
treaty terms) by filing Form 1001 (Ownership, Exemption or Reduced Rate
Certificate). If the treaty provides only for a reduced rate, withholding tax
will be imposed at that rate unless the filer alternatively files Form W-8. Form
1001 may be filed by the Bond 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 Bond Owner of a Global
Security or, in the case of a Form 1001 or a Form 4224 filer, his agent, files
by submitting the appropriate form to the person though whom it holds (the
clearing agency, in the case of persons holding directly on the books of the
clearing agency). Form W-8 and Form 1001 are effective for three calendar years,
and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation or partnership organized in or under the laws of the
United States or any political subdivision thereof, (iii) an estate that is
subject to United States federal income tax, regardless of the source of its
income or (iv) a trust if (a) a court within the United States is able to
exercise primary supervision over the administration of the trust, and (b) one
or more United States fiduciaries have the authority to control all substantial
decisions of
B-3
<PAGE> 176
the trust. The term "Non-U.S. Person" means any person who is not a U.S. Person.
This summary does not deal with all aspects of U.S. federal income tax
withholding that may be relevant to foreign holders of Global Securities.
Investors are advised to consult their own tax advisors for specific tax advice
concerning their holding and disposing of Global Securities.
B-4
<PAGE> 177
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- ------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN
THE BONDS OFFERED HEREBY NOR AN OFFER OF THE BONDS TO ANY PERSON IN ANY STATE OR
OTHER JURISDICTION IN WHICH SUCH OFFER WOULD BE UNLAWFUL. THE DELIVERY OF THE
PROSPECTUS AND THIS PROSPECTUS SUPPLEMENT AT ANY TIME DOES NOT IMPLY THAT
INFORMATION THEREIN OR HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF; HOWEVER, IF ANY MATERIAL CHANGE OCCURS WHILE THIS PROSPECTUS SUPPLEMENT
OR PROSPECTUS IS REQUIRED BY LAW TO BE DELIVERED, THIS PROSPECTUS SUPPLEMENT OR
THE PROSPECTUS WILL BE AMENDED OR SUPPLEMENTED ACCORDINGLY.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
Reports to Certificateholders.............. S-3
Available Information...................... S-4
Incorporation of Certain Documents by
Reference................................ S-4
Summary of Terms........................... S-7
Risk Factors............................... S-26
Description of the Certificates............ S-33
The Mortgage Loans......................... S-61
Prepayment and Yield Considerations........ S-64
Origination and Servicing of the Mortgage
Loans.................................... S-70
[The Certificate Insurance Policy and the
Certificate Insurer...................... S-76]
Certain Federal Income Tax Consequences.... S-80
ERISA Considerations....................... S-81
Use of Proceeds............................ S-82
Legal Investment Considerations............ S-82
Underwriting............................... S-83
Report of Experts.......................... S-84
Legal Matters.............................. S-84
Rating of the Class A Certificates......... S-84
ANNEX A Description of the Mortgage Pool... A-1
ANNEX B Global Clearance, Settlement and
Tax Documentation Procedures............. B-1
PROSPECTUS -- Prospectus Supplement........ 1
Reports to Bondholders..................... 4
Available Information...................... 4
Incorporation of Certain Documents by
Reference................................ 4
Summary of Terms........................... 6
Risk Factors............................... 16
Description of Bonds....................... 23
The Bond Issuer............................ 39
The Mortgage Loans......................... 40
Prepayment and Yield Considerations........ 42
Origination and Servicing of the Mortgage
Loans.................................... 46
The Financial Guaranty Insurance Policy and
the Financial Guaranty Insurer........... 55
Certain Federal Income Tax Consequences.... 60
ERISA Considerations....................... 60
Use of Proceeds............................ 61
Legal Investment Considerations............ 61
Underwriting............................... 61
Report of Experts.......................... 62
Legal Matters.............................. 62
Rating of Bonds............................ 62
Index of Principal Terms................... 64
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
AAMES CAPITAL OWNER TRUST
[ ]
$[ ]
ASSET-BACKED BONDS,
SERIES [ ]
DUE [ ]
AAMES CAPITAL
ACCEPTANCE CORP.
TRANSFEROR
AAMES CAPITAL CORPORATION
SERVICER
PROSPECTUS SUPPLEMENT
[UNDERWRITERS]
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 178
PROSPECTUS
DATED SEPTEMBER 17, 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 19 BEFORE PURCHASING ANY
SECURITIES.
BONDS OF A SERIES WILL CONSTITUTE NON-RECOURSE OBLIGATIONS OF THE RELATED
BOND ISSUER. CERTIFICATES OF A SERIES WILL EVIDENCE INTERESTS ONLY IN THE
RELATED TRUST. EXCEPT AS OTHERWISE SET FORTH HEREIN AND IN THE RELATED
PROSPECTUS SUPPLEMENT, THE SECURITIES WILL NOT REPRESENT AN INTEREST IN OR
OBLIGATION OF THE SERVICER, ANY ORIGINATOR, THE TRUSTEE OR ANY OF THEIR
RESPECTIVE AFFILIATES. NEITHER THE SECURITIES NOR THE UNDERLYING MORTGAGE LOANS
WILL BE GUARANTEED OR INSURED BY ANY GOVERNMENTAL AGENCY OR ANY OTHER PERSON OR
ENTITY, EXCEPT AS SET FORTH IN THE RELATED PROSPECTUS SUPPLEMENT.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS OR THE RELATED PROSPECTUS SUPPLEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
THIS PROSPECTUS MAY NOT BE USED TO CONSUMMATE SALES OF SECURITIES OF ANY
SERIES UNLESS ACCOMPANIED BY THE RELATED PROSPECTUS SUPPLEMENT.
<PAGE> 179
(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
2
<PAGE> 180
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.
3
<PAGE> 181
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to a Series of Securities to be offered
hereunder, among other things, will set forth with respect to such Series of
Securities: (i) a description of such Securities; (ii) the rate of interest, the
"Certificate Rate" or "Bond Rate" or other applicable rate (or the manner of
determining such rate) and authorized denominations of such Securities; (iii)
certain information concerning the Mortgage Loans and financial guaranty
insurance policies, cash accounts, letters of credit, limited guaranty insurance
policies, third party guarantees or other forms of credit enhancement, if any,
relating to one or more Mortgage Pools or all or part of the related Securities;
(iv) in the case of Certificates, the specified interest of each Class of
Certificates in, and manner and priority of, the distributions on the Mortgage
Loans; (v) in the case of Certificates, information as to the nature and extent
of subordination with respect to such Certificates, if any; (vi) the
Distribution Dates or Payment Dates, as applicable; (vii) the amount, if any,
deposited in the related Prefunding Account, the length of the related Funding
Period or the Revolving Period and the criteria for determining which additional
Mortgage Loans may become assets of the related Trust or Trust Estate, as
applicable; (viii) in the case of Certificates, the circumstances, if any, under
which the related Trust may be subject to early termination; (ix) in the case of
Bonds, the circumstances, if any, under which such Bonds may be subject to
redemption; (x) in the case of Certificates, whether a REMIC election will be
made and the designation of the regular and residual interest therein; and (xi)
additional information with respect to the plan of distribution of such
Securities.
AVAILABLE INFORMATION
The Transferors have filed a Registration Statement under the Securities
Act of 1933, as amended (the "1933 Act"), with the Securities and Exchange
Commission (the "Commission") with respect to the Securities. The Registration
Statement and amendments thereof and the exhibits thereto may be inspected at
the Public Reference Room of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's regional offices at Seven World
Trade Center, 13th Floor, New York, New York 10048, and Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
materials can also be obtained at prescribed rates from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549.
Electronic filings made through the Electronic Data Gathering Analysis and
Retrieval System are publicly available through the Commission's Web Site
(http://www.sec.gov).
No person has been authorized to give any information or to make any
representation regarding the Series of Securities referred to in the
accompanying Prospectus Supplement other than those contained or incorporated by
reference in this Prospectus and such Prospectus Supplement with respect to such
Series and, if given or made, such information or representations must not be
relied upon. This Prospectus and the accompanying Prospectus Supplement do not
constitute an offer to sell or a solicitation of an offer to buy any securities
other than the Securities offered hereby and thereby nor an offer of the
Securities to any person in any state or other jurisdiction in which such offer
would be unlawful. The delivery of this Prospectus at any time does not imply
that information herein is correct as of any time subsequent to its date.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed with the Commission relating to the Trust or Trust
Estate, as applicable, referred to in the accompanying Prospectus Supplement
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), after the date of this Prospectus and
prior to the termination of any offering of the related Securities or relating
to the terms or collateral with respect to such offering shall be deemed to be
incorporated by reference in this Prospectus and to be part of this Prospectus
from the date of the filing of such documents. Any statement contained in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for all purposes of this Prospectus to the
extent that a statement contained herein (or in the accompanying Prospectus
Supplement) or in any other subsequently filed document that also is or is
deemed to be incorporated by reference modifies or replaces such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
4
<PAGE> 182
The Trustee or Transferor with respect to any Series of Securities will
provide without charge to each person to whom this Prospectus is delivered, on
the written or oral request of such person, a copy of any or all of the
documents referred to above that may be incorporated by reference in this
Prospectus (not including exhibits to the information that is incorporated by
reference unless such exhibits are specifically incorporated by reference into
the information that this Prospectus incorporates). Such requests should be
directed to the Corporate Trust Office of the Trustee specified in the
accompanying Prospectus Supplement.
Except as otherwise specified in the related Prospectus Supplement, no
information that relates to any Series of Securities other than the Series
referred to in the accompanying Prospectus Supplement shall be deemed to be
incorporated by reference in this Prospectus.
REPORTS TO SECURITYHOLDERS
Monthly and annual reports concerning any Securities and the related assets
included in the Trust or Trust Estate, as applicable, will be sent by the
Trustee to all related Securityholders. See "Description of the
Securities -- Reports to Securityholders" herein. If the Securities of a Series
are to be issued in book-entry form, such reports will be sent to the
Securityholder of record, and beneficial owners of such Securities will have to
rely on the procedures described herein under "Description of the
Securities -- Form of Securities -- Book-Entry Registration" to obtain such
reports.
5
<PAGE> 183
TABLE OF CONTENTS
<TABLE>
<S> <C>
SUMMARY................................... 8
RISK FACTORS.............................. 19
Limited Liquidity....................... 19
Limited Assets; Limited Obligations..... 19
Nature of the Security for Mortgage
Loans................................ 19
Risks Associated with Prepayment of the
Mortgage Loans....................... 22
Environmental Statutes Affecting
Security Interests................... 23
Risks Associated With Certain
Origination Fees..................... 23
Legal Considerations.................... 23
Yield, Maturity and Prepayment
Considerations....................... 24
Limitations on Interest Payments and
Foreclosures......................... 26
Security Rating......................... 26
Book-Entry Registration................. 26
THE TRUSTS AND TRUST ESTATES.............. 27
The Mortgage Loans -- General........... 27
Negative Amortization................... 29
Forward Commitments; Prefunding
Accounts; Capitalized Interest
Accounts............................. 29
USE OF PROCEEDS........................... 30
AAMES CAPITAL CORPORATION................. 30
AAMES CAPITAL ACCEPTANCE CORP............. 31
THE SERVICER.............................. 31
General................................. 32
Mortgage Loan Delinquency and
Foreclosure Experience............... 32
THE ORIGINATORS........................... 33
Underwriting Guidelines................. 33
Representations by Originators and the
Transferors.......................... 34
DESCRIPTION OF THE SECURITIES............. 35
General................................. 35
Form of Securities...................... 36
Distributions and Payments on
Securities........................... 38
Revolving Period and Amortization
Period; Transferor Interest.......... 41
Reports to Securityholders.............. 41
CREDIT ENHANCEMENT........................ 43
Subordination........................... 43
Overcollateralization Feature........... 44
Reserve Accounts........................ 44
Financial Guaranty Insurance Policies... 44
Mortgage Pool Insurance Policies........ 45
Special Hazard Insurance Policies....... 46
Bankruptcy Bonds........................ 46
Cross Support........................... 46
Other Insurance, Guarantees and Similar
Instruments or Agreements............ 47
Maintenance of Credit Enhancement....... 47
MATURITY, PREPAYMENT AND YIELD
CONSIDERATIONS.......................... 48
THE POOLING AND SERVICING AGREEMENT....... 50
Assignment of Mortgage Loans............ 50
Payments on the Mortgage Loans.......... 53
Investment of Accounts.................. 53
Permitted Investments................... 53
Monthly Advances and Compensating
Interest............................. 54
Realization upon Defaulted Mortgage
Loans................................ 55
General Servicing Procedures............ 56
Sub-Servicers........................... 56
Servicing and Other Compensation and
Payment of Expenses.................. 56
Maintenance of Hazard Insurance......... 57
Enforcement of Due-on-Sale Clauses...... 57
Voting.................................. 58
Amendments.............................. 58
Certificate Events of Default........... 58
Rights upon Certificate Events of
Default.............................. 59
Termination; Optional Termination....... 60
Evidence as to Compliance............... 60
Indemnification of Officers and
Directors of the Transferors......... 60
The Trustee............................. 60
THE INDENTURE............................. 61
General................................. 61
Modification of Indenture............... 61
Bond Events of Default.................. 62
Rights upon Bond Events of Default...... 62
List of Bondholders..................... 63
Annual Compliance Statement............. 63
Trustee's Annual Report................. 63
Satisfaction and Discharge of
Indenture............................ 64
Redemption of Bonds..................... 64
Reports by Trustee to Bondholders....... 64
Limitation on Suits..................... 64
CERTAIN LEGAL ASPECTS OF THE MORTGAGE
LOANS AND RELATED MATTERS............... 64
Nature of the Mortgage Loans............ 64
Foreclosure/Repossession................ 65
Rights of Redemption.................... 66
Certain Provisions of California Deeds
of Trust............................. 66
Anti-deficiency Legislation and Other
Limitations on Lenders............... 67
Enforceability of Due-on-Sale Clauses... 68
</TABLE>
6
<PAGE> 184
<TABLE>
<S> <C>
Prepayment Charges...................... 68
Applicability of Usury Laws............. 68
Soldiers' and Sailors' Civil Relief
Act.................................. 68
Environmental Considerations............ 69
CERTAIN FEDERAL INCOME TAX CONSEQUENCES... 69
Taxation of Certificates................ 70
General................................. 70
Taxation of Debt Certificates (Including
Regular Certificates)................ 70
Taxation of Certificates as to Which a
REMIC Election Has Been Made......... 76
Tax Status as a Grantor Trust........... 81
Tax Characterization of the Trust as a
Partnership; Tax Consequences to
Holders of the Certificates Issued
By a Partnership..................... 84
Certain Certificates Treated as
Indebtedness......................... 88
Taxation of Bonds....................... 90
Miscellaneous Tax Aspects............... 90
Tax Treatment of Foreign Investors...... 90
STATE TAX CONSIDERATIONS.................. 92
ERISA CONSIDERATIONS...................... 92
Plan Asset Regulations.................. 92
Prohibited Transaction Class
Exemption............................ 93
LEGAL INVESTMENT CONSIDERATIONS........... 94
SMMEA................................... 94
FFIEC Policy Statement.................. 94
General................................. 95
METHOD OF DISTRIBUTION.................... 95
LEGAL MATTERS............................. 96
FINANCIAL INFORMATION..................... 96
RATING.................................... 96
INDEX OF PRINCIPAL TERMS.................. 98
</TABLE>
7
<PAGE> 185
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 Supplement.
A Series of Certificates may include one or more
Classes of senior Certificates (collectively, the
"Senior Certificates") that receive certain
preferential treatment specified in the related
Prospectus Supplement with respect to one or more
Classes of subordinate Certificates (collectively,
the "Subordinated Certificates"). Holders of
Certificates are referred to herein as
"Certificateholders."
Each Series of Bonds will be non-recourse
obligations of either ACAC or a separate entity
(which may be organized as a trust, partnership,
limited liability company or corporation) formed by
ACAC solely for the purpose of issuing the Bonds of
the related Series (either such entity, as
applicable, the "Bond Issuer"). The Bond Issuer
will be identified and described in the Prospectus
Supplement relating to a Series of Bonds and will
not have, nor be expected in the future to have,
any significant assets available for payments on
such Series of Bonds, other than the assets
included in the related Trust Estate.
Each Series of Bonds will be issued pursuant to an
indenture (each, an "Indenture") between the
related Bond Issuer and the related Trustee,
8
<PAGE> 186
and the assets included in the trust estate (each,
a "Trust Estate") pledged to secure such Series
will be the sole source of payments on the Bonds.
The Bonds of any Series will be issuable in a
single class. Holders of Bonds are referred to
herein as "Bondholders" and, together with
Certificateholders, as "Securityholders."
The assets of each Trust or Trust Estate, as
applicable, will consist primarily of the Mortgage
Loans. Certain Series of Securities may be covered
by a Financial Guaranty Insurance Policy, a
Mortgage Pool Insurance Policy, a Special Hazard
Insurance Policy, a Bankruptcy Bond or other
insurance policies, cash accounts, letters of
credit, limited guaranty insurance policies, third
party guarantees or other forms of credit
enhancement, as described herein and in the related
Prospectus Supplement. See "Credit Enhancement"
herein.
Each Class of Certificates within a Series will
evidence the interests specified in the related
Prospectus Supplement, which may (i) include the
right to receive distributions allocable only to
principal, only to interest or to any combination
thereof; (ii) include the right to receive
distributions only of prepayments of principal
throughout the lives of the Certificates or during
specified periods; (iii) be subordinated in the
right to receive distributions of scheduled
payments of principal, prepayments of principal,
interest or any combination thereof to one or more
other Classes of Certificates of such Series
throughout the lives of the Certificates or during
specified periods or may be subordinated with
respect to certain losses or delinquencies; (iv)
include the right to receive such distributions
only after the occurrence of events specified in
the related Prospectus Supplement; (v) include the
right to receive distributions in accordance with a
schedule or formula or on the basis of collections
from designated portions of the assets in the
related Trust; (vi) include, as to Certificates
entitled to distributions allocable to interest,
the right to receive interest at a fixed rate or an
adjustable rate; and (vii) include, as to
Certificates entitled to distributions allocable to
interest, the right to distributions allocable to
interest only after the occurrence of events
specified in the related Prospectus Supplement and,
in each case, may accrue interest until such events
occur, as specified in such Prospectus Supplement.
The timing and amount of such distributions may
vary among Classes as specified in the related
Prospectus Supplement.
Unless otherwise specified in the related
Prospectus Supplement, the Securities will be
issuable in fully registered form, in the minimum
denominations set forth in such Prospectus
Supplement. See "Description of the Securities"
herein.
The Mortgage Loans......... The primary assets of each Trust or Trust Estate,
as applicable, will consist of one or more pools
(each, a "Mortgage Pool") of first and junior lien
mortgage loans or deeds of trust (the "Mortgage
Loans"), including any note or other instrument of
indebtedness (each, a "Mortgage Note").
The Mortgage Pool for a given Series of Securities
will be transferred pursuant to the related Pooling
and Servicing Agreement or Indenture, as
applicable. The Mortgage Loans will be secured by
one- to four-family residential properties,
including townhouses, condominiums and
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manufactured housing (which is permanently affixed
to and treated as real property under local law),
but excluding cooperatives and mobile homes. To the
extent provided in the related Prospectus
Supplement, additional Mortgage Loans may be
periodically added as assets of the related Trust
or Trust Estate, as applicable, or may be removed
from time to time if certain asset tests are met,
all as described in the related Prospectus
Supplement.
The Mortgage Loans will not be insured or
guaranteed by any governmental agency.
The Mortgage Loans to be included in any Mortgage
Pool will be described in the related Prospectus
Supplement. The Mortgage Loans will have interest
payable thereon at (i) fixed rates specified in the
related Prospectus Supplement, (ii) adjustable
rates computed as specified in the related
Prospectus Supplement or (iii) graduated or other
variable rates described in the related Prospectus
Supplement. Unless otherwise specified in the
related Prospectus Supplement, each Mortgage Loan
will require monthly payment of principal and
interest. Scheduled payments of principal on any
Mortgage Loan may be computed (i) on a level debt
service basis that will result in full amortization
over the stated term of such Mortgage Loan, (ii) in
the case of a Balloon Loan, on the basis of an
assumed amortization schedule that is significantly
longer than the original term of maturity of such
Mortgage Loan and will require payment of a
substantial amount of principal at the stated
maturity specified in the related Mortgage Note or
(iii) on such other basis as is specified in the
related Prospectus Supplement.
If so specified in the Prospectus Supplement
relating to a Series of Certificates, the Mortgage
Pool may be divided into two or more groups based
on certain characteristics of the related Mortgage
Loans (such as type or amount of Mortgage Rate,
remaining term to maturity or type of Mortgaged
Property) and amounts received, collected or
recovered in respect of any such group will be the
primary source from which distributions on certain
Classes of Certificates will be derived.
The property securing a Mortgage Loan (each, a
"Mortgaged Property") may be located in any one of
the fifty states or the District of Columbia.
Unless otherwise specified in the related
Prospectus Supplement, all of the Mortgage Loans
will be covered by Standard Hazard Insurance
Policies insuring against certain losses due to
fire and other causes.
The Prospectus Supplement for each Series of
Securities will specify with respect to all
Mortgage Loans included in each related Mortgage
Pool, among other things, (i) the aggregate
outstanding principal balance and the average
outstanding principal balance of the Mortgage Loans
in such Mortgage Pool as of the date specified in
the Prospectus Supplement (the "Cut-off Date"),
(ii) the largest principal balance of any of the
Mortgage Loans, (iii) the types of Mortgaged
Properties securing the Mortgage Loans, (iv) the
original terms to maturity of the Mortgage Loans,
(v) the weighted average term to maturity of the
Mortgage Loans as of the Cut-off Date and the range
of the terms to maturity, (vi) the ranges of the
Combined Loan-to-Value Ratios at origination, (vii)
the weighted average Mortgage Rate and ranges of
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Mortgage Rates borne by the Mortgage Loans and
(viii) the geographic distribution of the Mortgaged
Properties on a state-by-state basis.
Revolving Period and
Amortization Period;
Transferor Interest........ If the Prospectus Supplement relating to a Series
of Certificates so provides, there may be a period
commencing on the date of issuance of a Class or
Classes of such Certificates and ending on the date
set forth in the related Prospectus Supplement (the
"Revolving Period") during which no principal
payments will be made to one or more Classes of
Certificates of the related Series as are
identified in such Prospectus Supplement. All
collections of principal otherwise allocated to
such Class or Classes of Certificates may be (i)
utilized by the Trust during such period to acquire
additional Mortgage Loans that satisfy the criteria
described in the related Prospectus Supplement,
(ii) held in an account and invested in Eligible
Investments for later distribution to
Certificateholders, (iii) applied to those Class or
Classes of Certificates, if any, of the same or
different Series as specified in the related
Prospectus Supplement as then are in amortization
or (iv) otherwise applied as specified in the
related Prospectus Supplement.
An "Amortization Period" is the period, if any,
specified as such in the Prospectus Supplement
relating to a Series of Certificates during which
an amount of principal is payable to holders of one
or more Classes of such Series of Certificates. If
so specified in the related Prospectus Supplement,
during an Amortization Period all or a portion of
principal collections on the Mortgage Loans may be
applied as specified above for a Revolving Period
and, to the extent not so applied, will be
distributed to the Class or Classes of Certificates
of the same or different Series as specified in the
related Prospectus Supplement as then being
entitled to payments of principal. In addition, if
so specified in the related Prospectus Supplement,
amounts deposited in certain accounts for the
benefit of one or more Classes of Certificates may
be released from time to time or on a specified
date and applied as a payment of principal on such
Class or Classes of Certificates. The related
Prospectus Supplement will set forth the
circumstances that will result in the commencement
of an Amortization Period.
Each Trust that has a Revolving Period may also
issue to the related Transferor a certificate
evidencing an undivided beneficial interest (the
"Transferor Interest") in the Trust not represented
by the other Certificates issued by such Trust. As
further described in the Prospectus Supplement
relating to a Series of Certificates, the value of
such Transferor Interest will fluctuate as the
amount of the assets of the Trust fluctuates and
the outstanding amount of the Certificates of the
related Series of Certificates is reduced.
Forward Commitments;
Prefunding Accounts and
Capitalized
Interest Accounts.......... If so specified in the related Prospectus
Supplement, the related Pooling and Servicing
Agreement or Indenture, as applicable, may contain
provisions pursuant to which the related Transferor
will agree to transfer additional Mortgage Loans
into the related Mortgage Pool for a specified
period of time (the "Funding Period") following the
date on which the related Securities are issued
(such provisions being referred to herein as a
"Forward Commitment"). Any Forward Commitment will
require that
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any Mortgage Loans so transferred conform to the
requirements specified in the related Pooling and
Servicing Agreement or Indenture, as applicable. If
a Forward Commitment is to be utilized, unless
otherwise specified in the related Prospectus
Supplement, a deposit will be made to a segregated
account (each, a "Prefunding Account") in an amount
equal to all or a portion of the proceeds received
by the related Transferor in connection with the
sale of the Securities of the related Series (such
amount, the "Prefunding Amount"). Subsequently, the
additional Mortgage Loans will be conveyed by the
related Transferor to the related Trust in exchange
for cash from the related Prefunding Account in one
or more transfers. The related Pooling and
Servicing Agreement or Indenture, as applicable,
will require that, if any of the Prefunding Amount
is not applied to acquire additional Mortgage Loans
by the end of the Funding Period, then any amounts
remaining on deposit in the Prefunding Account will
be released from the Prefunding Account and
distributed or paid, as applicable, in reduction of
the principal balance of the related Securities as
specified in the related Prospectus Supplement.
If a Prefunding Account is established, a
segregated account (each, a "Capitalized Interest
Account") may also be established for the related
Series. On the closing date for such Series, all or
a portion of the proceeds received by the related
Transferor in connection with the sale of the
Securities of the related Series may be deposited
in the Capitalized Interest Account and used to
fund the excess, if any, of (x) the sum of (i) the
amount of interest accrued on the Securities of
such Series specified in the related Prospectus
Supplement and, (ii) if specified in the related
Prospectus Supplement, certain fees or expenses
during the Funding Period such as Trustee fees and
credit enhancement fees, over (y) the amount of
interest available therefor from the Mortgage Loans
included in the original Mortgage Pool. If so
specified in the related Prospectus Supplement,
amounts on deposit in the Capitalized Interest
Account may be released to the related Transferor
prior to the end of the Funding Period subject to
the satisfaction of certain tests specified in the
related Prospectus Supplement. Any amounts on
deposit in the Capitalized Interest Account at the
end of the Funding Period that are not necessary
for such purposes will be distributed to the person
specified in the related Prospectus Supplement.
Credit Enhancement......... The Mortgage Loans included in a Trust or Trust
Estate, as applicable, the Securities of the
related Series or, in the case of Certificates, one
or more Classes of Certificates of the related
Series may have the benefit of one or more types of
credit enhancement, as described in the related
Prospectus Supplement. The protection against
losses afforded by any such credit support will be
limited. Such credit enhancement may include one or
more of the following types or another type of
credit enhancement as specified in the Prospectus
Supplement:
A. Subordinated
Certificates............ In the case of a Series of Certificates, the rights
of the holders of any Subordinated Certificates of
such Series to receive distributions with respect
to the related Trust will be subordinated to the
rights of the holders of the Senior Certificates of
the same Series to receive distributions to the
extent described in the related Prospectus
Supplement. This subordination is intended to
enhance the likelihood of regular receipt by
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holders of Senior Certificates of the full amount
of payments which such holders would be entitled to
receive if there had been no losses; however, there
can be no assurance that the Senior Certificates
will receive the full amount of payments to which
they are entitled as a result of such subordination
or the existence of the Reserve Accounts described
below. The protection afforded to the holders of
Senior Certificates through subordination may be
accomplished by the preferential right of such
Certificateholders to receive, prior to any
distribution being made in respect of the related
Subordinated Certificates, the amounts of principal
and interest due to them on each Distribution Date
out of the funds available for distribution on such
date in the related Certificate Account to the
extent described in the related Prospectus
Supplement. The protection afforded to the holders
of Senior Certificates through subordination also
may be accomplished by allocating certain types of
losses or delinquencies to the related Subordinated
Certificates to the extent described in the related
Prospectus Supplement.
If so specified in the related Prospectus
Supplement, a Subordinated Class of Certificates
may be senior to other Classes of Certificates with
respect to the right to receive certain types of
payments or with respect to allocation of certain
losses or delinquencies. If so specified in the
related Prospectus Supplement, subordination may
apply only in the event of certain types of losses
not covered by other forms of credit enhancement,
such as hazard losses not covered by Standard
Hazard Insurance Policies or losses due to the
bankruptcy of the borrower under a Mortgage Loan
(the "Mortgagor") not covered by a Bankruptcy Bond.
The related Prospectus Supplement will set forth
information concerning the amount of subordination
of a Class or Classes of Subordinated Certificates
in a Series, the circumstances in which such
subordination will be applicable and the manner, if
any, in which the amount of subordination will
decrease over time.
B. Reserve Account......... If so specified in the related Prospectus
Supplement, one or more reserve or spread accounts
(each, a "Reserve Account") may be established and
maintained, in whole or in part, by the deposit
therein of distributions allocable to the holders
of the Securities of the related Series or, in the
case of Certificates, specified Classes of the
Certificates of the related Series for a specified
time or until a specified level is reached. The
related Prospectus Supplement will set forth
information concerning the manner of funding any
Reserve Account and the conditions under which
amounts in any such Reserve Account will be used to
make distributions or payments to holders of such
Securities or released to holders of Securities,
the Servicer, the related Transferor or another
entity, as applicable.
C. Financial Guaranty
Insurance Policy........ If so specified in the related Prospectus
Supplement, a financial guaranty insurance policy
or policies (each, a "Financial Guaranty Insurance
Policy") may be obtained and maintained for
Securities of the related Series or, in the case of
Certificates, specified Classes of the Certificates
of the related Series. A Financial Guaranty
Insurance Policy generally will unconditionally and
irrevocably guarantee that the full amount of
principal and interest distributable or payable, as
applicable, to Securityholders on any Distribution
Date or Payment Date, as applicable, as
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well as any other amounts specified in the related
Prospectus Supplement (the "Insured Amount"), will
be available for distribution or payment, as
applicable, to Securityholders on such date. The
terms of any such Financial Guaranty Insurance
Policy will be described in the related Prospectus
Supplement.
D. Mortgage Pool
Insurance Policy........ If so specified in the related Prospectus
Supplement, a mortgage pool insurance policy or
policies (each, a "Mortgage Pool Insurance Policy")
may be obtained and maintained for all or certain
of the Mortgage Loans in the related Mortgage Pool,
limited in scope, covering losses on the related
Mortgage Loans up to a maximum amount. The terms of
any such Mortgage Pool Insurance Policy will be
described in the related Prospectus Supplement.
E. Special Hazard
Insurance Policy........ If so specified in the related Prospectus
Supplement, certain physical risks with respect to
the related Mortgaged Properties that would not
otherwise be insured against by Standard Hazard
Insurance Policies may be covered by a special
hazard insurance policy or policies (each, a
"Special Hazard Insurance Policy"). Each Special
Hazard Insurance Policy will be limited in scope
and will cover losses up to a maximum amount. The
terms of any such Special Hazard Insurance Policy
will be described in the related Prospectus
Supplement.
F. Bankruptcy Bond......... If so specified in the related Prospectus
Supplement, a mortgagor bankruptcy bond or bonds
(each, a "Bankruptcy Bond") may be obtained to
cover certain losses resulting from a reduction by
a bankruptcy court of scheduled payments of
principal or interest on a Mortgage Loan or a
reduction by such court of the principal amount of
a Mortgage Loan. The level of coverage and other
terms of each Bankruptcy Bond will be specified in
the related Prospectus Supplement.
G. Cross Support........... If so specified in the Prospectus Supplement
relating to a Series of Certificates, the interests
of separate Trusts or separate groups of assets in
a single Trust may be evidenced by separate Classes
of the related Series of Certificates. In such
case, credit support may be provided by a
cross-support feature which requires that
distributions be made with respect to certain
Certificates evidencing interests in one or more
Trusts or asset groups prior to distributions to
other Certificates evidencing interests in other
Trusts or asset groups. If specified in the related
Prospectus Supplement, the coverage provided by one
or more other forms of credit support, such as
Reserve Accounts or Financial Guaranty Insurance
Policies, may apply concurrently to two or more
separate Trusts, without priority among such
Trusts, until the credit support is exhausted. If
applicable, the Prospectus Supplement will identify
the Trusts or asset groups to which such credit
support relates and the manner of determining the
amount of the coverage provided thereby and of the
application of such coverage to the identified
Trusts or asset groups.
H. Other Credit
Enhancement............. Other credit enhancement arrangements, including,
but not limited to, letters of credit or third
party guarantees, may be used to provide coverage
for certain risks of losses on the Mortgage Loans
in a given Trust or Trust Estate, as applicable.
These arrangements may be in
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addition to or in lieu of any forms of credit
support described in this Prospectus. The related
Prospectus Supplement will describe any such
arrangements, including information as to the
extent of coverage and any conditions thereto or
limitations thereon. Any such arrangement must be
acceptable to each nationally recognized
statistical rating agency that is engaged by the
related Transferor to provide a rating for any
Securities of the related Series (each, a "Rating
Agency").
Advances................... Unless otherwise specified in the related
Prospectus Supplement, the Servicer and, if
applicable, each Sub-Servicer, will be obligated
each month (or at such other intervals specified in
the related Prospectus Supplement) to advance
amounts corresponding to all or a portion of
delinquent interest payments on such Mortgage Loan
until the date on which the related Mortgaged
Property is sold at a foreclosure sale or the
related Mortgage Loan is otherwise liquidated or
charged off. See "The Pooling and Servicing
Agreement -- Monthly Advances and Compensating
Interest" herein.
Compensating Interest...... Unless otherwise specified in the related
Prospectus Supplement, with respect to each
Mortgage Loan as to which a prepayment is received,
that becomes a Liquidated Mortgage Loan or is
otherwise charged-off during the Collection Period
related to a Distribution Date or Payment Date, as
applicable, the Servicer will be required with
respect to such date to remit to the Trustee, from
amounts otherwise payable to the Servicer as
servicing compensation, an amount generally
representing the excess of 30 days of interest on
the principal balance of such Mortgage Loan prior
to such prepayment, liquidation or charge-off over
the amount of interest actually received on the
related Mortgage Loan during the applicable
Collection Period. See "The Pooling and Servicing
Agreement -- Monthly Advances and Compensating
Interest" herein.
Optional Termination with
Respect to Certificates.... The related Transferor, the Servicer or certain
other entities specified in the Prospectus
Supplement relating to a Series of Certificates may
have the option to effect early retirement of such
Series of Certificates by acquiring the Mortgage
Loans in the Trust, subject to the aggregate
principal balance of the related Mortgage Loans
being less than the percentage specified in the
related Prospectus Supplement of the aggregate
principal balance of the Mortgage Loans at the
Cut-off Date for the related Series. Typically, the
related Transferor, the Servicer or such other
entity will cause the retirement of a Series of
Certificates when servicing of the then remaining
amount of Mortgage Loans becomes inefficient. See
"The Pooling and Servicing
Agreement -- Termination; Optional Termination"
herein.
Redemption of Bonds........ To the extent provided in the Prospectus Supplement
relating to a Series of Bonds, the Bonds of any
Series may be (i) redeemed at the 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.
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Certain Federal Income
Tax Consequences........... Investors are advised to consult their tax advisors
and to review "Certain Federal Income Tax
Consequences" herein and in the related Prospectus
Supplement.
I. Certificates
A. REMIC................ If an election is to be made to treat the Trust for
a Series of Certificates as a REMIC for federal
income tax purposes, the related Prospectus
Supplement will specify which Class or Classes
thereof will be designated as regular interests in
the REMIC ("Regular Certificates") and which Class
of Certificates will be designated as the residual
interest in the REMIC ("Residual Certificates"). To
the extent provided herein and in the related
Prospectus Supplement, Certificates representing an
interest in the REMIC will be considered "real
estate assets" for purposes of Section 856(c)(4)(A)
of the Internal Revenue Code of 1986, as amended
(the "Code"), and assets described in Section
7701(a)(19)(C) 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 entitled, subject to certain limitations,
to deduct their pro rata share of expenses of the
Trust.
To the extent provided herein and in the related
Prospectus Supplement, Certificates of such Series
will represent "real estate assets" for purposes of
Section 856(c)(4)(A) of the Code and
"loans . . . secured by an interest in real
property" within the meaning of Section
7701(a)(19)(C)(v) of the Code.
C. Certificates
Treated as Debt......... If so specified in the Prospectus Supplement
relating to a Series of Certificates, a Trust may
issue Certificates that will be characterized as
indebtedness for federal income tax purposes of the
related Transferor secured by the related Mortgage
Loans. Each investor in an interest in the
Certificates of the related Series, by acceptance
of its interest therein,
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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.
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
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institution should consult its own legal advisors
in determining whether and the extent to which a
Series of Securities constitutes legal investments
for such investors. See "Legal Investment
Considerations" herein.
Registration of
Securities................. Unless otherwise specified in the related
Prospectus Supplement, the Securities will be
issued as physical securities ("Definitive
Securities") in fully registered form in the
denominations specified in the related Prospectus
Supplement. The Securities may be represented,
however, by a single certificate or bond, as
applicable, registered in the name of Cede & Co.
("Cede"), as nominee of The Depository Trust
Company ("DTC"), or another nominee if so specified
in the related Prospectus Supplement. In such case,
the beneficial owners thereof will not be entitled
to receive Definitive Securities representing their
respective interests, except in certain
circumstances described in the related Prospectus
Supplement. See "Description of the
Securities -- Form of Securities -- Book-Entry
Registration" herein.
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RISK FACTORS
LIMITED LIQUIDITY
Prior to issuance, there will have been no market for the Securities of any
Series. There can be no assurance that a secondary market for the Securities
will develop or, if a secondary market does develop, that it will provide
Securityholders with liquidity of investment or that it will continue for the
lives of the Securities. Unless otherwise indicated in the related Prospectus
Supplement, the Securities will not constitute "mortgage related securities"
under SMMEA, and certain investors may be subject to legal restrictions that
preclude their purchase of any such non-SMMEA Certificates. In addition, with
respect to a given Series of Certificates, certain Classes of Certificates may
be restricted as to transferability to certain entities if so specified in the
related Prospectus Supplement. Any restrictions on the purchase or
transferability of the Securities of a given Series may have a negative effect
on the development of a secondary market in such Securities.
LIMITED ASSETS; LIMITED OBLIGATIONS
Proceeds of the assets of any Trust or Trust Estate, as applicable,
including the Mortgage Loans, any Reserve Account and any Financial Guaranty
Insurance Policy or other form of credit enhancement, will be the sole source of
funds for the required distributions or payments, as applicable, on the
Securities of the related Series and there will be no recourse to the related
Transferor or any other entity in the event that such proceeds are insufficient
or otherwise unavailable to make any such required distributions or payments, as
applicable, on such Securities. The Certificates of any Series will represent
beneficial interests in the related Trust only. The Bonds of any Series will be
non-recourse obligations of the related Bond Issuer, and the assets of the
related Trust Estate will be the sole source of payments on the Bonds. The
Securities will not represent an interest in or obligation of the Servicer, any
Originator, the Trustee, any Sub-Servicer or any other person. Neither the
Securities nor the Mortgage Loans will be insured or guaranteed by any
governmental agency or instrumentality. Except as otherwise specified in the
related Prospectus Supplement, neither the Securities nor the underlying
Mortgage Loans will be guaranteed or insured by the related Transferor, the
Servicer, the related Originators, the Trustee, any Sub-Servicer or any of their
respective affiliates. The only obligations of the foregoing entities with
respect to the Securities or the Mortgage Loans will be the obligations (if any)
of the related Transferor pursuant to certain limited representations and
warranties made with respect to the Mortgage Loans, and the servicing
obligations of the Servicer and any Sub-Servicer under the related Agreement
(including their respective limited obligations to make certain advances in the
event of delinquencies on the Mortgage Loans, but only to the extent deemed
recoverable). Notwithstanding the foregoing, and as specified in the related
Prospectus Supplement, certain types of credit enhancement, such as a Financial
Guaranty Insurance Policy or a letter of credit, may constitute a full recourse
obligation of the provider of such credit enhancement.
NATURE OF THE SECURITY FOR MORTGAGE LOANS
Risks Associated with Any Decline in Value of Mortgaged Properties. An
overall decline in the market value of residential real estate, the general
condition of a Mortgaged Property or other factors, including acts of nature
such as hurricanes, floods, tornadoes or earthquakes, could adversely affect the
values of the Mortgaged Properties such that the outstanding balances of the
Mortgage Loans, together with any other liens on the Mortgaged Properties, equal
or exceed the value of the Mortgaged Properties. Such a decline could, in
certain circumstances, result in the interest in the Mortgaged Property held by
the related Trust or Trust Estate, as applicable, being extinguished. In
addition, certain areas of the country may from time to time experience
significant declines in real estate values. The related Transferor will not be
able to quantify the impact of any such declines in the value of any Mortgaged
Properties or predict whether, to what extent or how long such declines may
continue. Because certain Mortgage Loans may have been underwritten pursuant to
standards that rely primarily on the value of the related Mortgaged Properties
rather than the creditworthiness of the borrowers under such Mortgage Loans
(each, a "Mortgagor"), the actual rates of delinquencies, foreclosures and
losses on such Mortgage Loans, particularly in periods during which the value of
the related
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Mortgaged Properties has declined, could be higher than those historically
experienced by the mortgage lending industry in general.
Risks Associated with Junior Liens. Certain of the Mortgage Loans will be
home equity loans secured by junior liens (each, a "Junior Loan") subordinate to
the rights of the mortgagees under the related senior mortgages (each, a "Senior
Lien"). As a result, the proceeds from any liquidation, insurance or
condemnation proceedings will be available to satisfy the principal balance of a
Junior Loan only to the extent that the claims, if any, of each such Senior Lien
are satisfied in full, including any related foreclosure costs. In addition, a
junior mortgagee may not foreclose on the Mortgaged Property securing the
related Junior Loan unless it forecloses subject to the related Senior Lien, in
which case it must either pay the entire amount of each Senior Lien to the
applicable mortgagee at or prior to the foreclosure sale or undertake the
obligation to make payments on each Senior Lien in the event of a default
thereunder. Generally, a servicer will satisfy each such Senior Lien at or prior
to the foreclosure sale only to the extent it determines that any amounts so
paid will be recoverable from future payments and collections on the Junior Loan
or otherwise. No Trust or Trust Estate will have any source of funds to satisfy
any such Senior Lien or make payments due under any Senior Lien. See "Certain
Legal Aspects of the Mortgage Loans and Related Matters --
Foreclosure/Repossession" herein.
Risks Associated with Balloon Loans. Certain of the Mortgage Loans may
constitute "Balloon Loans." Balloon Loans are loans originated with a term to
stated maturity that is shorter than the period on which the corresponding
amortization schedule is based. As a result, upon the maturity of a Balloon
Loan, the Mortgagor will be required to make a "balloon payment" which will be
significantly larger than the previous monthly payments due on such Balloon
Loan. The ability of such Mortgagor to repay a Balloon Loan at maturity
frequently will depend on such Mortgagor's ability to refinance the Mortgage
Loan. The ability of a Mortgagor to refinance such a Mortgage Loan will be
affected by a number of factors, including the prevailing level of mortgage
rates at the time, the value of the related Mortgaged Property, the Mortgagor's
equity in the related Mortgaged Property, the financial condition of the
Mortgagor, the tax laws and general economic conditions at the time.
Although a low interest rate environment may facilitate the refinancing of
a Balloon Loan, the receipt and reinvestment by Securityholders of the proceeds
in such an environment may produce a lower return than that previously received
in respect of the related Mortgage Loan. Conversely, a high interest rate
environment may make it more difficult for the Mortgagor to accomplish a
refinancing and may result in delinquencies or defaults. None of the related
Transferor, the Servicer, the Originators, the Trustee or any other entity will
be obligated to provide funds to refinance any Balloon Loan.
Risks Associated with Bankruptcy of the Mortgagor. General economic
conditions and other factors (which may not affect real property values) have an
impact on the ability of Mortgagors to repay Mortgage Loans. Loss of earnings,
illness, divorce and other similar factors may lead to an increase in
delinquencies, defaults and bankruptcy filings by Mortgagors. In the event of
personal bankruptcy of a Mortgagor, a bankruptcy court may suspend or reduce the
payments of principal and interest to be paid with respect to the related
Mortgage Loan or permanently reduce the principal balance of such Mortgage Loan,
thus either delaying or permanently limiting the amount ultimately received by
the related Trust or Trust Estate in respect of such Mortgage Loan. Moreover, if
a bankruptcy court were to prevent the Trustee for the related Trust or Trust
Estate, as applicable, or the related Servicer from causing a transfer of the
related Mortgaged Property in connection with a foreclosure or similar
proceeding, any remaining balance on the related Mortgage Loan may not be
recoverable and the related Trust or Trust Estate may experience a loss to the
extent of any such remaining balance.
Risks Associated with Defaulted Mortgage Loans. Even assuming that the
Mortgaged Properties provide adequate security for the Mortgage Loans,
substantial delays could be encountered in connection with the liquidation of
defaulted Mortgage Loans and corresponding delays in the distribution or payment
of related proceeds to the related Securityholders could occur. An action to
foreclose on a Mortgaged Property securing a Mortgage Loan is regulated by state
statutes and rules and is subject to many of the same delays and expenses as
other lawsuits if defenses or counterclaims are interposed, sometimes requiring
several years to
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complete. Furthermore, in some states an action to obtain a deficiency judgment
is not permitted following a nonjudicial sale of a Mortgaged Property. In the
event of a default by a Mortgagor, these restrictions, among other things, may
impede the ability of the Servicer or any Sub-Servicer to foreclose on or sell
the Mortgaged Property or to obtain Liquidation Proceeds (net of expenses)
sufficient to repay all amounts due on the related Mortgage Loan. The Servicer
or any Sub-Servicer will be entitled to deduct from Liquidation Proceeds all
expenses reasonably incurred in attempting to recover amounts due on the related
Liquidated Mortgage Loan and not yet repaid, including unreimbursed Monthly
Advances and Servicing Advances, payments to prior lienholders, legal fees and
costs of legal action, real estate taxes, and maintenance and preservation
expenses. In the event that any of the Mortgaged Properties fail to provide
adequate security for the related Mortgage Loans, and the credit enhancement for
the related Series is not available to cover resulting shortfalls,
Securityholders could experience a loss on their investment.
Liquidation expenses with respect to defaulted Mortgage Loans do not vary
directly with the outstanding principal balance of the Mortgage Loans at the
time of default. Therefore, assuming that the Servicer or any Sub-Servicer took
the same steps in realizing upon a defaulted Mortgage Loan having a small
remaining principal balance as it would in the case of a defaulted Mortgage Loan
having a larger principal balance, the amount realized after expenses of
liquidation would be smaller as a percentage of the outstanding principal
balance of the smaller Mortgage Loan than would be the case with a larger
Mortgage Loan. Because the average outstanding principal balances of Mortgage
Loans that are Junior Loans generally are smaller relative to the average
outstanding principal balances of Mortgage Loans that are first mortgage loans,
realizations net of liquidation expenses on defaulted Mortgage Loans that are
Junior Loans may also be smaller as a percentage of the principal amount of such
Mortgage Loans than would be the case if such mortgage loans were secured by
first mortgages.
Risks Associated with Acquiring Additional Mortgage Loans. If a Pooling and
Servicing Agreement or Indenture provides for a Prefunding Account and the
principal balance of additional Mortgage Loans delivered by the related
Transferor during the related Funding Period is less than the Prefunding Amount,
the holders of the Securities of the related Series may receive a prepayment of
principal as and to the extent described in the related Prospectus Supplement.
In addition, if so specified in the Prospectus Supplement relating to a Series
of Certificates, an Amortization Period may result from the failure of the
related Transferor to assign additional Mortgage Loans to the related Trust
during the Revolving Period, thereby resulting in a prepayment of the related
Certificates. Any such principal prepayment may adversely affect the yield to
maturity of the related Securities. Because prevailing interest rates are
subject to fluctuation, there can be no assurance that investors will be able to
reinvest such a prepayment at yields equaling or exceeding the yields on the
related Securities. It is possible that the yield on any such reinvestment will
be lower, and may be significantly lower, than the yield on the related
Securities.
Each additional Mortgage Loan must satisfy the eligibility criteria
specified in the related Prospectus Supplement and related Pooling and Servicing
Agreement or Indenture, as applicable. Such eligibility criteria will be
determined in consultation with each Rating Agency (and/or any credit
enhancement provider for the related Series) prior to the issuance of such
Series and are designed to ensure that if such additional Mortgage Loans were
included as part of the initial Mortgage Loans, the credit quality thereof would
be consistent with the initial rating of the Securities of such Series. At the
time additional Mortgage Loans are transferred for inclusion in the related
Mortgage Pool, the related Transferor will certify that all conditions precedent
to the transfer of such additional Mortgage Loans, including the satisfaction of
specific eligibility criteria, have been satisfied. It is a condition to the
transfer of any additional Mortgage Loans by the related Transferor for
inclusion in the related Mortgage Pool that each Rating Agency, after receiving
prior notice of any such proposed transfer, shall not have advised the related
Transferor or the Trustee or any credit enhancement provider for the related
Series that the conveyance of such additional Mortgage Loans will result in a
qualification, modification or withdrawal of its then current rating of the
Securities of such Series. Following the transfer of additional Mortgage Loans
for inclusion in the related Mortgage Pool, the aggregate characteristics of the
Mortgage Loans then held in the related Trust or Trust Estate, as applicable,
may vary from those included in the original Mortgage Pool. As a result, the
additional Mortgage Loans may adversely
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affect the performance of the related Securities. See "The Trusts and Trust
Estates -- Forward Commitments; Prefunding Accounts; Capitalized Interest
Accounts" herein.
The ability of any Trust or Trust Estate, as applicable, to invest in
additional Mortgage Loans during the related Funding Period and, in the case of
a Series of Certificates, any Revolving Period, will be dependent upon the
ability of the related Transferor to acquire Mortgage Loans that satisfy the
prerequisites to transfer for inclusion in the related Mortgage Pool specified
in the related Prospectus Supplement. The ability of the related Transferor to
acquire such Mortgage Loans will be affected by a variety of social and economic
factors, including the prevailing level of market interest rates, unemployment
levels and consumer perceptions of general economic conditions.
Risks Associated with Non-Owner Occupied Properties. Certain of the
Mortgaged Properties relating to Mortgage Loans may not be owner occupied. It is
possible that the rates of delinquencies, foreclosures and losses on Mortgage
Loans secured by non-owner occupied properties could be higher than such rates
on Mortgage Loans secured by the primary residence of the borrower.
RISKS ASSOCIATED WITH PREPAYMENT OF THE MORTGAGE LOANS
All of the Mortgage Loans may be prepaid in full or in part at any time,
generally upon the payment to the Servicer of a prepayment charge. The rate of
prepayments of the Mortgage Loans cannot be predicted and may be affected by a
wide variety of economic, social and other factors, including state and federal
income tax policies, interest rates, the availability of alternative financing
and homeowner mobility. Therefore, no assurance can be given as to the level of
prepayments that the Trust or the Trust Estate will experience. A number of
factors suggest that the prepayment behavior of the Mortgage Pool may be
significantly different from that of a pool of conventional first lien
residential mortgage loans with equivalent interest rates and maturities. One
such factor is that the principal balance of the average Mortgage Loan is
smaller than that of the average conventional first lien mortgage loan. A
smaller principal balance may be easier for a borrower to prepay than a larger
balance and, therefore, a higher prepayment rate may result for the Mortgage
Pool than for a pool of conventional first lien mortgage loans, irrespective of
the relative average interest rates and the general interest rate environment.
In addition, in order to refinance a first lien mortgage loan, the borrower must
generally repay any junior mortgage loans. However, a small principal balance
may make refinancing a Mortgage Loan at a lower interest rate less attractive to
the borrower as the perceived impact to the borrower of lower interest rates on
the size of the monthly payment may not be significant. Other factors that might
be expected to affect the prepayment rate of the Mortgage Pool include general
economic conditions, possible future changes affecting the deductibility for
federal income tax purposes of interest payments on mortgage loans, the amounts
of and interest rates on the underlying senior mortgage loans and the tendency
of borrowers to use first lien mortgage loans as long-term financing for home
purchase and junior mortgage loans as shorter-term financing for a variety of
purposes, including home improvement, education expenses, debt consolidation and
purchases of consumer durables such as automobiles. Accordingly, the Mortgage
Loans may experience higher rates of prepayment than traditional first lien
mortgage loans. See "Maturity, Prepayment and Yield Considerations".
Prepayments may result from voluntary early payments by borrowers
(including payments in connection with refinancing of any related senior
mortgage loans), sales of Mortgaged Properties subject to "due-on-sale" clauses
as to which the Servicer exercises its rights thereunder and liquidations due to
default, as well as the receipt of proceeds from hazard, credit life and
disability insurance policies. In addition, repurchases or purchases of Mortgage
Loans in a Mortgage Loan Group required or permitted to be made by the Sponsor,
the Servicer and, under certain limited circumstances, as applicable, the
Certificate Insurer under the related Pooling and Servicing Agreement or
Servicing Agreement will have the same effect on Securityholders as a prepayment
of the related Mortgage Loans. Prepayments and such repurchases and purchases
will accelerate the receipt of distributions of monthly principal on the
Certificates or the Bonds, as applicable. See "The Pooling and Servicing
Agreement -- Assignment of Mortgage Loans" and "-- Termination; Optional
Termination" and "Certain Legal Aspects of the Mortgage Loans and Related
Matters -- Enforceability of Due-on-Sale Clauses" herein. The Servicer's
practice of soliciting refinancings from existing borrowers under loans
originated by Affiliated Originators may have the effect of increasing the rate
of prepayment, due to
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refinancings, on the Mortgage Loans. See "Origination and Servicing of the
Mortgage Loans -- Servicing of the Mortgage Loans" herein.
ENVIRONMENTAL STATUTES AFFECTING SECURITY INTERESTS
A substantial portion of the Mortgage Loans are secured by Mortgaged
Properties located in states that may impose a statutory lien for associated
costs on property that is the subject of a clean-up action by the state on
account of hazardous wastes or hazardous substances released or disposed of on
the property. Such a lien generally will have priority over all subsequent liens
on the property, although in some states, including California, it will not have
priority over prior recorded liens, including the lien of a mortgage. In
addition, under federal environmental statutes and under the laws of many
states, including California, a secured party that takes a deed in lieu of
foreclosure, acquires a mortgaged property at a foreclosure sale or, prior to
foreclosure, has been involved in decisions or actions that may lead to
contamination of a property, may be liable for the costs of cleaning up a
contaminated site. These costs, which could be substantial, could be a liability
of the Trust or the Trust Estate, as applicable, and any such liability may
ultimately be borne by the Securityholders of the related Series of Securities.
This potential exposure will be minimized to some extent because under the terms
of the related Pooling and Servicing Agreement, Indenture or Servicing
Agreement, as applicable, the related Trustee and Servicer will not be
authorized to take any action that may be deemed participation in the management
of a contaminated Mortgaged Property. See "Certain Legal Aspects of the Mortgage
Loans and Related Matters -- Environmental Considerations" herein. Any such
liens or costs imposed in connection with a clean-up action by the state may
impede the ability of the Servicer to foreclose on or sell the related Mortgaged
Property or to obtain Net Liquidation Proceeds sufficient to repay all amounts
due on the related Mortgage Loan. Any resulting losses will be covered by funds
made available through operation of the overcollateralization or
cross-collateralization features described herein.
RISKS ASSOCIATED WITH CERTAIN ORIGINATION FEES
Fees earned on the origination of loans, placement of related insurance and
other services provided by the Sponsor and Affiliated Originators are often paid
by the borrower out of related loan proceeds. From time to time, in the ordinary
course of their businesses, originators of home equity loans have been named in
legal actions brought by mortgagors challenging the amount or method of imposing
or disclosing such fees. To date, no such action has been decided against the
Sponsor or any Affiliated Originator. If such an action against any Originator
with respect to any Mortgage Loan were successful, a court might require that
the principal balances of the related Mortgage Loans be reduced by the amount of
contested fees or charges. Any such reductions could result in substantial
Realized Losses during one or more Collection Periods, potentially requiring
accelerated distributions in reduction of the Principal Balances of Bonds or
Certificates.
LEGAL CONSIDERATIONS
State and Federal Regulations. Applicable state laws generally regulate
interest rates and other charges, require certain disclosures and require
licensing of the Originators, the Servicer and any Sub-Servicer. In addition,
most states have other laws, public policies and general principles of equity
relating to the protection of consumers, unfair and deceptive practices and
practices which may apply to the origination, servicing and collection of the
Mortgage Loans. In California, for example, a mortgage lender is subject to the
California Fair Debt Collection Practices Act which regulates practices used to
effect collection on consumer loans. See "Certain Legal Aspects of the Mortgage
Loans and Related Matters" herein.
The Mortgage Loans may also be subject to federal laws, including: (i) the
Truth in Lending Act and Regulation Z promulgated thereunder, which require
certain disclosures to the borrowers regarding the terms of the Mortgage Loans;
(ii) the Equal Credit Opportunity Act and Regulation B promulgated thereunder,
which prohibit discrimination on the basis of age, race, color, sex, religion,
marital status, national origin, receipt of public assistance or the exercise of
any right under the Consumer Credit Protection Act, in the extension of credit;
(iii) the Real Estate Settlement Procedures Act and Regulation X promulgated
thereunder, which require certain disclosures to borrowers regarding the
settlement and servicing of the Mortgage Loans; (iv) the Fair Credit Reporting
Act, which regulates the use and reporting of information
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related to the borrower's credit experience; and (v) the Federal Trade
Commission Preservation of Consumer's Claims and Defenses Rule, 16 C.F.R. Part
433, regarding the preservation of a consumer's rights.
The federal Soldiers' and Sailors' Civil Relief Act of 1940, as amended
(the "Relief Act"), may affect the ability of the Servicer to collect full
amounts of interest on certain Mortgage Loans and could interfere with the
ability of the Servicer to foreclose on certain properties. See "Certain Legal
Aspects of the Mortgage Loans and Related Matters -- Soldiers' and Sailors'
Civil Relief Act" herein.
It is possible that some of the Mortgage Loans will be subject to the
Riegle Community Development and Regulatory Improvement Act of 1994 (the "Riegle
Act") which incorporates the Home Ownership and Equity Protection Act of 1994.
The Riegle Act amended the Truth in Lending Act, which in turn led to certain
additional provisions being added to Regulation Z, the implementing regulation
of the Truth in Lending Act. These provisions impose additional disclosure and
other requirements on creditors with respect to non-purchase money mortgage
loans with high interest rates or high up-front fees and charges. In general,
mortgage loans within the purview of the Riegle Act have annual percentage rates
over 10% greater than the yield on Treasury Securities of comparable maturity
and/or fees and points which exceed the greater of 8% of the total loan amount
or $400. The provisions of the Riegle Act apply on a mandatory basis to all
mortgage loans originated on or after October 1, 1995. The provisions can impose
specific statutory liabilities upon creditors who fail to comply with their
provisions and may affect the enforceability of the related loans. In addition,
any assignee of the creditor would generally be subject to all claims and
defenses that the consumer could assert against the creditor, including, without
limitation, the right to rescind the mortgage loan.
Depending on the provisions of the applicable law and the specific facts
and circumstances involved, violations of these laws, policies and principles
may limit the ability of the Servicer, or any Sub-Servicer, to collect all or
part of the principal of or interest on the Mortgage Loans, may entitle the
borrower to a refund of amounts previously paid and, in addition, could subject
the Servicer, or any Sub-Servicer, to damages and administrative sanctions. If
the Servicer, or any Sub-Servicer, is unable to collect all or part of the
principal or interest on any Mortgage Loans because of a violation of the
aforementioned laws, public policies or general principles of equity,
distributions or payments to Securityholders of realized proceeds of the assets
in the related Trust or Trust Estate, as applicable, may be delayed, or such
proceeds may not be sufficient to repay all amounts owed to Securityholders.
Furthermore, depending upon whether damages and sanctions are assessed against
the Servicer or an Originator, such violations may have a material impact upon
the financial ability of the Servicer to continue to act in such capacity or the
ability of a Transferor to withdraw or replace Mortgage Loans if such violation
breaches a representation or warranty contained in the related Pooling and
Servicing Agreement or Indenture, as applicable.
YIELD, MATURITY AND PREPAYMENT CONSIDERATIONS
The yield to maturity of the Securities of any Series will be affected by
the amount and timing of principal payments on the related Mortgage Loans, the
manner of allocation of available funds and/or losses to such Securities, the
interest rates or amounts of interest payable on such Securities and the
purchase price paid for such Securities. In the case of a Series of Certificates
issued in Classes, the interaction of the foregoing factors may have different
effects on, and create different risks for, such Classes, and the effects and/or
risks for any one Class may vary over the life of such Class. The related
Prospectus Supplement may include additional prepayment considerations with
respect to the Securities of the related Series. Investors should carefully
consider the different consequences of such risks as may be described in the
related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, the
Mortgage Loans may be prepaid in full or in part at any time; however, a
prepayment penalty or premium may still be imposed in connection therewith. The
rate of prepayments of the Mortgage Loans cannot be predicted and may be
affected by a wide variety of economic, social and other factors, including
prevailing interest rates, the availability of alternative financing and
homeowner mobility. Therefore, no assurance can be given as to the level of
prepayments that may be experienced on Mortgage Loans included in any Mortgage
Pool.
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Although published statistical data regarding the effects of interest rates
on prepayment rates for Mortgage Loans of the type typically made or acquired by
the Originators is limited, a number of factors suggest that the prepayment
behavior of a pool including Mortgage Loans may be significantly different from
that of a pool composed entirely of conforming, non-conforming, "jumbo" or
government-insured (i.e., "traditional") first mortgage loans with equivalent
interest rates and maturities. One such factor is the smaller average principal
balance of Mortgage Loans that may result in a higher prepayment rate than that
of a traditional first mortgage loan with a larger average balance, regardless
of the interest rate environment. A small principal balance, however, also may
make refinancing Mortgage Loans at a lower interest rate less attractive to the
borrower relative to refinancing a larger balance first mortgage loan, as the
perceived impact to the borrower of lower interest rates on the amount of the
monthly payment for a Mortgage Loan may be less than for a traditional first
mortgage loan with a larger balance. Other factors that might be expected to
affect the prepayment rate of a pool of Mortgage Loans include the amounts of,
and interest rates on, the underlying Senior Liens, if any, and the use of first
mortgage loans as long-term financing for home purchase and home equity loans as
shorter-term financing for a variety of purposes, including home improvement,
education expenses and purchases of consumer durables such as automobiles.
Accordingly, Mortgage Loans may experience a higher rate of prepayments than
traditional first mortgage loans. In addition, any future limitations on the
deductibility of interest payments on the Mortgage Loans for federal income tax
purposes may further increase the rate of prepayments on the Mortgage Loans.
In addition, certain of the Mortgage Loans comprising the Mortgage Pool may
have adjustable Mortgage Interest Rates ("ARM Loans"). As is the case with
conventional fixed-rate mortgage loans, ARM Loans may be subject to a greater
rate of principal prepayments in a declining interest rate environment. For
example, if prevailing interest rates fall appreciably, ARM Loans could be
subject to higher prepayment rates than if prevailing interest rates remain
constant because the availability of fixed-rate mortgage loans at competitive
interest rates may encourage mortgagors to refinance their ARM Loans to "lock
in" a lower fixed interest rate. Conversely, if prevailing interest rates rise
appreciably, ARM Loans may prepay at lower rates than if prevailing interest
rates remain at or below those in effect at the time such ARM Loans were
originated. There can be no certainty as to the rate of prepayments on the ARM
Loans in stable or changing interest rate environments. See "Maturity,
Prepayment and Yield Considerations" herein.
Prepayments may result from voluntary early payments by borrowers
(including payments in connection with refinancings of any related Senior
Liens), sales of Mortgaged Properties subject to due-on-sale provisions and
liquidations due to default, as well as the receipt of proceeds from physical
damage, credit life and disability insurance policies. In addition, withdrawals
or reacquisitions of Mortgage Loans from a Trust or Trust Estate, as applicable,
required to be made under the related Pooling and Servicing Agreement or
Indenture will have the same effect on the Securityholders as a prepayment of
such Mortgage Loans. Unless otherwise specified in the related Prospectus
Supplement, all of the Mortgage Loans contain due-on-sale provisions, and the
Servicer will be required to enforce such provisions unless (i) such enforcement
would materially increase the risk of default or delinquency on, or materially
decrease the security for, such Mortgage Loan or (ii) such enforcement is not
permitted by applicable law, in which case the Servicer is authorized to permit
the purchaser of the related Mortgaged Property to assume the Mortgage Loan.
Additionally, should any Originator solicit refinancings from existing
borrowers, the rate of prepayments on the Mortgage Loans may increase due to any
resulting refinancings.
Prepayments on the Mortgage Loans for a Series generally will result in a
faster rate of distributions or payments, as applicable, of principal on the
Securities. Thus, the prepayment experience of the Mortgage Loans will affect
the average life and yield to investors and the extent to which the Securities
of any Series are paid prior to the final scheduled Distribution Date or Payment
Date, as applicable, therefor. A Series of Certificates may include Classes
which pay "interest only" or are entitled to receive a disproportionately high
level of interest distributions compared to the amount of principal to which
such Classes are entitled (each, an "Interest Weighted Class") or Classes which
pay "principal only" or are entitled to receive a disproportionately high level
of principal distributions compared to the amount of interest to which such
Classes are entitled (each, a "Principal Weighted Class"). A Series of
Certificates may include an Interest Weighted Class offered at a significant
premium or a Principal Weighted Class offered at a substantial discount. Yields
on
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such Classes will be extremely sensitive to prepayments on the Mortgage Loans
for such Series. In general if the Securities of any Series, including
Certificates that represent an Interest Weighted Class, are purchased at a
premium and principal payments on the Mortgage Loans occur at a rate faster than
anticipated at the time of purchase, the investor's actual yield to maturity
could be significantly lower than that assumed at the time of purchase. Where
the amount of interest allocated with respect to an Interest Weighted Class of
Certificates is extremely disproportionate to principal, the related
Certificateholder could, under some such prepayment scenarios, fail to recoup
its original investment. Conversely, if the Securities of any Series, including
Certificates that represent a Principal Weighted Class, are purchased at a
discount and principal payments on the Mortgage Loans occur at a rate slower
than assumed at the time of purchase, the investor's actual yield to maturity
could be significantly lower than that originally anticipated. See "Maturity,
Prepayment and Yield Considerations" herein.
Any rating assigned to the Securities by a Rating Agency will reflect only
such Rating Agency's assessment of the likelihood that timely distributions or
payments, as applicable, will be made with respect to such Securities in
accordance with the related Pooling and Servicing Agreement or Indenture, as
applicable. Such rating will not constitute an assessment of the likelihood that
principal prepayments on the Mortgage Loans will be made by Mortgagors or of the
degree to which the rate of such prepayments might differ from that originally
anticipated. As a result, such rating will not address the possibility that
prepayment rates higher or lower than anticipated by an investor may cause such
investor to experience a lower than anticipated yield, or that an investor
purchasing an Interest Weighted Class of Certificates at a significant premium
might fail to recoup its initial investment.
Collections on the Mortgage Loans may vary due to the level of incidence of
delinquent payments and of prepayments. Collections on the Mortgage Loans may
also vary due to seasonal purchasing and payment habits of Mortgagors.
LIMITATIONS ON INTEREST PAYMENTS AND FORECLOSURES
Generally, under the terms of the Relief Act or similar state legislation,
a mortgagor who enters military service after the origination of the related
mortgage loan (including a mortgagor who is a member of the National Guard or is
in reserve status at the time of the origination of the mortgage loan and is
later called to active duty) may not be charged interest (including fees and
charges) above an annual rate of 6% during the period of such mortgagor's active
duty status, unless a court orders otherwise upon application of the lender. It
is possible that such action could affect, for an indeterminate period of time,
the ability of the Servicer to collect full amounts of interest on certain of
the Mortgage Loans. In addition, the Relief Act imposes limitations which would
impair the ability of the Servicer to foreclose on an affected Mortgage Loan
during the Mortgagor's period of active duty status. Thus, in the event that
such a Mortgage Loan goes into default, there may be delays and losses
occasioned by the inability to realize upon the Mortgaged Property in a timely
fashion.
SECURITY RATING
Depending on the structure of the related transaction, the ratings assigned
to the Securities of a given Series the credit of which is enhanced through
external means, such as a letter of credit, Financial Guaranty Insurance Policy,
Mortgage Pool Insurance Policy, Special Hazard Insurance Policy or Bankruptcy
Bond, may depend primarily on the creditworthiness of the provider of such
external credit enhancement device. Any reduction or withdrawal of the rating
assigned to the claims-paying ability of the credit enhancement provider below
the rating initially given to such Securities would likely result in a reduction
in the rating of such Securities and, in such event, the market price of such
Securities could be adversely affected. See "Rating" herein.
BOOK-ENTRY REGISTRATION
Effect on Liquidity. If so specified in the related Prospectus Supplement,
the Securities may initially be registered in book-entry form. Issuance of the
Securities in book-entry form may reduce the liquidity of such
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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.
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.
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The Mortgage Loans to be included in any Mortgage Pool will be described in
the related Prospectus Supplement. The Mortgage Loans will have interest payable
thereon at (i) fixed rates specified in the related Prospectus Supplement, (ii)
adjustable rates computed as specified in the related Prospectus Supplement or
(iii) graduated or other variable rates described in the related Prospectus
Supplement. Unless otherwise specified in the related Prospectus Supplement,
each Mortgage Loan will require monthly payment of principal and interest.
Scheduled payments of principal on any Mortgage Loan may be computed (i) on a
level debt service basis that will result in full amortization over the stated
term of such Mortgage Loan, (ii) in the case of a Balloon Loan, on the basis of
an assumed amortization schedule that is significantly longer than the original
term to maturity of such Mortgage Loan and will require payment of a substantial
amount of principal at the stated maturity specified in the related Mortgage
Note or (iii) on such other basis as is specified in the related Prospectus
Supplement.
Certain of the Mortgage Loans may have been originated pursuant to
underwriting standards that rely primarily on the value and adequacy of the
Mortgaged Property as collateral and, to a much lesser extent, on the
creditworthiness of the related Mortgagor. Accordingly, the rates of
delinquencies, foreclosures and losses on such Mortgage Loans, particularly in
periods during which the value of the related Mortgaged Properties has declined,
may be higher than those historically experienced by the mortgage lending
industry in general. See "The Originators -- Underwriting Guidelines" herein.
Prepayments of principal may be subject to a prepayment fee, which may be
fixed for the life of the Mortgage Loan or may decline over time, and may be
prohibited for the life of the Mortgage Loan or for certain periods ("lockout
periods"). Certain Mortgage Loans may permit prepayments after expiration of the
applicable lockout period and may require the payment of a prepayment fee in
connection with any such subsequent prepayment. Other Mortgage Loans may permit
prepayments without payment of a fee unless the prepayment occurs during
specified time periods. The Mortgage Loans may include due-on-sale clauses which
permit the mortgagee to demand payment of the entire Mortgage Loan in connection
with the sale or certain transfers of the related Mortgaged Property. Other
Mortgage Loans may be assumable by persons meeting the then applicable
underwriting standards of the applicable Originator.
The Prospectus Supplement for each Series of Securities will contain
information, as of the date of such Prospectus Supplement and to the extent then
specifically known to the related Transferor, with respect to the Mortgage Loans
contained in the related Mortgage Pool, including (i) the aggregate outstanding
principal balance and the average outstanding principal balance of the Mortgage
Loans as of the applicable Cut-off Date, (ii) the largest principal balance and
the smallest principal balance of any of the Mortgage Loans, (iii) the types of
Mortgaged Properties securing the Mortgage Loans, (iv) the original terms to
maturity of the Mortgage Loans, (v) the weighted average term to maturity of the
Mortgage Loans as of the related Cut-off Date and the range of the terms to
maturity, (vi) the ranges of Combined Loan-to-Value Ratios at origination, (vii)
the weighted average Mortgage Rate and ranges of Mortgage Rates borne by the
Mortgage Loans and (viii) the geographical distribution of the Mortgaged
Properties on a state-by-state basis. If specific information respecting the
Mortgaged Loans is not known to the related Transferor at the time the related
Securities are initially offered, more general information of the nature
described above will be provided in the related Prospectus Supplement and
specific information will be set forth in the Detailed Description.
The "Combined Loan-to-Value Ratio" of a Mortgage Loan at any given time is
the ratio, expressed as a percentage, determined by dividing (x) the sum of the
original principal balance of such Mortgage Loan, plus the current principal
balance of any Senior Lien on the related Mortgaged Property, by (y) the
Appraised Value of such Mortgaged Property. "Appraised Value" is the appraised
value of a Mortgaged Property based upon the lesser of (i) the appraisal or
valuation made either at the time of the origination of the related Mortgaged
Loan or, in certain cases with respect to Mortgage Loans acquired directly or
indirectly by the related Transferor from an Unaffiliated Originator, at or
immediately prior to the date of acquisition of the related Mortgage Loan, and
(ii) in the case where there is no Senior Lien to the Mortgage Loan and such
Mortgage represents a purchase money instrument, the sales price of the related
Mortgaged Property at the time of the origination of the related Mortgage Loan.
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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 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
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of the proceeds received in connection with the sale of the Securities of the
related Series (such amount, the "Prefunding Amount"). Subsequently, additional
Mortgage Loans will be conveyed by the related Transferor for inclusion in the
related Mortgage Pool in exchange for cash from the related Prefunding Account
in one or more transfers. The related Pooling and Servicing Agreement or
Indenture, as applicable, will require that, if any portion of the Prefunding
Amount is not applied to acquire additional Mortgage Loans by the end of the
Funding Period, any amounts remaining will be released from the Prefunding
Account and distributed or paid, as applicable, in reduction of the principal
balance of the related Securities as specified in the related Prospectus
Supplement.
Each additional Mortgage Loan must satisfy the eligibility criteria
specified in the related Prospectus Supplement and related Pooling and Servicing
Agreement or Indenture, as applicable. Such eligibility criteria will be
determined in consultation with each Rating Agency (and/or any credit
enhancement provider for the related Series) prior to the issuance of such
Series and are designed to ensure that if such additional Mortgage Loans were
included as part of the initial Mortgage Pool, the credit quality thereof would
be consistent with the initial rating of the Securities of such Series. At the
time additional Mortgage Loans are transferred for inclusion in the related
Mortgage Pool, the related Transferor will certify that all conditions precedent
to the transfer of such additional Mortgage Loans, including the satisfaction of
specific eligibility criteria, have been satisfied. It is a condition to the
transfer of any additional Mortgage Loans by the related Transferor for
inclusion in the related Mortgage Pool that each Rating Agency, after receiving
prior notice of such proposed transfer, shall not have advised the related
Transferor or the Trustee or any credit enhancement provider for the related
Series that the conveyance of such additional Mortgage Loans will result in a
qualification, modification or withdrawal of its then current rating of any
Securities of such Series. Following the transfer of additional Mortgage Loans
to the related Trust or Trust Estate, as applicable, the aggregate
characteristics of the Mortgage Loans then held in such Trust or Trust Estate
may vary from those included in the original Mortgage Pool. As a result, the
additional Mortgage Loans may adversely affect the performance of the related
Securities.
If a Prefunding Account is established, a Capitalized Interest Account may
also be established for the related Series. On the Closing Date for such Series,
all or a portion of the proceeds received by the related Transferor in
connection with the sale of the Securities of the related Series may be
deposited in the Capitalized Interest Account and used to fund the excess, if
any, of the sum of (i) the amount of interest accrued on the Securities of such
Series specified in the related Prospectus Supplement and (ii) if specified in
the related Prospectus Supplement, certain fees or expenses during the Funding
Period such as Trustee fees and credit enhancement fees, over the amount of
interest available therefor from the Mortgage Loans in the related Mortgage
Pool. If so specified in the related Prospectus Supplement, amounts on deposit
in the Capitalized Interest Account may be released to the related Transferor
prior to the end of the Funding Period subject to the satisfaction of certain
tests specified in the related Prospectus Supplement. Any amounts on deposit in
the Capitalized Interest Account at the end of the Funding Period that are not
necessary for such purposes will be distributed to the person specified in the
related Prospectus Supplement.
USE OF PROCEEDS
Each Transferor intends to use the net proceeds to be received from the
sale of the Securities of each Series to acquire the Mortgage Loans to be
deposited in the related Mortgage Pool, to establish any Reserve Account,
Prefunding Account or Capitalized Interest Account and to pay other expenses
connected with the pooling of Mortgage Loans and the issuance of Securities. Any
amounts remaining after such payments may be used for general corporate
purposes. The timing and amount of offerings of Securities by each Transferor
will be influenced by a number of factors, including volume of Mortgage Loans
acquired by such Transferor from time to time, prevailing interest rates,
availability of funds and general market conditions.
AAMES CAPITAL CORPORATION
Aames Capital Corporation ("ACC") was incorporated in the State of
California on August 13, 1993 and is a wholly owned subsidiary of Aames
Financial Corporation ("AFC"). ACC is primarily engaged in
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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.
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.
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MORTGAGE LOAN DELINQUENCY AND FORECLOSURE EXPERIENCE
The following table sets forth delinquency and foreclosure experience of
home equity loans originated or purchased by the Servicer or Affiliated
Originators and included in the servicing portfolio of the Servicer or its
affiliates for the periods indicated, except that the information with respect
to losses on foreclosed loans does not include any mortgage loans not sold by
the Servicer in connection with a securitization even if serviced and foreclosed
upon during the indicated period.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JUNE 30
-----------------------------
1998 1997 1996
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Percentage of dollar amount of delinquent loans to loans
serviced
(period end)(1)(2)(3)(4)
One Month................................................. 3.8% 4.3% 4.9%
Two Months................................................ 1.3% 1.9% 1.8%
Three or More Months:
Not foreclosed(5)...................................... 9.0% 8.1% 8.0%
Foreclosed(6).......................................... 1.5% 1.0% 1.0%
------- ------- -------
Total.................................................. 15.6% 15.3% 15.7%
======= ======= =======
Percentage of dollar amount of loans foreclosed during
period to loans serviced (period end)(2)(4)............... 2.0% 1.5% 1.1%
Number of loans foreclosed(7)............................... 1,125 560 221
Principal amount of foreclosed loans(7)..................... $84,613 $48,029 $14,349
Net losses on liquidations(8)............................... $26,488 $ 5,470 $ 931
One-time charge against loan loss reserves(9)............... 6,000 -- --
Percentage of losses to average servicing
portfolio(4)(10).......................................... .72% .24% .09%
Liquidation loss reserve(11)................................ $50,262 $43,586 $10,300
</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. Percentages for fiscal year 1996
have not been restated to include delinquencies of loans originated by One
Stop Mortgage, Inc., which was acquired by AFC in August 1996. The Servicer
believes any such adjustment would not be material.
(3) At June 30, 1998, the dollar volume of loans delinquent more than 90 days
in ACC's 12 REMIC trusts formed in November 1992, December 1992 and June
1993 and during the period from December 1994 to December 1996 exceeded the
permitted limit in the related pooling and servicing agreements. Seven of
those trusts plus one additional trust exceeded certain loss limits.
(4) The servicing portfolio used in percentage calculations includes $82
million of loans subserviced by the Servicer on an interim basis at June
30, 1998.
(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 Servicer.
(7) The increase in the number of loans foreclosed and principal amount of
loans foreclosed in 1997 and 1998 relative to 1996 is due to the larger and
more seasoned servicing portfolio.
(8) Represents losses net of gains on foreclosed properties sold during the
periods indicated excluding the one-time charge referred to in footnote (9)
below.
(9) Represents a one-time reversal of $6.0 million to the loss reserve recorded
in March 1998 resulting from ACC's delay in recording information
transferred from a third party servicer regarding loan payoffs. The amount
was not sufficiently material to require adjustment of previously reported
receivables or the reserve.
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(10) Does not include the one-time charge referred to in footnote (9) above.
(11) Represents period end reserves for future liquidation losses.
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 historically experienced by the mortgage lending
industry in general. To the extent the Aames Guidelines permit higher initial
Combined Loan-to-Value Ratios than those that have been required historically,
or to the extent Mortgage Pools contain a larger percentage of higher credit
grade loans than have historically been the case, losses realized on
foreclosures of the related Mortgaged Properties may be higher than the
experience reflected above for home equity mortgage loans originated or
purchased and serviced by affiliates of the Servicer. In addition, the rate of
delinquencies, foreclosures and losses with respect to the Mortgage Loans will
also be affected by, among other things, interest rate fluctuations and general
and regional economic conditions. See "Risk Factors -- Nature of the Security
for Mortgage Loans" herein.
THE ORIGINATORS
Each Transferor may acquire Mortgage Loans originated by one or more
subsidiaries of AFC ("Affiliated Originators"). In addition, each Transferor may
directly, or indirectly through one of the Affiliated Originators, acquire
Mortgage Loans originated by entities unaffiliated with AFC ("Unaffiliated
Originators") (together with Affiliated Originators, the "Originators").
UNDERWRITING GUIDELINES
All Mortgage Loans originated by Affiliated Originators will be
underwritten in accordance with standard guidelines (the "Aames Guidelines")
developed by the Servicer and the related Affiliated Originator for customary
application in the Affiliated Originator's loan origination activities, as
described below. Unless otherwise specified in the related Prospectus
Supplement, Mortgage Loans originated by Unaffiliated Originators are
reunderwritten in accordance with the applicable Aames Guidelines. In connection
with certain purchases of Mortgage Loans from Unaffiliated Originators, ACC may
decide, after evaluating a number of factors, including ACC's previous
experiences with a particular seller, the size of the loan portfolio and other
relevant information to complete such purchase without re-underwriting the
entire loan portfolio. In such cases, ACC will re-underwrite a statistically
significant sample of the loans in that portfolio to confirm compliance with the
Aames Guidelines.
The Aames Guidelines generally are applied to evaluate the value and
adequacy of the Mortgaged Property as collateral and to evaluate the Mortgagor's
credit standing and repayment ability. In determining the adequacy of the
Mortgaged Property as collateral, the related Originator obtains an appraisal of
each property considered for financing. The appraiser is required to inspect the
property and verify that it is in acceptable condition and that construction, if
new, has been completed. The appraisal is based on the market value of
comparable homes and is conducted substantially in accordance with mortgage
banking industry appraisal standards. In connection with the related
Transferor's reunderwriting of the Mortgage Loans originated by Unaffiliated
Originators, such Transferor will have reviewed the appraisal values for all of
the Mortgaged Properties securing such Mortgage Loans; however, such Transferor
generally will not reappraise any such Mortgage Loans. There can be no assurance
that if such Mortgage Loans were reappraised by the
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related Transferor in accordance with the applicable Aames' Guidelines that the
appraised value of such Mortgaged Properties would not be lower than the
appraised value determined at origination by or on behalf of the related
Unaffiliated Originators.
In general, a prospective borrower applying for a Mortgage Loan is required
to fill out a detailed application designed to provide the Originator pertinent
information. As part of the description of the borrower's financial condition,
the borrower generally is required to provide a current list of assets and
liabilities and a statement of income and expenses, as well as an authorization
to apply for a credit report that summarizes the borrower's credit history. The
Originator obtains credit information from credit reporting agencies. In many
cases, the credit information obtained will include major derogatory credit
items such as credit write-offs, outstanding judgments and prior bankruptcies.
The Originator generally verifies the borrower's employment but in many cases
does not verify the borrower's income.
Once all the signed loan documents, including the promissory note and a
security instrument (i.e., mortgage, deed of trust or security deed), and all
applicable employment, credit and property information are received, a
determination is made as to whether to make the loan. The primary (but not the
only) factor considered by the Originator in making this determination is the
Combined Loan-to-Value Ratio of the related Mortgaged Property, taking into
account any existing Senior Liens and the principal amount of the loan made with
respect to the related Mortgaged Property. Generally, a Mortgaged Property with
a lower Combined Loan-to-Value Ratio provides greater security than a Mortgaged
Property with a higher Combined Loan-to-Value Ratio.
After expiration of any three business day rescission period that is
required by the federal Truth in Lending Act and the security instrument is
ready for recordation, the loan is fully funded. Repayment of principal and
interest is generally scheduled to begin approximately one month after funding
and, in many cases, the Originator, solely at the direction of the related
borrower, will withhold out of the related loan proceeds at origination the
first monthly payment to become due on such loan. The Aames Guidelines generally
require title insurance coverage issued at origination by an approved title
insurance company issuing an a standard form title insurance policy. Such title
policy is required to be in an amount at least equal to the original principal
amount of the related Mortgage Loan.
Notwithstanding the foregoing, in circumstances deemed appropriate by the
Servicer and/or ACC, certain of the Aames Guidelines may be modified or waived
with respect to some or all of the Mortgage Loans included in the Mortgage Pool
for a Series of Securities.
REPRESENTATIONS BY ORIGINATORS AND THE TRANSFERORS
Generally, an Unaffiliated Originator will make certain representations and
warranties with respect to the Mortgage Loans, as specified below, when the
Mortgage Loans are sold by such Unaffiliated Originator to the related
Transferor or an affiliate thereof. The related Transferor will make comparable
representations and warranties with respect to the Mortgage Loans being
transferred pursuant to the related Pooling and Servicing Agreement or
Indenture, as applicable.
Such representations and warranties generally include, among other things,
that (A) at the time of the sale by the Originator of each Mortgage Loan and,
(B) at the time of the conveyance by such Transferor of each Mortgage Loan into
the related Mortgage Pool: (i) the information with respect to each Mortgage
Loan set forth in the Loan Schedule and delivered upon conveyance of the
Mortgage Loan is true and correct as of the related Cut-off Date; (ii) the
proceeds of each Mortgage Loan have been fully disbursed (subject to any escrow
for repairs) and there are no obligations to make further disbursements with
respect to any Mortgage Loan; (iii) each Mortgaged Property is improved by a
single (one- to four-) family residential dwelling, which may include a
condominium, townhouse or manufactured home which is permanently affixed to and
treated as real property under local law; (iv) each Mortgage Loan had, at the
time of origination, either an attorney's certification of title or a title
search or title policy; (v) as of the related Cut-off Date, each Mortgage Loan
is secured by a valid and subsisting lien of record on the Mortgaged Property
having the priority indicated on the related Loan Schedule and subject in all
cases to exceptions to title set forth in the title insurance policy, if any,
with respect to the related Mortgage Loan; (vi) each Originator held good and
indefeasible title to, and
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was the sole owner of, each Mortgage Loan conveyed by such Originator; and (vii)
each Mortgage Loan was originated in accordance with law and is the valid, legal
and binding obligation of the related Mortgagor, subject to certain limitations.
Unless otherwise described in the related Prospectus Supplement, all of the
representations and warranties of an Unaffiliated Originator in respect of a
Mortgage Loan will be made as of the date on which such Unaffiliated Originator
sells the Mortgage Loan, and all of the representations and warranties of the
related Transferor in respect of a Mortgage Loan will be made as of the date
such Transferor conveys such Mortgage Loan into the related Mortgage Pool. The
date as of which such representations and warranties are made thus may be a date
prior to the date of the issuance of the related Series of the Securities. A
substantial period of time may elapse between the date as of which the
representations and warranties are made and the date the related Series of
Securities is issued. However, the related Transferor will not include any
Mortgage Loan in the Mortgage Pool for any Series of Securities if anything has
come to such Transferor's attention that would cause it to believe that such
representations and warranties will not be accurate and complete in all material
respects in respect of such Mortgage Loan as of the date of initial issuance of
the related Series of Securities.
Upon a breach of a representation and/or warranty with respect to a
Mortgage Loan made by the related Transferor under the related Pooling and
Servicing Agreement or Indenture, as applicable, which occurs after conveyance
of the related Mortgage Loan to a Mortgage Pool, such Transferor may be required
to withdraw such Mortgage Loan from such Mortgage Pool or remove such Mortgage
Loan from the Mortgage Pool and convey a substantially similar mortgage loan to
the Mortgage Pool in substitution therefor.
DESCRIPTION OF THE SECURITIES
Each Series of Certificates will be issued in one or more classes (each, a
"Class") pursuant to an agreement (each, a "Pooling and Servicing Agreement")
dated as of the related Cut-off Date among the related Transferor, the Servicer
and the Trustee for the benefit of the holders of the Certificates
("Certificateholders") of such Series. Each Series of Bonds will be issued in a
single class pursuant to an indenture (each, an "Indenture") dated as of the
related Cut-off Date between the related Bond Issuer and the Trustee for the
benefit of the holders of the Bonds ("Bondholders" and, together with
Certificateholders, "Securityholders") of such Series. The provisions of each
Pooling and Servicing Agreement or Indenture, as applicable, will vary depending
upon the nature of the Securities to be issued thereunder and the nature of the
related Trust or Trust Estate, as applicable. A representative form of Pooling
and Servicing Agreement and Indenture has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part. The following
summaries describe the material provisions relating to the Securities which may
appear in any related Pooling and Servicing Agreement or Indenture, as
applicable. The Prospectus Supplement for a Series of Securities will describe
any material provision of the related Pooling and Servicing Agreement or
Indenture, as applicable, relating to such Series that materially differs from
the description thereof contained in this Prospectus. The summaries do not
purport to be complete and are subject to, and are qualified in their entirety
by reference to, all of the provisions of the definitive Pooling and Servicing
Agreement or Indenture, as applicable, for each Series of Securities and the
applicable Prospectus Supplement. A copy of the definitive Pooling and Servicing
Agreement or Indenture, as applicable (each without exhibits), relating to any
Series of Securities will be provided to Securityholders, without charge, upon
written request to the related Transferor addressed to it at: 350 South Grand
Avenue, Los Angeles, California 90071, Attention: Corporate Secretary.
GENERAL
The Certificates of a given Series will evidence undivided beneficial
interests in the assets of the related Trust specified in the related Prospectus
Supplement. The Bonds of a given Series will represent non-recourse obligations
of the related Bond Issuer, secured by the assets in the related Trust Estate,
and the proceeds of such assets will be the sole source of payments on such
Bonds. The Securities of a given Series may be covered by or entitled to the
benefits of a Financial Guaranty Insurance Policy, a Mortgage Pool Insurance
Policy, a Special Hazard Insurance Policy, a Bankruptcy Bond or other insurance
policies, cash accounts, letters of
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credit, limited guaranty insurance policies, third party guarantees or other
forms of credit enhancement, in each case as described herein and in the related
Prospectus Supplement. A Series of Certificates may include one or more Classes
of senior certificates that receive certain preferential treatment
(collectively, "Senior Certificates") with respect to one or more subordinated
Classes (collectively, "Subordinated Classes") of Certificates of such Series.
Distributions on one or more Classes of a Series of Certificates may be made:
(a) prior to one or more other Classes, (b) after the occurrence of specified
events, (c) in accordance with a schedule or formula, (d) on the basis of
collections from designated portions of the Mortgage Loans in the related Trust
or (e) on a different basis, in each case as specified in the related Prospectus
Supplement. The timing and amounts of such distributions may vary among such
Classes or over time as specified in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement,
distributions or payments, as applicable, on Securities will be made only from
the assets of the related Trust or Trust Estate, as applicable, and the
Securities will not represent interests in or obligations of the related
Transferor, the Servicer, the Trustee, any Originator or any other person. The
assets of each Trust or Trust Estate, as applicable, will consist of one or more
of the following, to the extent set forth in the related Prospectus Supplement:
(a) the Mortgage Loans that from time to time are subject to the related Pooling
and Servicing Agreement or Indenture, as applicable; (b) the assets of the Trust
or the Trust Estate that from time to time are required by the Pooling and
Servicing Agreement or Indenture, as applicable, to be deposited in the
Certificate Account or Bond Account, as applicable, the Collection Account and
any other accounts (collectively, the "Accounts") established pursuant to the
related Pooling and Servicing Agreement or Indenture, as applicable, or to be
invested in Permitted Investments; (c) property and any proceeds thereof
acquired by foreclosure, deed in lieu of foreclosure or a comparable conversion
of the Mortgage Loans in the related Mortgage Pool; (d) any Financial Guaranty
Insurance Policy; (e) any Mortgage Pool Insurance Policy; (f) any Special Hazard
Insurance Policy; (g) any Bankruptcy Bond; (h) any funds on deposit from time to
time in any Reserve Account; and (i) all rights under any other insurance
policies, guarantees, surety bonds, letters of credit or other credit
enhancement covering any Securities, any Mortgage Loan in the related Mortgage
Pool or any related Mortgaged Property required pursuant to the related Pooling
and Servicing Agreement or Indenture, as applicable.
FORM OF SECURITIES
General. Unless otherwise specified in the Prospectus Supplement, the
Securities of each Series will be issued as physical certificates ("Definitive
Securities") in fully registered form only in the denominations specified in the
related Prospectus Supplement. Definitive Securities, if issued, will be
transferable and exchangeable at the corporate trust office of the Trustee or,
at the election of the Trustee, the office of a registrar for the Securities
appointed by the Trustee, in either case as named in the related Prospectus
Supplement. No service charge will be incurred for any registration of exchange
or transfer, but the Trustee may require payment of a sum sufficient to cover
any tax or other governmental charge. If provided in the related Pooling and
Servicing Agreement or Indenture, as applicable, a certificate administrator may
perform certain duties in connection with the administration of the Securities.
Book-Entry Registration. If so specified in the related Prospectus
Supplement, the Securities may initially be registered in the name of Cede & Co.
("Cede"), the nominee of The Depository Trust Company ("DTC"). DTC is a limited
purpose trust company organized under the laws of the State of New York, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the Uniform Commercial Code and a "clearing agency" registered
pursuant to the provisions of Section 17A of the Exchange Act. DTC was created
to hold securities for its participating organizations ("Participants") and
facilitate the clearance and settlement of securities transactions between
Participants through electronic book-entry changes in their accounts, thereby
eliminating the need for physical movement of certificates. Participants include
securities brokers and dealers, banks, trust companies and clearing corporations
and may include certain other organizations. Indirect access to the DTC system
also is available to others such as brokers, dealers, banks and trust companies
that clear through or maintain a custodial relationship with a Participant,
either directly or indirectly ("Indirect Participant").
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Under a book-entry format, Securityholders that are not Participants or
Indirect Participants but desire to purchase, sell or otherwise transfer
ownership of Securities registered in the name of Cede, as nominee of DTC, may
do so only through Participants and Indirect Participants. In addition, such
Securityholders will receive all distributions or payments, as applicable, of
principal of and interest on the Securities from the Trustee through DTC and its
Participants. Under a book-entry format, Securityholders will receive payments
after the related Distribution Date or Payment Date, as applicable, because,
while payments are required to be forwarded to Cede, as nominee for DTC, on each
such date, DTC will forward such payments to its Participants which thereafter
will be required to forward them to Indirect Participants or Securityholders.
Under a book-entry format, it is anticipated that the only Securityholder will
be Cede, as nominee of DTC, and that the beneficial holders of Securities will
not be recognized by the Trustee as Securityholders under the related Pooling
and Servicing Agreement or Indenture, as applicable. The beneficial holders of
such Securities will only be permitted to exercise the rights of Securityholders
under the related Pooling and Servicing Agreement or Indenture, as applicable,
indirectly through DTC and its Participants who in turn will exercise their
rights through DTC.
Under the rules, regulations and procedures creating and affecting DTC and
its operations, DTC is required to make book-entry transfers among Participants
on whose behalf it acts with respect to the Securities and is required to
receive and transmit payments of principal of and interest on the Securities.
Participants and Indirect Participants with which Securityholders have accounts
with respect to the Securities similarly are required to make book-entry
transfers and receive and transmit such payments on behalf of such
Securityholders. Accordingly, although Securityholders will not possess physical
securities, such rules, regulations and procedures provide a mechanism by which
Securityholders will receive distributions or payments, as applicable, and will
be able to transfer their interests.
Securityholders who are not Participants may transfer ownership of
Securities only through Participants by instructing such Participants to
transfer Securities, by book-entry transfer, through DTC for the account of the
purchasers of such Securities, which account is maintained with their respective
Participants. Under the rules and in accordance with DTC's normal procedures,
transfers of ownership of Securities will be executed through DTC and the
accounts of the respective Participants at DTC will be debited and credited.
Similarly, the respective Participants will make debits or credits, as the case
may be, on their records on behalf of the selling and purchasing
Securityholders.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a
Securityholder to pledge Securities to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of such
Securities, may be limited due to the lack of a physical certificate for such
Securities.
DTC in general advises that it will take any action permitted to be taken
by a Securityholder under a Pooling and Servicing Agreement or Indenture, as
applicable only at the direction of one or more Participants to whose account
the Securities are credited. Additionally, DTC in general advises that it will
take such actions with respect to specified percentages of the Securityholders
only at the direction of and on behalf of Participants whose holdings include
current principal amounts of outstanding Securities that satisfy such specified
percentages. DTC may take conflicting actions with respect to other current
principal amounts of outstanding Securities to the extent that such actions are
taken on behalf of Participants whose holdings include such current principal
amounts of outstanding Securities.
Any Securities initially registered in the name of Cede, as nominee of DTC,
will be issued in fully registered form as Definitive Securities to
Securityholders or their nominees, rather than to DTC or its nominee only under
the events specified in the related Pooling and Servicing Agreement or
Indenture, as applicable, as described in the related Prospectus Supplement.
Upon the occurrence of any of the events specified in the related Pooling and
Servicing Agreement and Prospectus Supplement, DTC will be required to notify
all Participants of the availability through DTC of Definitive Securities. Upon
surrender by DTC of the physical securities representing the Securities and
instruction for re-registration, the Trustee will issue the Securities in the
form of Definitive Securities, and thereafter the Trustee will recognize the
holders of such Definitive Securities as Securityholders. Thereafter, payments
of principal of and interest on the Securities
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will be made by the Trustee directly to Securityholders in accordance with the
procedures set forth herein and in the related Pooling and Servicing Agreement
or Indenture, as applicable. The final distribution or payment, as applicable,
of any Security (whether Definitive Securities or Securities registered in the
name of Cede), however, will be made only upon presentation and surrender of
such Securities on the final Distribution Date or Payment Date, as applicable,
at such office or agency as is specified in the notice of final payment to
Securityholders.
DISTRIBUTIONS AND PAYMENTS ON SECURITIES
General. Unless otherwise specified in the related Prospectus Supplement,
distributions of principal and interest (or, if applicable, of principal only or
interest only) on the related Certificates, or payments of principal and
interest on the related Bonds, as applicable, will be made by the Trustee on
each Distribution Date specified in the related Prospectus Supplement (each, a
"Distribution Date") or Payment Date specified in the related Prospectus
Supplement (each, a "Payment Date"), respectively, in the amounts specified in
the related Prospectus Supplement. Distributions or payments, as applicable,
will be made to the persons in whose names the Securities are registered at the
close of business on the record dates specified in the Prospectus Supplement.
Distributions or payments, as applicable, will be made by check mailed to the
persons entitled thereto at the address appearing in the register maintained for
Securityholders (the "Security Register") or, to the extent described in the
related Prospectus Supplement, by wire transfer or by such other means as are
described therein, except that the final distribution or payment, as applicable,
in retirement of the Securities will be made only upon presentation and
surrender of the Securities at the office or agency of the Trustee or other
person specified in the final distribution notice to Securityholders.
With respect to a given Series of Certificates, each Class of Certificates
within such Series will evidence the interests specified in the related
Prospectus Supplement, which may include, among other things, (i) the right to
receive distributions allocable only to principal, only to interest or to any
combination thereof; (ii) the right to receive distributions only of prepayments
of principal throughout the lives of the Certificates or during specified
periods; (iii) interests that are subordinated in their right to receive
distributions of scheduled payments of principal, prepayments of principal,
interest or any combination thereof to one or more other Classes of Certificates
of such Series throughout the lives of the Certificates or during specified
periods or interests that are subordinated with respect to certain losses or
delinquencies; (iv) the right to receive distributions only after the occurrence
of events specified in the related Prospectus Supplement; (v) the right to
receive distributions in accordance with a schedule or formula or on the basis
of collections from designated portions of the assets in the related Trust; (vi)
as to Certificates entitled to distributions allocable to interest, the right to
receive interest at a fixed rate or an adjustable rate; (vii) as to Certificates
entitled to distributions allocable to interest, the right to such distributions
allocable to interest only after the occurrence of events specified in the
related Prospectus Supplement; and (viii) as to Certificates entitled to
distributions allocable to interest only after the occurrence of certain events,
the accrual but deferment of payment of interest until such events occur, in
each case as specified in such Prospectus Supplement.
In general, the method of determining the amount of distributions or
payments, as applicable, on a particular Series of Securities will depend on the
type of credit support, if any, that is used with respect to such Series. See
"Credit Enhancement" herein. Set forth below is a general description of certain
methods that may be used to determine the amount of distributions or payments,
as applicable, on the Securities of a particular Series. The Prospectus
Supplement for each Series of Securities will describe the method to be used in
determining the amount of distributions or payments, as applicable, on the
Securities of such Series.
Distributions or payments, as applicable, allocable to principal and
interest on the Securities of a Series will be made by the Trustee out of, and
only to the extent of, funds in a segregated account established and maintained
by the Trustee for the deposits of such amounts (the "Certificate Account," with
respect to Certificates, and the "Bond Account," with respect to Bonds). The
Certificate Account or Bond Account, as applicable, may include funds
transferred from any Reserve Account, any Prefunding Account and funds received
as a result of any other form of credit enhancement. As between Certificates of
different Classes and as between distributions of interest and principal and, if
applicable, between distributions of prepayments of principal and scheduled
payments of principal, distributions made on any Distribution Date will be
applied as
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specified in the related Prospectus Supplement. Unless otherwise specified in
the Prospectus Supplement relating to a given Series of Certificates,
distributions or payments, as applicable, on the Certificates of any Class of a
Series will be made pro rata to all related Certificateholders of that Class.
Available Funds. All distributions or payments, as applicable, on the
Securities of each Series on any Distribution Date or Payment Date, as
applicable, will be made from the funds available for distribution or payment,
as applicable, on such Distribution Date or Payment Date, as applicable, as
described below ("Available Funds"), in accordance with the terms described in
the related Prospectus Supplement. Unless otherwise specified in the related
Prospectus Supplement, Available Funds for each Distribution Date or Payment
Date, as applicable, will equal the sum of the following amounts:
(i) the aggregate of all previously undistributed payments on account
of principal (including principal prepayments, if any, and prepayment
penalties, if so provided in the related Prospectus Supplement) and
interest on the Mortgage Loans in the related Mortgage Pool, received by
the Servicer during the related collection period (the "Collection Period")
except:
(a) all payments which were due before the Cut-off Date;
(b) amounts received on particular Mortgage Loans as late payments
of principal or interest and, unless otherwise specified in the related
Prospectus Supplement, other amounts required to be paid by the
Mortgagors which are to be retained by the Servicer (including any
Sub-Servicer) as additional compensation;
(c) amounts representing reimbursement, to the extent permitted as
described under "The Pooling and Servicing Agreement -- Monthly Advances
and Compensating Interest" and "-- Servicing and Other Compensation and
Payment of Expenses," for advances made by the Servicer or any
Sub-Servicers that were deposited into the Certificate Account or Bond
Account, as applicable, and amounts representing reimbursement for
certain other losses and expenses incurred by the Servicer or any
Sub-Servicer as permitted under the related Pooling and Servicing
Agreement or Servicing Agreement, as applicable;
(d) that portion of each collection of interest on a particular
Mortgage Loan in such Mortgage Pool representing servicing compensation
payable to the Servicer that is to be retained from such collection or
is permitted to be retained from related Insurance Proceeds, Liquidation
Proceeds or proceeds of Mortgage Loans withdrawn from the Mortgage Pool
pursuant to the related Pooling and Servicing Agreement or Servicing
Agreement, as applicable; and
(e) Trustee fees and other expenses or fees payable out of the
related Trust or Trust Estate, as applicable, as specified in the
related Prospectus Supplement;
(ii) all amounts received and retained, if any, in connection with the
liquidation of defaulted Mortgage Loans ("Liquidation Proceeds"), net of
unreimbursed liquidation expenses and insured expenses incurred and
unreimbursed advances made by the Servicer or any Sub-Servicer ("Net
Liquidation Proceeds"), including all proceeds (net of unreimbursed
Servicing Advances) of title insurance, hazard insurance and primary
mortgage insurance, if any ("Insurance Proceeds"), all Principal
Prepayments, all proceeds received in connection with the condemnation of a
Mortgaged Property or the release of part of a Mortgaged Property and all
proceeds of any Mortgage Loan acquired by the related Transferor or any
other entity pursuant to the Pooling and Servicing Agreement, the Indenture
or the Servicing Agreement;
(iii) the amount of any Monthly Advance or Compensating Interest
Payment made by the Servicer or any Sub-Servicer, as deposited by such in
the Certificate Account or Bond Account, as applicable; and
(iv) if applicable, amounts withdrawn from a Reserve Account or a
Prefunding Account or received in connection with other credit enhancement.
Distributions and Payments of Interest. Unless otherwise specified in the
Prospectus Supplement relating to a given Series of Certificates, each Class of
Certificates may bear interest at a different rate, which
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may be fixed or adjustable (the "Certificate Rate"). All of the Bonds of a given
Series will bear interest at the same rate, which may be fixed or adjustable
(the "Bond Rate"). Interest will accrue on the Security Principal Balance (or,
in the case of a Class of Certificates entitled only to distributions allocable
to interest, the aggregate notional principal balance) of Securities entitled to
interest, at the Certificate Rate or Bond Rate, as applicable, and for the
periods specified in the Prospectus Supplement. To the extent funds are
available therefor, interest accrued during each such specified period on
Securities entitled to interest (other than a Class of Certificates that
provides for interest that accrues, but is not currently payable, referred to
hereafter as "Accrual Certificates") will be distributable or payable on the
Distribution Dates or Payment Dates, as applicable, specified in the Prospectus
Supplement until the aggregate Security Principal Balance of the related
Securities has been distributed or paid in full or, in the case of a Class of
Certificates entitled only to distributions allocable to interest, until the
aggregate notional principal balance of such Certificates is reduced to zero or
for the period of time designated in the Prospectus Supplement.
Unless otherwise specified in the Prospectus Supplement relating to a given
Series of Certificates, distributions allocable to interest on each Certificate
of such Series that is not entitled to distributions allocable to principal will
be calculated based on the notional principal balance of such Certificate. The
notional principal balance of a Certificate will not evidence an interest in or
entitlement to distributions allocable to principal but will be used solely for
convenience in expressing the calculation of interest and for certain other
purposes.
With respect to any Class of Accrual Certificates, if specified in the
Prospectus Supplement relating to a given Series of Certificates, any interest
that has accrued but is not paid on a given Distribution Date will be added to
the aggregate Security Principal Balance of such Class of Certificates on that
Distribution Date. Unless otherwise specified in the related Prospectus
Supplement, distributions of interest on each Class of Accrual Certificates will
commence only after the occurrence of the events specified in such Prospectus
Supplement. Prior to such time, the beneficial interest of such Class of Accrual
Certificates in the Trust, as reflected in the aggregate Security Principal
Balance of such Class of Accrual Certificates, will increase on each
Distribution Date by the amount of interest that accrued on such Class during
the preceding interest accrual period but that was not required to be
distributed to such Class on such Distribution Date. Any such Class of Accrual
Certificates will thereafter accrue interest on its outstanding Security
Principal Balance as so adjusted.
Distributions and Payments of Principal. Unless otherwise specified in the
Prospectus Supplement relating to a given Series of Certificates, the aggregate
principal balance amount of any Class of Certificates entitled to distributions
of principal will be the aggregate original Security Principal Balance of such
Class of Certificates specified in the related Prospectus Supplement, less all
amounts previously distributed to such Certificates as allocable to principal.
The aggregate principal balance amount of the Bonds of any Series will be the
aggregate original Security Principal Balance of such Bonds specified in the
related Prospectus Supplement, less all amounts previously paid on such Bonds as
allocable to principal. In the case of Accrual Certificates, unless otherwise
specified in the Prospectus Supplement relating to a given Series of
Certificates, the original Security Principal Balance will be increased by all
interest accrued but not then distributable on such Accrual Certificates. The
Prospectus Supplement relating to a given Series of Certificates will specify
the method by which the amount of principal payments on the Certificates will be
calculated and the manner in which such amount will be allocated among the
Classes of Certificates entitled to distributions of principal. As used herein,
the term "Security Principal Balance" at any time means the principal balance of
the related Securities determined as described above.
The Prospectus Supplement relating to a given Series of Certificates may
provide that one or more Classes of Senior Certificates will be entitled to
receive all or a disproportionate percentage of any principal payments made by a
Mortgagor which are received in advance of their scheduled due dates and are not
accompanied by amounts representing scheduled interest due after the month of
such payments ("Principal Prepayments") in the percentages and under the
circumstances or for the periods specified in the Prospectus Supplement. Any
such allocation of Principal Prepayments to such Class or Classes of
Certificates will have the effect of accelerating the amortization of such
Senior Certificates while increasing the interests evidenced by Subordinated
Certificates in the Trust. Increasing the interests of Subordinated Certificates
relative to that
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of the Senior Certificates is intended to preserve the availability of the
subordination provided by the Subordinated Certificates. See "Credit
Enhancement -- Subordination" herein. The timing and amounts of distributions
allocable to interest and principal and, if applicable, Principal Prepayments
and scheduled payments of principal, to be made on any Distribution Date may
vary among Classes over time, or otherwise, as specified in the Prospectus
Supplement.
REVOLVING PERIOD AND AMORTIZATION PERIOD; TRANSFEROR INTEREST
If the Prospectus Supplement relating to a given Series of Certificates so
provides, there may be a period commencing on the date of issuance of a Class or
Classes of Certificates of a Series and ending on the date set forth in the
related Prospectus Supplement (the "Revolving Period") during which no principal
payments will be made to one or more Classes of Certificates of the related
Series as are identified in such Prospectus Supplement. All collections of
principal otherwise allocated to such Class or Classes of Certificates may be
(i) utilized by the Trust during such period to acquire additional Mortgage
Loans that satisfy the criteria described in the related Prospectus Supplement,
(ii) held in an account and invested in Eligible Investments for later
distribution to Certificateholders, (iii) applied to those Class or Classes of
Certificates, if any, of the same Series as specified in the related Prospectus
Supplement as then are in amortization or (iv) otherwise applied as specified in
the related Prospectus Supplement.
An "Amortization Period" is the period, if any, specified as such in the
related Prospectus Supplement during which an amount of principal is payable to
holders of one or more Classes of a Series of Certificates. If so specified in
the related Prospectus Supplement, during an Amortization Period all or a
portion of principal collections on the Mortgage Loans may be applied as
specified above for a Revolving Period and, to the extent not so applied, will
be distributed to the Class or Classes of Certificates of the same or different
Series as specified in the related Prospectus Supplement as then being entitled
to payments of principal. In addition, if so specified in the related Prospectus
Supplement, amounts deposited in certain accounts for the benefit of one or more
Classes of Certificates may be released from time to time or on a specified date
and applied as a payment of principal on such Classes of Certificates. The
related Prospectus Supplement will set forth the circumstances that will result
in the commencement of an Amortization Period.
Each Trust that has a Revolving Period may also issue to the related
Transferor a certificate evidencing a Transferor Interest in the Trust not
represented by the other Certificates issued by such Trust. As further described
in the related Prospectus Supplement, the value of such Transferor Interest will
fluctuate as the amount of the assets of the Trust fluctuates and the
outstanding amount of the Certificates of the related Series of Certificates is
reduced.
REPORTS TO SECURITYHOLDERS
Except as otherwise set forth in the related Prospectus Supplement, on or
before each Distribution Date or Payment Date, as applicable, each
Securityholder of record of the related Series of Securities will be entitled to
receive a statement setting forth, to the extent applicable to such Series, the
following information with respect to the distribution for such Distribution
Date or Payment Date, as applicable.
(i) the amount of such distribution or payment, as applicable,
allocable to principal, separately identifying the aggregate amount of any
Principal Prepayments and, if so specified in the related Prospectus
Supplement, any prepayment penalties included therein;
(ii) the amount of such distribution or payment, as applicable,
allocable to interest;
(iii) the amounts of (a) any overdue accrued interest included in such
distribution or payment, as applicable, (b) any remaining overdue accrued
interest with respect to such Securities or (c) any current shortfall in
amounts to be distributed or paid, as applicable, as accrued interest to
holders of such Securities;
(iv) the amounts of (a) any overdue payments of scheduled principal
included in such distribution, (b) any remaining overdue principal amounts
with respect to such Securities, (c) any current shortfall in receipt of
scheduled principal payments on the related Mortgage Loans or (d) any
realized losses or
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Liquidation Proceeds to be allocated as reductions in the outstanding
principal balances of such Securities;
(v) if applicable with respect to a given Series of Certificates, the
aggregate amount (a) otherwise allocable to the Subordinated
Certificateholders on such Distribution Date and (b) withdrawn from a
Reserve Account, if any, that is included in the amounts distributed with
respect to Senior Certificates;
(vi) the total amount of the Insured Amount included in the amount
distributed on such Distribution Date or Payment Date, as applicable;
(vii) the Pool Balance and the Pool Factor of the Mortgage Loans after
giving effect to the distribution or payment, as applicable, on the
Distribution Date or Payment Date, as applicable;
(viii) if applicable with respect to a given Series of Certificates,
the percentage of principal payments on the Mortgage Loans, if any, which
each Class will be entitled to receive on the following Distribution Date;
(ix) unless the Certificate Rate or Bond Rate, as applicable, is a
fixed rate, the related Certificate Rate or Bond Rate applicable to the
distribution on the Distribution Date or Payment Date, as applicable;
(x) the number and aggregate principal balance of Mortgage Loans in
the related Mortgage Pool contractually delinquent (a) one month, (b) two
months and (c) three or more months as of the end of the related Collection
Period;
(xi) the number and aggregate principal balance of all Mortgage Loans
in foreclosure or other similar proceedings, and the book value of any real
estate acquired through foreclosure or grant of a deed in lieu of
foreclosure;
(xii) if applicable, the amount remaining in any Reserve Account or
the amount remaining of any other credit support, after giving effect to
the distribution or payment, as applicable, on the Distribution Date or
Payment Date, as applicable;
(xiii) if applicable, during the Funding Period, the remaining
Prefunding Amount and the portion of the Prefunding Amount used to acquire
additional Mortgage Loans since the preceding Distribution Date or Payment
Date as applicable;
(xiv) if applicable, during the Funding Period, the amount remaining
in the Capitalized Interest Account; and
(xv) the amount of Monthly Advances, Servicing Advances and/or
Compensating Interest Payments, if any, made since the preceding
Distribution Date or Payment Date, as applicable.
Where applicable, any amount set forth above may be expressed as a dollar
amount of the related Securities having the denomination or interest specified
either in the related Prospectus Supplement or in the report to Securityholders.
The report to Securityholders for any Series of Securities may include
additional or other information of a similar nature to that specified above.
The "Pool Balance" means the aggregate outstanding principal balance of the
Mortgage Loans as of the related Distribution Date or Payment Date, as
applicable, and the "Pool Factor" is the percentage obtained by dividing the
Pool Balance as of such Distribution Date or Payment Date, as applicable, by the
Cut-off Date Pool Balance.
In addition, within a reasonable period of time after the end of each
calendar year, the Servicer or the Trustee will mail to each person who was a
Securityholder of record at any time during such calendar year (a) a report as
to the aggregate of amounts reported pursuant to (i) and (ii) above for such
calendar year or, in the event such person was a Securityholder of record during
a portion of such calendar year, for the applicable portion of such year and (b)
such other customary information as may be deemed necessary or desirable for
Securityholders to prepare their tax returns.
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CREDIT ENHANCEMENT
Credit enhancement may be provided with respect to a Series of Securities
or with respect to the Mortgage Loans included in the related Trust or Trust
Estate, as applicable. Credit enhancement may be in the form of (i) in the case
of a given Series of Certificates, the subordination of one or more Classes of
the Certificates of such Series, (ii) the use of a Financial Guaranty Insurance
Policy, a Mortgage Pool Insurance Policy, a Special Hazard Insurance Policy, a
Bankruptcy Bond, a Reserve Account or other insurance policies, cash accounts,
letters of credit, limited guaranty insurance policies, third party guarantees
or other forms of credit enhancement described in the related Prospectus
Supplement, or in the case of a given Series of Certificates, the use of a
cross-support feature, or (iii) any combination of the foregoing. The protection
against losses afforded by any credit enhancement will be limited and will not
guarantee repayment of the entire principal balance of the Securities and
interest thereon. If losses occur that exceed the maximum amount covered by the
credit enhancement or that are not covered by the credit enhancement,
Securityholders will bear their allocable share of such deficiency. If a form of
credit enhancement applies to several Classes of Certificates of a given Series,
and if principal payments of certain Classes will be distributed prior to such
distributions to other Classes, the Classes which receive distributions at a
later time are more likely to bear any losses which exceed the amount covered by
credit enhancement.
Unless otherwise specified in the Prospectus Supplement, coverage under any
credit enhancement may be canceled or reduced by the related Transferor without
the consent of Securityholders, if such cancellation or reduction would not
adversely affect the rating or ratings of the related Securities.
SUBORDINATION
If so specified in a Prospectus Supplement relating to a given Series of
Certificates, scheduled principal, Principal Prepayments, interest or any
combination thereof that otherwise would have been distributable to one or more
Classes of Subordinated Certificates of such Series will instead be distributed
to holders of one or more Classes of Senior Certificates, under the
circumstances and to the extent specified in such Prospectus Supplement. If
specified in the related Prospectus Supplement, the holders of Senior
Certificates will receive the amounts of principal and interest due to them on
each Distribution Date out of the funds available for distribution on such date
in the related Certificate Account prior to any such distribution being made to
holders of the related Subordinated Certificates, in each case under the
circumstances and subject to the limitations specified in such Prospectus
Supplement. The protection afforded to the holders of Senior Certificates
through subordination also may be accomplished by first allocating certain types
of losses or delinquencies to the related Subordinated Certificates, to the
extent described in the related Prospectus Supplement. If aggregate losses and
delinquencies in respect of such Mortgage Loans were to exceed the total amounts
otherwise available for distribution to holders of Subordinated Certificates or,
if applicable, were to exceed the specified maximum amount, holders of Senior
Certificates would experience losses on such Certificates.
If so specified in the Prospectus Supplement relating to a given Series of
Certificates, the same Class of Certificates may be Senior Certificates with
respect to the right to receive certain types of payments or with respect to the
allocation of certain types of losses or delinquencies and Subordinated
Certificates with respect to the right to receive other types of payments or
with respect to the allocation of certain types of losses or delinquencies. If
specified in the Prospectus Supplement, various Classes of Senior Certificates
and Subordinated Certificates may themselves be subordinate in their right to
receive certain distributions to other Classes of Senior and Subordinated
Certificates, respectively, through a cross-support mechanism or otherwise. As
between Classes of Senior Certificates and as between Classes of Subordinated
Certificates, distributions may be allocated among such Classes (i) in the order
of their scheduled final distribution dates, (ii) in accordance with a schedule
or formula, (iii) in relation to the occurrence of certain events or (iv)
otherwise, in each case as specified in the related Prospectus Supplement.
The related Prospectus Supplement will set forth information concerning the
amount of subordination of a Class or Classes of Subordinated Certificates in a
Series, the circumstances in which such subordination will be applicable, the
manner, if any, in which the amount of subordination will decrease over time,
the manner of
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funding any Reserve Account and the conditions under which amounts in any such
Reserve Account will be used to make distributions to Senior Certificateholders
or released to Subordinated Certificateholders from the related Trust.
OVERCOLLATERALIZATION FEATURE
If so specified in the related Prospectus Supplement, credit enchancement
may include overcollateralization resulting from (i) the application of excess
cash on specified Distribution Dates to the reduction of the principal balances
of the Certificates and/or Bonds, as applicable, so that over time the
outstanding principal balance of the related Mortgage Loans will exceed the
aggregate of the principal balances of the Certificates and/or Bonds, as
applicable, or (ii) collateral securing the Mortgage Loans having a value at the
Closing Date in excess of the aggregate of the principal balances of the
Certificates and/or Bonds, as applicable (any such feature, an
"Overcollateralization Feature"). Any Overcollateralization Feature will be
described more fully in the related Prospectus Supplement.
RESERVE ACCOUNTS
If so specified in the related Prospectus Supplement, cash, U.S. Treasury
securities, instruments evidencing ownership of principal or interest payments
thereon, demand notes, certificates of deposit or a combination thereof in the
aggregate amount specified in such Prospectus Supplement may be deposited by the
related Transferor, the Servicer or the Originators, as applicable, on the date
specified in the related Prospectus Supplement in one or more reserve accounts
(each, a "Reserve Account") established as part of the related Trust or Trust
Estate, as applicable. In addition to or in lieu of the foregoing, if so
specified in a Prospectus Supplement relating to a given Series of Certificates,
all or any portion of amounts otherwise distributable on any Distribution Date
to holders of Subordinated Certificates may instead be deposited into a Reserve
Account. Such deposits may be made on the date specified in the related
Prospectus Supplement, which may include each Distribution Date for specified
periods or until the balance in the Reserve Account has reached a specified
amount. See " -- Subordination" above.
The cash and other assets in a Reserve Account will be used to enhance the
likelihood of timely payment of principal of, and interest on, or, if so
specified in the related Prospectus Supplement, to provide additional protection
against losses in respect of, the assets in the related Trust or Trust Estate,
as applicable, to pay the expenses of the Trust or Trust Estate, as applicable,
or for such other purposes specified in such Prospectus Supplement. Any cash in
a Reserve Account and the proceeds upon maturity or liquidation of any other
asset or instrument therein will be invested, to the extent acceptable to the
applicable Rating Agency, in Permitted Investments, including obligations of the
United States and certain agencies thereof, certificates of deposit, certain
commercial paper, time deposits and bankers acceptances sold by eligible
commercial banks, certain repurchase agreements of United States government
securities with eligible commercial banks and certain other instruments
acceptable to the applicable Rating Agency. Unless otherwise specified in the
related Prospectus Supplement, any asset or instrument deposited in any Reserve
Account will name the Trustee, in its capacity as trustee for the
Securityholders, as beneficiary and will be issued by an entity acceptable to
the applicable Rating Agency.
Any amounts on deposit in a Reserve Account will be available for
withdrawal from such Reserve Account for distribution or payment, as applicable,
to holders of Securities or release to holders of Securities, the related
Transferor, the Servicer, the Originators or another entity for the purposes, in
the manner and at the times specified in the related Prospectus Supplement.
FINANCIAL GUARANTY INSURANCE POLICIES
If so specified in the related Prospectus Supplement, a financial guaranty
insurance policy or policies (each, a "Financial Guaranty Insurance Policy") may
be obtained and maintained for the Securities of a given Series. The provider of
any Financial Guaranty Insurance Policy (a "Securities Insurer") will be
described in the related Prospectus Supplement. A copy of any such Financial
Guaranty Insurance Policy will be attached as an exhibit to the related Pooling
and Servicing Agreement or Indenture, as applicable.
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Unless otherwise specified in the related Prospectus Supplement, a
Financial Guaranty Insurance Policy will unconditionally and irrevocably
guarantee to Securityholders that a certain amount will be available for
distribution or payment, as applicable, to Securityholders on a related
Distribution Date or Payment Date, as applicable (the "Insured Amount"). The
Insured Amount will equal the full amount of principal and interest
distributable as of any Distribution Date or due and payable as of any Payment
Date, as applicable, to Securityholders under the related Pooling and Servicing
Agreement or Indenture, as applicable, plus any other amounts specified therein
or in the related Prospectus Supplement.
The specific terms of any Financial Guaranty Insurance Policy will be
described in the related Prospectus Supplement.
Subject to the terms of the related Pooling and Servicing Agreement or
Indenture, as applicable, a Securities Insurer may be subrogated to the rights
of Securityholders to receive payments under the Securities to the extent of any
payments by such Securities Insurer under the related Financial Guaranty
Insurance Policy that were not previously reimbursed. However, any such
subrogation rights of a Securities Insurer may not result in a reduction of the
amount otherwise distributable on any Distribution Date or due and payable on
any Payment Date, as applicable, to holders of the Securities covered by such
Financial Guaranty Insurance Policy.
MORTGAGE POOL INSURANCE POLICIES
If so specified in the related Prospectus Supplement, a mortgage pool
insurance policy or policies (each, a "Mortgage Pool Insurance Policy") issued
by the insurer (the "Mortgage Pool Insurer") named in such Prospectus Supplement
will be obtained and maintained for all or certain of the Mortgage Loans. A
Mortgage Pool Insurance Policy will, subject to the limitations described below,
cover losses on the related Mortgage Loans up to a maximum amount specified in
the related Prospectus Supplement. A Mortgage Pool Insurance Policy, however, is
not a blanket policy against loss, as claims thereunder may be made only
respecting losses on certain Mortgage Loans and only upon satisfaction of
certain conditions precedent described below. Unless otherwise specified in a
related Prospectus Supplement, a Mortgage Pool Insurance Policy will not cover
losses due to a failure to pay or denial of a claim under a primary mortgage
insurance policy.
A Mortgage Pool Insurance Policy generally will not insure (and many
primary mortgage insurance policies do not insure) against loss sustained by
reason of a default arising from, among other things, (i) fraud or negligence in
the origination or servicing of a Mortgage Loan, including misrepresentation by
the Mortgagor, the Originator or persons involved in the origination thereof, or
(ii) failure to construct a Mortgaged Property in accordance with plans and
specifications. If so specified in the related Prospectus Supplement, an
endorsement to a Mortgage Pool Insurance Policy, a bond or other credit support
may cover fraud in connection with the origination of Mortgage Loans. If so
specified in the related Prospectus Supplement, a failure of coverage
attributable to an event specified in clause (i) or (ii) above might result in a
breach of the related Transferor's representations and, in such event, might
give rise to an obligation on the part of the related Transferor to withdraw the
defaulted Mortgage Loan from the Mortgage Pool if the breach cannot be cured by
the such Transferor. No Mortgage Pool Insurance Policy will cover losses in
respect of a defaulted Mortgage Loan occurring when the Servicer of such
Mortgage Loan, at the time of default or thereafter, was not approved by the
applicable Mortgage Pool Insurer.
The original amount of coverage under a Mortgage Pool Insurance Policy will
be reduced over the life of the related Securities by the aggregate dollar
amount of claims paid by the Servicer less the aggregate of the net amounts
realized by the Mortgage Pool Insurer upon disposition of all foreclosed
properties. The amount of claims paid will include certain expenses incurred by
the Servicer, as well as accrued interest on delinquent Mortgage Loans to the
date of payment of the claim. Accordingly, if aggregate net claims paid under a
Mortgage Pool Insurance Policy reach the maximum amount, coverage under the
Mortgage Pool Insurance Policy will be exhausted and any further losses will be
borne by the related Securityholders.
The terms of any Mortgage Pool Insurance Policy will be described in the
related Prospectus Supplement.
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SPECIAL HAZARD INSURANCE POLICIES
If so specified in the related Prospectus Supplement, a special hazard
insurance policy or policies (each, a "Special Hazard Insurance Policy") will be
obtained for the related Mortgage Pool and will be issued by the insurer (the
"Special Hazard Insurer") named in such Prospectus Supplement. Each Special
Hazard Insurance Policy, subject to limitations described below, will protect
the related Securityholders from (i) loss by reason of damage to Mortgaged
Properties caused by certain hazards (including earthquakes and, to a limited
extent, tidal waves and related water damage) not insured against under the
standard form of hazard insurance policy for the respective states in which the
Mortgaged Properties are located or under a flood insurance policy if the
Mortgaged Property is not located in a federally designated flood area, and (ii)
loss caused by reason of the application of the coinsurance clause contained in
a hazard insurance policy. See "The Pooling and Servicing
Agreement -- Maintenance of Hazard Insurance" herein. A Special Hazard Insurance
Policy will not cover losses occasioned by war, civil insurrection, certain
governmental action, errors in design, faulty workmanship or materials (except
under certain circumstances), nuclear reaction, flood (if the Mortgaged Property
is located in a federally designated flood area), chemical contamination and
certain other risks. The amount of coverage under any Special Hazard Insurance
Policy will be specified in the related Prospectus Supplement. A Special Hazard
Insurance Policy will provide that no claim may be paid unless hazard and, if
applicable, flood insurance on the related Mortgaged Property securing the
Mortgage Loan has been kept in force and other protection and preservation
expenses have been paid.
The terms of any Special Hazard Insurance Policy will be described in the
related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, because
each Special Hazard Insurance Policy will be designed to permit full recovery
under the Mortgage Pool Insurance Policy in circumstances in which such
recoveries would otherwise be unavailable because property has been damaged by a
cause not insured against by a standard hazard policy and thus would not be
restored, each Pooling and Servicing Agreement and Servicing Agreement will
provide that, if the related Mortgage Pool Insurance Policy shall have been
terminated or been exhausted through payment of claims, the Servicer will be
under no further obligation to maintain such Special Hazard Insurance Policy.
BANKRUPTCY BONDS
If so specified in the related Prospectus Supplement, a bankruptcy bond or
bonds (each, a "Bankruptcy Bond") for proceedings under the United States
Bankruptcy Code will be issued by an insurer named in such Prospectus
Supplement. A Bankruptcy Bond will cover certain losses resulting from a
reduction by a bankruptcy court of scheduled payments of principal and interest
on a Mortgage Loan or a reduction by such court of the principal amount of a
Mortgage Loan and will cover certain unpaid interest on the amount of such a
principal reduction from the date of the filing of a bankruptcy petition. The
level of coverage and other terms of a Bankruptcy Bond will be set forth in the
related Prospectus Supplement.
CROSS SUPPORT
If so specified in a Prospectus Supplement relating to a given Series of
Certificates, the beneficial interests of separate Trusts or separate groups of
assets in a single Trust may be evidenced by separate Classes of the
Certificates of such Series. In such case, credit support may be provided by a
cross-support feature which requires that distributions be made with respect to
Certificates evidencing a beneficial interest in other asset groups within the
same Trust. The Prospectus Supplement for a Series of Certificates which
includes a cross-support feature will describe the manner and conditions for
applying such cross-support feature.
If so specified in a Prospectus Supplement relating to a given Series of
Certificates, the coverage provided by one or more other forms of credit
enhancement, such as Financial Guaranty Insurance Policies or Reserve Accounts,
may apply concurrently to two or more separate Trusts, without priority among
such Trusts, until the credit support is exhausted. If applicable, the
Prospectus Supplement will identify the Trusts to which such credit enhancement
relates and the manner of determining the amount of the coverage provided
thereby and the application of such coverage to the identified Trusts or asset
groups.
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OTHER INSURANCE, GUARANTEES AND SIMILAR INSTRUMENTS OR AGREEMENTS
If so specified in the related Prospectus Supplement, a Trust or Trust
Estate, as applicable, may include, in addition to or in lieu of some or all of
the foregoing, letters of credit, third party guarantees and other arrangements
for maintaining timely payments or providing additional protection against
losses on the assets included in such Trust or Trust Estate, as applicable,
paying administrative expenses or accomplishing such other purpose. The related
Prospectus Supplement will describe any such arrangements, including information
as to the extent of coverage and any conditions or limitations thereto. The
related Trust or Trust Estate, as applicable, may include a guaranteed
investment contract or reinvestment agreement pursuant to which funds held in
one or more accounts will be invested at a specified rate. Any such arrangement
must be acceptable to each Rating Agency named in the related Prospectus
Supplement.
MAINTENANCE OF CREDIT ENHANCEMENT
To the extent that the related Prospectus Supplement expressly provides for
credit enhancement and maintenance arrangements, the following paragraphs shall
apply.
If a form of credit enhancement has been obtained for a Series of
Securities, the related Transferor or the Servicer will be obligated to exercise
its reasonable efforts to keep or cause to be kept such form of credit support
in full force and effect throughout the term of the related Pooling and
Servicing Agreement, Indenture or Servicing Agreement, as applicable, unless
coverage thereunder has been exhausted through payment of claims or otherwise,
or substitution therefor is made as described below.
In lieu of the obligation to maintain a particular form of credit
enhancement, the related Transferor or the Servicer may obtain a substitute or
alternate form of credit enhancement. If the related Transferor obtains such a
substitute form of credit enhancement, such form of credit enhancement will be
maintained and kept in full force and effect as provided herein. Prior to its
obtaining any substitute or alternate form of credit enhancement, the related
Transferor or the Servicer will obtain written confirmation from each applicable
Rating Agency that the substitution or alternate form of credit enhancement for
the existing credit enhancement will not adversely affect the then current
ratings assigned to such Securities by each applicable Rating Agency.
The Servicer will provide the Trustee information required for the Trustee
to draw under a Financial Guaranty Insurance Policy or any letter of credit,
will present claims to any Mortgage Pool Insurer, any Special Hazard Insurer and
to any provider of a Bankruptcy Bond, and will take such reasonable steps as are
necessary to permit recovery under such Financial Guaranty Insurance Policy,
letter of credit, Bankruptcy Bond, Special Hazard Insurance Policy, Mortgage
Pool Insurance Policy or other applicable forms of credit enhancement.
Additionally, the Servicer will present such claims and take such steps as are
reasonably necessary to provide for the performance by another party of its
obligations to withdraw Mortgage Loans from the related Mortgage Pool pursuant
to the terms of the related Agreement or Indenture, as applicable. All
collections by the Servicer under any Mortgage Pool Insurance Policy or any
Bankruptcy Bond and, where the related property has not been restored, any
Special Hazard Insurance Policy, are to be deposited initially in the Collection
Account and ultimately in the Certificate Account or Bond Account, as
applicable, subject to withdrawal. Unless otherwise specified in the related
Prospectus Supplement, all draws under any Financial Guaranty Insurance Policy
or letter of credit will be deposited directly in the Certificate Account or
Bond Account, as applicable.
If any property securing a defaulted Mortgage Loan is damaged and proceeds,
if any, from the related hazard insurance policy or any applicable Special
Hazard Insurance Policy are insufficient to restore the damaged property to a
condition sufficient to permit recovery under any applicable form of credit
enhancement, the Servicer is not required to expend its own funds to restore the
damaged property unless it determines (i) that such restoration will increase
the proceeds to Securityholders on liquidation of the Mortgage Loan after
reimbursement to the Servicer for its expenses and (ii) that such expenses will
be recoverable out of related Liquidation Proceeds or Insurance Proceeds. If
recovery under any applicable form of credit enhancement is not available
because the Servicer has been unable to make the above determinations or has
made such determinations incorrectly or recovery is not available for any other
reason, the Servicer is
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nevertheless obligated to follow such normal practices and procedures (subject
to the preceding sentence) as it deems necessary or advisable to realize upon
the defaulted Mortgage Loan and in the event such determination has been
incorrectly made, is entitled to reimbursement of its expenses in connection
with such restoration.
MATURITY, PREPAYMENT AND YIELD CONSIDERATIONS
The yields to maturity of the Securities will be affected by the amount and
timing of principal payments on or in respect of the Mortgage Loans included in
the related Mortgage Pools, the allocation of available funds to the Securities,
the Certificate Rate for various Classes of a Series of Certificates or the Bond
Rate for various Series of Bonds, as applicable, and the purchase price paid for
the Securities.
The original terms to maturity of the Mortgage Loans in a given Mortgage
Pool will vary depending upon the type of Mortgage Loans included therein. Each
Prospectus Supplement will contain information with respect to the type and
maturities of the Mortgage Loans in the related Mortgage Pool. Unless otherwise
specified in the related Prospectus Supplement, Mortgage Loans may be prepaid
without penalty in full or in part at any time, although a prepayment fee or
penalty may be imposed in connection therewith.
The rate of prepayments with respect to mortgage loans has fluctuated
significantly in recent years. In general, if prevailing rates fall appreciably
below the Mortgage Rates borne by the Mortgage Loans, such Mortgage Loans are
likely to be subject to higher prepayment rates than if prevailing interest
rates remain at or above such Mortgage Rates. Conversely, if prevailing interest
rates rise appreciably above the Mortgage Rates borne by the Mortgage Loans,
such Mortgage Loans are likely to experience a lower prepayment rate than if
prevailing rates remain at or below such Mortgage Rates. However, there can be
no assurance that such will be the case.
Prepayments are influenced by a variety of economic, geographical, social,
tax, legal and additional factors. The rate of prepayments on Mortgage Loans may
be affected by changes in a Mortgagor's housing needs, job transfers,
unemployment, Mortgagor's net equity in the related Mortgaged Property, the
enforcement of due-on-sale clauses and other servicing decisions. Adjustable
rate mortgage loans, bi-weekly mortgage loans, graduated payment mortgage loans,
growing equity mortgage loans, reverse mortgage loans, buy-down mortgage loans
and mortgage loans with other characteristics may experience a rate of principal
prepayments which is different from that of fixed rate, monthly pay, fully
amortizing mortgage loans.
Generally, mortgage loans secured by junior liens have smaller average
principal balances than senior or first mortgage loans and are not viewed by
borrowers as permanent financing. Accordingly, such mortgage loans may
experience a higher rate of prepayment than mortgage loans which represent first
liens. In addition, any future limitations on the right of borrowers to deduct
interest payments on second mortgage loans for federal income tax purposes may
result in a higher rate of prepayment of such mortgage loans. The obligation of
the Servicer to enforce due-on-sale provisions of the mortgage loans may also
increase prepayments. The prepayment experience of the Mortgage Pools may be
affected by a wide variety of factors, including general and local economic
conditions, mortgage market interest rates, the availability of alternative
financing and homeowner mobility.
Unless otherwise provided in the related Prospectus Supplement, all of the
Mortgage Loans will contain due-on-sale provisions permitting the mortgagee to
accelerate the maturity of the Mortgage Loan upon sale or certain transfers by
the Mortgagor of the underlying Mortgaged Property. Unless otherwise provided in
the related Prospectus Supplement, the Servicer generally will enforce any
due-on-sale or due-on-encumbrance clause, to the extent it has knowledge of the
conveyance or further encumbrance or the proposed conveyance or proposed further
encumbrance of the Mortgaged Property and reasonably believes that it is
entitled to do so under applicable law; provided, however, that the Servicer
will not take any enforcement action that would materially increase the risk of
default or delinquency on, or materially decrease the security for, such
Mortgage Loan. See "The Pooling and Servicing Agreement -- Enforcement of
Due-on-Sale Clauses" herein.
The weighted average lives of Securities will also be affected by the
amount and timing of delinquencies and defaults on the Mortgage Loans and the
liquidations of defaulted Mortgage Loans. Delinquencies and
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defaults will generally slow the rate of payment of principal to the
Securityholders. However, this effect will be offset to the extent that lump sum
recoveries on defaulted Mortgage Loans and foreclosed Mortgaged Properties
result in principal payments on the Mortgage Loans that are faster than
otherwise scheduled.
When a full prepayment occurs on a Mortgage Loan, the Mortgagor will be
charged interest on the principal amount of the Mortgage Loan so prepaid only
for the number of days in the month actually elapsed up to the date of the
prepayment rather than for a full month. Interest shortfalls also could result
from the application of the Relief Act, as described under "Certain Legal
Aspects of the Mortgage Loans and Related Matters -- Soldiers' and Sailors'
Civil Relief Act" herein. Unless otherwise specified in the related Prospectus
Supplement, in the event that less than 30 days' interest is collected on a
Mortgage Loan during a Collection Period, the Servicer or any Sub-Servicer, if
applicable, will be obligated to make a Compensating Interest Payment with
respect thereto, but only to the extent of the aggregate Servicing Fee for the
related Distribution Date or Payment Date, as applicable. To the extent such
shortfalls exceed the amount of the Compensating Interest Payment that the
Servicer or any Sub-Servicer is obligated to pay, the yield on the Securities
could be adversely affected. Partial prepayments in a given month may be applied
to the outstanding principal balances of the Mortgage Loans so prepaid on the
first day of the month of receipt or the month following receipt. In the latter
case, partial prepayments will not reduce the amount of interest passed through
in such month.
Under certain circumstances, the related Transferor, the Servicer or
certain other entities specified in the Prospectus Supplement relating to a
Series of Certificates may have the option to acquire the Mortgage Loans and
other assets of a Trust, thereby effecting early retirement of the related
Series of Certificates, subject to the principal balance of the related Mortgage
Loans being less than the percentage specified in the related Prospectus
Supplement of the aggregate principal balance of the Mortgage Loans at the
Cut-off Date for the related Series. Typically, the related Transferor, the
Servicer or such other entity will cause the retirement of a Series of
Certificates at the point at which servicing of the remaining relatively small
pool of Mortgage Loans becomes inefficient. See "The Pooling and Servicing
Agreement -- Termination; Optional Termination" herein. Under certain
circumstances, a Series of Bonds may be (i) redeemed at the 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.
With respect to Mortgage Loans that provide for Negative Amortization, the
related mortgagor has the option to defer payments of interest for periods
specified in such Mortgage Loan. In the aggregate, deferral of interest may
result in reduced collections during one or more Collection Periods, although
collections in future Collection Periods may be relatively greater because (i)
interest not paid during such period will be added to the principal balance of
the related Mortgage Loan to be repaid over time and (ii) such Deferred Interest
will bear interest at the interest rate specified in the Mortgage Loan each
month until paid, increasing the aggregate amount of interest to be paid by the
related mortgagor over time. In the aggregate, Negative Amortization of Mortgage
Loans may have the effect of reducing the overall payment and repayment rate
experience of a Mortgage Pool.
The timing of payments on the Mortgage Loans may significantly affect an
investor's yield. In general, the earlier a prepayment of principal on the
Mortgage Loans, the greater will be the effect on an investor's yield to
maturity. As a result, the effect on an investor's yield of principal
prepayments occurring at a rate faster (or slower) than the rate anticipated by
the investor during the period immediately following the issuance of the
Securities will not be offset by a subsequent like reduction (or increase) in
the rate of principal payments.
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The Prospectus Supplement relating to a Series of Securities may discuss in
greater detail the effect of the rate and timing of principal payments
(including prepayments) on the yield, weighted average lives and maturities of
such Securities, including the effect of prepayments and allocation of realized
losses on the Mortgage Loans as they relate to specific Classes of Certificates.
Factors other than those identified herein and in the related Prospectus
Supplement could significantly affect principal prepayments at any time and over
the lives of the Securities. The relative combination of the various factors
affecting prepayment may also vary from time to time. There can be no assurance
as to the rate of payment of principal of the Mortgage Loans at any time or over
the lives of the Securities.
THE POOLING AND SERVICING AGREEMENT
Set forth below is a summary of the material provisions of each Pooling and
Servicing Agreement that are not described elsewhere in this Prospectus. The
summary does not purport to describe all provisions of each Pooling and
Servicing Agreement, and is subject to, and qualified in its entirety by
reference to, the provisions of each Pooling and Servicing Agreement. Where
provisions or terms used in a particular Pooling and Servicing Agreement are
different than as described herein, a description of such provisions or terms
will be included in the related Prospectus Supplement.
The Mortgage Loans to be included in a Mortgage Pool for a Series of Bonds
will be assigned to the Trustee pursuant to provisions included in the related
Indenture that are substantially the same as, and the obligations of ACAC, as
Transferor (or the related Bond Issuer, if a different entity, to the extent
described in the related Prospectus Supplement), and the Trustee with respect to
the Mortgage Loans so conveyed will be substantially similar to, those described
under "-- Assignment of Mortgage Loans" below. In addition, the Mortgage Loans
included in a Mortgage Pool for a Series of Bonds will be serviced pursuant to
the terms of a Servicing Agreement and any such Servicing Agreement will contain
provisions governing the servicing of such Mortgage Loans that are substantially
similar to the provisions included in each Pooling and Servicing Agreement
relating to servicing and collection procedures with respect to the related
Mortgage Loans as described below. See "The Indenture -- General" herein.
ASSIGNMENT OF MORTGAGE LOANS
Assignment of the Mortgage Loans. At the Closing Date for a Series of
Certificates, the related Transferor will cause the Mortgage Loans that will
comprise the related Trust to be assigned to the Trustee, without recourse,
together with all principal and interest received by or on behalf of the related
Transferor on or with respect to such Mortgage Loans on or after the Cut-off
Date, other than principal and interest due before the Cut-off Date. The Trustee
will, concurrently with such assignment, deliver the Certificates to the related
Transferor in exchange for the Mortgage Loans.
Each Mortgage Loan assigned to the Trustee will be identified in a schedule
appearing as an exhibit to the related Pooling and Servicing Agreement (a "Loan
Schedule"). The Loan Schedule will include information as to the outstanding
principal balance of each Mortgage Loan after application of payments due on the
Cut-off Date, as well as information regarding the Mortgage Rate, the maturity
date of the Mortgage Loan, the Combined Loan-to-Value Ratio at origination and
certain other information.
In connection with the assignment, the related Transferor will be required
to deliver or cause to be delivered to the Trustee certain specified items
(collectively, with respect to each Mortgage Loan, the "Mortgage File"). Unless
otherwise specified in the related Prospectus Supplement each Mortgage File will
be required to include:
(a) the original Mortgage Note, with all intervening endorsements
sufficient to show a complete chain of endorsement to the related
Transferor, endorsed by the related Transferor, without recourse, to the
order of the Trustee;
(b) the original Mortgage with evidence of recording indicated
thereon;
(c) the original executed assignment of the Mortgage in recordable
form;
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(d) originals of all assumption, modification and substitution
agreements, if any, in those instances where the terms or provisions of a
Mortgage or Mortgage Note have been modified or such Mortgage or Mortgage
Note has been assumed;
(e) originals of all intervening mortgage assignments with evidence of
recording indicated thereon sufficient to show a complete chain of
assignment from the originator of the Mortgage Loan to the related
Transferor; and
(f) the original lender's title insurance policy issued on the date of
the origination of such Mortgage Loan.
Unless otherwise specified in the related Prospectus Supplement, the
related Transferor will promptly cause the assignments of the related Mortgage
Loans to be recorded in the appropriate public office for real property records,
except in states in which, in the opinion of counsel acceptable to the Trustee,
such recording is not required to protect the Trustee's interest in such loans
against the claim of any subsequent transferee or any successor to or creditor
of the related Transferor or the Originator of such Mortgage Loans.
If the related Transferor cannot deliver the original Mortgage or mortgage
assignment with evidence of recording thereon on the Closing Date solely because
of a delay caused by the public recording office where such original Mortgage or
mortgage assignment has been delivered for recordation, such Transferor shall
deliver to the Trustee an Officer's Certificate, with a photocopy of such
Mortgage attached thereto, stating that such original Mortgage or mortgage
assignment has been delivered to the appropriate public recording official for
recordation. The related Transferor shall promptly deliver to the Trustee such
original Mortgage or mortgage assignment with evidence of recording indicated
thereon upon receipt thereof from the public recording official. If the related
Transferor within six months from the Closing Date shall not have received such
original Mortgage or mortgage assignment from the public recording official, it
shall obtain, and deliver to the Trustee within eight months from the Closing
Date, a copy of such original Mortgage or mortgage assignment certified by such
public recording official to be a true and complete copy of such original
Mortgage or mortgage assignment as recorded by such public recording office.
The Trustee will be authorized to appoint a custodian pursuant to a
custodial agreement to maintain possession of and, if applicable, to review the
documents relating to the Mortgage Loans as agent of the Trustee.
Review of the Mortgage File. The Trustee will agree, for the benefit of the
Certificateholders, to review each Mortgage File and the specified items
delivered by or on behalf of the related Transferor within 45 days after the
Closing Date, to determine if the documents described in clauses (a) through (f)
above have been executed and received, and that such documents relate to the
Mortgage Loans in the Loan Schedule. The Trustee is under no duty or obligation
to inspect, review or examine any such documents, instruments, certificates or
other papers to determine that they are genuine, enforceable or appropriate for
the represented purpose or that they are other than what they purport to be on
their face, nor is the Trustee under any duty to determine independently whether
there are any intervening assignments or assumption or modification agreements
with respect to any Mortgage Loan.
If within such 45-day period the Trustee finds that any document
constituting a part of a Mortgage File is not properly executed, has not been
received or is unrelated to the Mortgage Loans identified in the related Loan
Schedule, or that any Mortgage Loan does not conform in a material respect to
the description thereof as set forth in the related Loan Schedule, the Trustee
will be required to promptly notify the related Transferor of any defect. Such
Transferor will use reasonable efforts to remedy a material defect in a document
constituting part of a Mortgage File within 60 days after the Trustee's notice.
Thereafter, the Trustee shall also certify that it has received all of the
documents referred to in clauses (a) through (f) and that all corrections or
curative actions required to be taken by the related Transferor within the
60-day period have been completed or effected, or that the related Mortgage
Loans will be withdrawn or substituted, as specified below.
Withdrawal or Substitution of Mortgage Loans. Unless otherwise specified in
the related Prospectus Supplement, if, within 60 days after the Trustee's notice
of defect, the related Transferor has not remedied the defect and the defect
materially and adversely affects the interest of the Certificateholders in the
related
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Mortgage Loan, such Transferor will be required to, prior to the next
Distribution Date, at its option, (i) substitute in lieu of such Mortgage Loan
another Mortgage Loan of like kind (a "Qualified Replacement Mortgage Loan") or
(ii) withdraw such Mortgage Loan from the related Mortgage Property by paying an
amount equal to its Principal Balance together with one month's interest at the
Mortgage Rate, less any payments received during the related Collection Period
("Loan Withdrawal Amount").
If as provided above, the related Transferor, rather than withdrawing the
Mortgage Loan, removes a Mortgage Loan (a "Deleted Mortgage Loan") from the
related Trust and substitutes in its place a Qualified Replacement Mortgage
Loan, such substitution must be effected within 90 days of the date of the
initial issuance of the Certificates of a Series with respect to which no REMIC
election is made. With respect to a Trust for which a REMIC election is to be
made, except as otherwise provided in the related Prospectus Supplement, such
substitution of a defective Mortgage Loan must be effected within two years of
the date of the initial issuance of the Certificates, and may not be made if
such substitution would cause the Trust to not qualify as a REMIC or result in a
prohibited transaction tax under the Code. Except as otherwise provided in the
related Prospectus Supplement, any Qualified Replacement Mortgage Loan generally
will, on the date of substitution, (i) have an outstanding principal balance,
after deduction of all scheduled payments due in the month of substitution, not
in excess of and not substantially less than the outstanding principal balance
of the Deleted Mortgage Loan (the amount of any shortfall to be paid by or at
the direction of the related Transferor to the related Trust in the month of
substitution for distribution to the Certificateholders as a reduction of
principal), (ii) have a Mortgage Rate neither one percentage point or more less
than nor one percentage point or more greater than the Mortgage Rate of the
Deleted Mortgage Loan as of the date of substitution, (iii) have a remaining
term to maturity neither one year or more earlier than nor one year or more
later than that of the Deleted Mortgage Loan and (iv) comply with all of the
representations and warranties set forth in the related Pooling and Servicing
Agreement as of the date of substitution. The related Pooling and Servicing
Agreement may include additional provisions relating to meeting the foregoing
requirements on an aggregate basis where a number of substitutions occur
contemporaneously.
Additionally, unless otherwise specified in the related Prospectus
Supplement, the related Transferor will have made representations and warranties
in respect of the Mortgage Loans assigned by such Transferor and evidenced by a
Series of Certificates. Such representations and warranties generally include,
among other things: (i) that title insurance (or in the case of Mortgaged
Properties located in areas where such policies are generally not available, an
attorney's certificate of title) was in effect on the Closing Date; (ii) that
such Transferor had title to each such Mortgage Loan and such Mortgage Loan was
subject to no offsets, defenses or counterclaims; (iii) that each Mortgage Loan
constituted a valid first or junior lien on the Mortgaged Property (subject only
to permissible title insurance exceptions, if applicable, and certain other
exceptions described in the Pooling and Servicing Agreement) and that the
Mortgaged Property was free from damage and was in acceptable condition; (iv)
that there were no delinquent tax or assessment liens against the Mortgaged
Property; (v) that no required payment on a Mortgage Loan was more than thirty
days delinquent as of the related Cut-off Date; and (vi) that each Mortgage Loan
was made in compliance with, and, subject to certain limitations, is enforceable
under, all applicable state and federal laws and regulations in all material
respects. Upon the discovery by the related Transferor or the Trustee that the
representations in the applicable Pooling and Servicing Agreement are untrue in
any material respect as of the dates specified therein, with the result that the
interests of the Certificateholders in the related Mortgage Loan are materially
and adversely affected, the party discovering such breach is required to give
prompt written notice to the other parties. Upon the earliest to occur of the
related Transferor's discovery, its receipt of notice of breach from any of the
other parties or such time as a situation resulting from a representation which
is untrue and materially and adversely affects the interests of the
Certificateholders, such Transferor is required promptly to cure such breach in
all material respects or such Transferor will (or will cause the applicable
Originator to) on the Distribution Date next succeeding such discovery, receipt
of notice or such other time, withdraw, or provide a Qualified Replacement
Mortgage Loan, as set forth above. The obligation of the related Transferor so
to cure, substitute or withdraw any Mortgage Loan as to which breach has not
been remedied constitutes the sole remedy available to the Certificateholders or
the Trustee respecting such breach.
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Any agreements pursuant to which the related Transferor acquires certain
Mortgage Loans to be deposited in a Trust will contain representations and
obligations of the related Originators that are similar to those described in
the preceding paragraph. The related Transferor may enforce any obligations of
the related Originators in connection with its efforts to cure any breach of a
representation pursuant to the related Pooling and Servicing Agreement. See "The
Originators -- Representations by Originators and the Transferors" herein.
PAYMENTS ON THE MORTGAGE LOANS
Unless otherwise specified in the related Prospectus Supplement, the
Pooling and Servicing Agreement will require the Servicer to establish and
maintain one or more accounts (each, a "Collection Account") at one or more
institutions meeting the requirements set forth in the related Pooling and
Servicing Agreement. Pursuant to the related Pooling and Servicing Agreement,
the Servicer will be required to deposit all collections (other than amounts
escrowed for taxes and insurance) related to the Mortgage Loans into the
Collection Account no later than the second business day after receipt. All
funds in the Collection Accounts will be required to be invested in instruments
designated as Permitted Investments. Any investment earnings on funds held in
the Collection Accounts are for the benefit of the Servicer.
The Servicer may make withdrawals from the Collection Account only for the
following purposes: (a) to make deposits into the Certificate Account as set
forth below; (b) to pay itself any monthly Servicing Fees; (c) to make any
Servicing Advance or to reimburse itself for any Servicing Advance or Monthly
Advance previously made; (d) to withdraw amounts that have been deposited to the
Collection Account in error; and (e) to clear and terminate the Collection
Account.
Unless otherwise specified in the related Prospectus Supplement, not later
than the third day prior to any Distribution Date (the "Deposit Date"), the
Servicer will be required to wire transfer to the Trustee for deposit in the
Certificate Account the sum (without duplication) of all amounts on deposit in
the Collection Account that constitute any portion of Available Funds for the
related Distribution Date. See "Description of Securities -- Distributions and
Payments on Securities -- Available Funds" herein.
INVESTMENT OF ACCOUNTS
Unless otherwise specified in the related Prospectus Supplement, all or a
portion of any Account, including the Collection Account, may be invested and
reinvested in one or more Permitted Investments bearing interest or sold at a
discount. The Trustee or any affiliate thereof may be the obligor on any
investment in any Account which otherwise qualifies as a Permitted Investment.
No investment in the Collection Account may mature later than the Deposit Date
next succeeding the date of investment.
The Trustee will not in any way be held liable by reason of any
insufficiency in any Account resulting from any loss on any Permitted Investment
included therein.
Unless otherwise specified in the related Prospectus Supplement, all income
or other gain from investments in any Account will be held in such Account for
the benefit of the Servicer and will be subject to withdrawal from time to time
as permitted by the related Pooling and Servicing Agreement. Any loss resulting
from such investments will be for the account of the Servicer. The Servicer will
be required to deposit the amount of any such loss immediately upon the
realization of such loss to the extent such loss is not offset by other income
or gain from investments in such Account and then available for such
application.
PERMITTED INVESTMENTS
Unless otherwise specified in the related Prospectus Supplement, each
Pooling and Servicing Agreement will define "Permitted Investments" generally as
follows:
(a) Direct general obligations of the United States or the obligations
of any agency or instrumentality of the United States, the timely payment
or the guarantee of which constitutes a full faith and credit obligation of
the United States.
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(b) Federal Housing Administration debentures, but excluding any such
securities whose terms do not provide for payment of a fixed dollar amount
upon maturity or call for redemption.
(c) Federal Home Loan Mortgage Corporation senior debt obligations,
but excluding any such securities whose terms do not provide for payment of
a fixed dollar amount upon maturity or call for redemption.
(d) Federal National Mortgage Association senior debt obligations, but
excluding any such securities whose terms do not provide for payment of a
fixed dollar amount upon maturity or call for redemption.
(e) Federal funds, certificates of deposit, time and demand deposits,
and bankers' acceptances (having original maturities of not more than 365
days) of any domestic bank or trust company, the short-term debt
obligations of which have been assigned a minimum rating specified in the
related Pooling and Servicing Agreement by the applicable Rating Agency.
(f) Deposits of any bank or savings and loan association which has
combined capital, surplus and undivided profits of at least $50,000,000
which deposits are not in excess of the applicable limits insured by the
Bank Insurance Fund or the Savings Association Insurance Fund of the
Federal Deposit Insurance Corporation, provided that the long-term deposits
of such bank or savings and loan association are assigned a minimum rating
specified in the related Pooling and Servicing Agreement by the applicable
Rating Agency.
(g) Commercial paper (having original maturities of not more than 180
days) assigned a minimum rating specified in the related Pooling and
Servicing Agreement by the applicable Rating Agency.
(h) Investments in money market funds assigned a minimum rating
specified in the related Pooling and Servicing Agreement by the applicable
Rating Agency.
(i) Other investments acceptable to the applicable Rating Agency.
No instrument described above is permitted to evidence either the right to
receive (a) only interest with respect to obligations underlying such instrument
or (b) both principal and interest payments derived from obligations underlying
such instrument and the interest and principal payments with respect to such
instrument provided a yield to maturity at par greater than 120% of the yield to
maturity at par of the underlying obligations, and no instrument described above
may be purchased at a price greater than par if such instrument may be prepaid
or called at a price less than its purchase price prior to stated maturity.
MONTHLY ADVANCES AND COMPENSATING INTEREST
In order to maintain a regular flow of scheduled interest to
Certificateholders (rather than to guarantee or insure against losses), unless
otherwise provided in the related Prospectus Supplement, each Pooling and
Servicing Agreement will require that, on each Distribution Date, the Servicer
or any Sub-Servicer deposit in the Collection Account an amount of its own funds
(a "Monthly Advance"). Unless otherwise specified in the related Prospectus
Supplement, a "Monthly Advance" will be equal to the sum of the interest
portions of the aggregate amount of monthly payments (net of the Servicing Fee)
due on the Mortgage Loans during the related Collection Period, but delinquent
as of the close of business on the last day of the related Collection Period,
plus, with respect to each Mortgaged Property which was acquired in foreclosure
or similar action (each, an "REO Property") during or prior to the related
Collection Period and as to which final sale did not occur during the related
Collection Period, an amount equal to the excess, if any, of interest on the
outstanding principal balance of the Mortgage Loan relating to such REO Property
for the related Collection Period at the related Mortgage Rate (net of the
Servicing Fee) over the net income from the REO Property transferred to the
Certificate Account for such Distribution Date.
The Servicer or any Sub-Servicer, if applicable, may recover Monthly
Advances, if not recovered from the Mortgagor on whose behalf such Monthly
Advance was made, from late collections on the related Mortgage Loans, including
Liquidation Proceeds, insurance proceeds and such other amounts as may be
collected by the Servicer from the Mortgagor or otherwise relating to the
Mortgage Loan. To the extent the
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Servicer, in its good faith business judgment, determines that any Monthly
Advance will not be ultimately recoverable from late collections, insurance
proceeds, Liquidation Proceeds on the related Mortgage Loans or otherwise, the
Servicer may reimburse itself or a Sub-Servicer, if applicable, on the next
Distribution Date from Available Funds remaining in the Certificate Account
after making required payments on such Distribution Date.
With respect to each Mortgage Loan as to which a prepayment is received,
that becomes a Liquidated Mortgage Loan or is otherwise charged-off during the
Collection Period related to a Distribution Date, unless otherwise specified in
the related Prospectus Supplement, the Servicer will be required with respect to
such Distribution Date to remit to the Trustee, from amounts otherwise payable
to the Servicer as the Servicing Fee, an amount generally representing the
excess of interest on the principal balance of such Mortgage Loan prior to such
prepayment, liquidation or charge-off over the amount of interest actually
received on the related Mortgage Loan during the applicable Collection Period
(each such amount, a "Compensating Interest Payment"). The Servicer will not be
entitled to be reimbursed from collections on the Mortgage Loans or any assets
of the Trust for any Compensating Interest Payments made. If the Servicing Fee
in respect of such Collection Period is insufficient to make the entire required
Compensating Interest Payment, the resulting shortfall will reduce the amount of
interest payable to the Certificateholders on such Distribution Date and such
reduction will not be recoverable thereafter.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
Unless otherwise specified in the related Prospectus Supplement, the
Servicer is required to foreclose upon or otherwise comparably effect the
ownership in the name of the Servicer, on behalf of the Trustee, of Mortgaged
Properties relating to defaulted Mortgage Loans as to which no satisfactory
arrangements can be made for collection of delinquent payments and which the
related Transferor or the Servicer has not reacquired pursuant to the option
described below, unless the Servicer reasonably believes that Liquidation
Proceeds with respect to such Mortgage Loan would not be increased as a result
of such foreclosure or other action, in which case the Mortgage Loan will be
charged off and will be liquidated (a "Liquidated Mortgage Loan"). In connection
with such foreclosure or other conversion, the Servicer is required to exercise
or use foreclosure procedures with the same degree of care and skill as it would
ordinarily exercise or use under the circumstances in the conduct of its own
affairs. Any amounts advanced in connection with such foreclosure or other
action will constitute Servicing Advances.
Unless otherwise specified in the related Prospectus Supplement, if a REMIC
election has been made, the Servicer will be required to sell REO Property
within two years of its acquisition by the Trustee, unless an opinion of counsel
experienced in federal income tax matters, addressed to the Trustee, the related
Transferor and the Servicer is obtained to the effect that the holding by the
Trust of such REO Property for a greater specified period will not result in the
imposition of taxes on "prohibited transactions" of the Trust as defined in
Section 860F of the Code or cause the Trust to fail to qualify as a REMIC.
In servicing the Mortgage Loans, the Servicer is required to determine,
with respect to each defaulted Mortgage Loan, when it has recovered, whether
through trustee's sale, foreclosure sale or otherwise, all amounts, if any, it
expects to recover from or on account of such defaulted Mortgage Loan, whereupon
such Mortgage Loan shall become a Liquidated Mortgage Loan.
Unless otherwise specified in the related Prospectus Supplement, the
related Transferor or the Servicer may have the right and the option under the
related Pooling and Servicing Agreement, but not the obligation, to reacquire
for its own account any Mortgage Loan which becomes delinquent, in whole or in
part, as to three consecutive monthly installments or any Mortgage Loan as to
which enforcement proceedings have been brought by the Servicer subject to
certain limitations set forth in the Prospectus Supplement. Any such Mortgage
Loan so reacquired will be withdrawn from the related Mortgage Pool on a Deposit
Date at the Loan Withdrawal Amount thereof.
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GENERAL SERVICING PROCEDURES
The Servicer will service the Mortgage Loans, either directly or through
Sub-Servicers, in accordance with the provisions of each related Pooling and
Servicing Agreement and the policies and procedures customarily employed by the
Servicer in servicing other comparable mortgage loans. Servicing includes, but
is not limited to, post-origination loan processing, customer service,
remittance handling, collections and liquidations.
The Servicer, in its own name or in the name of any Sub-Servicer, will be
authorized and empowered pursuant to the related Pooling and Servicing Agreement
(i) to execute and deliver any and all instruments of satisfaction or
cancellation or of partial or full release or discharge and all other comparable
instruments with respect to the Mortgage Loans and with respect to the Mortgaged
Properties, (ii) to institute foreclosure proceedings or obtain a deed in lieu
of foreclosure so as to effect ownership of any Mortgaged Property in its own
name on behalf of the Trustee and (iii) to hold title in its own name to any
Mortgaged Property upon such foreclosure or deed in lieu of foreclosure on
behalf of the Trustee.
During a foreclosure, any expenses incurred by the Servicer are added to
the amount owed by the Mortgagor, as permitted by applicable law. Upon
completion of the foreclosure, the property is sold to an outside bidder, or
passes to the mortgagee, in which case the Servicer will proceed to liquidate
the asset. Servicing and charge-off policies and collection practices may change
over time in accordance with the Servicer's business judgment, changes in its
real estate loan portfolio and applicable laws and regulations.
SUB-SERVICERS
The Servicer will be permitted under the related Pooling and Servicing
Agreement to enter into sub-servicing arrangements with certain mortgage
servicing institutions meeting the requirements of such Pooling and Servicing
Agreement (each, a "Sub-Servicer") to service the Mortgage Loans in a Mortgage
Pool. Any such sub-servicing arrangements will not relieve the Servicer of any
liability associated with servicing the Mortgage Loans. Compensation for the
services of the Sub-Servicer with respect to the Mortgage Loans will be paid by
the Servicer. See "-- Servicing and Other Compensation and Payment of Expenses"
below.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
Unless otherwise specified in the related Prospectus Supplement, as
compensation for its servicing activities under a Pooling and Servicing
Agreement, the Servicer will be entitled to retain the amount of the Servicing
Fee (as defined in the related Pooling and Servicing Agreement) with respect to
each Mortgage Loan. Additional servicing compensation in the form of prepayment
charges, release fees, bad check charges, assumption fees, extension fees, late
payment charges and any other servicing-related fees, Net Liquidation Proceeds
not required to be deposited in the Collection Account and similar items may, to
the extent collected from Mortgagors, be retained by the Servicer.
The Servicer will be required to pay all reasonable and customary
"out-of-pocket" costs and expenses incurred in the performance of its servicing
obligations, including, but not limited to, the cost of (i) the preservation,
restoration and protection of the Mortgaged Properties, (ii) any enforcement or
judicial proceedings, including foreclosures and (iii) the management and
liquidation of Mortgaged Properties acquired in satisfaction of the related
Mortgage Loans. Such expenditures (each, a "Servicing Advance") may include
costs of collection efforts, reappraisals, forced placement of hazard insurance
if a borrower allows his hazard policy to lapse, legal fees in connection with
foreclosure actions, advancing payments due under any Senior Lien, if any,
advancing delinquent property taxes, and upkeep and maintenance of the Mortgaged
Property if it is acquired through foreclosure and similar types of expenses.
The Servicer will be obligated to make the Servicing Advances incurred in the
performance of its servicing obligations. Unless otherwise specified in the
related Prospectus Supplement, the Servicer will be entitled to recover
Servicing Advances, if not theretofore recovered from the Mortgagor on whose
behalf such Servicing Advance was made, from late 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
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funds on deposit in the Collection Account. The Servicer is not required to make
any Servicing Advance that it determines would be nonrecoverable.
In addition, a Sub-Servicer may be entitled to a monthly servicing fee in a
minimum amount set forth in the related Prospectus Supplement. The Sub-Servicer
may also be entitled to collect and retain, as part of its servicing
compensation, any late charges or prepayment penalties provided in the Mortgage
Note or related instruments. The Sub-Servicer will be reimbursed by the Servicer
for certain expenditures that it makes, generally to the same extent that the
Servicer would be reimbursed for such expenditures under the related Pooling and
Servicing Agreement. Compensation for the services of the Sub-Servicer shall be
paid by the Servicer as a general corporate obligation of the Servicer.
MAINTENANCE OF HAZARD INSURANCE
Unless otherwise specified in the related Prospectus Supplement, the
Servicer will be required to cause to be maintained fire and hazard insurance
with extended coverage customary in the area where each Mortgaged Property is
located in an amount which is at least equal to the least of (i) the outstanding
principal balance owing on the Mortgage Loan and the related Senior Lien, if
any, (ii) the full insurable value of the related Mortgaged Property and (iii)
the minimum amount required to compensate for damage or loss on a replacement
cost basis. Unless otherwise specified in the related Prospectus Supplement, if
the Mortgaged Property is in an area identified in the Federal Register by the
Flood Emergency Management Agency as having special flood hazards, the Servicer
will be required to cause to be purchased a flood insurance policy with a
generally acceptable insurance carrier, in an amount representing coverage not
less than the least of (a) the outstanding principal balance of the Mortgage
Loan and the Senior Lien, if any, (b) the minimum amount required to compensate
for damages or loss on a replacement cost basis or (c) the maximum amount of
insurance available under the National Flood Protection Act of 1973, as amended,
provided that such flood insurance is available. The Servicer will also be
required to maintain fire, hazard and, if applicable, flood insurance on each
REO Property in the respective amounts described above, as well as liability
insurance, in each case to the extent such insurance is available. Any amounts
collected by the Servicer under any such policies (other than amounts to be
applied to the restoration or repair of the Mortgaged Property, or to be
released to the Mortgagor in accordance with customary mortgage servicing
procedures) are required to be deposited by the Servicer in the Collection
Account.
In the event that the Servicer obtains and maintains a blanket policy
insuring against fire and hazards of extended coverage on all of the Mortgage
Loans, then, to the extent such policy names the Trustee as loss payee and
provides coverage in an amount equal to the aggregate unpaid principal balances
of the Mortgage Loans without co-insurance, and otherwise complies with the
requirements of the preceding paragraph, the Servicer will be deemed
conclusively to have satisfied its obligations with respect to fire and hazard
insurance coverage. If such blanket policy contains a deductible clause, the
Servicer will be required to pay to the Trustee the difference between the
amount that would have been payable under a policy described in the preceding
paragraph and the amount paid under the blanket policy.
ENFORCEMENT OF DUE-ON-SALE CLAUSES
Unless otherwise specified in the related Prospectus Supplement, when a
Mortgaged Property has been or is about to be voluntarily conveyed by the
Mortgagor, the Servicer, on behalf of the Trustee, in performing its servicing
functions, to the extent it has knowledge of such conveyance or prospective
conveyance, will be required to enforce the rights of the Trustee as the
mortgagee of record to accelerate the maturity of the related Mortgage Loan
under any due-on-sale clause contained in the related Mortgage or Mortgage Note;
provided, however, that the Servicer will not be required to exercise any such
right if the due-on-sale clause, in the reasonable belief of the Servicer, is
not enforceable under applicable law or if such enforcement would materially
increase the risk of default or delinquency on, or materially decrease the
security for, such Mortgage Loan. In such event, the Servicer will attempt to
enter into an assumption and modification agreement with the person to whom such
property has been or is about to be conveyed, pursuant to which such 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
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a substitution of liability agreement with such person, pursuant to which the
original Mortgagor is released from liability and such person is substituted as
Mortgagor and becomes liable under the Mortgage Note. The Servicer will not
enter into an assumption agreement unless permitted by applicable law and unless
such assumption agreement would not materially increase the risk of default or
delinquency on, or materially decrease the security for, such Mortgage Loan.
VOTING
Unless otherwise specified in the related Pooling and Servicing Agreement,
with respect to any provisions of the Pooling and Servicing Agreement providing
for the action, consent or approval of the holders of all Certificates
evidencing specified "Voting Interests" in the Trust, the holders of any Class
of Certificates will collectively be entitled to the then-applicable percentage
of such Class of Certificates of the aggregate Voting Interests represented by
all Certificates. Each Certificateholder of a Class will have a Voting Interest
equal to the product of the Voting Interest to which such Class is collectively
entitled and the Certificateholder's Percentage Interest (as such term is
defined in the related Pooling and Servicing Agreement) in such Class. With
respect to any provisions of the Pooling and Servicing Agreement providing for
action, consent or approval of a specified Class or Classes of Certificates,
each Certificateholder of such specified Class will have a Voting Interest in
such Class equal to such Certificateholder's Percentage Interest in such Class.
Any Certificate registered in the name of the related Transferor or any
affiliate thereof will be deemed not to be outstanding and the Percentage
Interest evidenced thereby shall not be taken into account in determining
whether the requisite amount of Percentage Interests necessary to take any such
action, or effect any such consent, has been obtained.
AMENDMENTS
Unless otherwise specified in the related Prospectus Supplement, at any
time and from time to time, without the consent of the Certificateholders, the
Trustee, the related Transferor and the Servicer may amend the related Pooling
and Servicing Agreement for the purposes of (a) curing any ambiguity or
correcting or supplementing any provision of such agreement that may be
inconsistent with any other provision of such agreement, (b) if a REMIC election
has been made and if accompanied by an approving opinion of counsel experienced
in federal income tax matters, removing the restriction against the transfer of
a Residual Certificate to a Disqualified Organization (as such term is defined
in the Code) or (c) complying with the requirements of the Code; provided,
however, that such action shall not, as evidenced by an opinion of counsel
delivered to the Trustee, materially and adversely affect the interests of any
Certificateholder.
Unless otherwise specified in the related Prospectus Supplement, the
related Pooling and Servicing Agreement may also be amended by the Trustee, the
related Transferor and the Servicer, at any time and from time to time, with the
prior written approval of not less than a majority of the Percentage Interests
represented by each affected Class of Certificates then outstanding, for the
purpose of adding any provisions or changing in any manner or eliminating any of
the provisions thereof or of modifying in any manner the rights of the
Certificateholders thereunder; provided, however, that no such amendment shall
(a) change in any manner the amount of, or delay the timing of, payments which
are required to be distributed to any Certificateholder without the consent of
such Certificateholder or (b) change the aforesaid percentages of Percentage
Interests which are required to consent to any such amendments, without the
consent of the Certificateholders of all Certificates of the Class or Classes
affected then outstanding. If a REMIC election has been made with respect to the
related Trust, any such amendment must be accompanied by an opinion of tax
counsel as to REMIC matters.
The Trustee will be required to furnish a copy of any such amendment to
each Certificateholder in the manner set forth in the related Pooling and
Servicing Agreement.
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
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(a) any failure by the Servicer to make a Monthly Advance as required; (b) any
failure by the Servicer to deposit in the Collection Account or Certificate
Account any amount (other than an amount representing a Monthly Advance)
required to be so deposited under the related Pooling and Servicing Agreement,
which failure continues unremedied for one Business Day after the giving of
written notice of such failure to the Servicer by the Trustee or to the Servicer
and the Trustee by Certificateholders evidencing Voting Interests represented by
all Certificates aggregating not less than 51%; (c) any failure by the Servicer
to duly observe or perform in any material respect any other of its covenants or
agreements in the Pooling and Servicing Agreement which materially and adversely
affects the rights of Certificateholders and continues unremedied for 30 days
after the giving of written notice of such failure to the Servicer by the
Trustee or the Certificateholders evidencing Voting Interests represented by all
Certificates aggregating not less than 51%; (d) certain events of insolvency,
readjustment of debt, marshaling of assets and liabilities or similar
proceedings regarding the Servicer and certain actions by the Servicer
indicating its insolvency or inability to pay its obligations; (e) the
occurrence of delinquencies and/or losses in respect of the Mortgage Loans in
excess of levels, and for periods of time, as specified in the Pooling and
Servicing Agreement; and (f) if the related Transferor and the Servicer are the
same entity (i.e., ACC), any failure of the Transferor to duly observe or
perform in any material respect any of its covenants or agreements in the
related Pooling and Servicing Agreement that materially and adversely affects
the rights of Certificateholders and continues unremedied for 30 days after the
giving of a written notice of such failure to such Transferor by the Trustee or
to the Servicer and the Trustee by Certificateholders evidencing Voting
Interests represented by all Certificates aggregating not less than 51%.
RIGHTS UPON CERTIFICATE EVENTS OF DEFAULT
Unless otherwise specified in the related Prospectus Supplement, upon the
occurrence of a Certificate Event of Default, Certificateholders evidencing
Voting Interests represented by all Certificates aggregating not less than 51%
or the Trustee may terminate all of the rights and obligations of the Servicer
under the related Pooling and Servicing Agreement, whereupon the Trustee will
succeed to all the responsibilities, duties and liabilities of the Servicer
under the related Pooling and Servicing Agreement and will be entitled to such
compensation as the Servicer would have been entitled to thereunder. In the
event that the Trustee would be obligated to succeed the Servicer but is
unwilling or legally unable to act, it may appoint, or petition a court of
competent jurisdiction for the appointment of, any established housing and home
finance institution or any institution that regularly services home equity loans
that is currently servicing a home equity loan portfolio that has all licenses,
permits and approvals required by applicable law and a net worth of at least
$10,000,000 to act as successor to the Servicer under the related Pooling and
Servicing Agreement, provided that the appointment of any such successor
Servicer will not result in the qualification, reduction or withdrawal of the
rating assigned to the Certificates by any applicable Rating Agency. Pending
appointment of a successor Servicer, unless the Trustee is prohibited by law
from so acting, the Trustee shall be obligated to act as Servicer. The Trustee
and such successor Servicer may agree upon the servicing compensation to be
paid, which in no event may be greater than the compensation described above.
Unless otherwise specified in the related Prospectus Supplement, no
Certificateholder, solely by virtue of its status as a Certificateholder, will
have any right under the related Pooling and Servicing Agreement to institute
any action, suit or proceeding with respect to the related Pooling and Servicing
Agreement unless such Certificateholder previously has given to the Trustee
written notice of default and unless Certificateholders evidencing Voting
Interests represented by all Certificates aggregating not less than 51% have
made written request upon the Trustee to institute such action, suit or
proceeding in its own name as Trustee thereunder and have offered to the Trustee
reasonable indemnity for costs, expenses and liabilities to be incurred, and the
Trustee for 60 days has neglected or refused to institute any such action, suit
or proceeding. However, the Trustee will be under no obligation to exercise any
of the rights or powers vested in it by the related Pooling and Servicing
Agreement or to institute, conduct or defend any litigation thereunder or in
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.
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TERMINATION; OPTIONAL TERMINATION
Unless otherwise specified in the related Pooling and Servicing Agreement,
the obligations created by each Pooling and Servicing Agreement for each Series
of Certificates will terminate upon the payment to the related
Certificateholders of all amounts held in any Accounts or by the Servicer, and
required to be paid to them pursuant to such Pooling and Servicing Agreement
following the later of (i) the final payment or other liquidation of the last of
the Mortgage Loans subject thereto or the disposition of all property acquired
upon foreclosure or deed in lieu of foreclosure of any such Mortgage Loans
remaining in the Trust and (ii) the acquiring by the related Transferor, the
Servicer or other entity specified in the related Prospectus Supplement
including, if REMIC treatment has been elected, the holder of the residual
interest in the REMIC (see "Certain Federal Income Tax Consequences" below),
from the related Trust of all of the remaining Mortgage Loans and all property
acquired in respect of such Mortgage Loans. Unless otherwise specified in the
related Prospectus Supplement, any such acquisition of Mortgage Loans and
property acquired in respect of Mortgage Loans evidenced by a Series of
Certificates will be made at the option of the related Transferor, the Servicer
or other entity at a price, and in accordance with the procedures, specified in
the Prospectus Supplement. The exercise of such right will effect early
retirement of the Certificates of that Series, but the right of the related
Transferor, the Servicer or other entity to so acquire is subject to the
principal balance of the related Mortgage Loans being less than the percentage
specified in the related Prospectus Supplement of the aggregate principal
balance of such Mortgage Loans at the Cut-off Date for the Series. The foregoing
is subject to the provisions that if a REMIC election is made with respect to a
Trust, any reacquisition pursuant to clause (ii) above will be made only in
connection with a "qualified liquidation" of the REMIC within the meaning of
Section 860F(g)(4) of the Code.
EVIDENCE AS TO COMPLIANCE
Unless otherwise specified in the related Prospectus Supplement, each
Pooling and Servicing Agreement will provide that on or before a specified date
in each year, a firm of independent public accountants will furnish a statement
to the Trustee to the effect that on the basis of certain procedures
substantially in conformance with the Uniform Single Audit Program for Mortgage
Bankers (to the extent the procedures are applicable to the servicing
obligations set forth in the Pooling and Servicing Agreement), the servicing by
or on behalf of the Servicer of the related Mortgage Loans, under agreements
substantially similar to each other (including the related Pooling and Servicing
Agreement) was conducted in compliance with such agreements and such procedures
have disclosed no exceptions or errors in records relating to the Mortgage Loans
subject to the related Pooling and Servicing Agreement which, in the opinion of
such firm, are material, except for such exceptions as will be referred to in
the report. Unless otherwise specified in the related Prospectus Supplement,
each Pooling and Servicing Agreement will provide that the Servicer will be
required to deliver to the Trustee, on or before a specified date in each year,
an annual statement signed by an officer of the Servicer to the effect that the
Servicer has fulfilled its material obligations under the related Pooling and
Servicing Agreement throughout the preceding year.
INDEMNIFICATION OF OFFICERS AND DIRECTORS OF THE TRANSFERORS
The related Pooling and Servicing Agreement will provide that neither the
related Transferor nor any of its directors, officers, employees or agents shall
have any liability to the related Trust created thereunder or to any of the
Certificateholders, except with respect to liabilities resulting from willful
malfeasance, bad faith or gross negligence or from the reckless disregard of
obligations or duties arising under the related Pooling and Servicing Agreement.
The related Pooling and Servicing Agreement will further provide that, with the
exceptions stated above, the related Transferor and its directors, officers,
employees and agents are entitled to be indemnified and held harmless by the
related Trust against any loss, liability or expense incurred in connection with
legal actions relating to such Pooling and Servicing Agreement or the
Certificates.
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
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related Transferor, the Servicer and any Rating Agency, in which event such
Transferor will be obligated to appoint a successor Trustee. The related
Transferor may remove the Trustee if the Trustee ceases to be eligible to
continue as such under the Pooling and Servicing Agreement or if the Trustee
becomes insolvent. Any resignation or removal of the Trustee and appointment of
a successor Trustee will not become effective until acceptance of the
appointment by the successor Trustee. Each Pooling and Servicing Agreement will
provide that the Trustee is under no obligation to exercise any of the rights or
powers vested in it by the Pooling and Servicing Agreement at the request or
direction of any of the Certificateholders, unless such Certificateholders shall
have offered to the Trustee reasonable security or indemnity against the costs,
expenses and liabilities which might be incurred by it in compliance with such
request or direction. The Trustee may execute any of the rights or powers
granted by the Pooling and Servicing Agreement or perform any duties thereunder
either directly or by or through agents or attorneys, and the Trustee is
responsible for any misconduct or negligence on the part of any agent or
attorney appointed and supervised with due care by it thereunder. Pursuant to
the Pooling and Servicing Agreement, the Trustee is not liable for any action it
takes or omits to take in good faith which it reasonably believes to be
authorized by an authorized officer of any person or within its rights or powers
under the Pooling and Servicing Agreement. The Trustee and any director,
officer, employee or agent of the Trustee may rely and will be protected in
acting or refraining from acting in good faith in reliance on any certificate,
notice or other document of any kind prima facie properly executed and submitted
by the authorized officer of any person respecting any matters arising under the
Pooling and Servicing Agreement.
THE INDENTURE
GENERAL
Each Series of Bonds will be issued pursuant to an Indenture to be entered
into between the related Bond Issuer and the related Trustee. The Mortgage Loans
to be included in the related Mortgage Pool will be assigned to the Trustee
pursuant to provisions included in the related Indenture that are substantially
the same as, and the obligations of ACAC, as Transferor (or the related Bond
Issuer, if a different entity, to the extent described in the related Prospectus
Supplement), and the Trustee with respect to the Mortgage Loans so conveyed will
be substantially similar to, those described under "The Pooling and Servicing
Agreement -- Assignment of Mortgage Loans" herein. In addition, the Mortgage
Loans included in the Mortgage Pool for any Series of Bonds will be serviced by
the Servicer pursuant to the terms of a Servicing Agreement to be entered into
among the Bond Issuer, ACC, as Servicer, and the related Trustee, which will
contain provisions substantially similar to the servicing and collection
provisions included in each Pooling and Servicing Agreement and described under
"The Pooling and Servicing Agreement" herein. Where provisions or terms used in
a particular Indenture or Servicing Agreement differ from those provided herein,
a description of such provisions or terms will be included in the related
Prospectus Supplement.
The following summaries describe certain provisions of the Indenture not
described elsewhere in this Prospectus. Where particular provisions or terms
used in the Indenture are referred to, the actual provisions (including
definitions of terms) are incorporated by reference as part of such summaries.
The description set forth below is subject to modification in the Prospectus
Supplement for a Series of Bonds to describe the terms and provisions of the
particular Indenture relating to such Series of Bonds.
MODIFICATION OF INDENTURE
With the consent of the holders of not less than 51% of the then aggregate
principal amount of the outstanding Bonds of any Series issued under an
Indenture, the related Trustee and the related Bond Issuer may execute a
supplemental indenture to add provisions to, or change in any manner or
eliminate any 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
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interest on, any Bond of such Series or reduce the principal amount thereof, the
Bond Rate specified thereon (except as provided in the related Indenture with
respect to Bonds that have an adjustable Bond Rate), the redemption price with
respect thereto or the earliest date on which any Bonds of such Series may be
redeemed at the option of the related Bond Issuer, or change any place of
payment where, or the coin or currency in which, any Bond of such Series or any
interest thereon is payable, or impair the right to institute suit for the
enforcement of certain provisions of the Indenture regarding payment, (b) reduce
the percentage of the aggregate principal amount of the outstanding Bonds of
such Series, the consent of the holders of which is required for any such
supplemental indenture, or the consent of the holders of which is required for
any waiver of compliance with certain provisions of the Indenture or of certain
defaults thereunder and their consequences as provided for in the Indenture, (c)
modify the provisions of the Indenture specifying the circumstances under which
such a supplemental indenture may not change the provisions of the Indenture
without the consent of the holders of each outstanding Bond of such Series
affected thereby, or the provisions of the Indenture with respect to certain
remedies available in a Bond Event of Default (as described below), except to
increase any percentage specified therein or to provide that certain other
provisions of the Indenture cannot be modified or waived without the consent of
the holder of each outstanding Bond affected thereby, (d) modify or alter the
provisions of the Indenture regarding the voting of Bonds held by the related
Bond Issuer or an affiliate of the related Bond Issuer 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 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.
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If, following a Bond Event of Default, a Series of Bonds has been declared
to be due and payable, the Trustee may, in its discretion (provided that the
holders of the Bonds of such Series have not directed the Trustee to sell the
assets included in the related Trust Estate), refrain from selling such assets
and continue to apply all amounts received on such assets to payments due on the
Bonds of such Series in accordance with their terms, notwithstanding the
acceleration of the maturity of such Bonds. The Trustee, however, must sell the
assets included in the related Trust Estate for such Series if collections in
respect of such assets are determined to be insufficient to make all scheduled
payments on Bonds of such Series, in which case payments will be made on the
Bonds in the same manner as described in the next sentence with regard to
instances in which such assets are sold. In addition, upon a Bond Event of
Default the Trustee may, in its discretion (provided that, unless the Bond Event
of Default relates to a default in payment of principal or interest, the Trustee
must receive the consent of the holders of all outstanding Bonds of such Series,
and certain other conditions must be met), sell the assets included in the
related Trust Estate for such Series, in which event the Bonds of such Series
will be payable pro rata out of the collections on, or the proceeds from the
sale of, such assets and any overdue installments of interest on the Bonds will,
to the extent permitted by applicable law, bear interest at the highest stated
interest rate borne by any Bond of such Series.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case a Bond Event of Default shall occur and be continuing, the
Trustee shall be under no obligation to exercise any of the rights and powers
under the Indenture at the request or direction of any of the Bondholders,
unless such Bondholders have offered to the Trustee reasonable security or
indemnity satisfactory to it against the costs, expenses and liabilities which
might be incurred by it in compliance with such request or direction. Subject to
such provisions for indemnification and certain limitations contained in the
Indenture, the holders of a majority in principal amount of the outstanding
Bonds of a Series shall have the right to direct the time, method, and place of
conducting any proceeding or any remedy available to the Trustee or exercising
any trust or power conferred on the Trustee with respect to the Bonds of such
Series; and the holders of a majority in principal amount of the Bonds of a
Series then outstanding may, in certain cases, waive any default with respect
thereto, except a default in the payment of principal or interest or a default
in respect of a covenant or provision of the Indenture that cannot be modified
without the waiver or consent of the holder of each outstanding Bond affected
thereby.
LIST OF BONDHOLDERS
Unless otherwise specified in the Prospectus Supplement relating to a given
Series of Bonds, three or more holders of the Bonds of any Series (each of whom
has owned a Bond of such Series for at least six months) may, by written request
to the Trustee, obtain access to the list of all Bondholders of such Series
maintained by the Trustee for the purpose of communicating with other such
Bondholders with respect to their rights under the Indenture. The Trustee may
elect not to afford the requesting Bondholders access to the list of Bondholders
if it agrees to mail the desired communication or proxy, on behalf of the
requesting Bondholders, to all Bondholders.
ANNUAL COMPLIANCE STATEMENT
The related Bond Issuer will be required to file annually with the Trustee
a written statement as to the fulfillment of its obligations under the
Indenture.
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.
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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.
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,
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irrevocably until the debt is paid, in trust, generally with a power of sale, to
the trustee to secure payment of the borrower's obligation to the lender. A
security deed and a deed to secure debt are special types of deeds that indicate
on their face that they are granted to secure an underlying debt. By executing a
security deed or deed to secure debt, the grantor conveys title to, as opposed
to merely creating a lien upon, the subject property to the grantee until such
time as the underlying debt is repaid. The mortgagee's authority under a
mortgage, the trustee's authority under a deed of trust and the grantee's
authority under a security deed or deed to secure debt are governed by law and,
with respect to some deeds of trust, the directions of the beneficiary.
Certain of the Mortgage Loans may be loans secured by condominium units.
The condominium building may be a multi-unit building or buildings, or a group
of buildings whether or not attached to each other, located on property subject
to condominium ownership. Condominium ownership is a form of ownership of a real
property wherein each owner is entitled to the exclusive ownership and
possession of his or her individual condominium unit and also owns a
proportionate undivided interest in all parts of the condominium building (other
than the individual condominium units) and all areas or facilities, if any, for
the common use of the condominium units. The condominium unit owners appoint or
elect the condominium association to govern the affairs of the condominium.
FORECLOSURE/REPOSSESSION
Foreclosure of a deed of trust is generally accomplished by a non-judicial
sale under a specific provision in the deed of trust which authorizes the
trustee to sell the property at public auction upon any default by the borrower
under the terms of the note or deed of trust. In addition to this non-judicial
remedy, a deed of trust may be judicially foreclosed. In addition to any notice
requirements contained in a deed of trust, in some states the trustee must
record a notice of default and send a copy to the borrower-trustor, to any
person who has recorded a request for a copy of any notice of default and notice
of sale, to any successor-in-interest to the borrower-trustor, to the
beneficiary of any junior deed of trust and to certain other persons. Before
such non-judicial sale takes place, typically a notice of sale must be posted in
a public place and published during a specific period of time in one or more
newspapers, posted on the property and sent to parties having an interest of
record in the property.
Foreclosure of a mortgage is generally accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest in the real property. Delays in completion of the
foreclosure may occasionally result from difficulties in locating necessary
parties. When the mortgagee's right to foreclosure is contested, the legal
proceedings necessary to resolve the issue can be time-consuming. After the
completion of a judicial foreclosure proceeding, the court generally issues a
judgment of foreclosure and appoints a referee or other court officer to conduct
the sale of the property.
In some states, the borrower under a mortgage or a deed of trust will have
the right to reinstate the loan at any time following default until shortly
before the foreclosure sale. In such states, the borrower, or any other person
having a junior encumbrance on the real estate, may, during a statutorily
prescribed reinstatement period, cure a monetary default by paying the entire
amount in arrears plus other designated costs and 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
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interest and the expenses of foreclosure. Thereafter, the lender will assume the
burden of ownership, including obtaining hazard insurance and making such
repairs at its own expense as are necessary to render the property suitable for
sale. The lender will commonly obtain the services of a real estate broker and
pay the broker's commission in connection with the sale of the property.
Depending upon market conditions, the ultimate proceeds of the sale of the
property may not equal the lender's investment in the property, in which event
the lender may be entitled to a deficiency judgment in certain states. Any loss
may be reduced by the receipt of any mortgage insurance proceeds.
Courts have imposed general equitable principles upon foreclosure, which
are generally designed to mitigate the legal consequences to the borrower of the
borrower's defaults under the loan documents. Some courts have been faced with
the issue of whether federal or state constitutional provisions reflecting due
process concerns for fair notice require that borrowers under deeds of trust
receive notice earlier than that prescribed by statute. For the most part, these
cases have upheld the notice provisions as being reasonable or have found that
the sale by a trustee under a deed of trust does not involve sufficient state
action to afford constitutional protection to the borrower.
RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the borrower and foreclosed junior lienholders are given a statutory
period in which to redeem the property from the foreclosure sale. In some
states, redemption may occur only upon payment of the entire principal balance
of the loan, accrued interest and expenses of foreclosure. In other states,
redemption may be authorized if the former borrower pays only a portion of the
sums due. The effect of a statutory right of redemption would defeat the title
of any purchaser from the lender subsequent to foreclosure or sale under a deed
of trust. Consequently, the practical effect of the redemption right is to force
the lender to retain the property and pay the expenses of ownership until the
redemption period has run. In some states, such as California, there is no right
to reclaim property after a trustee's sale under a deed of trust.
CERTAIN PROVISIONS OF CALIFORNIA DEEDS OF TRUST
Most institutional lenders in California, including the Affiliated
Originators originating loans secured by real property in California, use a form
of deed of trust that confers on the beneficiary the right both to receive all
proceeds collected under any hazard insurance policy and all awards made in
connection with any condemnation proceedings, and to apply such proceeds and
awards made in connection with any condemnation proceedings to any indebtedness
secured by the deed of trust, in such order as the beneficiary may determine;
provided, however, that the beneficiary is prohibited (under California law)
from applying insurance and condemnation proceeds to the indebtedness secured by
the deed of trust unless the beneficiary's security has been impaired by the
casualty or condemnation, and, if such security has been impaired, permits such
proceeds to be so applied only to the extent of such impairment. Thus, in the
event improvements on the property are damaged or destroyed by fire or other
casualty, or in the event the property is taken by condemnation, and, as a
result thereof, the beneficiary's security is impaired, the beneficiary may
apply any award received in respect of such damages or in connection with such
condemnation to the indebtedness secured by the first deed of trust. Proceeds in
excess of the amount of indebtedness secured by a first deed of trust will, in
most cases, be applied to the indebtedness of a junior deed of trust.
Another provision typically found in the forms of deed of trust used by
most institutional lenders in California obligates the trustor to pay before
delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which are senior to the deed of
trust, to provide and maintain fire and hazard insurance on the property, to
maintain and repair the property and not to commit or permit any waste thereof,
and to appear in and defend any action or proceeding purporting to affect the
property or the rights of the beneficiary under the deed of trust. Upon a
failure of the trustor to perform any of these obligations, the beneficiary is
given the right under the deed of trust to perform the obligation itself, at its
election, with the trustor agreeing to reimburse the beneficiary for any sums
expended by the beneficiary on behalf of the trustor. All sums so expended by
the beneficiary become part of the indebtedness secured by the deed of trust.
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ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states, including California, have adopted statutory prohibitions
restricting the right of the beneficiary or mortgagee to obtain a deficiency
judgment against borrowers financing the purchase of their residence or
following sale under a deed of trust or certain other foreclosure proceedings. A
deficiency judgment is a personal judgment against the borrower equal in most
cases to the difference between the amount due to the lender and the net amount
received by the lender at the foreclosure sale. As a result of these
prohibitions, it is anticipated that in many instances the Servicer will not
seek deficiency judgments against defaulting Mortgagors.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other federal and state statutory provisions, including the federal bankruptcy
laws and state laws affording relief to debtors, may interfere with or affect
the ability of the secured mortgage lender to realize upon collateral or enforce
a deficiency judgment. For example, with respect to federal bankruptcy law, a
court with federal bankruptcy jurisdiction may permit a debtor through his or
her Chapter 11 or Chapter 13 rehabilitative plan to cure a monetary default in
respect of a mortgage loan on the debtor's residence by paying arrearages within
a reasonable time period and reinstating the original mortgage loan payment
schedule even though the lender accelerated the mortgage loan and final judgment
of foreclosure had been entered in state court (provided no sale of the
residence had yet occurred) prior to the filing of the debtor's petition. Some
courts with federal bankruptcy jurisdiction have approved plans, based on the
particular facts of the reorganization case, that effected the curing of a
mortgage loan default by paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction also have indicated that the
terms of a mortgage loan secured by property of the debtor may be modified.
These courts have allowed modifications that include reducing the amount of each
monthly payment, changing the rate of interest, altering the repayment schedule,
forgiving all or a portion of the debt and reducing the lender's security
interest to the value of the residence, thus leaving the lender a general
unsecured creditor for the difference between the value of the residence and the
outstanding balance of the loan.
California courts have imposed general equitable principles upon judicial
foreclosure. These equitable principles are generally designed to relieve the
borrower from the legal effect of the borrower's default under the related loan
documents. Examples of judicial remedies that have been fashioned include
judicial requirements that the lender undertake affirmative and expensive
actions to determine the causes for the borrower's default and the likelihood
that the borrower will be able to reinstate the loan. In some cases, California
courts have required that lenders reinstate loans or recast payment schedules in
order to accommodate borrowers who are suffering from temporary financial
disabilities. In other cases, such courts have limited the right of the lender
to foreclose if the default under the loan is not monetary, such as the
borrower's failure to adequately maintain the property or the borrower's
execution of a second deed of trust affecting the property.
Federal and local real estate tax laws provide priority to certain tax
liens over the lien of a mortgage or secured party. Numerous federal and state
consumer protection laws impose substantive requirements upon 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
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apply on a mandatory basis to all mortgage loans originated on or after October
1, 1995. The provisions can impose specific statutory liabilities upon creditors
who fail to comply with their provisions and may affect the enforceability of
the related loans. In addition, any assignee of the creditor would generally be
subject to all claims and defenses that the consumer could assert against the
creditor, including, without limitation, the right to rescind the mortgage loan.
ENFORCEABILITY OF DUE-ON-SALE CLAUSES
Unless otherwise provided in the related Prospectus Supplement, each
Mortgage Loan will contain a due-on-sale clause which will generally provide
that if the Mortgagor sells, or voluntarily transfers or conveys the Mortgaged
Property, the Mortgage Loan may be accelerated by the mortgagee. The Garn-St.
Germain Depository Institutions Act of 1982 (the "Garn-St. Germain Act"),
subject to certain exceptions, preempts state constitutional, statutory and case
law prohibiting the enforcement of due-on-sale clauses. As to loans secured by
an owner-occupied residence, the Garn-St. Germain Act sets forth nine specific
instances in which a mortgagee covered by such Act may not exercise its rights
under a due-on-sale clause, notwithstanding the fact that a transfer of the
property may have occurred. The inability to enforce a due-on-sale clause may
result in transfer of the related Mortgaged Property to an uncreditworthy
person, which could increase the likelihood of default.
PREPAYMENT CHARGES
Under certain state laws, prepayment charges may not be imposed at all or
after a certain period of time following origination of the mortgage loans with
respect to prepayments on mortgage loans secured by liens encumbering
owner-occupied residential properties. Because many of the Mortgaged Properties
will be owner-occupied, it is anticipated that prepayment charges may not be
imposed with respect to many of the Mortgage Loans. The absence of such a
restraint on prepayment may increase the likelihood of refinancing or other
early retirement of such Mortgage Loans.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ("Title V"), provides that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. The Office of Thrift
Supervision, as successor to the Federal Home Loan Bank Board, is authorized to
issue rules and regulations and to publish interpretations governing
implementation of Title V. The statute authorized the states to reimpose
interest rate limits by adopting, before April 1, 1983, a law or constitutional
provision which expressly rejects an application of the federal law. In
addition, even where Title V is not so rejected, any state is authorized by the
law to adopt a provision limiting discount points or other charges on mortgage
loans covered by Title V. Certain states have taken action to reimpose interest
rate limits and/or to limit discount points or other charges.
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.
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ENVIRONMENTAL CONSIDERATIONS
Real property pledged as security to a lender may be subject to unforeseen
environmental risks. Under the laws of certain states, contamination of a
property may give rise to a lien on the property to assure the payment of the
costs of clean-up. In several states such a lien has priority over the lien of
an existing mortgage against such property. In addition, under the federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA"), the United States Environmental Protection Agency (the "EPA") may
impose a lien on property where the EPA has incurred cleanup costs. However, a
CERCLA lien is subordinate to pre-existing, perfected security interests.
Under the laws of some states, and under CERCLA, it is conceivable that a
lender may be held liable, as an "owner" or "operator," for costs of addressing
releases or threatened releases of hazardous substances at a Mortgaged Property,
regardless of whether or not the environmental damage or threat was caused by a
prior owner or operator. CERCLA imposes liability on any and all "responsible
parties" (which term includes, among others, the property owner and operator)
for the cost of clean-up of releases of hazardous substances. However, CERCLA
excludes from the definition of "owner or operator" secured creditors who hold
indicia of ownership for the purpose of protecting their security interest, but
"without participating in the management of the facility."
Court decisions, such as United States v. Fleet Factors, 901 F.2d 1550
(11th Cir. 1990), cert. denied, 498 US 1049 (1991) (CERCLA liability may be
imposed on a secured lender if it has the ability to participate in management),
and Kelley v. EPA, 15 F.3d 1100 (DC Cir. 1994) cert. denied sub nom, Kelley v.
Am. Bankers Ass'n., 115 S. Ct. 900 (1995) (invalidated the Lender Liability Rule
issued by the EPA in 1992) created considerable uncertainty about the scope and
availability of the secured lender's exemption from liability. In September
1996, however, Congress passed the Asset Conservation, Lender Liability, and
Deposit Insurance Protection Act of 1996 to address this uncertainty in federal
law. This statute adopted EPA's Lender Liability Rule into law and, among other
things, clarified the exemption by defining more clearly the circumstances under
which a lender will be deemed to have participated in management. Similar
legislation has been enacted in some states. In the jurisdictions in which such
enactments are in effect, the environmental liability risks associated with
protecting a security interest in property have been reduced, although not
completely eliminated.
The costs associated with environmental clean-up may be substantial. If the
related Trustee or Servicer is deemed to have participated in management of a
contaminated property that is part of the Trust or Trust Estate, as applicable,
it is likely that remedial costs would become a liability of that Trust or Trust
Estate, as applicable, and in certain circumstances, of the Trustee. Such an
occurrence could occasion a loss to Securityholders. If a lender is or becomes
liable, it can bring an action for contribution against any other "responsible
parties," including a previous owner or operator, who created the environmental
hazard, but those persons or entities may be bankrupt or otherwise judgment
proof.
Unless otherwise specified in the related Prospectus Supplement, at the
time the Mortgage Loans were originated, no environmental assessment or a very
limited environmental assessment of the Mortgaged Properties was conducted.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary of certain of the anticipated material federal income
tax consequences of the purchase, ownership and disposition of Securities is
based on the advice of Andrews & Kurth L.L.P., counsel to the Transferors. This
summary is based on laws, regulations, including the real estate mortgage
investment conduit ("REMIC") regulations promulgated by the Treasury Department
(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
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regarding the federal, state, local and any other tax consequences to them of
the purchase, ownership and disposition of Securities.
I. TAXATION OF CERTIFICATES
A. GENERAL
The federal income tax consequences to Certificateholders will vary
depending on whether (i) the Certificates of a Series are classified as
indebtedness for federal income tax purposes; (ii) an election is made to treat
the Trust (or certain assets of the Trust) relating to a particular Series of
Certificates as a REMIC under the Internal Revenue Code of 1986, as amended (the
"Code"); (iii) the Certificates represent an ownership interest for federal
income tax purposes in some or all of the assets included in the Trust for a
Series; or (iv) for federal income tax purposes the Trust relating to a
particular Series of Certificates is classified as a partnership 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
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conditions of the debt instruments underlying the Debt Certificates or the Debt
Certificates themselves are determinative of whether the likelihood of late
payment or non-payment is a remote contingency. Accordingly, Andrews & Kurth
L.L.P. 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.
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
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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 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
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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 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
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Variable Rate Debt Certificate's issue date. Any objective rate (other than a
qualified inverse floating rate) provided for under the terms of the Multiple
Variable Rate Debt Certificate is converted into a fixed rate that reflects the
yield that is reasonably expected for the Multiple Variable Rate Debt
Certificate. In the case of a Multiple Variable Rate Debt Certificate that
qualifies as a "variable rate debt instrument" and provides for stated interest
at a fixed rate in addition to either one or more qualified floating rates or a
qualified inverse floating rate, the fixed rate is initially converted into a
qualified floating rate (or a qualified inverse floating rate, if the Multiple
Variable Rate Debt Certificate provides for a qualified inverse floating rate).
Under such circumstances, the qualified floating rate or qualified inverse
floating rate that replaces the fixed rate must be such that the fair market
value of the Multiple Variable Rate Debt Certificate as of the Multiple Variable
Rate Debt Certificate's issue date is approximately the same as the fair market
value of an otherwise identical debt instrument that provides for either the
qualified floating rate or qualified inverse floating rate rather than the fixed
rate. Subsequent to converting the fixed rate into either a qualified floating
rate or a qualified inverse floating rate, the Multiple Variable Rate Debt
Certificate is then converted into an "equivalent" fixed rate debt instrument in
the manner described above.
Once the Multiple Variable Rate Debt Certificate is converted into an
"equivalent" fixed rate debt instrument pursuant to the foregoing rules, the
amount of original issue discount and qualified stated interest, if any, are
determined for the "equivalent" fixed rate debt instrument by applying the
original issue discount rules to the "equivalent" fixed rate debt instrument in
the manner described above. A holder of the Multiple Variable Rate Debt
Certificate will account for such original issue discount and qualified stated
interest as if the holder held the "equivalent" fixed rate debt instrument. Each
accrual period appropriate adjustments will be made to the amount of qualified
stated interest or original issue discount assumed to have been accrued or paid
with respect to the "equivalent" fixed rate debt instrument in the event that
such amounts differ from the accrual amount of interest accrued or paid on the
Multiple Variable Rate Debt Certificate during the accrual period.
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 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.
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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.
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.
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Sale or Exchange. A holder's adjusted tax basis in its Debt Certificate is
the price such holder pays for a Debt Certificate, plus amounts of OID or market
discount included in income and reduced by any payments received (other than
qualified stated interest payments) and any amortized premium. Except as
described in "-- Interest and Acquisition Discount" and "-- Market Discount,"
gain or loss recognized on a sale, exchange, or redemption of a Debt
Certificate, measured by the difference between the amount realized and the Debt
Certificate's basis as so adjusted, will generally be capital gain or loss,
assuming that the Debt Certificate is held as a capital asset. In the case of a
Debt Certificate held by a bank, thrift or similar institution described in
Section 582 of the Code, however, gain or loss realized on the sale or exchange
of a Debt Certificate will be taxable as ordinary income or loss. Gain from the
disposition of a Debt Certificate that might otherwise be capital gain will be
treated as ordinary income (i) if a Debt Certificate is held as part of a
"conversion transaction" as defined in Code Section 1258(c), up to the amount of
interest that would have accrued on the Debt Certificateholder's net investment
in the conversion transaction at 120% of the appropriate applicable federal rate
under Code Section 1274(d) in effect at the time the taxpayer entered into the
transaction minus any amount previously treated as ordinary income with respect
to any prior disposition of property that was held as part of such transaction,
(ii) in the case of a non-corporate taxpayer, to the extent such taxpayer has
made an election under Code Section 163(d)(4) to have net capital gains taxed as
investment income at ordinary income rates, or (iii) in the case of a Regular
Certificate to the extent that such gain does not exceed the excess, if any, of
(a) the amount that would have been includable in the gross income of the holder
if his yield on such Regular Certificate were 110% of the applicable Federal
rate under Code Section 1274(d) as of the date of purchase, over (b) the amount
of income actually includable in the gross income of such holder with respect to
the Regular Certificate. Although the legislative history to the 1986 Act
indicates that the portion of the gain from disposition of a Regular Certificate
that will be recharacterized as ordinary income under clause (iii) is limited to
the amount of OID (if any) on the Regular Certificate that was not previously
includable in income, the applicable Code provision contains no such limitation.
C. TAXATION OF CERTIFICATES AS TO WHICH A REMIC ELECTION HAS BEEN MADE
1. TAXATION OF THE REMIC AND ITS HOLDERS
General. In the opinion of Andrews & Kurth L.L.P., if a REMIC election is
made with respect to a Series of Certificates, then the arrangement by which the
Certificates of that Series are issued will be treated as a REMIC as long as all
of the provisions of the applicable Pooling and Servicing Agreement are complied
with and the statutory and regulatory requirements are satisfied. Certificates
will be designated as "Regular Interests" or "Residual Interests" in a REMIC, as
specified in the related Prospectus Supplement.
Status of Regular Certificates. 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
Andrews & Kurth L.L.P. is unable to opine whether the Mortgage Loans will be
qualifying assets. The REMIC Regulations treat credit enhancements as part of
the mortgage or pool of mortgages to which they relate, and therefore credit
enhancements generally should be qualifying assets. Regulations issued in
conjunction with the REMIC Regulations provide that amounts paid
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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 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 stated interest and any original issue discount
or market discount
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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 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,
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however, such taxes will be paid out of the Trust and will be allocated pro rata
to all outstanding Classes of Certificates of such REMIC.
4. TAXATION OF HOLDERS OF RESIDUAL CERTIFICATES
The holder of a Certificate representing a residual interest (a "Residual
Interest Certificate") will take into account the "daily portion" of the taxable
income or net loss of the REMIC for each day during the taxable year on which
such holder held the Residual Interest Certificate. The daily portion is
determined by allocating to each day in any calendar quarter its ratable portion
of the taxable income or net loss of the REMIC for such quarter, and by
allocating that amount among the holders (on such day) of the Residual
Certificates in proportion to their respective holdings on such day.
The holder of a Residual Interest Certificate must report its proportionate
share of the taxable income of the REMIC whether or not it receives cash
distributions from the REMIC attributable to such income or loss. The reporting
of taxable income without corresponding distributions could occur, for example,
in certain REMIC issues in which the Mortgage Loans held by the REMIC were
issued or acquired at a discount, since mortgage prepayments cause recognition
of discount income, while the corresponding portion of the prepayment could be
used in whole or in part to make principal payments on REMIC Regular Interests
issued without any discount or at an insubstantial discount. (If this occurs, it
is likely that cash distributions will exceed taxable income in later years.)
Taxable income may also be greater in earlier years of certain REMIC issues as a
result of the fact that interest expense deductions, as a percentage of
outstanding principal on REMIC Regular Certificates, will typically increase
over time as lower yielding Certificates are paid, whereas interest income with
respect to loans will generally remain constant over time as a percentage of
loan principal.
In any event, because the holder of a residual interest is taxed on the net
income of the REMIC, the taxable income derived from a Residual Interest
Certificate in a given taxable year will not be equal to the taxable income
associated with investment in a corporate bond or stripped instrument having
similar cash flow characteristics and pretax yield. Therefore, the after-tax
yield on the Residual Interest Certificate may be less than that of such a bond
or instrument.
Limitation on Losses. The amount of the REMIC's net loss that a holder may
take into account currently is limited to the holder's adjusted basis at the end
of the calendar quarter in which such loss arises. A holder's basis in a
Residual Interest Certificate will initially equal such holder's purchase price,
and will subsequently be increased by the amount of the REMIC's taxable income
allocated to the holder, and decreased (but not below zero) by the amount of
distributions made and the amount of the REMIC's net loss allocated to the
holder. Any disallowed loss may be carried forward indefinitely, but may be used
only to offset income of the REMIC generated by the same REMIC. The ability of
holders of Residual Certificates to deduct net losses may be subject to
additional limitations under the Code, as to which such holders should consult
their tax advisors.
Distributions. Distributions on a Residual Interest Certificate (whether at
their scheduled times or as a result of prepayments) will generally not result
in any additional taxable income or loss to a holder of a Residual Interest
Certificate. If the amount of such payment exceeds a holder's adjusted basis in
the Residual Interest Certificate, however, the holder will recognize gain
(treated as gain from the sale of the Residual Interest Certificate) to the
extent of such excess.
Sale or Exchange. A holder of a Residual Interest Certificate will
recognize gain or loss on the sale or exchange of a Residual Interest
Certificate equal to the difference, if any, between the amount realized and
such holder's adjusted basis in the Residual Interest Certificate at the time of
such sale or exchange. Except to the extent provided in regulations, which have
not yet been issued, any loss upon disposition of a Residual Interest
Certificate will be disallowed if the selling holder acquires any residual
interest in a REMIC or similar mortgage pool within six months before or after
such disposition.
Excess Inclusions. The portion of the REMIC taxable income of a holder of a
Residual Interest Certificate consisting of "excess inclusion" income may not be
offset by other deductions or losses, including net operating losses, on such
holder's federal income tax return. Further, if the holder of a Residual
Interest
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Certificate is an organization subject to the tax on unrelated business income
imposed by Code Section 511, such holder's excess inclusion income will be
treated as unrelated business taxable income of such holder. In addition, under
Treasury Department regulations yet to be issued, if a real estate investment
trust, a regulated investment company, a common trust fund, or certain
cooperatives were to own a Residual Interest Certificate, a portion of dividends
(or other distributions) paid by the real estate investment trust (or other
entity) would be treated as excess inclusion income. If a Residual Interest
Certificate is owned by a foreign person, excess inclusion income is subject to
tax at a rate of 30% which may not be reduced by treaty, is not eligible for
treatment as "portfolio interest" and is subject to certain additional
limitations. See "Tax Treatment of Foreign Investors" herein.
The excess inclusion portion of a REMIC's income is generally equal to the
excess, if any, of REMIC taxable income for the quarterly period allocable to a
Residual Interest Certificate, over the daily accruals for such quarterly period
of (i) 120% of the long-term applicable federal rate on the Startup Day
multiplied by (ii) the adjusted issue price of such Residual Interest
Certificate at the beginning of such quarterly period. The adjusted issue price
of a Residual Interest Certificate at the beginning of each calendar quarter
will equal its issue price (calculated in a manner analogous to the
determination of the issue price of a Regular Certificate), increased by the
aggregate of the daily accruals for prior calendar quarters, and decreased (but
not below zero) by the amount of loss allocated to a holder and the amount of
distributions made on the Residual Interest Certificate before the beginning of
the quarter. The long-term federal rate, which is announced monthly by the
Treasury Department, is an interest rate that is based on the average market
yield of outstanding marketable obligations of the United States government
having remaining maturities in excess of nine years.
The Small Business Job Protection Act ("SBJPA") of 1996 has eliminated the
special rule permitting Section 593 institutions ("thrift institutions") to use
net operating losses and other allowable deductions to offset their excess
inclusion income from Residual Interest Certificates that have "significant
value" within the meaning of the REMIC Regulations, effective for taxable years
beginning after December 31, 1995, except with respect to Residual Interest
Certificates continuously held by thrift institutions since November 1, 1995.
In addition, the SBJPA of 1996 provides three rules for determining the
effect of excess inclusions on the alternative minimum taxable income of a
holder of a Residual Interest Certificate. First, alternative minimum taxable
income 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.
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If a Residual Interest Certificate is transferred to a Disqualified
Organization (in violation of the restrictions set forth above), a substantial
tax will be imposed on the transferor of such Residual Interest Certificate at
the time of the transfer. In addition, if a Disqualified Organization holds an
interest in a pass-through entity (including, among others, a partnership,
trust, real estate investment trust, regulated investment company, or any person
holding as nominee an interest in a pass-through entity) that owns a Residual
Interest Certificate, the pass-through entity will be required to pay an annual
tax on its allocable share of the excess inclusion income of the REMIC. For
taxable years beginning after December 31, 1997, all partners of certain
electing partnerships having 100 or more 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 Andrews & Kurth L.L.P. will be
obtained that the Trust relating to a Series of Certificates will be classified
for federal income tax purposes as a grantor trust under Subpart E, Part I of
Subchapter J of Chapter 1 of Subtitle A of the Code and not as an association
taxable as a corporation (the Certificates of such Series, "Pass-Through
Certificates"). Accordingly, each holder of a Pass-Through Certificate is
treated for federal income tax purposes as the owner of an undivided interest in
the Mortgage Loans included in the Trust. As further described below, each
holder of a Pass-Through Certificate therefore must report on its federal income
tax return the gross income from the portion of the 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-
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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 Andrews & Kurth L.L.P. is unable
to opine whether the Mortgage Loans will be qualifying assets.
Taxation of Pass-Through Certificates Under Stripped Bond Rules. The
federal income tax treatment of the Pass-Through Certificates will depend on
whether they are subject to the rules of Section 1286 of the Code (the "stripped
bond rules"). The Pass-Through Certificates will be subject to those rules if
stripped interest-only Certificates are issued. In addition, whether or not
stripped interest-only Certificates are issued, the IRS may contend that the
stripped bond rules apply on the ground that the Servicer's servicing fee, or
other amounts, if any, paid to (or retained by) the Servicer or its affiliates,
as specified in the applicable Prospectus Supplement, represent greater than an
arm's length consideration for servicing the Mortgage Loans and should be
characterized for federal income tax purposes as an ownership interest in the
Mortgage Loans. The IRS has concluded in Revenue Ruling 91-46 that a retained
interest in excess of reasonable compensation for servicing is treated as a
"stripped coupon" under the rules of Code Section 1286.
If interest retained for the Servicer's servicing fee or other interest is
treated as a "stripped coupon," the Pass-Through Certificates will be subject to
the OID rules and/or the market discount rules. A holder of a Pass-Through
Certificate generally will account for any discount on the Pass-Through
Certificate 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
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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 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.
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It is not clear whether the foregoing adjustments for discount or premium
would be made based on the scheduled payments on the Mortgage Loans or taking
account of a reasonable prepayment assumption, and Andrews & Kurth L.L.P. is
unable to opine on this issue.
If a Mortgage Loan is prepaid in full, the holder of a Pass-Through
Certificate acquired at a discount or premium will recognize ordinary income or
loss equal to the difference between the portion of the prepaid principal amount
of the Mortgage Loan that is allocable to the Pass-Through Certificate and the
portion of the adjusted basis of the Pass-Through Certificate (see "-- Tax
Characterization of the Trust as a Partnership; Tax Consequences To Holders of
the Certificates Issued by a Partnership -- Disposition of Certificates" below)
that is allocable to the Mortgage Loan. The method of allocating such basis
among the Mortgage Loans may differ depending on whether a reasonable prepayment
assumption is used in calculating the yield of the Pass-Through Certificates for
purposes of accruing OID. Other adjustments might be required to reflect
differences between the prepayment rate that was assumed in accounting for
discount or premium and the actual rate of prepayments.
E. TAX CHARACTERIZATION OF THE TRUST AS A PARTNERSHIP; TAX CONSEQUENCES TO
HOLDERS OF THE CERTIFICATES ISSUED BY A PARTNERSHIP
Tax Characterization of the Trust as a Partnership. Andrews & Kurth L.L.P.
will deliver its opinion that a Trust which is intended to be a partnership for
federal income tax purposes will not be an association (or publicly traded
partnership) taxable as a corporation for federal income tax purposes. This
opinion will be based on the assumption that the terms of the Pooling and
Servicing Agreement and related documents will be complied with, and on
counsel's conclusions that (i) the Trust will not be classified as an
association taxable as a corporation and (ii) the nature of the income of the
Trust will exempt it from the rule that certain publicly traded partnerships are
taxable as corporations or the issuance of the Certificates has been structured
as a private placement under an IRS safe harbor, so that the Trust will not be
characterized as a publicly traded partnership taxable as a corporation.
If the Trust were taxable as a corporation for federal income tax purposes,
the Trust would be subject to corporate income tax on its taxable income. The
Trust's taxable income would include all its income. Any such corporate income
tax could materially reduce cash available to make distributions on the
Certificates, and Certificateholders could be liable for any such tax that is
unpaid by the Trust. In 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
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given Series of Certificates, additional tax considerations with respect to such
Certificates will be disclosed in the applicable Prospectus Supplement.
Partnership Taxation. As a partnership, the Trust will not be subject to
federal income tax. Rather, each Certificateholder will be required to
separately take into account such Certificateholder's allocated share of income,
gains, losses, deductions and credits of the Trust. The Trust's income will
consist primarily of interest and finance charges earned on the Mortgage Loans
(including appropriate adjustments for market discount, OID and bond premium)
and any gain upon collection or disposition of Mortgage Loans. The Trust's
deductions will consist primarily of servicing and other fees, and losses or
deductions upon collection or disposition of Mortgage Loans.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury Department regulations and the partnership agreement
(here, the Pooling and Servicing Agreement and related documents). The Pooling
and Servicing Agreement will provide, in general, that the Certificateholders
will be allocated taxable income of the Trust for each month equal to the sum of
(i) the interest that accrues on the Certificates in accordance with their terms
for such month, including interest accruing at the Pass Through Rate for such
month and interest on amounts previously due on the Certificates but not yet
distributed; (ii) any Trust income attributable to discount on the Mortgage
Loans that corresponds to any excess of the principal amount of the Certificates
over their initial issue price; (iii) prepayment premium payable to the
Certificateholders for such month; and (iv) any other amounts of income payable
to the Certificateholders for such month. Such allocation will be reduced by any
amortization by the Trust of premium on Mortgage Loans that corresponds to any
excess of the issue price of Certificates over their principal amount. All
remaining taxable income of the Trust will be allocated to the related
Transferor. Based on the economic arrangement of the parties, this approach for
allocating Trust income should be permissible under applicable Treasury
Department regulations, although no assurance can be given that the IRS would
not require a greater amount of income to be allocated to Certificateholders.
Moreover, even under the foregoing method of allocation, Certificateholders may
be allocated income equal to the entire Pass-Through Rate plus the other items
described above even though the Trust might not have sufficient cash to make
current cash distributions of such amount. Thus, cash basis holders will in
effect be required to report income from the Certificates on the accrual basis
and Certificateholders may become liable for taxes on Trust income even if they
have not received cash from the Trust to pay such taxes. In addition, because
tax allocations and tax reporting will be done on a uniform basis for all
Certificateholders but Certificateholders may be purchasing Certificates at
different times and at different prices, Certificateholders may be required to
report on their tax returns taxable income that is greater or less than the
amount reported to them by the Trust.
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 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.)
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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.
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,
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Certificateholders might be allocated a greater or lesser amount of Trust income
than would be appropriate based on their own purchase price for Certificates.
Administrative Matters. The Trustee is required to keep or have kept
complete and accurate books of the Trust. Such books will be maintained for
financial reporting and tax purposes on an accrual basis and the fiscal year of
the Trust will be the calendar year. The Trustee will file a partnership
information return (IRS Form 1065) with the IRS for each taxable year of the
Trust and will report each Certificateholder's allocable share of items of Trust
income and expense to Certificateholders and the IRS on Schedule K-1. The Trust
will provide the Schedule K-I information to nominees that fail to provide the
Trust with the information statement described below and such nominees will be
required to forward such information to the beneficial owners of the
Certificates. Generally, holders must file tax returns that are consistent with
the information return filed by the Trust or be subject to penalties unless the
holder notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust with
a statement containing certain information on the nominee, the beneficial owners
and the Certificates so held. Such information includes (i) the name, address
and taxpayer identification number of the nominee and (ii) as to each beneficial
owner (x) the name, address and identification number of such person, (y)
whether such person is a United States person, a tax-exempt entity or a foreign
government, an international organization, or any wholly owned agency or
instrumentality of either of the foregoing, and (z) certain information on
Certificates that were held, bought or sold on behalf of such person throughout
the year. In addition, brokers and financial institutions that hold Certificates
through a nominee are required to furnish directly to the Trust information as
to themselves and their ownership of Certificates. A clearing agency registered
under Section 17A of the Exchange Act is not required to furnish any such
information statement to the Trust. The information referred to above for any
calendar year must be furnished to the Trust on or before the following January
31. Nominees, brokers and financial institutions that fail to provide the Trust
with the information described above may be subject to penalties.
The related Transferor will be designated as the tax matters partner in the
related Pooling and Servicing Agreement and, as such, will be responsible for
representing the Certificateholders in any dispute with the IRS. The Code
provides for administrative examination of a partnership as if the partnership
were a separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Trust by the appropriate taxing authorities could
result in an adjustment of the returns of the Certificateholders, and, under
certain circumstances, a Certificateholder may be precluded from separately
litigating a proposed adjustment to the items of the Trust. An adjustment could
also result in an audit of a Certificateholder's returns and adjustments of
items not related to the income and losses of the Trust.
Tax Consequences to Foreign Certificateholders. It is not clear whether the
Trust would be considered to be engaged in a trade or business in the United
States for purposes of federal withholding taxes with respect to 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
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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, Andrews & Kurth L.L.P. will opine
that based upon its analysis of the factors discussed below, the Certificates
will be characterized as indebtedness for federal income tax purposes of the
related Transferor that is secured by the Mortgage Loans. Opinions of counsel
are not binding on the IRS, however, and there can be no assurance that the IRS
could not successfully challenge this conclusion.
The related Transferor will express in the Pooling and Servicing Agreement
its intent that the Certificates be indebtedness secured by the Mortgage Loans
for federal, state and local income or franchise tax purposes. The related
Transferor, by entering into the Pooling and Servicing Agreement, has agreed and
each Certificateholder, by the acceptance of a Certificate, will agree to treat
the Certificates as indebtedness for federal, state and local income or
franchise tax purposes. However, because different criteria are used to
determine the non-tax accounting characterization of the transactions
contemplated by the Pooling and Servicing Agreements, the Transferors expect to
treat such transactions, for financial accounting purposes, as a transfer of an
ownership interest in the Mortgage Loans and not as a debt obligation.
A basic premise of federal income tax law is that the economic substance of
a transaction generally determines the tax consequences. The form of a
transaction, while a relevant factor, is not conclusive evidence of its economic
substance. In appropriate circumstances, the courts have allowed taxpayers, as
well as the IRS, to treat a transaction in accordance with its economic
substance, as determined under federal income tax law, notwithstanding that the
participants characterize the transaction differently for non-tax purposes. In
some instances, however, courts have held that a taxpayer is bound by the
particular form it has chosen for a transaction, even if the substance of the
transaction does not accord with its form. Andrews & Kurth L.L.P. believes that
the rationale of those cases will not apply to the issuance of the Certificates.
The determination of whether the economic substance of a transfer of an
interest in property is a sale or a loan secured by the transferred property
depends on numerous factors that indicate whether the transferor has
relinquished (and the transferee has obtained) substantial incidents of
ownership in the property. Among the primary factors considered are whether the
transferee has obtained the opportunity for gain if the property increases in
value and has assumed the risk of loss if the property decreases in value. Based
upon its analysis of such factors, Andrews & Kurth L.L.P. will conclude that the
Certificateholders do not own or have an equity interest in the Mortgage Loans
for federal income tax purposes. As a result, Andrews & Kurth L.L.P. will opine
that the Certificates will properly be characterized for federal income tax
purposes as indebtedness. Contrary characterizations that could be asserted by
the IRS are described under "-- Possible Characterization of the Transaction as
a Partnership or as an Association Taxable as a Corporation" below. In this
regard, it should be noted that the IRS has recently issued a notice stating
that, upon examination, it will scrutinize instruments treated as debt for
federal income tax purposes but as equity for regulatory, rating agency or
financial accounting purposes to determine if their purported status as debt for
federal income tax purposes is appropriate.
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Certificateholders as the holders of debt instruments for federal tax
purposes will be taxed in the manner described above in "-- Taxation of Debt
Certificates (Including Regular Certificates)" for Debt Certificates that are
not Regular Certificates.
Possible Characterization of the Transaction as a Partnership or as
Association Taxable as a Corporation. As stated above, the opinion of Andrews &
Kurth L.L.P. with respect to the Certificates will not be binding on the courts
or the IRS, and no assurance can be given that the characterization of the
Certificates as debt would prevail. It is possible that the IRS would assert
that, for purposes of the Code, the transaction described herein constitutes a
transfer of the Mortgage Loans (or an interest therein) to the
Certificateholders and that the proper classification of the legal relationship
between the related Transferor and the Certificateholders resulting from the
transaction is that of a partnership, a publicly traded partnership taxed as a
corporation, or an association taxable as a corporation. Because it is
anticipated that Andrews & Kurth L.L.P. will advise that the Certificates will
be treated as indebtedness for federal income tax purposes, the Transferors
generally will not attempt to comply with the federal income tax reporting
requirements that would apply if Certificates were treated as interests in a
partnership, a publicly traded partnership or a corporation.
If a partnership were deemed to be created between the related Transferor
and the Certificateholders, the partnership itself would not be subject to
federal income tax (unless it were to be characterized as a publicly traded
partnership taxable as a corporation); rather, the partners of such partnership,
including the Certificateholders, would be taxed individually on their
respective distributive shares of the partnership's income, gain, loss,
deductions and credits. The amount and timing of items of income and deduction
of a Certificateholder would differ to the degree the Certificates were held to
constitute partnership interests, rather than indebtedness. Moreover, an
individual's share of expenses of the partnership would be miscellaneous
itemized deductions that, in the aggregate, are allowed as deductions only to
the extent they exceed 2% of the individual's adjusted gross income, and would
be subject to reduction under Section 68 of the Code if the individual's
adjusted gross income exceeded certain limits. As a result, the individual might
be taxed on a greater amount of income than would be the case if the
Certificates were treated as a debt instrument.
If it were determined that the transaction created an entity classified as
an association or as a publicly traded partnership taxable as a corporation, the
Trust would be subject to federal income tax at corporate income tax rates on
the income it derives from the Mortgage Loans, which would reduce the amounts
available for distribution to the Certificateholders. Such classification may
also have adverse state and local tax consequences that would reduce amounts
available for distribution to Certificateholders. Moreover, distributions on the
Certificates would most likely not be deductible in computing the entity's
taxable income, and cash distributions to the Certificateholders generally would
be treated as dividends for tax purposes to the extent of such entity's earnings
and profits.
Foreign Investors. If the IRS were to contend successfully that the
Certificates are interests in a partnership and if such partnership were
considered to be engaged in a trade or business in the United States, the
partnership would be subject to a withholding tax on income allocable to a
Foreign Investor, and such holder would be credited for his or her share of the
withholding tax paid by the partnership. In such case, the holder generally
would be subject to United States federal income tax at regular federal income
tax rates, and possibly a branch profits tax in the case of a corporate holder.
Alternatively, although there may be arguments to the contrary, if such a
partnership is not considered to be engaged in a trade or business within the
United States and if income with respect to the Certificates is not otherwise
effectively connected with the conduct of a trade or business in the United
States by the Foreign Investor, the Foreign Investor would be subject to United
States federal income tax and withholding at a rate of 30% (unless reduced by an
applicable tax treaty) on the holder's distributive share of the partnership's
interest income.
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, Andrews & Kurth L.L.P., counsel to the Transferors, will deliver their
opinion that the Bonds will be treated for federal income tax purposes as
indebtedness, and 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.
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
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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, 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 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,
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especially if, with respect to such assets, the related Transferor (or a Bond
Issuer, if applicable), the Servicer, any Sub-Servicer, the Trustee, the obligor
under any credit enhancement mechanism or an affiliate thereof either (i) has
investment discretion with respect to the investment of Plan assets; or (ii) has
authority or responsibility to give (or regularly gives) investment advice with
respect to Plan assets for a fee pursuant to an agreement or understanding that
such advice will serve as a primary basis for investment decisions with respect
to such assets.
Any person who has discretionary authority or control respecting the
management or disposition of Plan assets, and any person who provides investment
advice with respect to such assets for a fee (in the manner described above), is
a fiduciary of the investing Plan. If the Mortgage Loans were to constitute Plan
assets then any party exercising management or discretionary control regarding
those assets may be deemed to be a Plan "fiduciary," and thus subject to the
fiduciary requirements of ERISA and the prohibited transaction provisions of
ERISA and Section 4975 of the Code with respect to the investing Plan. In
addition, if the Mortgage Loans were to constitute Plan assets, then the
acquisition or holding of Securities by a Plan, as well as the operation of the
Trust or a Transferor (or a Bond Issuer, if applicable) issuing Bonds, may
constitute or involve a prohibited transaction under ERISA and the Code.
PROHIBITED TRANSACTION CLASS EXEMPTION
The DOL has issued an administrative exemption, Prohibited Transaction
Class Exemption 83-1 ("PTCE 83-1"), which, under certain conditions, exempts
from the application of the prohibited transaction provisions of ERISA and
Section 4975 of the Code transactions involving a Plan in connection with the
operation of a "mortgage pool" and the purchase, sale and holding of "mortgage
pool pass-through certificates." A "mortgage pool" is defined as an investment
pool, consisting solely of interest-bearing obligations secured by first or
second mortgages or deeds of trust on single-family residential property,
property acquired in foreclosure and undistributed cash. A "mortgage pool
pass-through certificate" is defined as a certificate which represents a
beneficial undivided interest in a mortgage pool which entitles the holder to
pass-through payments of principal and interest from the mortgage loans.
For the exemption to apply, PTCE 83-1 requires that (i) the related
Transferor and the Trustee maintain a system of insurance or other protection
for the Mortgage Loans and the property securing such Mortgage Loans, and for
indemnifying holders of Certificates against reductions in pass-through payments
due to defaults in loan payments or property damage in an amount at least equal
to the greater of 1% of the aggregate principal balance of the Mortgage Loans,
or 1% of the principal balance of the largest covered pooled 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
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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 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
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the Policy Statement. The Policy Statement, among other things, places
responsibility on a depository institution to develop and monitor appropriate
policies and strategies regarding the investment, sale and trading of securities
and restricts an institution's ability to engage in certain types of
transactions.
The Policy Statement provides that a depository institution must ascertain
and document prior to purchase and no less frequently than annually thereafter
that a non-high-risk mortgage security held for investment remains outside the
high-risk category. If an institution is unable to make these determinations
through internal analysis, it must use information derived from a source that is
independent of the party from whom the product is being purchased. The
institution is responsible for ensuring that the assumptions underlying the
analysis and resulting calculations are reasonable. Reliance on analyses and
documentation from a securities dealer or other outside party without internal
analyses by the institution is unacceptable.
A "high-risk mortgage security" is not suitable as an investment portfolio
holding for a depository institution. A high-risk mortgage security must be
reported in the trading account at market value or as an asset held for sale at
the lower of cost or market value and generally may only be acquired to reduce
an institution's interest rate risk. However, an institution with strong capital
and earnings and adequate liquidity that has a closely supervised trading
department is not precluded from acquiring high-risk mortgage securities for
trading purposes.
The Policy Statement and any applicable modifications or supplements
thereto should be reviewed prior to the purchase of any Securities by a
depository institution. The summary of the Policy Statement contained herein
does not purport to be complete and should not be relied upon for purposes of
making any regulatory determinations. In addition, any regulator may adopt
modifications or supplements to the Policy Statement or additional restrictions
on the purchase of mortgage-backed or other securities. Investors are urged to
consult their own legal advisors prior to making any determinations with respect
to the Policy Statement or other regulatory requirements.
GENERAL
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Securities, to purchase
Securities representing more than a specified percentage of the investor's
assets, or to purchase certain types of Certificates, such as residual interests
or stripped mortgage-backed securities. Investors should consult their own legal
advisors in determining whether and to what extent the Securities of a given
Series constitute legal investments for such investors and comply with any other
applicable requirements.
METHOD OF DISTRIBUTION
The Securities offered hereby and by the Prospectus Supplement will be
offered in Series, either directly by the related Transferor or through one or
more underwriters or underwriting syndicates ("Underwriters"). The Prospectus
Supplement for each Series will set forth the terms of the offering of the
Securities of such Series, including the name or names of the Underwriters, the
proceeds to the related Transferor (in the case of a Series of Certificates) or
to the related Bond Issuer (in the case of a Series of Bonds), and either the
initial public offering price, the discounts and commissions to the Underwriters
and any discounts or concessions allowed or reallowed to certain dealers, or the
method by which the price at which the Underwriters will sell the Securities
will be determined.
The Securities may be acquired by Underwriters for their own account and
may be resold from time to time in one or more transactions, including
negotiated transactions, at a fixed public offering price or at varying prices
determined at the time of sale. It is anticipated that the underwriting
agreement pertaining to the sale of any Series of Securities will provide that
the obligations of any Underwriters will be subject to certain conditions
precedent, and such Underwriters will be severally obligated to purchase all of
a Series of Securities described in the related Prospectus Supplement, if they
are purchased and that in limited circumstances the related Transferor will
indemnify any Underwriters against certain civil liabilities, including
95
<PAGE> 273
liabilities under the Securities Act of 1933, or will contribute to payments any
Underwriters may be required to make in respect thereof.
If Securities of a Series are offered other than through Underwriters, the
related Prospectus Supplement will contain information regarding the nature of
such offering and any agreements to be entered into between the seller and
purchasers of Securities of such Series.
The Transferors anticipate that the Securities will be sold primarily to
institutional investors. Purchasers of Securities, including dealers, may,
depending on the facts and circumstances of such purchases, be deemed to be
"underwriters" within the meaning of the Securities Act of 1933, as amended, in
connection with reoffers and sales by them of Securities. Securityholders should
consult with their legal advisors in this regard prior to any such reoffer or
sale.
LEGAL MATTERS
Certain legal matters relating to the issuance of the Securities of each
Series, including certain federal income tax consequences with respect thereto,
will be passed upon by Andrews & Kurth L.L.P., Washington, D.C.
FINANCIAL INFORMATION
The Transferors have determined that their financial statements are not
material to the offering made hereby.
A new Trust will be formed to hold the Mortgage Loans in connection with
each Series of Certificates. Each such Trust will have no assets or obligations
prior to the issuance of the Certificates and will not engage in any activities
other than those described herein. Accordingly, no financial statements with
respect to such Trusts will be included in this Prospectus or any Prospectus
Supplement.
Although the Bonds of any Series will represent obligations of the related
Bond Issuer, such obligations will be non-recourse and the proceeds of the
assets included in the related Trust Estate will be the sole source of payments
on the Bonds of such Series. The Bond Issuer for any Series of Bonds (whether it
is ACAC or a trust, partnership, limited liability company or corporation formed
by ACAC solely for the purpose of issuing the Bonds of such Series) will not
have, nor be expected in the future to have, any significant assets available
for payments on such Series of Bonds other than the assets included in the
related Trust Estate. Accordingly, the investment characteristics of a Series of
Bonds will be determined by the assets included in the related Trust Estate and
will not be affected by the identity of the obligor with respect to such Series
of Bonds. Accordingly, no capitalization information or any historical or pro
forma ratio of earnings to fixed charges or any other financial information with
respect to ACAC or any trust, partnership, limited liability company or
corporation formed for the purpose of issuing a Series of Bonds has been or will
be included herein or in the related Prospectus Supplement.
RATING
Unless otherwise specified in the related Prospectus Supplement, it is a
condition to the issuance of the Securities of each Series offered hereby that
they shall have been rated in one of the four highest rating categories by the
nationally recognized statistical rating agency or agencies specified in the
related Prospectus Supplement (each, a "Rating Agency").
Ratings on asset-backed securities address the likelihood of receipt by the
related securityholders of all distributions on the underlying mortgage loans.
These ratings address the structural, legal and issuer-related aspects
associated with such securities, the nature of the underlying mortgage loans and
the credit quality of the guarantor, if any. Ratings on asset-backed securities
do not represent any assessment of the likelihood of principal prepayments by
mortgagors or of the degree by which such prepayments might differ from those
originally anticipated. As a result, the related the related securityholders
might suffer a lower than anticipated
96
<PAGE> 274
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.
97
<PAGE> 275
INDEX OF PRINCIPAL TERMS
Unless the context indicates otherwise, the following capitalized terms
shall have the meanings set forth on the pages indicated below:
1933 Act...................................................................4, 96
1986 Act......................................................................75
Aames Guidelines..............................................................33
ACAC....................................................................1, 8, 31
ACC.....................................................................1, 8, 31
Accounts......................................................................36
Accrual Certificates..........................................................40
AFC........................................................................8, 31
Affiliated Originators........................................................33
Amortizable Bond Premium Regulations..........................................75
Amortization Period.......................................................11, 41
Appraised Value...............................................................29
ARM...........................................................................83
ARM Loans.....................................................................25
Available Funds...............................................................39
Balloon Loans.................................................................20
Balloon payment...............................................................20
Bankruptcy Bond...........................................................14, 46
Bond Account..................................................................38
Bond Event of Default.........................................................62
Bondholders................................................................9, 35
Bond Issuer.................................................................1, 8
Bond Rate.....................................................................40
Bonds.......................................................................1, 8
Buydown Funds.................................................................76
Capitalized Interest Account..................................................12
Cash flow investments.........................................................77
Cede......................................................................18, 36
CERCLA........................................................................69
Certificate Account...........................................................38
Certificate Event of Default..................................................59
Certificate Rate..............................................................40
Certificateholders.........................................................8, 35
Certificates................................................................1, 8
Class...................................................................2, 8, 35
Closing Date..................................................................30
Code......................................................................16, 70
Collection Account............................................................53
Collection Period.............................................................39
Combined Loan-to-Value Ratio..................................................29
Commission.....................................................................4
Compensating Interest Payment.................................................55
Contingent Regulations........................................................74
Cut-off Date..................................................................10
Debt Certificates.............................................................70
Deferred Interest.............................................................30
Definitive Securities.....................................................17, 36
Deleted Mortgage Loan.........................................................52
Deposit Date..................................................................53
Detailed Description..........................................................28
Disqualified Organization.....................................................80
Disqualified Persons..........................................................92
Distribution Date..........................................................2, 38
DOL...........................................................................93
DOL Regulations...............................................................93
DTC.......................................................................18, 36
Electing large partnerships...................................................81
EPA...........................................................................69
ERISA.....................................................................17, 92
ERISA Plans...................................................................92
Exchange Act...................................................................4
Financial Guaranty Insurance Policy.......................................13, 44
Foreign Investors.............................................................91
Forward Commitment............................................................11
Funding Period................................................................11
Garn-St. Germain Act..........................................................68
Indenture...............................................................1, 8, 35
Indirect Participant..........................................................36
Insurance Proceeds............................................................39
Insured Amount............................................................14, 45
Interest Weighted Class.......................................................25
IRAs..........................................................................92
IRS...........................................................................72
Junior Loan...................................................................20
Liquidated Mortgage Loan......................................................55
Liquidation Proceeds..........................................................39
Loan Schedule.................................................................50
Loan Withdrawal Amount........................................................52
Lockout periods...............................................................28
Monthly Advance...............................................................54
Mortgage File.................................................................50
Mortgage Loans..............................................................2, 9
Mortgage Note..............................................................9, 38
Mortgage Pool..............................................................9, 17
Mortgage Pool Insurance Policy............................................14, 45
Mortgage Pool Insurer.........................................................45
Mortgaged Property........................................................10, 26
Mortgaged Properties..........................................................28
Mortgagor.................................................................13, 19
Multiple Variable Rate Debt Certificate.......................................74
Negative Amortization.........................................................30
Net Liquidation Proceeds......................................................39
New Withholding Regulations...................................................92
OID...........................................................................70
OID Regulations...............................................................70
Objective Rate................................................................73
Originators................................................................2, 33
Overcollateralization Feature.................................................44
98
<PAGE> 276
Participants..................................................................36
Parties in Interest...........................................................92
Pass-Through Certificates.....................................................81
Payment Date...........................................................2, 36, 38
Pay-Through Certificate.......................................................72
Permitted Investments.........................................................53
Plan Asset Regulations........................................................17
Plan(s)...................................................................17, 92
Policy Statement..............................................................95
Pool Balance..................................................................42
Pool Factor...................................................................42
Pooling and Servicing Agreement............................................8, 35
Prefunding Account............................................................12
Prefunding Amount.........................................................12, 30
Prepayment Assumption.........................................................72
Presumed Single Qualified Floating Rate.......................................73
Presumed Single Variable Rate.................................................75
Principal Prepayments.........................................................40
Principal Weighted Class......................................................25
PTCE 83-1.....................................................................93
Qualified floating rate.......................................................73
Qualified inverse floating rate...............................................73
Qualified Replacement Mortgage Loan...........................................52
Qualified Retirement Plans....................................................92
Qualifying assets.........................................................76, 82
Rating Agency.............................................................15, 97
Regular Certificates......................................................16, 70
Relief Act....................................................................24
REMIC......................................................................2, 70
REMIC Certificates............................................................76
REMIC Regulations.............................................................70
REO Property..................................................................54
Reserve Account...........................................................13, 44
Residual Certificates.....................................................16, 29
Residual Interest Certificate.................................................79
Revolving Period..........................................................11, 41
Riegle Act................................................................24, 68
SBJPA.........................................................................80
Securities..................................................................1, 8
Securities Insurer............................................................44
Security Register.............................................................38
Securityholders.........................................................2, 9, 35
Security Principal Balance....................................................40
Senior Certificates........................................................8, 36
Senior Lien...................................................................20
Series......................................................................1, 8
Servicer................................................................1, 8, 32
Servicing Advance.............................................................56
Servicing Agreement............................................................2
Single Variable Rate Debt Certificate.........................................73
SMMEA.........................................................................17
Special Hazard Insurance Policy...........................................14, 46
Special Hazard Insurer........................................................46
Standard Hazard Insurance Policies............................................28
Startup Day...................................................................78
Stripped bond rules...........................................................82
Sub-Servicer...................................................................8
Subordinated Classes..........................................................36
Subordinated Certificates......................................................8
Tax-Favored Plans.............................................................92
Thrift institutions...........................................................80
Tiered REMICS.................................................................77
Title V.......................................................................68
Transferor(s)...............................................................1, 8
Transferor Interest...........................................................11
Trust.......................................................................1, 8
Trust Estate................................................................1, 8
Trustee.....................................................................1, 8
Unaffiliated Originators......................................................33
Underwriters..................................................................96
United States holder..........................................................91
Variable Rate Debt Certificate................................................72
Variable Rate Debt Instrument.................................................72
Variable Rate Pass-Through Certificates.......................................83
99
<PAGE> 277
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses expected to be
incurred by the Registrants in connection with the issuance and distribution of
the securities being registered, other than underwriting discounts and
commissions*:
<TABLE>
<S> <C>
SEC Registration Fee........................................ $ 278,000.00
Trustee's Fees and Expenses (including counsel fees)........ 200,000.00
Printing and Engraving Costs................................ 250,000.00
Legal Fees and Expenses..................................... 500,000.00
Blue Sky and Legal Investment Fees and Expenses............. 75,000.00
Accounting Fees and Expenses................................ 200,000.00
Rating Agency Fees.......................................... 300,000.00
Miscellaneous............................................... 100,000.00
-------------
TOTAL.................................................. $1,903,000.00
</TABLE>
- ---------------
* Provided for each series of securities on the cover page of the related
Prospectus Supplement.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Aames Capital Corporation's Articles of Incorporation eliminate the
liability of the directors of the corporation to the fullest extent permitted by
California law and provide for indemnification of the officers and directors in
excess of that expressly provided by and to the full extent permitted under
California law. Aames Capital Acceptance Corp.'s Certificate of Incorporation
eliminates the liability of the directors of the corporation to the fullest
extent permitted by Delaware law and provides for indemnification of the
officers and directors in excess of that expressly provided by and to the full
extent permitted under Delaware law.
Each Pooling and Servicing Agreement will provide that neither the related
Registrant nor any of its directors, officers, employees or agents shall have
any liability to the 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.
Each such Pooling and Servicing Agreement will further provide that, with the
exceptions stated above, the related Registrant and its directors, officers,
employees and agents are entitled to be indemnified and held harmless by said
Trust against any loss, liability or expense incurred in connection with legal
actions relating to such Pooling and Servicing Agreement or the Certificates.
Each Indenture will provide that neither the related Registrant nor any of
its directors, officers, employees or agents shall have any liability to the
Trust created thereunder or to any of the Bondholders, 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
Indenture. Each such Indenture will further provide that, with the exceptions
stated above, the related Registrant and its directors, officers, employees and
agents are entitled to be indemnified and held harmless by said Trust against
any loss, liability or expense incurred in connection with legal actions
relating to such Indenture or the Bonds.
The form of Underwriting Agreement incorporated by reference as Exhibit 1.1
to this Registration Statement provides, under certain circumstances, for
indemnification of the related Registrant and other persons.
II-1
<PAGE> 278
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
1.1 Form of Underwriting Agreement (REMIC)**
1.2 Form of Underwriting Agreement (debt for tax)**
4.1 Form of Pooling and Servicing Agreement**
4.2 Form of Indenture**
5.1 Opinion of Andrews & Kurth L.L.P. as to legality of the
Certificates
5.2 Opinion of Andrews & Kurth L.L.P. as to legality of the
Bonds
8.1 Opinion of Andrews & Kurth L.L.P. as to tax matters
23.1 Consent of Andrews & Kurth L.L.P. (included in Exhibits 5.1,
5.2 and 8.1)
24.1 Powers of Attorney*
25.1 Form T-1 Statement of Eligibility and Qualification of
Trustee***
</TABLE>
- ---------------
* Previously filed.
** Incorporated by reference to the corresponding exhibit to Pre-Effective
Amendment No. 1 to the Registrants' Registration Statement on Form S-3 (File
No. 333-46893) filed on April 16, 1998.
*** To be filed by amendment or incorporated by reference in connection with the
offering of applicable securities.
ITEM 17. UNDERTAKINGS
A. Each undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Act");
(ii) To reflect in the prospectus any facts or events arising after
the effective date of this Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in this
Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in this Registration Statement or any
material change to such information in this Registration Statement;
provided, however, that paragraphs (i) and (ii) above do not apply if the
information required to be included in a post-effective amendment to those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the Registrants pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the Registration
Statement.
(2) That, for the purpose of determining any liability under the Act, each
such post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
B. Each undersigned Registrant undertakes that, for purposes of determining any
liability under the Act, each filing of such Registrant's annual report pursuant
to Section 13(a) or Section 15(d) of the Securities
II-2
<PAGE> 279
Exchange Act of 1934 that is incorporated by reference in this Registration
Statement shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
C. Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of each Registrant as
specified in Item 15 above or otherwise, the Registrants have been advised that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrants of expenses incurred or paid by a director,
officer or controlling person of the Registrants in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, each
Registrant will, unless in the opinion of such Registrant's counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-3
<PAGE> 280
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
each Registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form S-3 (notwithstanding the fact
that a security rating pursuant to Transaction Requirement B.5. has not yet been
obtained, which security rating requirement, in the reasonable belief of each
Registrant, will be met by the time of any sale) and has duly caused this
Amendment No. 1 to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Los Angeles, State of
California, on September 17, 1999.
AAMES CAPITAL CORPORATION
By: /s/ NEIL KORNSWEIT
--------------------------------------
Name: Neil Kornsweit
Title: President
AAMES CAPITAL ACCEPTANCE CORP.
By: /s/ DAVID A. SKLAR
--------------------------------------
Name: David A. Sklar
Title: Chief Executive Officer and
President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 1 to the Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ NEIL KORNSWEIT President September 17, 1999
- --------------------------------------------------- (Principal Executive
Neil Kornsweit Officer) of Aames Capital
Corporation
/s/ DAVID A. SKLAR Executive Vice September 17, 1999
- --------------------------------------------------- President -- Finance,
David A. Sklar Chief Financial and
Accounting Officer
(Principal Financial and
Accounting Officer) and
Director of Aames Capital
Corporation
/s/ BARBARA S. POLSKY Executive Vice President, September 17, 1999
- --------------------------------------------------- General Counsel and
Barbara S. Polsky Director of Aames Capital
Corporation
</TABLE>
II-4
<PAGE> 281
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 1 to the Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ DAVID A. SKLAR President, Chief Executive September 17, 1999
- --------------------------------------------------- Officer (Principal
David A. Sklar Executive Officer), Chief
Financial and Accounting
Officer (Principal
Financial and Accounting
Officer) and Director of
Aames Capital Acceptance
Corp.
/s/ JON D. VAN DEUREN Director of Aames Capital September 17, 1999
- --------------------------------------------------- Acceptance Corp.
Jon D. Van Deuren
/s/ DONALD J. PUGLISI Director of Aames Capital September 17, 1999
- --------------------------------------------------- Acceptance Corp.
Donald J. Puglisi
</TABLE>
II-5
<PAGE> 282
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
1.1 Form of Underwriting Agreement (REMIC)**
1.2 Form of Underwriting Agreement (debt for tax)**
4.1 Form of Pooling and Servicing Agreement**
4.2 Form of Indenture**
5.1 Opinion of Andrews & Kurth L.L.P. as to legality of the
Certificates
5.2 Opinion of Andrews & Kurth L.L.P. as to legality of the
Bonds
8.1 Opinion of Andrews & Kurth L.L.P. as to tax matters
23.1 Consent of Andrews & Kurth L.L.P. (included in Exhibits 5.1,
5.2 and 8.1)
24.1 Powers of Attorney*
25.1 Form T-1 Statement of Eligibility and Qualification of
Trustee***
</TABLE>
- ---------------
* Previously filed.
** Incorporated by reference to the corresponding exhibit to Pre-Effective
Amendment No. 1 to the Registrants' Registration Statement on Form S-3 (File
No. 333-46893) filed on April 16, 1998.
*** To be filed by amendment or incorporated by reference or in connection with
the offering of the applicable securities.
<PAGE> 1
EXHIBIT 5.1
<TABLE>
<S> <C> <C>
OTHER OFFICES:
HOUSTON ANDREWS & KURTH L.L.P.
DALLAS A REGISTERED LIMITED LIABILITY PARTNERSHIP
LOS ANGELES ATTORNEYS
NEW YORK 1701 PENNSYLVANIA AVENUE, N.W. TELEPHONE: (202) 662-2700
THE WOODLANDS SUITE 200 TELECOPIER: (202) 662-2739
LONDON WASHINGTON, D.C. 20006-5805 TELEX: 79-1208
</TABLE>
September 17, 1999
Aames Capital Corporation
Aames Capital Acceptance Corp.
350 South Grand Avenue
Los Angeles, California 90071
Re: Aames Capital Corporation and Aames Capital Acceptance Corp.
Registration Statement on Form S-3
------------------------------------------------------------
Ladies and Gentlemen:
We have acted as counsel to Aames Capital Corporation, a California
corporation ("ACC"), and Aames Capital Acceptance Corp., a Delaware corporation
("ACAC"), in connection with the authorization and proposed issuance from time
to time after the date hereof in one or more series (each, a "Series") of
asset-backed certificates (the "Certificates") to be offered pursuant to a
registration statement on Form S-3 (such registration statement, the
"Registration Statement") relating to the Certificates. The Registration
Statement has been filed with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "1933 Act"),
and the rules and regulations promulgated thereunder. As set forth in the
Registration Statement, each Series of Certificates will be issued under and
pursuant to the conditions of a separate pooling and servicing agreement (each,
a "Pooling and Servicing Agreement") among either ACC or ACAC, as applicable,
as transferor (the "Transferor" for such Series), ACC, as servicer (in such
capacity, the "Servicer"), and a trustee to be identified in the prospectus
supplement for such Series of Certificates (the "Trustee" for such Series).
We have examined originals or copies, certified or otherwise identified
to our satisfaction, of the organizational documents of ACC and ACAC, the form
of Pooling and Servicing Agreement incorporated by reference as an exhibit to
the Registration Statement, the forms of Certificates included in such form of
Pooling and Servicing Agreement, the prospectus (the "Prospectus") and the forms
of prospectus supplements incorporated by reference as exhibits to the
Registration Statement, and such other records, documents and statutes as we
have deemed necessary for the purpose of rendering this opinion.
Based upon the foregoing, we are of the opinion that:
1. When a Pooling and Servicing Agreement for a Series of
Certificates has been duly and validly authorized by all necessary action on the
part of the related Transferor and has been duly executed and delivered by such
Transferor, the Servicer, the Trustee and any other party thereto for such
Series, such Pooling and Servicing Agreement will constitute a legal, valid and
binding agreement of
<PAGE> 2
Aames Capital Corporation
Aames Capital Acceptance Corp.
September 17, 1999
Page 2
such Transferor, enforceable against such Transferor, in accordance with its
terms, except as enforcement thereof may be limited by (a) bankruptcy,
insolvency, reorganization, liquidation, receivership, moratorium or other
similar laws relating to or affecting creditors' rights generally or (b) general
principles of equity or public policy, regardless of whether such enforceability
is considered in a proceeding in equity or at law.
2. When a Series of Certificates has been duly authorized by all
necessary action on the part of the related Transferor, duly executed and
authenticated by the Trustee for such Series in accordance with the terms of the
related Pooling and Servicing Agreement, and issued and delivered against
payment therefor as contemplated in the Registration Statement, the Certificates
of such Series will be legally and validly issued, fully paid and nonassessable,
and the holders thereof will be entitled to the benefits of the related Pooling
and Servicing Agreement.
In rendering the foregoing opinions, we express no opinion as to the
laws of any jurisdiction other than the General Corporate Law of the State of
Delaware, the laws of the State of California (excluding choice of law
principles therein) and the federal laws of the United States of America.
We hereby consent to the filing of this letter as Exhibit 5.1 to the
Registration Statement and to the reference to this firm under the heading
"Legal Matters" in the Prospectus, without implying or admitting that we are
"experts" within the meaning of the 1933 Act or the rules and regulations of the
Commission issued thereunder, with respect to any part of the Registration
Statement, including this Exhibit 5.1.
Sincerely,
/s/ ANDREWS & KURTH L.L.P.
<PAGE> 1
EXHIBIT 5.2
<TABLE>
<S> <C> <C>
OTHER OFFICES:
HOUSTON ANDREWS & KURTH L.L.P.
DALLAS A REGISTERED LIMITED LIABILITY PARTNERSHIP
LOS ANGELES ATTORNEYS
NEW YORK 1701 PENNSYLVANIA AVENUE, N.W. TELEPHONE: (202) 662-2700
THE WOODLANDS SUITE 200 TELECOPIER: (202) 662-2739
LONDON WASHINGTON, D.C. 20006-5805 TELEX: 79-1208
</TABLE>
September 17, 1999
Aames Capital Corporation
Aames Capital Acceptance Corp.
350 South Grand Avenue
Los Angeles, California 90071
Re: Aames Capital Corporation and Aames Capital Acceptance Corp.
Registration Statement on Form S-3
Ladies and Gentlemen:
We have acted as counsel to Aames Capital Corporation, a California
corporation ("ACC"), and Aames Capital Acceptance Corp., a Delaware corporation
("ACAC"), in connection with the authorization and proposed issuance from time
to time after the date hereof in one or more series (each, a "Series") of
asset-backed bonds (the "Bonds") to be offered pursuant to a registration
statement on Form S-3 (such registration statement, the "Registration
Statement") relating to the Bonds. The Registration Statement has been filed
with the Securities and Exchange Commission (the "Commission") under the
Securities Act of 1933, as amended (the "1933 Act"), and the rules and
regulations promulgated thereunder. As set forth in the Registration Statement,
each Series of Bonds will be issued under and pursuant to the conditions of an
indenture (an "Indenture") between ACC or ACAC, as applicable, as transferor
(the "Transferor" for such Series), or a trust, partnership, limited liability
company or corporation formed by ACC or ACAC solely for the purpose of issuing
the related Series of Bonds (the Transferor or any such entity, as applicable,
the "Bond Issuer") and a trustee to be identified in the prospectus supplement
for such Series of Bonds (the "Trustee" for such Series).
We have examined originals or copies, certified or otherwise identified
to our satisfaction, of the organizational documents of ACC and ACAC, the form
of Indenture incorporated by reference as an exhibit to the Registration
Statement, the form of Bonds included in such form of Indenture, the prospectus
(the "Prospectus") and the forms of prospectus supplements incorporated by
reference as exhibits to the Registration Statement, and such other records,
documents and statutes as we have deemed necessary for the purpose of rendering
this opinion.
Based upon the foregoing, we are of the opinion that:
1. When an Indenture for a Series of Bonds has been duly and validly
authorized by all necessary action on the part of the related Bond Issuer and
has been duly executed and delivered by the related Bond Issuer and the Trustee
and any other party thereto for such Series, such Indenture will constitute a
legal, valid and binding agreement of the related Bond Issuer, enforceable
against the related Bond Issuer, in accordance with its terms, except as
enforcement thereof may be limited by
<PAGE> 2
Aames Capital Corporation
Aames Capital Acceptance Corp.
September 17, 1999
Page 2
(a) bankruptcy, insolvency, reorganization, liquidation, receivership,
moratorium or other similar laws relating to or affecting creditors' rights
generally or (b) general principles of equity or public policy, regardless of
whether such enforceability is considered in a proceeding in equity or at law.
2. When a Series of Bonds has been duly authorized by all necessary
action on the part of the related Bond Issuer, duly executed and authenticated
by the Trustee for such Series in accordance with the terms of the related
Indenture, and issued and delivered against payment therefor as contemplated in
the Registration Statement, the Bonds of such Series will be valid and binding
non- recourse obligations of the related Bond Issuer, enforceable against the
related Bond Issuer, in accordance with their terms, except as enforcement
thereof may be limited by (a) bankruptcy, insolvency, reorganization,
liquidation, receivership, moratorium or other similar laws relating to or
affecting creditors' rights generally or (b) general principles of equity or
public policy, regardless of whether such enforceability is considered in a
proceeding in equity or at law.
In rendering the foregoing opinions, we express no opinion as to the
laws of any jurisdiction other than the General Corporate Law of the State of
Delaware, the laws of the State of California (excluding choice of law
principles therein) and the federal laws of the United States of America.
We hereby consent to the filing of this letter as Exhibit 5.2 to the
Registration Statement and to the reference to this firm under the heading
"Legal Matters" in the Prospectus, without implying or admitting that we are
"experts" within the meaning of the 1933 Act or the rules and regulations of the
Commission issued thereunder, with respect to any part of the Registration
Statement, including this Exhibit 5.2.
Sincerely,
/s/ ANDREWS & KURTH L.L.P.
<PAGE> 1
EXHIBIT 8.1
<TABLE>
<S> <C> <C>
OTHER OFFICES:
HOUSTON ANDREWS & KURTH L.L.P.
DALLAS A REGISTERED LIMITED LIABILITY PARTNERSHIP
LOS ANGELES ATTORNEYS
NEW YORK 1701 PENNSYLVANIA AVENUE, N.W. TELEPHONE: (202) 662-2700
THE WOODLANDS SUITE 200 TELECOPIER: (202) 662-2739
LONDON WASHINGTON, D.C. 20006-5805 TELEX: 79-1208
</TABLE>
September 17, 1999
Aames Capital Corporation
Aames Capital Acceptance Corp.
350 South Grand Avenue
Los Angeles, California 90071
Re: Aames Capital Corporation and Aames Capital Acceptance Corp.
Registration Statement on Form S-3
Ladies and Gentlemen:
We have acted as counsel to Aames Capital Corporation ("ACC"), a
California corporation, and Aames Capital Acceptance Corp., a Delaware
corporation ("ACAC" and, together with ACC, the "Transferors"), in connection
with the authorization and proposed issuance from time to time after the date
hereof in one or more series (each, a "Series") of asset-backed certificates
(the "Certificates") and asset-backed bonds (the "Bonds" and, together with the
Certificates, the "Securities") to be offered pursuant to a registration
statement on Form S-3 (such registration statement, the "Registration
Statement") relating to the Securities. The Registration Statement has been
filed with the Securities and Exchange Commission (the "Commission") under the
Securities Act of 1933, as amended (the "1933 Act"), and the rules and
regulations promulgated thereunder. As set forth in the Registration Statement,
each Series of Certificates will be issued under and pursuant to the conditions
of a separate pooling and servicing agreement (each, a "Pooling and Servicing
Agreement") among one of the Transferors, as transferor, Aames Capital
Corporation, as servicer (in such capacity, the "Servicer"), and a trustee to
be identified in the prospectus supplement for such Series of Certificates (the
"Trustee" for such Series of Certificates); each Series of Bonds will be issued
under and pursuant to the conditions of an indenture (each, an "Indenture")
between ACAC or a trust, partnership, limited liability company or corporation
formed by ACAC solely for the purpose of issuing the related Series of Bonds
(ACAC or any such entity, as applicable, the "Bond Issuer") and a trustee to be
identified in the prospectus supplement for such Series of Bonds (the "Trustee"
for such Series of Bonds).
We have examined the prospectus contained in the Registration Statement
(the "Prospectus") and such other documents, records and instruments as we have
deemed necessary for the purpose of this opinion.
In arriving at the opinion expressed below, we have assumed that each
Pooling and Servicing Agreement and each Indenture will be duly authorized by
all necessary corporate action on the part of the related Transferor or Bond
Issuer, as applicable, the related Trustee, the Servicer, as applicable, and any
other party thereto for the related Series of Certificates or Bonds and will be
duly executed and delivered
<PAGE> 2
Aames Capital Corporation
Aames Capital Acceptance Corp.
September 17, 1999
Page 2
by the related Transferor or Bond Issuer, as applicable, the related Trustee,
the Servicer, as applicable, and any other party thereto substantially in the
form filed as an exhibit to the Registration Statement, that the Certificates or
the Bonds of each Series will be duly executed and delivered substantially in
the forms contemplated by the Pooling and Servicing Agreement or the Indenture,
as applicable, and that the Certificates or the Bonds will be sold in the manner
described in the Registration Statement.
Based upon such examination and the qualifications set forth herein and
in reliance thereon, we are of the opinion that the description of federal
income tax consequences appearing under the captions "Summary - Certain Federal
Income Tax Consequences" and "Certain Federal Income Tax Consequences" in the
Prospectus accurately describes the material federal income tax consequences to
holders of the Securities.
The opinion herein is based upon our interpretations of current law,
including court authority and existing final and temporary treasury regulations,
which are subject to change both prospectively and retroactively, and upon the
facts and assumptions discussed herein. This opinion letter is limited to the
matters set forth herein, and no opinions are intended to be implied or may be
inferred beyond those expressly stated herein. Our opinion is rendered as of the
date hereof and we assume no obligation to update or supplement this opinion or
any matter related to this opinion to reflect any change of fact, circumstances
or law after the date hereof. In addition, our opinion is based on the
assumption that the matter, if litigated, will be properly presented to the
applicable court. Furthermore, our opinion is not binding on the Internal
Revenue Service or a court. Our opinion represents merely our best legal
judgment on the matters presented; others may disagree with our conclusion.
There can be no assurance that the Internal Revenue Service will not take a
contrary position or that a court would agree with our opinion if litigated. In
the event any one of the statements, representations or assumptions we have
relied upon to issue this opinion is incorrect, our opinion might be adversely
affected and may not be relied upon.
We hereby consent to the filing of this letter as Exhibit 8.1 to the
Registration Statement and to the reference to this firm under the captions
"Summary - Certain Federal Income Tax Consequences" and "Certain Federal Income
Tax Consequences" in the Prospectus, without implying or admitting that we are
"experts" within the meaning of the 1933 Act or the rules and regulations of the
Commission issued thereunder, with respect to any part of the Registration
Statement, including this Exhibit 8.1.
Sincerely,
/s/ ANDREWS & KURTH L.L.P.
