As filed with the Securities and Exchange Commission on November 4, 1997
Registration Statement No. 333-_____
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------------------
CONTISECURITIES ASSET FUNDING CORP.
(Exact name of registrant as specified in governing instruments)
Delaware 13-2937238
(State of incorporation) (IRS Employee Identification
Number)
277 Park Avenue
New York, New York 10172
(212) 207-2840
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
James E. Moore
President
ContiSecurities Asset Funding Corp.
277 Park Avenue
New York, New York 10172
(212) 207-2842
Fax: (212) 207-5251
(Name and Address of agent for service)
Please send copies of communication to:
Jerry R. Marlatt, Esq. Alan L. Langus, Esq.
STROOCK & STROOCK & LAVAN LLP Chief Counsel
180 Maiden Lane ContiTrade Services, L.L.C.
New York, New York 10038 277 Park Avenue, 38th Floor
(212) 806-5400 New York, New York 10172
Fax: (212) 806-6006 (212) 207-2822
Fax: (212) 207-2937
--------------------------------------
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 then 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, please check the following box
and list the Securities Act 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, please 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. |_|
Pursuant to Rule 429 under the Securities Act of 1933, the Prospectus filed as
part of this Registration Statement may be used in connection with the
securities covered by Registration Statement No. 333-19427.
--------------------------------------
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
===================================================================================================================================
Title of each class Proposed Proposed
of Amount Maximum Maximum Amount Of
securities being To Be Offering Aggregate Registration Fee
registered Registered Price Per Offering
(1) Unit(1) Price
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asset-Backed $1,000,000 100% $1,000,000 $303.03
Certificates
===================================================================================================================================
(1) Estimated solely for purposes of calculating the registration fee.
--------------------------------------
</TABLE>
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that the Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
DIRECTORS ASSET CONDUIT CORPORATION
CROSS REFERENCE SHEET
ITEM AND CAPTION IN FORM S-3 LOCATION IN PROSPECTUS
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus...... Forepart of Registration
Statement and Outside Front
Cover Page**
2. Inside Front Cover and Outside Back Cover
Pages of Prospectus......................... Inside Front and Outside Back
Cover Page of Prospectus**
3. Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges................ Summary of Prospectus**; The
Company**; Risk Factors**
4. Use of Proceeds............................. Use of Proceeds**
5. Determination of Offering Price............. *
6. Dilution.................................... *
7. Selling Security Holders.................... *
8. Plan of Distribution.................... Plan of Distribution**
9. Description of Securities to be Registered.. Outside Front Cover Page;
Summary of Terms; The
Trust Fund; Description
of Certificates; Pooling
and Servicing Agreement**
10. Interests of Named Experts and counsel *
11. Material Changes *
12. Incorporation of Certain Information by Inside Front Cover Page**;
Reference Incorporation of Certain
Documents by Reference
13. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities............................ See Page II-2
- ----------------------
* Omitted since answer is negative or item is not applicable.
** To be completed or supplemented from time to time by Prospectus Supplement.
<PAGE>
SUBJECT TO COMPLETION, DATED __________, 199_ VERSION 1
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED ________, 199__,
$-----------
_______________ HOME EQUITY LOAN TRUST 199__-__
$___________ ____% CLASS A-1 CERTIFICATES
$___________ ____% CLASS A-2 CERTIFICATES
$__________ ____% CLASS A-3 CERTIFICATES
$__________ ____% CLASS A-4 CERTIFICATES
$__________ ____% CLASS A-5 CERTIFICATES*
$__________ CLASS A-6 ADJUSTABLE RATE CERTIFICATES
----------------------------
[INSERT NAME OF SERVICER]
SERVICER
CONTISECURITIES ASSET FUNDING CORP.
DEPOSITOR
----------------------------
The _______________ Home Equity Loan Pass-Through Certificates, Series
199__-__ (the "Certificates") will consist of (i) the Class A-1 Certificates,
Class A-2 Certificates, Class A-3 Certificates, Class A-4 Certificates and Class
A-5 Certificates (collectively, the "Fixed Rate Certificates"), (ii) the Class
A-6 Certificates (the "Adjustable Rate Certificates") and the Class A-7IO
Certificates (collectively, with the Fixed Rate Certificates and the Adjustable
Rate Certificates, the "Class A Certificates"), (iii) one or more classes of
subordinate Certificates and (iv) a residual class (the "Class R Certificates";
and together with such other subordinate Certificates, the "Subordinate
Certificates"). Only the Class A Certificates are offered hereby.
The Certificates represent undivided ownership interests in one of two
pools (each, a "Home Equity Loan Group") of fixed and adjustable rate mortgage
loans (the "Home Equity Loans") held by _______________ Home Equity Loan Trust
199__-__ (the "Trust"). The Fixed Rate Certificates will represent undivided
ownership interests in the Home Equity Loans in the Fixed Rate Group, which are
secured by first and second lien mortgages or deeds of trust. The Class A-6
Certificates will represent undivided ownership interests in the Home Equity
Loans in the Adjustable Rate Group, which are secured solely by first lien
mortgages or deeds of trust. The Class A Certificates also represent undivided
ownership interest in all monies due under the respective Home Equity Loans
(other than Retained Yield referred to herein) after _______, 199_ (the "Cut-Off
Date"), security interests in the properties which secure the Home Equity Loans
(the "Mortgaged Properties"), a certificate guaranty insurance policy, funds on
deposit in certain trust accounts, and certain other property. The Home Equity
Loans were originated or purchased by the Seller. The Trust will be created
pursuant to a Pooling and Servicing Agreement (the "Pooling and Servicing
Agreement") to be dated as of ________, 199_, among the Depositor, the Seller,
the Servicer, _______________, as Master Servicer and
_______________________________, as Trustee (the "Trustee"). For a discussion of
significant matters affecting investment in the Certificates, see "Risk Factors"
beginning on Page S-13 herein and beginning on Page 6 in the related Prospectus.
(Cover continued on next page)
----------
THE CLASS A CERTIFICATES REPRESENT BENEFICIAL INTERESTS IN THE TRUST ONLY
AND DO NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF THE DEPOSITOR,
THE SELLER, THE SERVICER OR ANY OF THEIR AFFILIATES. NEITHER
THE CLASS A CERTIFICATES NOR THE MORTGAGE LOANS ARE INSURED
OR GUARANTEED BY ANY GOVERNMENTAL AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
----------
The Class A Certificates will be purchased by the Underwriters from the
Depositor and will be offered by the Underwriters from time to time to the
public in negotiated transactions or otherwise at varying prices to be
determined at the time of sale. Proceeds to the Depositor from the sale of the
Class A Certificates will be approximately $_______________, plus accrued
interest on the Fixed Rate Certificates at the applicable Pass-Through Rate from
________, ____ to, but not including, the Closing Date, before deducting
expenses payable by the Depositor estimated to be approximately
$_______________.
The Class A Certificates are offered subject to prior sale, when, as, and
if accepted by the Underwriters and subject to the Underwriters' right 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 through the facilities of The
Depository Trust Seller, CEDEL S.A. and the Euroclear System on or about
_________, 199_. The Class A Certificates will be offered in Europe and the
United States of America. -------------- * The Class A-5 Pass-Through Rate will
be subject to certain limitations described in the Summary herein.
[UNDERWRITERS]
The date of this Prospectus Supplement is ________, 199_
<PAGE>
[Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This preliminary prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of any
such State.]
<PAGE>
(Cover continued from previous page)
On or before the issuance of the Certificates, the Depositor will obtain
from __________________________ (the "Certificate Insurer") a certificate
guaranty insurance policy relating to the Class A Certificates (the "Certificate
Insurance Policy") in favor of the Trustee. The Certificate Insurance Policy
will provide for a 100% coverage of the principal amount of, and scheduled
interest due on, the Class A Certificates.
[Guarantor Logo]
The Home Equity Loan Pool will be divided into two groups (each, a "Home
Equity Loan Group" or a "Group"). The Fixed Rate Certificates will represent an
undivided ownership interest in a group of fixed-rate Home Equity Loans (the
"Fixed Rate Group"). The Adjustable Rate Certificates will represent an
undivided ownership interest in a group of adjustable-rate Home Equity Loans
(the "Adjustable Rate Group").
The Pooling and Servicing Agreement provides that additional fixed rate
mortgage loans (the "Subsequent Home Equity Loans") may be purchased by the
Trust from the Depositor from time to time on or before __________, 199_ from
funds on deposit in the Pre-Funding Account. All Subsequent Home Equity Loans so
acquired by the Trust will be assigned to the Fixed Rate Group. On the Closing
Date an aggregate cash amount of approximately $_____________ will be deposited
with the Trustee in the Pre-Funding Account to be used to acquire Subsequent
Home Equity Loans for the Fixed Rate Group.
It is a condition to issuance of the Class A Certificates that the Class A
Certificates be rated "Aaa" by Moody's Investors Service and "AAA" by Standard
and Poor's Ratings Group.
Distributions of interest will be made to the Owners of the Certificates on
the 25th day of each month (or, if such day is not a business day, the next
business day) beginning ____________, 199_. Interest will be passed through on
each Payment Date to the Owners of the Class A Certificates based on the related
Certificate Principal Balance (as defined herein), and at the rate applicable to
each Class of the Class A Certificates (each, a "Pass-Through Rate"). The
Pass-Through Rate for each Class of the Fixed Rate Certificates is set out on
the cover hereof. The Pass-Through Rate for the Adjustable Rate Certificates
adjusts monthly based upon one-month LIBOR (as defined herein) or as otherwise
described herein. Distributions in reduction of the Certificate Principal
Balances will be made on each Payment Date in the manner and the amounts
described herein. Distributions on the Subordinate Certificates are subordinate
to distributions on the Class A Certificates to the extent described herein.
The yield to investors on the Class A Certificates sold at prices other
than par may be extremely sensitive to the rate and timing of principal payments
(including prepayments, repurchases, defaults and liquidations) on the Home
Equity Loans, which may vary over time. See "Prepayment and Yield
Considerations" herein and "Risk Factors" and "Yield, Prepayment and Maturity
Considerations" in the Prospectus.
An election will be made to treat certain assets of the Trust as a "real
estate mortgage investment conduit" (a "REMIC") for federal income tax purposes.
All of the Class A Certificates will constitute "regular interests" in a REMIC.
See "Certain Federal Income Tax Consequences" herein and in 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
PROSPECTUS TO WHICH IT RELATES. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS
TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
The Certificates offered by this Prospectus Supplement will be part of a
separate series of Certificates being offered by the Depositor pursuant to its
Prospectus dated _______, 199_, of which this Prospectus Supplement is a part
and which accompanies this Prospectus Supplement. The Prospectus contains
important information regarding this offering which is not contained herein, and
prospective investors are urged to read the Prospectus and this Prospectus
Supplement in full.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission a
Registration Statement under the Securities Act of 1933 with respect to the
Certificates. This Prospectus Supplement and the related Prospectus, which form
a part of the Registration Statement, omit certain information contained in such
Registration Statement pursuant to the Rules and Regulations of the Commission.
The Registration Statement can be inspected and copied at the Public Reference
Room of the Commission at 450 Fifth Street, N.W., Washington, D.C., and the
Commission's regional offices at Seven World Trade Center, 13th Floor, New York,
New York 10048, and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such materials can be obtained at prescribed
rates from the Public Reference Section of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549.
REPORTS TO OWNERS
Monthly and annual reports concerning the Certificates and the Trust will
be sent by the Trustee to the Owners of Class A Certificates. So long as any
Class A Certificate is in book-entry form, such reports will be sent to Cede &
Co., as the nominee of DTC and as Owner of such Class A Certificates pursuant to
the Pooling and Servicing Agreement. DTC will supply such reports to Owners of
any such Class A Certificates in accordance with its procedures.
<PAGE>
TABLE OF CONTENTS
Prospectus Supplement
Page
SUMMARY OF TERMS...............................................S-1
RISK FACTORS..................................................S-12
THE PORTFOLIO OF HOME EQUITY LOANS............................S-15
General....................................................S-15
USE OF PROCEEDS...............................................S-17
THE DEPOSITOR.................................................S-17
General....................................................S-18
Initial Home Equity Loans -- Adjustable Rate Group.........S-21
Conveyance of Subsequent Home Equity Loans.................S-24
Interest Payments on the Home Equity Loans.................S-25
PREPAYMENT AND YIELD CONSIDERATIONS...........................S-25
General....................................................S-25
Mandatory Prepayment.......................................S-26
Projected Prepayment and Yield for Class A Certificates....S-26
Payment Lag Feature of Class A Certificates................S-30
FORMATION OF THE TRUST AND TRUST PROPERTY.....................S-30
ADDITIONAL INFORMATION........................................S-30
DESCRIPTION OF THE CLASS A CERTIFICATES.......................S-31
General....................................................S-31
Payment Dates..............................................S-31
Distributions..............................................S-31
Pre-Funding Account........................................S-33
Capitalized Interest Account...............................S-34
Calculation of LIBOR.......................................S-34
Book Entry Registration of the Class A Certificates........S-34
Assignment of Rights.......................................S-37
THE CERTIFICATE INSURER.......................................S-37
CREDIT ENHANCEMENT............................................S-40
Certificate Insurance Policy...............................S-40
Overcollateralization Provisions...........................S-40
Crosscollateralization Provisions..........................S-42
THE POOLING AND SERVICING AGREEMENT...........................S-42
Assignment of Home Equity Loans............................S-42
Servicing and Sub-Servicing................................S-44
Removal and Resignation of Servicer........................S-46
Removal of Trustee for Cause...............................S-48
Governing Law..............................................S-48
Amendments.................................................S-48
Termination of the Trust...................................S-49
Optional Termination.......................................S-49
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.......................S-49
REMIC Election.............................................S-50
ERISA CONSIDERATIONS..........................................S-50
RATINGS.......................................................S-52
LEGAL INVESTMENT CONSIDERATIONS...............................S-52
UNDERWRITING..................................................S-53
CERTAIN LEGAL MATTERS.........................................S-54
GLOBAL CLEARANCE, SETTLEMENT AND TAX
DOCUMENTATION PROCEDURES......................................Annex I
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS...................A-1
AUDITED FINANCIAL STATEMENTS FOR THE
CERTIFICATE INSURER............................................B-1
UNAUDITED FINANCIAL STATEMENTS FOR THE
CERTIFICATE INSURER............................................C-1
<PAGE>
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. Reference is made to the Index of Principal Defined
Terms for the location of certain capitalized terms.
Issuer: _______________ Home Equity Loan Trust
199__-__ (the "Trust").
Certificates Offered: $___________ Home Equity Loan Pass-Through
Certificates, Series 199__-__, to be issued
in the following Classes (each, a "Class"):
Initial Certificate Pass-Through
Principal Balance Rate Class
$__________ ____% Class A-1 Certificates
$__________ ____% Class A-2 Certificates
$__________ ____% Class A-3 Certificates
$__________ ____% Class A-4 Certificates
$__________ ____% (1) Class A-5 Certificates
$__________ (2) Class A-6 Certificates
(1) The Pass-Through Rate with respect to the Class A-5 Certificates
shall be the lower of ____% and the weighted average of the
Coupon Rates of each Home Equity Loan in the Fixed Rate Group
less ____% representing the sum of the rates at which the
Servicing Fee, the Premium Amount and the Trustee Fee are
calculated (except as otherwise set forth in the Pooling and
Servicing Agreement). Approximately ____% of the Initial Home
Equity Loans in the Fixed Rate Group by Loan Balance as of the
Cut-Off Date bear interest at Coupon Rates which, after the
deduction of ____% would be lower than ____%. As a result, it is
unlikely that the weighted average of the Coupon Rates of the
Home Equity Loans in the Fixed Rate Group will be less than
____%.
(2) On each Payment Date, the Class A-6 Pass-Through Rate will be
equal to the lesser of (i) the rate equal to the London interbank
offered rate for one-month United States dollar deposits
("LIBOR") (calculated as described under "Description of the
Class A Certificates - Calculation of LIBOR" herein) plus ____%
per annum and (ii) the weighted average of the Coupon Rates on
the Home Equity Loans in the Adjustable Rate Group, less ____%
per annum (the "Available Funds Cap"). The Class A-1
Certificates, Class A-2 Certificates, Class A-3 Certificates,
Class A-4 Certificates and Class A-5 Certificates are
collectively referred to herein as the "Fixed Rate Certificates,"
and the Class A-6 Certificates are also referred to herein as the
"Adjustable Rate Certificates." The Fixed Rate Certificates, the
Adjustable Rate Certificates and the Class A-7IO Certificates are
collectively referred to as the "Class A Certificates."
Depositor: ContiSecurities Asset Funding Corp.
(the "Depositor"), a Delaware corporation.
Seller and ______________________ (the "Seller"
Servicer: and "Servicer"), a Delaware corporation.
Trustee: _______________________________ (the
"Trustee"), a _______________ banking
corporation.
Cut-Off Date: As of the close of business on ____, 199_.
Closing Date: On or about _________, 199_.
Description of
the Certificates: The Home Equity Loan Pass-Through
Certificates (the "Certificates")
will consist of the Class A Certificates,
one or more classes of subordinate
Certificates and a residual class (the
"Class R Certificates" and together with
such other subordinate Certificates, the
"Subordinate Certificates"). The
Certificates will be issued pursuant to a
Pooling and Servicing Agreement (the
"Pooling and Servicing Agreement") to be
dated as of ________, 199_, among the
Depositor, the Seller, the Servicer and the
Trustee. Only the Class A Certificates
will be offered hereby.
On the Closing Date, an aggregate cash
amount of approximately $_____________
(the "Original Pre-Funded Amount") will be
deposited in a trust account in the name
of the Trustee (the "Pre-Funding
Account"). It is intended that additional
fixed-rate Home Equity Loans satisfying
the criteria specified in the Pooling and
Servicing Agreement (the "Subsequent Home
Equity Loans") will be purchased by the
Trust from the Depositor from time to time
on or before __________, 199_ from funds
on deposit in the Pre-Funding Account.
Each Subsequent Home Equity Loan so
acquired by the Trust will be assigned to
the Fixed Rate Group. As a result, the
aggregate principal balance of the Home
Equity Loans in the Fixed Rate Group will
increase by an amount equal to the
aggregate principal balance of the
Subsequent Home Equity Loans so purchased
and the amount in the Pre-Funding Account
will decrease proportionately.
As described below, on the Closing Date,
cash will be deposited in the name of the
Trustee in the Capitalized Interest
Account (as defined herein). Funds in the
Capitalized Interest Account will be
applied by the Trustee to cover shortfalls
in interest during the Funding Period (as
described under "Pre-Funding Account") on
the Class A Certificates attributable to
the provisions allowing for purchase of
Subsequent Home Equity Loans.
Denominations: The Class A Certificates are issuable in
book entry form in minimum original
principal amounts of $_____ and integral
multiples thereof.
The Home Equity Loans: The mortgage loans to be conveyed to the
Trust by the Depositor on the Closing Date
(the "Initial Home Equity Loans") consist
of ______ fixed and adjustable rate
conventional mortgage loans evidenced by
promissory notes (the "Notes") secured by
first and second lien deeds of trust,
security deeds or mortgages (the
"Mortgages"), which are located in _____
states and the District of Columbia. The
properties securing the Initial Home
Equity Loans (the "Properties") consist
primarily of single-family residences
(which may be attached, detached, part of
a two-to-four family dwelling, a
condominium unit or a unit in a planned
unit development) and also include mixed
use properties. The Properties may be
owner-occupied and non-owner occupied
investment properties. No Combined
Loan-to-Value Ratio (based upon appraisals
made at the time of origination) exceeded
_____% as of the Cut-Off Date. The Initial
Home Equity Loans are [not] insured by
either primary or pool mortgage insurance
policies; however, certain distributions
due to the Owners of the Class A
Certificates (the "Owners") are insured by
the Certificate Insurer pursuant to the
Certificate Insurance Policy. See "Credit
Enhancement" herein. The Home Equity Loans
are not guaranteed by the Seller or any
affiliate thereof. The Home Equity Loans
will be serviced by the Servicer generally
in accordance with the standards and
procedures required by FNMA for FNMA
mortgage-backed securities.
Unless otherwise noted, all statistical
percentages in this Prospectus Supplement
are measured by the aggregate principal
balance of the Initial Home Equity Loans
(the "Original Aggregate Loan Balance") or
of the Initial Home Equity.
Loans in the applicable Home Equity Loan
Group, in each case as of the CutOff Date.
The statistical characteristics of the
Home Equity Loans will vary upon the
transfer into the Fixed Rate Group of
Subsequent Home Equity Loans.
FIXED RATE GROUP. As of the Cut-Off Date,
the average Loan Balance of the Initial
Home Equity Loans in the Fixed Rate Group
was $_________; the interest rates (the
"Coupon Rates") of such Initial Home
Equity Loans ranged from ____% to _____%;
the weighted average Loan-to-Value Ratio
of such Initial Home Equity Loans was
_____%; the weighted average Combined
Loan- to-Value Ratio of the Initial Home
Equity Loans was _____%; the weighted
average Coupon Rate of such Initial Home
Equity Loans was _____%; the weighted
average of the Coupon Rate being retained
by the Seller and not being sold to the
Trust (the "Retained Yield") for such
Initial Home Equity Loans was _______%;
the weighted average remaining term to
maturity of such Initial Home Equity Loans
was _____ months. The remaining terms to
maturity as of the Cut-Off Date of the
Initial Home Equity Loans in the Fixed
Rate Group ranged from _____ months to
_____ months. The maximum Loan Balance of
the Home Equity Loans in the Fixed Rate
Group as of the Cut-Off Date was
$__________. Initial Home Equity Loans in
the Fixed Rate Group containing "balloon"
payments represented not more than _____%
of the Original Aggregate Loan Balance of
the Fixed Rate Group. No Initial Home
Equity Loan in the Fixed Rate Group will
mature later than ________, ____. _____ of
the Initial Home Equity Loans in the Fixed
Rate Group are secured by first mortgages
representing in the aggregate _____% of
the Original Aggregate Loan Balance of the
Fixed Rate Group and ____ of the Initial
Home Equity Loans in the Fixed Rate Group
are secured by second lien mortgages
representing in the aggregate _____% of
the Original Aggregate Loan Balance of the
Fixed Rate Group. As a percentage of the
Original Aggregate Loan Balance of the
Fixed Rate Group, _____% were secured by
mortgages on single-family detached
dwellings, ____% by mortgages on
single-family attached dwellings, ____% by
mortgages on two-to-four family dwellings,
____% by condominiums, and ____% by other
types of dwellings. See "The Home Equity
Loan Pool -- Initial Home Equity Loans --
Fixed Rate Group" herein.
ADJUSTABLE RATE GROUP. [All] of the Home
Equity Loans in the Adjustable Rate Group
bear interest at rates that adjust
semiannually based on the London interbank
offered rate for six-month United States
dollar deposits. [Other indices.] The
Coupon Rates with respect to all of the
Home Equity Loans in the Adjustable Rate
Group are subject to periodic and lifetime
interest rate adjustment caps. See "The
Home Equity Loan Pool -- Initial Home
Equity Loans - Adjustable Rate Group."
As of the Cut-Off Date, the average Loan
Balance of the Initial Home Equity Loans
in the Adjustable Rate Group was
$_________; the Coupon Rates of such
Initial Home Equity Loans ranged from
____% to _____%; the weighted average
Loan-to-Value Ratio of such Initial Home
Equity Loans was _____%; the weighted
average Coupon Rate of such Initial Home
Equity Loans was _____%; the weighted
average remaining term to maturity of such
Initial Home Equity Loans was _____
months. The remaining terms to maturity as
of the Cut-Off Date of the Initial Home
Equity Loans in the Adjustable Rate Group
ranged from _____ months to _____ months.
The maximum Loan Balance of the Home
Equity Loans in the Adjustable Rate Group
as of the Cut- Off Date was $__________.
None of the Initial Home Equity Loans in
the Adjustable Rate Group contain
"balloon" payments. No Initial Home Equity
Loan in the Adjustable Rate Group will
mature later than ________, ____. All of
the Initial Home Equity Loans in the
Adjustable Rate Group are secured by first
mortgages representing in the aggregate
___% of the Original Aggregate Loan
Balance of the Adjustable Rate Group and
none of the Initial Home Equity Loans in
the Adjustable Rate Group are secured by a
second lien mortgage. As a percentage of
the Original Aggregate Loan Balance of the
Adjustable Rate Group, _____% were secured
by mortgages on single- family detached
dwellings, ____% by mortgages on
single-family attached dwellings, ____% by
mortgages on two-to-four family dwellings
and ____% by condominiums. See "The Home
Equity Loan Pool -- Initial Home Equity
Loans - Adjustable Rate Group" herein.
All of the Home Equity Loans in the
Adjustable Rate Group have maximum Coupon
Rates. The weighted average maximum Coupon
Rate of the Initial Home Equity Loans in
the Adjustable Rate Group is _____%, with
maximum Coupon Rates that range from
approximately _____% to _____%. The
Initial Home Equity Loans in the
Adjustable Rate Group have a weighted
average gross margin as of the Cut-Off
Date of ____%. The gross margin for the
Initial Home Equity Loans in the
Adjustable Rate Group ranges from ____% to
-----%.
Final Scheduled
Payment Dates: The Final Scheduled Payment Dates for each
of the respective classes of Class A
Certificates are as follows, although it
is anticipated that the actual final
Payment Date for each Class may occur
earlier than the Final Scheduled Payment
Date. See "Prepayment and Yield
Considerations" herein.
Final Scheduled
Payment Date
Class A-1 Certificates: _________, ____
Class A-2 Certificates: _________, ____
Class A-3 Certificates: _________, ____
Class A-4 Certificates: _________, ____
Class A-5 Certificates: _________, ____
Class A-6 Certificates: _________, ____
Distributions--General: On the _____ day of each month, or if such
day is not a Business Day, then the next
succeeding Business Day, commencing
____________, 199_ (each such day being a
"Payment Date"), the Trustee will be
required to distribute to the Owners of
the Fixed Rate Certificates of record as
of the last day of the calendar month
immediately preceding the calendar month
in which such Payment Date occurs and to
the Owners of the Adjustable Rate
Certificates of record as of the day
immediately preceding such Payment Date
(each such date, the "Record Date") the
"Class A Distribution Amount" which shall
be the sum of (x) Current Interest and (y)
the Principal Distribution Amount (each as
defined below).
For each Payment Date, interest due with
respect to the Fixed Rate Certificates
will be interest which has accrued thereon
during the calendar month immediately
preceding the month in which such Payment
Date occurs; the interest due with respect
to the Adjustable Rate Certificates will
be the interest which has accrued thereon
at the Class A-6 Pass-Through Rate from
the preceding Payment Date (or from the
Closing Date in the case of the first
Payment Date) to and including the day
prior to the current Payment Date. Each
period referred to in the prior sentence
relating to the accrual of interest is the
"Accrual Period" for the related Class of
Class A Certificates. All calculations of
interest on the Fixed Rate Certificates
will be made on the basis of a 360-day
year assumed to consist of twelve 30-day
months. Calculations of interest on the
Adjustable Rate Certificates will be made
on the basis of the actual number of days
elapsed in the related Accrual Period and
in a year of 360 days.
A "Business Day" is any day other than a
Saturday, Sunday or a day on which banking
institutions in New York City or in the
city in which the corporate trust office
of the Trustee is located are authorized
or obligated by law or executive order to
close.
Allocations of Interest The Class A Distribution Amount relating
and Principal: to each Group of Home Equity Loans for
each Payment Date (to the extent funds are
available therefor) shall be allocated
among the Class A Certificates in the
following amounts and in the following
order of priority:
(i) First, to the Owners of the Class A
Certificates of the related Group, the
related Class A Current Interest on a pro
rata basis without any priority among such
Class A Certificates.
(ii) Second, to the Owners of the related
Class of Class A Certificates (A) the
Principal Distribution Amount (as defined
below under the heading "Principal")
applicable to the Fixed Rate Group shall
be distributed as follows: (I) first, to
the Owners of the Class A- 1 Certificates
until the Class A-1 Certificate Principal
Balance is reduced to zero; (II) second,
to the Owners of the Class A-2
Certificates until the Class A-2
Certificate Principal Balance is reduced
to zero; (III) third, to the Owners of the
Class A-3 Certificates, until the Class
A-3 Certificate Principal Balance is
reduced to zero; (IV) fourth, to the
Owners of the Class A-4 Certificates,
until the Class A-4 Certificate Principal
Balance is reduced to zero; and, (V)
fifth, to the Owners of the Class A-5
Certificates, until the Class A-5
Certificate Principal Balance is reduced
to zero and (B) the Principal Distribution
Amount applicable to the Adjustable Rate
Group shall be distributed to the Owners
of the Class A-6 Certificates until the
Class A-6 Certificate Principal Balance
has been reduced to zero. "Current
Interest" with respect to each Class of
Class A Certificates means, with respect
to any Payment Date (i) the aggregate
amount of interest accrued during the
preceding Accrual Period on the
Certificate Principal Balance of the
related Class A Certificates plus (ii) the
Preference Amount as it relates to
interest previously paid on such Class of
the Class A Certificates prior to such
Payment Date plus (iii) the Carry Forward
Amount, if any, with respect to such Class
of Class A Certificates.
The "Carry Forward Amount" with respect to
any Class of the Class A Certificates for
any Payment Date is the sum of (x) the
amount, if any, by which (i) the Class A
Distribution Amount allocable to such
Class as of the immediately preceding
Payment Date exceeded (ii) the amount of
the actual distribution made to the Owners
of such Class of Class A Certificates on
such immediately preceding Payment Date
plus (y) 30 days' interest on such amount,
calculated at the related Pass-Through
Rate in effect with respect to such Class
of Class A Certificates.
Principal: The credit enhancement provisions of the
Trust result in a limited acceleration of
principal payments to the Owners of the
Classes of Class A Certificates; such
provisions are more fully described under
"Credit Enhancement--
Overcollateralization Provisions" and
"Credit Enhancement--
Crosscollateralization Provisions" herein.
Such credit enhancement provisions also
have an effect on the weighted average
lives of the Class A Certificates; see
"Prepayment and Yield Considerations"
herein. In addition, the following
discussion makes use of a number of
technical defined terms which are defined
under "Credit
Enhancement--Overcollateralization
Provisions" and "Credit
Enhancement--Crosscollateralization
Provisions" herein
The Fixed Rate Certificates are
"sequential pay" classes such that the
Owners of the Class A-5 Certificates will
receive no payments of principal until the
Class A-4 Certificate Principal Balance
has been reduced to zero, the Owners of
the Class A-4 Certificates will receive no
payments of principal until the Class A-3
Certificate Principal Balance has been
reduced to zero, the Owners of the Class
A-3 Certificates will receive no payments
of principal until the Class A-2
Certificate Principal Balance has been
reduced to zero, and the Owners of the
Class A-2 Certificates will receive no
payments of principal until the Class A-1
Certificate Principal Balance has been
reduced to zero.
On each Payment Date, distributions in
reduction of the Certificate Principal
Balance of the Class A Certificates will
be made in the amounts described herein.
The "Principal Distribution Amount" for
each Home Equity Loan Group and Payment
Date shall be the lesser of:
(a) the Total Available Funds (as defined
below) for the related Home Equity Loan
Group plus any related Insured Payments
minus the related Current Interest with
respect to the related Class A
Certificates; and
(b) the excess, if any, of (i) the sum of:
(A) the Preference Amount with respect to
principal owed to the Owners of the Class
A Certificates for the related Group that
remains unpaid as of such Payment Date;
(B) the principal actually collected by
the Servicer with respect to the Home
Equity Loans in the related Home Equity
Loan Group during the related Remittance
Period;
(C) the Loan Balance of each Home Equity
Loan in the related Home Equity Loan Group
that was repurchased by the Seller or
purchased by the Servicer on or prior to
the related Monthly Remittance Date, to
the extent such Loan Balance is actually
received by the Trustee on or prior to the
related Monthly Remittance Date;
(D) any Substitution Amounts (i.e., the
excess, if any, of the Loan Balance of a
Home Equity Loan being replaced over the
outstanding principal balance of a
replacement Home Equity Loan) delivered by
the Seller on the related Monthly
Remittance Date in connection with a
substitution of a Home Equity Loan in the
related Home Equity Loan Group, to the
extent such Substitution Amounts are
actually received by the Trustee on or
prior to the related Monthly Remittance
Date;
(E) all Net Liquidation Proceeds actually
collected by the Servicer with respect to
the Home Equity Loans in the related Home
Equity Loan Group during the related
Remittance Period (to the extent such Net
Liquidation Proceeds are related to
principal) to the extent such Net
Liquidation Proceeds are actually received
by the Trustee on or prior to the related
Monthly Remittance Date;
(F) the amount of any Subordination
Deficit with respect to the related Home
Equity Loan Group for such Payment Date;
(G) the portion of the proceeds received
with respect to the related Home Equity
Loan Group by the Trustee upon termination
of the Trust (to the extent such proceeds
relate to principal);
(H) with respect to the Fixed Rate Group
only, any moneys released from the Pre-
Funding Account as a prepayment of the
Fixed Rate Certificates on the Payment
Date which immediately follows the end of
the Funding Period; and
(I) the amount of any Subordination
Increase Amount with respect to the
related Home Equity Loan Group for such
Payment Date to the extent of any Net
Monthly Excess Cash Flow available for
such purpose;
over
(ii) the amount of any Subordination
Reduction Amount with respect to the
related Home Equity Loan Group for such
Payment Date.
The sum of Current Interest and the
Principal Distribution Amount with respect
to each Home Equity Loan Group and any
Payment Date is the "Class A Distribution
Amount" for such Home Equity Loan Group
and Payment Date.
The "Remittance Period" with respect to
any Monthly Remittance Date is the
calendar month immediately preceding the
calendar month in which the Monthly
Remittance Date occurs. A "Monthly
Remittance Date" is any date on which
funds on deposit in the Principal and
Interest Account are remitted to the
Certificate Account, which is the _____
day of each month, or if such day is not a
Business Day, the next succeeding Business
Day, commencing in the month following the
month in which the Closing Date occurs.
A "Liquidated Home Equity Loan" is, in
general, a defaulted Home Equity Loan as
to which the Servicer has determined that
all amounts that it expects to recover on
such Home Equity Loan have been recovered
(exclusive of any possibility of a
deficiency judgment).
The Owners of the Class A Certificates are
entitled to receive ultimate recovery of
Realized Losses which occur in the related
Home Equity Loan Group to the extent such
Realized Losses create a Subordination
Deficit in the related Home Equity Loan
Group, and payment in recovery of such
losses will be in the form of an Insured
Payment on the next following Payment Date
if not covered through Net Monthly Excess
Cashflow from the related Home Equity Loan
Group or cross-collateralization from the
other Home Equity Loan Group.
A "Subordination Deficit" with respect to
a Home Equity Loan Group and a Payment
Date is the amount, if any, by which (x)
the aggregate related Class A Certificate
Principal Balance, after taking into
account all distributions to be made on
such Payment Date, exceeds (y) the sum of
(i) the aggregate Loan Balances of the
Home Equity Loans in the related Home
Equity Loan Group as of the close of
business on the last day of the related
Remittance Period and (ii) with respect to
the Fixed Rate Group only, the amount, if
any, on deposit in the Pre-Funding Account
as of the close of business on the last
day of the related Remittance Period.
"Preference Amount" means any amount
previously distributed to an Owner on a
Class A Certificate that is recoverable
and sought to be recovered as a voidable
preference by a trustee in bankruptcy
under the United States Bankruptcy Code as
amended from time to time, in accordance
with a final nonappealable order of a
court having competent jurisdiction.
Monthly Servicing Fees: The Master Servicer is entitled to a fee
(the "[Master] Servicing Fee") equal to
____% per annum (subject to certain
exceptions set forth in the Pooling and
Servicing Agreement), payable monthly at
one-twelfth the annual rate, of the then
outstanding principal amount of each Home
Equity Loan as of the first day of each
calendar month. [Allocation to
servicers/subservicers or separate
payment.]
Credit Enhancement: The Credit Enhancement provided for the
benefit of the Owners of the Class A
Certificates consists of (x) the
overcollateralization and
crosscollateralization mechanics which
utilize the internal cash flows of the
Trust and (y) the Certificate Insurance
Policy (as defined below).
OVERCOLLATERALIZATION. The credit
enhancement provisions of the Trust result
in a limited acceleration of the Class A
Certificates (in the aggregate) relative
to the amortization of the related Home
Equity Loans in the early months of the
transaction. The accelerated amortization
is achieved by the application of certain
excess interest and excess principal to
the payment of Class A Certificate
principal. This acceleration feature
creates, with respect to each Home Equity
Loan Group, overcollateralization (i.e.,
the excess of the aggregate outstanding
Loan Balance of the Home Equity Loans in
the related Home Equity Loan Group, over
the aggregate related Class A Certificate
Principal Balance). Once the required
level of overcollateralization is reached,
and subject to the provisions described in
the next paragraph, the acceleration
feature will cease, until necessary to
maintain the required level of
overcollateralization.
The Pooling and Servicing Agreement
provides that, subject to certain floors,
caps and triggers, the required level of
overcollateralization with respect to a
Home Equity Loan Group may increase or
decrease over time. An increase would
result in a temporary period of
accelerated amortization of the Class A
Certificates to increase the actual level
of overcollateralization to its required
level; a decrease would result in a
temporary period of decelerated
amortization to reduce the actual level of
overcollateralization to its required
level.
As a result of the "sequential pay"
feature of the Fixed Rate Certificates,
any such accelerated principal will be
paid to that class of the Fixed Rate
Certificates then entitled to receive
distributions of principal.
CROSSCOLLATERALIZATION. In addition to the
foregoing, the Pooling and Servicing
Agreement provides for
crosscollateralization through the
application of excess amounts generated by
one Home Equity Loan Group to fund
shortfalls in Available Funds and the
required overcollateralization level in
the other Home Equity Loan Group, subject
to certain prior debt service and credit
enhancement requirements of such Home
Equity Loan Group. See "Prepayment and
Yield Considerations", "Credit Enhancement
-- Overcollateralization Provisions" and
"Credit Enhancement --
Crosscollateralization" herein and "Credit
Enhancement" in the Prospectus.
Certificate Insurance Policy.
__________________________, a New York
stock insurance company (the "Certificate
Insurer"), will provide a Certificate
Insurance Policy with respect to the Class
A Certificates. Subject to the terms
thereof, the Certificate Insurance Policy
unconditionally and irrevocably guarantees
the obligation of the Trust on any Payment
Date to pay Current Interest and any
Subordination Deficit.
The Certificate Insurance Policy is
noncancellable for any reason.
"Insured Payments" means with respect to
any Home Equity Loan Group and Payment
Date, (A) the excess, if any, of (i) the
sum of the related Current Interest and
the then existing Subordination Deficit
for the related Home Equity Loan Group, if
any, over (ii) Total Available Funds (net
of the Premium Amount for such Home Equity
Loan Group) for such Home Equity Loan
Group (after taking into account the
portion of any Principal Distribution
Amount to be actually distributed on such
Payment Date without regard to any Insured
Payment to be made with respect to such
Payment Date) plus (B) an amount equal to
the Preference Amount with respect to such
Home Equity Loan Group.
Insured Payments do not cover Realized
Losses except to the extent that a
Subordination Deficit exists. Insured
Payments do not cover the Servicer's
failure to make Delinquency Advances,
except to the extent that a Subordination
Deficit would otherwise result therefrom.
Nevertheless, the effect of the
Certificate Insurance Policy is to
guarantee the timely payment of interest
on all classes of the Class A Certificates
and the ultimate payment of the principal
amount of the Class A Certificates.
The Certificate Insurance Policy does not
guarantee any specified rate of
prepayments, nor does the Certificate
Insurance Policy provide funds to redeem
the Certificates on any specified date.
The Certificate Insurer's obligation under
the Certificate Insurance Policy will be
discharged to the extent that funds are
received by the Trustee for distribution
to the Owners of the Class A Certificates.
See "The Certificate Insurer" herein.
[Pre-Funding Account: On the Closing Date, the Original
Pre-Funded Amount will be deposited in the
Pre- Funding Account which account will be
in the name of, and maintained by, the
Trustee on behalf of the Trust and used to
acquire the Subsequent Home Equity Loans
for addition to the Fixed Rate Group.
During the period (the "Funding Period")
from and including the Closing Date until
the earliest of (i) the date on which the
amount on deposit in the Pre-Funding
Account is less than $_______, (ii) the
date on which an event of default under
the Pooling and Servicing Agreement occurs
and (iii) __________, 199_, the Pre-Funded
Amount will be maintained in the
Pre-Funding Account. The Original Pre-
Funded Amount will be reduced during the
Funding Period by the amount thereof used
to purchase Subsequent Home Equity Loans
in accordance with the Pooling and
Servicing Agreement. The amount on deposit
in the Pre-Funding Account at any time is
the "Pre-Funded Amount". Subsequent Home
Equity Loans purchased by and added to the
Fixed Rate Group on any date (each, a
"Subsequent Transfer Date") must satisfy
the criteria set forth in the Pooling and
Servicing Agreement. Any Pre-Funded Amount
remaining at the end of the Funding Period
will be distributed to the Owners of the
Fixed Rate Certificates then entitled to
receive distributions of principal on the
Payment Date that immediately follows the
end of the Funding Period in reduction of
the Certificate Principal Balance of such
Owners' Certificates, thus resulting in a
partial principal prepayment of such Class
of Fixed Rate Certificates as specified
herein under "Description of the
Certificates-- Distributions." All
interest and other investment earnings on
amounts on deposit in the Pre-Funding
Account will be deposited in the
Capitalized Interest Account. The
Pre-Funding Account will not be an asset
of the REMIC (as defined herein).]
Although no assurance can be given, it is
intended that the principal amount of
Subsequent Home Equity Loans sold to the
Trust and added to the Fixed Rate Group
will require application of substantially
all of the Original Pre-Funded Amount and
it is not intended that there will be any
material amount of principal prepaid to
the holders of the Fixed Rate Certificates
from the Pre-Funding Account. In the event
that the Depositor is unable to sell
Subsequent Home Equity Loans to the Trust
in an amount equal to the Original
Pre-Funded Amount, principal prepayments
to Owners of the Fixed Rate Certificates
will occur on the Payment Date in ________
199_ in an amount equal to the Pre- Funded
Amount remaining at the end of the Funding
Period.
Capitalized Interest On the Closing Date, cash will be
Account: deposited in a trust account (the
"Capitalized Interest Account") in the
name of, and maintained by, the Trustee on
behalf of the Trust. The amount on deposit
in the Capitalized Interest Account,
including reinvestment income thereon,
will be used by the Trustee to fund the
excess, if any, of (i) the sum of the
amount of interest accruing during the
related Accrual Period at the weighted
average Pass-Through Rate on all Fixed
Rate Certificates on the amount by which
the aggregate Certificate Principal
Balance of the Fixed Rate Certificates
exceeds the aggregate Loan Balance of the
Home Equity Loans in the Fixed Rate Group
plus the Trustee and Certificate Insurer
fees accruing during the related Accrual
Period on such excess balance over (ii)
the amount of any reinvestment income on
monies on deposit in the Pre-Funding
Account; such amounts on deposit will be
so applied by the Trustee on each Payment
Date in the Funding Period to fund such
excess, if any. Any amounts remaining in
the Capitalized Interest Account not
needed for such purpose will be paid to
the Seller at the end of the Funding
Period. The Capitalized Interest Account
will not be an asset of the REMIC (as
defined herein).
Mandatory Prepayment of
Certificates: In the event that at the end of the
Funding Period, not all of the Original
Pre- Funded Amount has been used to
acquire Subsequent Home Equity Loans, then
the Fixed Rate Certificates then entitled
to receive payments of principal will
receive a prepayment on the Payment Date
in ________ 199_.
Optional Termination: The Owners of Class R Certificates and, in
limited circumstances, the Certificate
Insurer will have the right to purchase
all the Home Equity Loans on any Monthly
Remittance Date when the aggregate Loan
Balances of the Home Equity Loans has
declined to less than __% of the sum of
(x) the aggregate Loan Balances of all
Initial Home Equity Loans as of the
Cut-Off Date plus (y) the original
Pre-Funded Amount (the "Maximum Collateral
Amount"). See "The Pooling and Servicing
Agreement--Optional Termination" herein.
Book-Entry Registration
of the Class A Certificates The Class A Certificates will initially be
Certificates: issued in book-entry form.
Persons acquiring beneficial ownership
interests in such Class A Certificates
("Beneficial Owners") may elect to hold
their interests through The Depository
Trust Seller ("DTC"), in the United
States, or Centrale de Livraison de
Valeurs Mobilieres, S.A. ("CEDEL") or the
Euroclear System ("Euroclear"), in Europe.
Transfers within DTC, CEDEL or Euroclear,
as the case may be, will be in accordance
with the usual rules and operating
procedures of the relevant system. So long
as the Class A Certificates are Book-Entry
Certificates (as defined herein), such
Certificates will be evidenced by one or
more Certificates registered in the name
of Cede & Co. ("Cede"), as the nominee of
DTC or one of the European Depositaries.
Cross-market transfers between persons
holding directly or indirectly through
DTC, on the one hand, and counterparties
holding directly or indirectly through
CEDEL or Euroclear, on the other, will be
effected in DTC through Citibank N.A.
("Citibank") or Morgan Guaranty Trust
Seller of New York ("Morgan", and together
with Citibank, the "European
Depositaries"), the relevant depositaries
of CEDEL and Euroclear, respectively, and
each a participating member of DTC. The
Class A Certificates will initially be
registered in the name of Cede. The
interests of the Owners of such
Certificates will be represented by
book-entries on the records of DTC and
participating members thereof. No
Beneficial Owner will be entitled to
receive a definitive certificate
representing such person's interest,
except in the event that Definitive
Certificates (as defined herein) are
issued under the limited circumstances
described herein. All references in this
Prospectus Supplement to any Class A
Certificates reflect the rights of
Beneficial Owners only as such rights may
be exercised through DTC and its
participating organizations for so long as
such Class A Certificates are held by DTC.
See "Description of the Class A
Certificates -- Book- Entry Registration
of the Class A Certificates" herein, and
Annex I hereto, and "Description of the
Certificates--Book-Entry Registration" in
the Prospectus.
Ratings: It is a condition of issuance of the Class
A Certificates that the Class A
Certificates receive ratings of "AAA" by
Standard & Poor's Ratings Group, a
division of McGraw Hill ("S&P") and "Aaa"
by Moody's Investors Service ("Moody's").
S&P and Moody's are referred to herein
collectively as 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 entity. See
"Prepayment and Yield Considerations" and
"Ratings" herein.
Risk Factors: CREDIT CONSIDERATIONS. For information
with regard to the Home Equity Loans and
their related risks, see "The Home Equity
Loan Pool" herein.
PREPAYMENT CONSIDERATIONS. For information
regarding the consequences of prepayments
of the Home Equity Loans and of the
failure of the Depositor to purchase
Subsequent Home Equity Loans during the
Funding Period in an amount equal to the
Original Pre-Funded Amount, see
"Prepayment and Yield Considerations" and
"Risk Factors"--"Sensitivity to
Prepayments" and "--The Subsequent Home
Equity Loans and the Pre-Funding Account"
herein.
OTHER CONSIDERATIONS. For a discussion of
other risk factors that should be
considered by prospective investors in the
Class A Certificates, see "Risk Factors"
herein and in the Prospectus.
Federal Tax Aspects: An election will be made to treat the
Trust Estate (exclusive of the Pre-Funding
Account and the Capitalized Interest
Account) created by the Pooling and
Servicing Agreement as a "real estate
mortgage investment conduit" ("REMIC").
The Certificates (other than the Class R
Certificates) will constitute "regular
interests" in the REMIC. The Class R
Certificates will be designated as the
"residual interest" in the REMIC.
Owners of the Class A Certificates,
including Owners that generally report
income on the cash method of accounting,
will be required to include interest on
the Class A Certificates in income in
accordance with the accrual method of
accounting. The Class A Certificates may
be considered to have been issued with
original issue discount or at a premium.
Any such original issue discount will be
includable in the income of the Owner as
it accrues under a method taking into
account the compounding of interest and
using ___ % of the Prepayment Assumption.
See "Prepayment and Yield Considerations"
and "Certain Federal Income Tax
Consequences" herein. Premium may be
deductible by the Owner either as it
accrues or when principal is received. No
representation is made as to whether the
Home Equity Loans will prepay in
accordance with the _____% of
Prepayment Assumption, or any other rate.
In general, as a result of the
qualification of the Class A Certificates
as regular interests in a REMIC, the Class
A Certificates will be treated as
"regular . . . interest(s) in a REMIC"
under Section 7701(a)(19)(C) of the
Internal Revenue Code of 1986, as amended
(the "Code") and "real
estate assets" under Section
856(c) of the Code in the same proportion
that the assets in the REMIC consist of
qualifying assets under such sections. In
addition, interest on the Class A
Certificates will be treated as "interest
on obligations secured by mortgages on
real property" under Section 856(c) of the
Code to the extent that such Certificates
are treated as "real estate assets" under
Section 856(c) of the Code.
ERISA Considerations: As described under "ERISA Considerations"
herein, the Class A Certificates may be
purchased by employee benefit plans that
are subject to the Employee Retirement
Income Security Act of 1974, as amended.
See "ERISA Considerations" herein and in
the Prospectus. Legal Investment
Considerations: [The Class [A/A-6]
Certificates will constitute "mortgage
related securities" for purposes of the
Secondary Mortgage Market Enhancement Act
of 1984 ("SMMEA") for so long as they are
rated in one of the two highest rating
categories by one or more nationally
recognized statistical rating
organizations. As such, such Classes of
Certificates will be legal investments for
certain entities to the extent provided in
SMMEA, subject to state laws overriding
SMMEA. In addition, institutions whose
investment activities are subject to
review by federal or state regulatory
authorities may be or may become subject
to restrictions, which may be
retroactively imposed by such regulatory
authorities, on the investment by such
institutions in certain forms of mortgage
related securities. Furthermore, certain
states have enacted legislation overriding
the legal investment provisions of SMMEA.
In addition, institutions whose activities
are subject to review by federal or state
regulatory authorities may be or may
become subject to restrictions, which may
be retroactively imposed by such
regulatory authorities, on
the investment by such institutions in
certain forms of mortgage related
securities.]
[Although the Fixed Rate Certificates are
expected to be rated "AAA" by S&P and
"Aaa" by Moody's, such Certificates will
not constitute "mortgage related
securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984
("SMMEA") because the Home Equity Loans in
the Fixed Rate Group include second liens.
Accordingly, many institutions with legal
authority to invest in comparably rated
securities based on first mortgage loans
may not be legally authorized to invest in
the Class A Certificates.]
<PAGE>
RISK FACTORS
Prospective investors in the Class A Certificates should consider the
following risk factors (as well as the risk factors set forth under "Risk
Factors" in the Prospectus) in connection with the purchase of the Class A
Certificates.
SENSITIVITY TO PREPAYMENTS. A [majority] of the Home Equity Loans may be
prepaid in whole or in part at any time without penalty. In addition, a
substantial portion of the Home Equity Loans contain due-on-sale provisions
which, to the extent enforced by the Servicer, will result in prepayment of such
Home Equity Loans. See "Prepayment and Yield Considerations" herein and "Certain
Legal Aspects of Mortgage Assets--Enforceability of Certain Provisions" in the
Prospectus. The rate of prepayments on fixed-rate mortgage loans, such as the
Home Equity Loans, is sensitive to prevailing interest rates. Generally, if
prevailing interest rates fall significantly below the interest rates on the
Home Equity Loans, the Home Equity Loans are likely to be subject to higher
prepayment rates than if prevailing rates remain at or above the interest rates
on the Home Equity Loans. Conversely, if prevailing interest rates rise
significantly above the interest rates on the Home Equity Loans, the rate of
prepayments is likely to decrease. The average life of the Class A Certificates,
and, if purchased at other than par, the yields realized by Owners of the Class
A Certificates will be sensitive to levels of payment (including prepayments
relating to the Home Equity Loans (the "Prepayments")) on the Home Equity Loans.
In general, the yield on a Class A Certificate that is purchased at a premium
from the outstanding principal amount thereof will be adversely affected by a
higher than anticipated level of Prepayments of the Home Equity Loans and
enhanced by a lower than anticipated level. Conversely, the yield on a Class A
Certificate that is purchased at a discount from the outstanding principal
amount thereof will be enhanced by a higher than anticipated level of
Prepayments and adversely affected by a lower than anticipated level. See
"Prepayment and Yield Considerations" herein.
[NATURE OF COLLATERAL. Because ____ of the Initial Home Equity Loans, all
of which are in the Fixed Rate Group, are secured by second liens subordinate to
the rights of the mortgagee or beneficiary under the related first mortgage or
deed of trust, the proceeds from any liquidation, insurance or condemnation
proceedings with respect to such Home Equity Loans will be available to satisfy
the outstanding balance of a Home Equity Loan only to the extent that the claims
of such first mortgagee or beneficiary have been satisfied in full, including
any related foreclosure costs. In addition, a second mortgagee may not foreclose
on the property securing a second mortgage unless it forecloses subject to the
first mortgage, in which case it must either pay the entire amount due on the
first mortgage to the first mortgagee at or prior to the foreclosure sale or
undertake the obligation to make payments on the first mortgage. In servicing
second mortgages in its portfolio, it is generally the Servicer's practice to
satisfy the first mortgage at or prior to the foreclosure sale. The Servicer may
also advance funds to keep the first mortgage current until such time as the
Servicer satisfies the first mortgage. The Trust will have no source of funds
(and may not be permitted under the REMIC provisions of the Code) to satisfy the
first mortgage or make payments due to the first mortgagee. See "The Pooling and
Servicing Agreement--Servicing and Sub-Servicing" herein.
An overall decline in the residential real estate market, the general
condition of a Property, or other factors, could adversely affect the value of
the Property such that the outstanding balance of the Home Equity Loans,
together with any senior liens on the Property, equal or exceed the value of the
Property. A decline in the value of a Property would affect the interest of the
Trust in the Property before having any effect on the interest of the related
first mortgagee, and could cause the Trust's interest in the Property to be
extinguished. If such a decline occurs, the actual rates of delinquencies,
foreclosures and losses on the Home Equity Loans could be higher than those
currently experienced in the mortgage lending industry in general. In addition,
adverse economic conditions (which may or may not affect real property values)
may affect the timely payment by borrowers of scheduled payments of principal
and interest on the Home Equity Loans and, accordingly, the actual rates of
delinquencies, foreclosures and losses with respect to the Trust.]
RISK OF HOME EQUITY LOAN RATES REDUCING THE CLASS A-6 PASS-THROUGH RATE.
The calculation of the Class A-6 Pass- Through Rate is based upon (i) the value
of an index (LIBOR) which is different from the value of the index applicable to
the Home Equity Loans as described under "The Home Equity Loan Pool -- Initial
Home Equity Loans -- Adjustable Rate Group" (either as a result of the use of a
different rate determination date or rate adjustment date) and (ii) the weighted
average on the Coupon Rates of the Adjustable Rate Group Home Equity Loans,
which are subject to periodic adjustment caps, maximum rate caps and minimum
rate floors. The Home Equity Loans in the Adjustable Rate Group adjust
semi-annually based upon the London interbank offered rate for six-month United
States dollar deposits ("Six-Month LIBOR"), whereas the Pass-Through Rate on the
Class A-6 Certificates adjusts monthly based upon LIBOR as described under
"Description of the Class A Certificates -- Calculation of LIBOR" herein,
subject to the Available Funds Cap. Consequently, the interest which becomes due
on the Home Equity Loans in the Adjustable Rate Group (net of the Servicing Fee,
the Premium Amount and the Trustee Fee related to the Adjustable Rate Group)
during any Remittance Period may not equal the amount of interest that would
accrue at LIBOR plus the margin on the Class A-6 Certificates during the related
Accrual Period. In particular, the Class A-6 Pass-Through Rate adjusts monthly,
while the interest rates of the Home Equity Loans in the Adjustable Rate Group
adjust less frequently with the result that the Available Funds Cap may limit
increases in the Class A-6 Pass-Through Rate for extended periods in a rising
interest rate environment. In addition, LIBOR and Six-Month LIBOR may respond to
different economic and market factors, and there is not necessarily a
correlation between them. Thus, it is possible, for example, that LIBOR may rise
during periods in which Six- Month LIBOR is stable or is falling or that, even
if both LIBOR and Six-Month LIBOR rise during the same period, LIBOR may rise
more rapidly than Six-Month LIBOR. Furthermore, if the Available Funds Cap
determines the Class A-6 Pass-Through Rate for a Payment Date, the value of the
Class A-6 Certificates may be temporarily or permanently reduced.
The Subsequent Home Equity Loans and the Pre-Funding Account. If the
principal amount of eligible Home Equity Loans available during the Funding
Period and sold by the Seller to the Depositor is less than 100% of the Original
Pre-Funded Amount, the Depositor will have insufficient Home Equity Loans to
sell to the Trust for addition to the Fixed Rate Group on the Subsequent
Transfer Dates, thereby resulting in a prepayment of principal to Owners of the
Fixed Rate Certificates as described herein. See "Social, Economic and Other
Factors" below. In addition, any conveyance of Subsequent Home Equity Loans is
subject to the following conditions, among others (i) each such Subsequent Home
Equity Loan must satisfy the representations and warranties specified in the
agreement pursuant to which such Subsequent Home Equity Loans are transferred to
the Trust (each a "Subsequent Transfer Agreement") and in the Pooling and
Servicing Agreement; (ii) the Depositor will not select such Subsequent Home
Equity Loans in a manner that it believes is adverse to the interest of the
Owners of the Fixed Rate Certificates or the Certificate Insurer; (iii) the
Depositor will deliver certain opinions of counsel with respect to the validity
of the conveyance of such Subsequent Home Equity Loans; and (iv) as of each
cut-off date (each, a "Subsequent Cut-Off Date") applicable thereto, the Home
Equity Loans, including the Subsequent Home Equity Loans to be conveyed by the
Depositor as of such Subsequent Cut-Off Date, will satisfy the criteria set
forth in the Pooling and Servicing Agreement, as described herein under "The
Home Equity Loan Pool--Conveyance of Subsequent Home Equity Loans."
To the extent that amounts on deposit in the Pre-Funding Account have not
been fully applied to the purchase of Subsequent Home Equity Loans by the Trust
for inclusion in the Fixed Rate Group by the end of the Funding Period, the
Owners of the Fixed Rate Certificates then entitled to receive payments of
principal will receive a prepayment of principal in an amount equal to the
Pre-Funded Amount remaining in the Pre-Funding Account on the first Payment Date
following the end of the Funding Period (in no event later than the ________
199_ Payment Date). Although no assurances can be given, the Depositor intends
that the principal amount of Subsequent Home Equity Loans sold to the Trust will
require the application of substantially all amounts on deposit in the
Pre-Funding Account and that there will be no material principal prepayment to
the Owners of the Fixed Rate Certificates from the Pre-Funded Amount.
Each Subsequent Home Equity Loan must satisfy the eligibility criteria
referred to above at the time of its addition. However, Subsequent Home Equity
Loans may have been originated or purchased by the Depositor using credit
criteria different from those which were applied to the Initial Home Equity
Loans and may be of a different credit quality. Therefore, following the
transfer of Subsequent Home Equity Loans to the Fixed Rate Group, the aggregate
characteristics of the Home Equity Loans then held in the Fixed Rate Group may
vary from those of the Initial Home Equity Loans in the Fixed Rate Group. See
"The Home Equity Loan Pool--Conveyance of Subsequent Home Equity Loans."
SOCIAL, ECONOMIC AND OTHER FACTORS. The ability of the Trust to invest in
Subsequent Home Equity Loans is largely dependent upon the ability of the Seller
to originate or purchase additional mortgage loans. The ability of the Seller to
originate or purchase additional mortgage loans may be affected as a result of a
variety of social and economic factors. Economic factors include interest rates,
unemployment levels, the rate of inflation and consumer perception of economic
conditions generally. However, the Depositor is unable to determine and has no
basis to predict whether or to what extent economic or social factors will
affect the Seller's origination ability and the availability of Subsequent Home
Equity Loans.
OTHER LEGAL CONSIDERATIONS. Applicable state laws generally regulate
interest rates and other charges, require certain disclosure, and require
licensing of the Originators. In addition, other state laws, public policy and
general principles of equity relating to the protection of consumers, unfair and
deceptive practices and debt collection practices may apply to the origination,
servicing and collection of the Home Equity Loans. The Seller will be required
to repurchase any Home Equity Loans which, at the time of origination, did not
comply with applicable federal and state laws and regulations. Depending on the
provisions of the applicable law and the specific facts and circumstances
involved, violations of these laws, policies and principles may limit the
ability of the Trust to collect all or part of the principal of or interest on
the Home Equity Loans, may entitle the borrower to a refund of amounts
previously paid and, in addition, could subject the Seller to damages and
administrative enforcement. See "Certain Legal Aspects of Mortgage Assets" in
the Prospectus.
The Home Equity Loans are also subject to federal laws, including:
(i) the Federal Truth in Lending Act and Regulation Z
promulgated thereunder, which require certain disclosures to the
borrowers regarding the terms of the Home Equity Loans;
(ii) the Equal Credit Opportunity Act and Regulation B
promulgated thereunder, which prohibit discrimination on the basis of
age, race, color, sex, religion, marital status, national origin,
receipt of public assistance or the exercise of any right under the
Consumer Credit Protection Act, in the extension of credit; and
(iii) the Fair Credit Reporting Act, which regulates the use
and reporting of information related to the borrower's credit
experience.
Violations of certain provisions of these federal laws may limit the ability of
the Seller to collect all or part of the principal of or interest on the Home
Equity Loans and in addition could subject the Seller to damages and
administrative enforcement. The Seller will be required to repurchase any Home
Equity Loans which, at the time of origination, did not comply with such federal
laws or regulations. See "Certain Legal Aspects of the Mortgage Assets" in the
Prospectus.
The federal Soldiers' and Sailors' Civil Relief Act of 1940 may affect the
ability of the Servicer to collect full amounts of interest on certain Home
Equity Loans and could interfere with the ability of the Servicer to foreclose
on certain properties. See "Certain Legal Aspects of the Mortgage
Assets--Soldiers' and Sailors' Civil Relief Act of 1940" in the Prospectus.
[It is possible that some of the Home Equity 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
non-purchase money mortgage loans with high interest rates or high upfront 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. These provisions can impose specific statutory liabilities upon
creditors who fail to comply with their provisions and may affect the
enforceability of the related loans. In addition, any assignee of the creditor
would generally be subject to all claims and defenses that the consumer could
assert against the creditor, including, without limitation, the right to rescind
the mortgage loan.]
[RISK OF HIGHER DEFAULT RATES FOR HOME EQUITY LOANS WITH BALLOON PAYMENTS.
_____% of the Initial Home Equity Loans in the Fixed Rate Group by aggregate
Loan Balance as of the Cut-Off Date are "balloon loans" that provide for the
payment of the unamortized Loan Balance of such Home Equity Loan in a single
payment at maturity ("Balloon Loans"). None of the Home Equity Loans in the
Adjustable Rate Group are Balloon Loans. Such Balloon Loans provide for equal
monthly payments, consisting of principal and interest, generally based on a
30-year amortization schedule, and a single payment of the remaining balance of
the Balloon Loan 15 years after origination. Amortization of a Balloon Loan
based on a scheduled period that is longer than the term of the loan results in
a remaining principal balance at maturity that is substantially larger than the
regular scheduled payments. The Depositor does not have any information
regarding the default history or prepayment history of payments on Balloon
Loans. Because borrowers of Balloon Loans are required to make substantial
single payments upon maturity, it is possible that the default risk associated
with the Balloon Loans is greater than that associated with fully-amortizing
Home Equity Loans.]
Risk of Seller Insolvency. The Seller believes that the transfer of the
Home Equity Loans to the Depositor and by the Depositor to the Trust constitutes
a sale by the Seller to the Depositor and by the Depositor to the Trust and,
accordingly, that such Home Equity Loans will not be part of the assets of the
Seller in the event of the insolvency of the Seller and will not be available to
the creditors of the Seller. However, in the event of an insolvency of the
Seller, it is possible that a bankruptcy trustee or a creditor of the Seller may
argue that the transaction between the Seller and the Depositor was a pledge of
such Home Equity Loans in connection with a borrowing by the Seller rather than
a true sale. Such an attempt, even if unsuccessful, could result in delays in
distributions on the Certificates.
On the Closing Date, the Trustee and the Seller will have received an
opinion of Stroock & Stroock & Lavan LLP, counsel to the Seller, with respect to
the true sale of the Initial Home Equity Loans from the Seller to the Depositor
and from the Depositor to the Trustee, in form and substance satisfactory to the
Trustee, the Certificate Insurer and the Rating Agencies.
[RISK OF HIGHER DEFAULT RATES ASSOCIATED WITH _______________ REAL
PROPERTY. Because _____% of the Mortgaged Properties relating to Initial Home
Equity Loans are located in the State of _______________, an overall decline in
the related residential real estate markets could adversely affect the values of
the Mortgaged Properties securing such Home Equity Loans causing the Loan
Balances of the related Home Equity Loans to equal or exceed the value of such
Mortgaged Properties.
The standard hazard insurance policy required to be maintained under the
terms of each Home Equity Loan does not insure against physical damage arising
from earth movement (including earthquakes, landslides and mudflows). See
"Servicing of Home Equity Loans and Contracts--Standard Hazard Insurance" in the
Prospectus.]
RISK ASSOCIATED WITH THE CERTIFICATE INSURER. If the protection afforded by
overcollateralization is insufficient and if, upon the occurrence of a
Subordination Deficit, the Certificate Insurer is unable to meet its obligations
under the Certificate Insurance Policies, then the Owners of the Class A
Certificates could experience a loss on their investment.
RISK OF HIGHER DELINQUENCIES ASSOCIATED WITH UNDERWRITING STANDARDS. The
Guidelines (as described below under "The Portfolio of Home Equity
Loans--Underwriting Standards") are intended to assess the credit quality of a
borrower and the value of the mortgaged property and to evaluate the adequacy of
such property as collateral for the mortgage loan. The Originators provide loans
primarily to borrowers who do not qualify for loans conforming to FNMA and FHLMC
guidelines but who also have substantial equity in their property.
As a result of the Guidelines, the Home Equity Loans are likely to
experience rates of delinquency, foreclosure and bankruptcy that are higher, and
that may be substantially higher, than those experienced by mortgage loans
underwritten to FNMA and FHLMC conforming guidelines. Furthermore, changes in
the values of Mortgaged Properties may have a greater effect on the delinquency,
foreclosure, bankruptcy and loss experience of the Home Equity Loans than on
mortgage loans originated in a more traditional manner. No assurance can be
given that the values of the Mortgaged Properties have remained or will remain
at the levels in effect on the dates of origination of the related Home Equity
Loans.
In addition, [none of the Originators nor] the Seller has representative
historical delinquency, bankruptcy, foreclosure, default or loss experience that
may be referred to for purposes of estimating the future delinquency and loss
experience of the Home Equity Loans.
The Subsequent Home Equity Loans and the Pre-Funding Account. If the
principal amount of eligible Home Equity Loans available during the Funding
Period and sold by the Seller to the Depositor is less than 100% of the Original
Pre-Funded Amount, the Depositor will have insufficient Home Equity Loans to
sell to the Trust on the Subsequent Transfer Dates, thereby resulting in a
prepayment of principal to Owners of the Class A-1 Certificates as described
herein and a return to the Owners of the Class A-1 Certificates of a
proportionate amount of their purchase price related to the Pre-Funded Amount.
See "Social, Economic and Other Factors" below and "Prepayment and Yield
Considerations--Mandatory Prepayments" herein. In addition, any conveyance of
Subsequent Home Equity Loans is subject to the following conditions, among
others (i) each such Subsequent Home Equity Loan must satisfy the
representations and warranties specified in the agreement pursuant to which such
Subsequent Home Equity Loans are transferred to the Trust (each a "Subsequent
Transfer Agreement") and in the Agreement; (ii) the Depositor will not select
such Subsequent Home Equity Loans in a manner that it believes is adverse to the
interest of the Owners of the Class A Certificates or the Certificate Insurer;
(iii) the Depositor will deliver certain opinions of counsel with respect to the
validity of the conveyance of such Subsequent Home Equity Loans; and (iv) as of
each cut-off date (each, a "Subsequent Cut-Off Date") applicable thereto, the
Home Equity Loans, including the Subsequent Home Equity Loans to be conveyed by
the Depositor as of such Subsequent CutOff Date, will satisfy the criteria set
forth in the Agreement, as described herein under "The Portfolio of Home Equity
Loans--Conveyance of Subsequent Home Equity Loans."
To the extent that amounts on deposit in the Pre-Funding Account have not
been fully applied to the purchase of Subsequent Home Equity Loans by the Trust
by the end of the Funding Period, the Owners of the Class A-1 Certificates will
receive a prepayment of principal in an amount equal to the Pre-Funded Amount
remaining in the Pre-Funding Account no later than the first Distribution Date
following the end of the Funding Period. Although no assurances can be given,
the Depositor intends that the principal amount of Subsequent Home Equity Loans
sold to the Trust will require the application of substantially all amounts on
deposit in the Pre-Funding Account and that there will be no material principal
prepayment to the Owners of the Class A-1 Certificates from the Pre-Funded
Amount.
Each Subsequent Home Equity Loan must satisfy the eligibility criteria
referred to above at the time of its addition. However, Subsequent Home Equity
Loans may have been purchased by the Depositor using credit criteria different
from those which were applied to the Initial Home Equity Loans and may be of a
different credit quality. Therefore, following the transfer of Subsequent Home
Equity Loans to the Home Equity Loan Pool, the aggregate characteristics of the
Home Equity Loans then held in the Home Equity Loan Pool may vary from those of
the Initial Home Equity Loans. See "The Portfolio of Home Equity
Loans--Conveyance of Subsequent Home Equity Loans."
THE PORTFOLIO OF HOME EQUITY LOANS
GENERAL
The Home Equity Loan Pool primarily includes newly originated loans which
were purchased by the Depositor from the Seller, which acquired such loans from
the Originators.
[None of the Originators], the Seller [or the Servicer] have representative
historical delinquency, bankruptcy, foreclosure or default experience that may
be referred to for purposes of estimating the future delinquency and loss
experience of the Home Equity Loans.
The Originator of a Home Equity Loan has made certain representations and
warranties with respect to such Home Equity Loan, as specified below, and, upon
a breach of such representations and warranties occurring after sale of the
related Home Equity Loan to the Trust, may be required to repurchase such Home
Equity Loan from the Trust.
UNDERWRITING STANDARDS
[To be provided]
THE SERVICER
[Description of Servicer]
The following tables set forth, as of December 31, 1993 and 1994 and
_______________ 1995 certain information relating to the delinquency experience
(including imminent foreclosures, foreclosures in progress and bankruptcies) of
one- to four-family residential mortgage loans included in the Servicer's
servicing portfolio (which portfolio does not include mortgage loans that are
subserviced by others) at the end of the indicated periods. The indicated
periods of delinquency are based on the number of days past due on a contractual
basis. No mortgage loan is considered delinquent for these purposes until it is
one month past due on a contractual basis.
DELINQUENCIES AND FORECLOSURES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AT DECEMBER 31, AT DECEMBER 31, AT DECEMBER 31,
1993 1994 1995
-----------------------------------------------------------------------------------------------------------
PERCENT PERCENT PERCENT PERCENT PERCENT PERCENT
BY BY BY BY BY BY BY BY BY BY BY BY
NO. DOLLAR NO. DOLLAR NO. DOLLAR NO. DOLLAR NO. DOLLAR NO. DOLLAR
OF AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT
LOANS LOANS LOANS LOANS LOANS LOANS
-----------------------------------------------------------------------------------------------------------
Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Portfolio...............
Period of
Delinquency.............
0 - 30 days....
31 - 59 days...
60 - 89 days...
90 days or more
Total
Delinquent
Loans..........
Loans in
Foreclosure*...
</TABLE>
<TABLE>
<CAPTION>
REAL ESTATE OWNED
(DOLLARS IN THOUSANDS)
At December 31, At December 31, At December 31,
1993 1994 1995 (1)
-----------------------------------------------------------------------------------------
By By By
By No. Dollar By No. Dollar By No. Dollar
of Amount of Amount of Amount
Loans of Loans of Loans of
Loans Loans Loans
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Portfolio......................
Foreclosed Loans(1)..................
Foreclosed Ratio(2)..................
- -----------------
(1) For the purposes of these tables, Foreclosed Loans means the principal
balance of mortgage loans secured by mortgaged properties the title to
which has been acquired by the Servicer, by investors or by an insurer
following foreclosure or delivery of a deed in lieu of foreclosure.
(2) The Foreclosure Ratio is equal to the aggregate principal balance or
number of Foreclosed Loans divided by the aggregate principal balance,
or number, as applicable, of mortgage loans in the Total Portfolio at
the end of the indicated period.
</TABLE>
LOAN LOSS EXPERIENCE ON THE
SERVICER'S SERVICING PORTFOLIO
OF HOME EQUITY LOANS
(DOLLARS IN THOUSANDS)
YEAR ENDED
DECEMBER 31, Year Ending December 31,
1995 1995 1993
Total Portfolio(1)
Gross Losses(2)
Recoveries(3)
Net Losses (4)
Net Losses as a Percentage of
Total Portfolio(5)
- ------------------------
(1) "Total Portfolio" on the date stated above is the principal balances of
the mortgage loans outstanding on the last day of the period.
(2) "Gross Losses" are actual losses incurred on liquidated properties for
each respective period. Losses include all principal, foreclosure costs
and accrued interest to the date of liquidation.
(3) "Recoveries" are recoveries from liquidation proceeds and deficiency
judgments.
(4) "Net Losses" means "Gross Losses" minus "Recoveries."
(5) For the six months ending June 30, 1995, "Net Losses as a Percentage of
Total Portfolio" was annualized by multiplying "Net Losses" by 2.0 before
calculating the percentage of "Net Losses as a Percentage of Total
Portfolio."
There can be no assurance that the delinquency experience of the Home
Equity Loans comprising the Home Equity Loan Pool will correspond to the
delinquency experience of the Servicer's mortgage portfolio set forth in the
foregoing tables. See "The Portfolio of Home Equity Loans -- General" herein.
The statistics shown above represent the delinquency experience for the
Servicer's residential mortgage servicing portfolios only for the periods
presented, whereas the delinquency experience on the Home Equity Loans
comprising the Home Equity Loan Pool will depend on the results obtained over
the life of the Home Equity Loan Pool. The Servicer's residential mortgage
servicing portfolios include mortgage loans with a variety of payment, credit
and other characteristics (including geographic location) which may not be
representative of the payment, credit and other characteristics of the Home
Equity Loans comprising the Home Equity Loan Pool. It should be noted that if
the residential real estate market should experience an overall decline in
property values, the actual rates of delinquencies and foreclosures could be
higher than those previously experienced by the Servicer. In addition, adverse
economic conditions may affect the timely payment by Mortgagors of scheduled
payments of principal and interest on the Home Equity Loans and accordingly, the
actual rates of delinquencies and foreclosures with respect to the Home Equity
Loan Pool.
USE OF PROCEEDS
The Depositor will sell the Initial Home Equity Loans to the Trust
concurrently with delivery of the Certificates. Net proceeds from the sale of
the Class A Certificates will be applied by the Depositor to the purchase of the
Initial Home Equity Loans from the Seller, to the deposit of the Pre-Funded
Amount in the Pre-Funding Account and to the deposit of certain amounts to the
Capitalized Interest Account. Such net proceeds less the Pre- Funded Amount and
the amount deposited in the Capitalized Interest Account will (together with the
Subordinate Certificates retained by the Depositor or its affiliates) represent
the purchase price to be paid by the Trust to the Depositor for the Initial Home
Equity Loans.
THE DEPOSITOR
The Depositor was incorporated in the State of Delaware on January 31, 1991
and is a wholly-owned subsidiary of ContiFinancial Corporation. The Depositor
maintains its principal offices at 277 Park Avenue, New York, NY 10172. Neither
the Depositor, the Seller nor the Servicer nor any of their affiliates will
insure or guarantee distributions on the Certificates.
THE HOME EQUITY LOAN POOL
GENERAL
The statistical information presented in this Prospectus Supplement
concerning the pool of Home Equity Loans is based on the pool of Initial Home
Equity Loans as of the Cut-Off Date. Subsequent Home Equity Loans are intended
to be purchased by the Trust for inclusion in the Fixed Rate Group from the
Depositor from time to time on or before __________, 199_ from funds on deposit
in the Pre- Funding Account. The Initial Home Equity Loans and the Subsequent
Home Equity Loans are referred to herein collectively as the "Home Equity
Loans." The Subsequent Home Equity Loans, if available, to be purchased by the
Trust will be sold by the Seller to the Depositor and then by the Depositor to
the Trust.
This subsection describes generally certain characteristics of the Initial
Home Equity Loans. Unless otherwise specified herein, references herein to
percentages of Initial Home Equity Loans refer in each case to the approximate
percentage of the aggregate principal balance of the Initial Home Equity Loans
as of the Cut-Off Date, based on the outstanding principal balances of the
Initial Home Equity Loans or the Home Equity Loans in the applicable Home Equity
Loan Group, in each case as of the Cut-Off Date, and giving effect to all
payments received prior to the Cut-Off Date. The Initial Home Equity Loan Pool
consists of fixed-rate and adjustable-rate Home Equity Loans with remaining
terms to maturity of not more than 360 months (including both fully amortizing
Home Equity Loans and Balloon Loans). The Initial Home Equity Loans have the
characteristics set forth below as of the Cut-Off Date. Percentages expressed
herein based on Loan Balances and number of Initial Home Equity Loans have been
rounded, and in the tables set forth herein the sum of the percentages may not
equal the respective totals due to such rounding.
Each Home Equity Loan in the Trust will be assigned to one of two mortgage
loan groups comprised of Home Equity Loans which bear fixed interest rates only,
in the case of the Fixed Rate Group, and Home Equity Loans which bear adjustable
interest rates only, in the case of the Adjustable Rate Group. The Fixed Rate
Certificates represent undivided ownership interests in all Home Equity Loans
contained in the Fixed Rate Group, and distributions on the Fixed Rate
Certificates will be based primarily on amounts available for distribution in
respect of Home Equity Loans in the Fixed Rate Group. The Adjustable Rate
Certificates represent undivided ownership interests in all Home Equity Loans
contained in the Adjustable Rate Group, and distributions on the Adjustable Rate
Certificates will be based primarily on amounts available for distribution in
respect of Home Equity Loans in the Adjustable Rate Group.
The Loan-to-Value Ratios and Combined Loan-to-Value Ratios shown below were
calculated based upon the appraised values of the Properties at the time of
origination (the "Appraised Values"). In a limited number of circumstances, and
within the Seller's underwriting guidelines, the Seller has reduced the
Appraised Value of Properties where the Properties are unique, have a high value
or where the comparables are not within FNMA guidelines. The purpose for making
these reductions is to value the Properties more conservatively than would
otherwise be the case if the appraisal were accepted as written.
No assurance can be given that values of the Properties have remained or
will remain at their levels on the dates of origination of the related Home
Equity Loans. If the residential real estate market has experienced or should
experience an overall decline in property values such that the outstanding
balance of any Home Equity Loan, together with the outstanding balance of any
first mortgage, become equal to or greater than the value of the Property, the
actual rates of delinquencies, foreclosures and losses could be higher than
those now generally experienced in the mortgage lending industry. Initial Home
Equity Loans -- Fixed Rate Group
As of the Cut-Off Date, the average Loan Balance of the Initial Home Equity
Loans in the Fixed Rate Group was $______; the Coupon Rates of the Initial Home
Equity Loans in the Fixed Rate Group ranged from ____% to ____%; the weighted
average Loan-to- Value Ratio of the Initial Home Equity Loans in the Fixed Rate
Group was ____%; the weighted average Combined Loan-to-Value Ratio of the
Initial Home Equity Loans in the Fixed Rate Group was ____%; the weighted
average Coupon Rate of the Initial Home Equity Loans in the Fixed Rate Group was
____%; the weighted average Retained Yield for the Initial Home Equity Loans in
the Fixed Rate Group was ____%; the weighted average remaining term to maturity
was ____ months; the weighted average original term to maturity was ____ months.
The remaining terms to maturity as of the Cut-Off Date of the Initial Home
Equity Loans in the Fixed Rate Group ranged from ____ months to ____ months. The
minimum and maximum Loan Balances of Initial Home Equity Loans in the Fixed Rate
Group as of the Cut-Off Date were $_____ and $_____, respectively. Initial Home
Equity Loans in the Fixed Rate Group containing "balloon" payments represented
not more than _____%; of the Original Aggregate Loan Balance of Initial Home
Equity Loans in the Fixed Rate Group. No Initial Home Equity Loan in the Fixed
Rate Group will mature later than ________, ____.
<PAGE>
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES -- FIXED RATE GROUP
The geographic distribution of Initial Home Equity Loans in the Fixed Rate
Group by state, as of the Cut-Off Date, was as follows:
NUMBER OF INITIAL AGGREGATE % OF AGGREGATE
STATE HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- ----- ---------------- ------------ ---------------
Alabama
Alaska
Arizona
Arkansas
California
Colorado
Connecticut
Delaware
District of Columbia
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Washington
Wisconsin
Wyoming
ORIGINAL LOAN-TO-VALUE RATIOS -- FIXED RATE GROUP
The original loan-to-value ratios as of the date of origination of the
Initial Mortgage in the Fixed Rate Group Loans (based upon appraisals made at
the time of origination thereof) (the "Loan-to-Value Ratios") as of the Cut-Off
Date were distributed as follows:
RANGE OF NUMBER OF INITIAL AGGREGATE % OF AGGREGATE
ORIGINAL LTV'S HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- -------------- ----------------- ------------ --------------
COMBINED LOAN-TO-VALUE RATIOS -- FIXED RATE GROUP
The original combined loan-to-value ratios as of the dates of origination
of the Initial Home Equity Loans in the Fixed Rate Group (based upon appraisals
made at the time of origination hereunder) (the "Combined Loan-to-Value Ratios")
as of the Cut-Off Date were distributed as follows:
RANGE OF NUMBER OF INITIAL AGGREGATE % OF AGGREGATE
ORIGINAL CLTV'S HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
CUT-OFF DATE COUPON RATES -- FIXED RATE GROUP
The Coupon Rates borne by the Notes relating to the Initial Home Equity
Loans in the Fixed Rate Group were distributed as follows as of the Cut-Off
Date:
RANGE OF NUMBER OF INITIAL AGGREGATE % OF AGGREGATE
COUPON RATES HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- ------------ ----------------- ------------ --------------
CUT-OFF DATE LOAN BALANCES -- FIXED RATE GROUP
The distribution of the outstanding principal amounts of the Initial Home
Equity Loans in the Fixed Rate Group as of the Cut- Off Date was as follows:
RANGE OF NUMBER OF INITIAL AGGREGATE % OF AGGREGATE
LOAN BALANCE HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- ------------ ----------------- ------------ --------------
TYPES OF MORTGAGED PROPERTIES - FIXED RATE GROUP
The Properties securing the Initial Home Equity Loans in the Fixed Rate
Group as of the Cut-Off Date were of the property types as follows:
NUMBER OF INITIAL AGGREGATE % OF AGGREGATE
PROPERTY TYPES HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- -------------- ----------------- ------------ --------------
DISTRIBUTION OF MONTHS SINCE ORIGINATION -- FIXED RATE GROUP
The distribution of the number of months since the date of origination of
the Initial Home Equity Loans in the Fixed Rate Group as of the Cut-Off Date was
as follows:
MONTHS ELAPSED NUMBER OF INITIAL AGGREGATE % OF AGGREGATE
SINCE ORIGINATION HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- ----------------- ----------------- ------------ --------------
DISTRIBUTION OF REMAINING TERM TO MATURITY -- FIXED RATE GROUP
The distribution of the number of months remaining to maturity of the
Initial Home Equity Loans in the Fixed Rate Group as of the Cut-Off Date was as
follows:
MONTHS REMAINING NUMBER OF INITIAL AGGREGATE % OF AGGREGATE
TO MATURITY HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- ---------------- ----------------- ------------ --------------
OCCUPANCY STATUS -- FIXED RATE GROUP
The occupancy status of the Properties securing the Initial Home Equity
Loans in the Fixed Rate Group as of the CutOff Date was as follows:
NUMBER OF INITIAL AGGREGATE % OF AGGREGATE
OCCUPANCY STATUS HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- ---------------- ----------------- ------------ --------------
INITIAL HOME EQUITY LOANS -- ADJUSTABLE RATE GROUP
As of the Cut-Off Date, the average Loan Balance of the Initial Home Equity
Loans in the Adjustable Rate Group was $_________; the Coupon Rates of the
Initial Home Equity Loans in the Adjustable Rate Group ranged from ____% to
_____%; the weighted average Loan-to-Value Ratio of the Initial Home Equity
Loans in the Adjustable Rate Group was _____%; the weighted average Coupon Rate
of the Initial Home Equity Loans in the Adjustable Rate Group was _____%; the
weighted average remaining term to maturity was 353 months; the weighted average
original term to maturity was 355 months. The remaining terms to maturity as of
the Cut-Off Date of the Initial Home Equity Loans in the Adjustable Rate Group
ranged from 119 months to 360 months. The minimum and maximum Loan Balances of
Initial Home Equity Loans in the Adjustable Rate Group as of the CutOff Date
were $______ and $__________, respectively. None of the Initial Home Equity
Loans in the Adjustable Rate Group contained "balloon" payments. No Initial Home
Equity Loan in the Adjustable Rate Group will mature later than ________, ____.
All of the Home Equity Loans in the Adjustable Rate Group have maximum
Coupon Rates. The weighted average maximum Coupon Rate of the Initial Home
Equity Loans in the Adjustable Rate Group was _____%, with maximum Coupon Rates
that range from _____% to _____%. The Initial Home Equity Loans in the
Adjustable Rate Group have a weighted average gross margin as of the Cut- Off
Date of ____%. The gross margin for the Initial Home Equity Loans in the
Adjustable Rate Group ranges from ____% to _____%.
[All] of the Initial Home Equity Loans in the Adjustable Rate Group bear
interest rates that adjust based on Six-Month LIBOR. [Other indices.] All of the
Initial Home Equity Loans in the Adjustable Rate Group have periodic rate
adjustment caps that range from ____% to ____% and a periodic rate adjustment
floor of ____%. _____% of the Initial Home Equity Loans in the Adjustable Rate
Group have a lifetime rate adjustment cap of _% over the initial Coupon Rate of
each respective Home Equity Loan in the Adjustable Rate Group and _____% of the
Initial Home Equity Loans in the Adjustable Rate Group have a lifetime rate
adjustment cap of _% over the initial Coupon Rate of each respective Home Equity
Loan in the Adjustable Rate Group.
<PAGE>
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES -- ADJUSTABLE RATE GROUP
The geographic distribution of Initial Home Equity Loans in the Adjustable
Rate Group by state, as of the Cut-Off Date, was as follows:
NUMBER OF INITIAL AGGREGATE % OF
STATE HOME EQUITY LOANS LOAN BALANCE AGGREGATE
- ----- ----------------- ------------ ---------
Alabama
Alaska
Arizona
Arkansas
California
Colorado
Connecticut
Delaware
District of Columbia
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Washington
Wisconsin
Wyoming
ORIGINAL LOAN-TO-VALUE RATIOS - ADJUSTABLE RATE GROUP
The original Loan-to-Value Ratios of the Initial Mortgage in the Adjustable
Rate Group as of the Cut-Off Date were distributed as follows:
NUMBER OF INITIAL AGGREGATE % OF AGGREGATE
ORIGINAL LTV'S HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- -------------- ----------------- ------------ --------------
CUT-OFF DATE COUPON RATES - ADJUSTABLE RATE GROUP
The Coupon Rates borne by the Notes relating to the Initial Home Equity
Loans in the Adjustable Rate Group were distributed as follows as of the Cut-Off
Date:
RANGE OF NUMBER OF INITIAL AGGREGATE % OF AGGREGATE
COUPON RATES HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- ------------ ----------------- ------------ --------------
CUT-OFF DATE LOAN BALANCES - ADJUSTABLE RATE GROUP
The distribution of the outstanding principal amounts of the Initial Home
Equity Loans in the Adjustable Rate Group as of the Cut-Off Date was as follows:
RANGE OF NUMBER OF INITIAL AGGREGATE % OF AGGREGATE
LOAN BALANCES HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- ------------- ----------------- ------------ --------------
TYPES OF MORTGAGED PROPERTIES -ADJUSTABLE RATE GROUP
The Properties securing the Initial Home Equity Loans in the Adjustable
Rate Group as of the Cut-Off Date were of the property types as follows:
NUMBER OF INITIAL AGGREGATE % OF AGGREGATE
PROPERTY TYPES HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- -------------- ----------------- ------------ --------------
DISTRIBUTION OF MONTHS SINCE ORIGINATION -- FIXED RATE GROUP
The distribution of the number of months since the date of origination of
the Initial Home Equity Loans in the Adjustable Rate Group as of the Cut-Off
Date was as follows:
MONTHS ELAPSED NUMBER OF INITIAL AGGREGATE % OF AGGREGATE
SINCE ORIGINATION HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- ----------------- ----------------- ------------ --------------
DISTRIBUTION OF REMAINING TERM TO MATURITY - ADJUSTABLE RATE GROUP
The distribution of the number of months remaining to maturity of the
Initial Home Equity Loans in the Adjustable Rate Group as of the Cut-Off Date
was as follows:
MONTHS REMAINING NUMBER OF INITIAL AGGREGATE % OF AGGREGATE
TO MATURITY HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- ---------------- ----------------- ------------ --------------
OCCUPANCY STATUS - ADJUSTABLE RATE GROUP
The occupancy status of the Properties securing the Initial Home Equity
Loans in the Adjustable Rate Group as of the CutOff Date was as follows:
NUMBER OF INITIAL AGGREGATE % OF AGGREGATE
OCCUPANCY STATUS HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- ---------------- ----------------- ------------ -------------
DISTRIBUTION OF MARGINS - ADJUSTABLE RATE GROUP
The margins borne by the Notes relating the Initial Home Equity Loans in
the Adjustable Rate Group as of the Cut-Off Date was as follows:
NUMBER OF INITIAL AGGREGATE % OF AGGREGATE
MARGINS HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- ------- ----------------- ------------ -------------
DISTRIBUTION OF MAXIMUM COUPON RATES - ADJUSTABLE RATE GROUP
The maximum Coupon Rates borne by the Notes relating to the Initial Home
Equity Loans in the Adjustable Rate Group as of the Cut-Off Date was as follows:
MAXIMUM NUMBER OF INITIAL AGGREGATE % OF AGGREGATE
COUPON RATES HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- ------------ ----------------- ------------ -------------
DISTRIBUTION OF COUPON RATES CHANGE - ADJUSTABLE RATE GROUP
The number of months until the next Coupon Rate change for each of the
Notes relating to the Initial Home Equity Loans in the Adjustable Rate Group as
of the Cut-Off Date was as follows:
MONTHS OF NEXT NUMBER OF INITIAL AGGREGATE % OF AGGREGATE
COUPON RATE CHANGE HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- ------------------ ----------------- ------------ -------------
CONVEYANCE OF SUBSEQUENT HOME EQUITY LOANS
The Pooling and Servicing Agreement permits the Trust to acquire
approximately $_____________ in aggregate principal balance of Subsequent Home
Equity Loans for addition to the Fixed Rate Group. Accordingly, the statistical
characteristics of the Home Equity Loan Pool and the Fixed Rate Group will vary
as of any Subsequent Cut-Off Date upon the acquisition of Subsequent Home Equity
Loans.
The obligation of the Trust to purchase Subsequent Home Equity Loans for
addition to the Fixed Rate Group on a Subsequent Transfer Date is subject to the
following requirements: (i) such Subsequent Home Equity Loan may not be 30 or
more days contractually delinquent as of the related Subsequent Cut-Off Date;
(ii) the remaining term to maturity of such Subsequent Home Equity Loan may not
exceed 30 years; (iii) no Subsequent Home Equity Loan will have a Coupon Rate
less than ____%; and (iv) following the purchase of such Subsequent Home Equity
Loans by the Trust, the Home Equity Loans (including the Subsequent Home Equity
Loans) (a) will have a weighted average Coupon Rate of at least _____%; (b) will
have a weighted average Combined Loan-to- Value Ratio of not more than __%; (c)
will not have Balloon Loans representing more than __% by aggregate principal
balance of the Home Equity Loans; (d) will not have a weighted average remaining
term to stated maturity of more than 210 months; and (e) will have no Home
Equity Loan with a principal balance in excess of $_______.
INTEREST PAYMENTS ON THE HOME EQUITY LOANS
There are a number of Home Equity Loans on which interest is charged to the
obligor (the "Mortgagor") at the Coupon Rate on the outstanding principal
balance calculated based on the number of days elapsed between receipt of the
Mortgagor's last payment through receipt of the Mortgagor's most current payment
(such Home Equity Loans, "Date-of-Payment Loans"). Such interest is deducted
from the Mortgagor's payment amount and the remainder, if any, of the payment is
applied as a reduction to the outstanding principal balance of such Note.
Although the Mortgagor is required to remit equal monthly payments on a
specified monthly payment date that would reduce the outstanding principal
balance of such Note to zero at such Note's maturity date, payments that are
made by the Mortgagor after the due date therefor would cause the outstanding
principal balance of such Note not to be reduced to zero on its maturity date.
In such a case, the Mortgagor would be required to make an additional principal
payment at the maturity date for such Note. If it were assumed that all the
Mortgagors on the Date-of-Payment Loans were to pay on the latest date possible
without the Date-of-Payment Loans being in default, the amount of such
additional principal payment would be a de minimis amount of the Maximum
Collateral Amount. On the other hand, if a Mortgagor makes a payment (other than
a Prepayment) before the due date therefor, the reduction in the outstanding
principal balance of such Note would occur over a shorter period of time than
would have occurred had it been based on the schedule of amortization in effect
on the Cut-Off Date. Accordingly, the timing of principal payments to the Owners
of the Class A Certificates may be affected by the fact that actual Mortgagor
payments may not be made on the due date therefor.
The Home Equity Loans which are not Date-of-Payment Loans (the "Actuarial
Loans") provide that interest is charged to the Mortgagors thereunder, and
payments are due from such Mortgagors, as of a scheduled day of each month which
is fixed at the time of origination. Scheduled monthly payments made by the
Mortgagors on the Actuarial Loans either earlier or later than the scheduled due
dates thereof will not affect the amortization schedule or the relative
application of such payments to principal and interest.
PREPAYMENT AND YIELD CONSIDERATIONS
GENERAL
The weighted average life of, and, if purchased at other than par
(disregarding, for purposes of this discussion, the effect on an investor's
yield resulting from the timing of the settlement date and those considerations
discussed below under "Payment Lag Feature of Certificates"), the yield to
maturity on the Class A Certificates will relate to the rate of payment of
principal of the Home Equity Loans in the related Home Equity Loan Group,
including for this purpose Prepayments, liquidations due to defaults, casualties
and condemnations, and repurchases by the Seller of Home Equity Loans. The
actual rate of principal prepayments on pools of mortgage loans is influenced by
a variety of economic, tax, geographic, demographic, social, legal and other
factors and has fluctuated considerably in recent years. In addition, the rate
of principal prepayments may differ among pools of mortgage loans at any time
because of specific factors relating to the mortgage loans in the particular
pool, including, among other things, the age of the mortgage loans, the
geographic locations of the properties securing the loans and the extent of the
mortgagors' equity in such properties, and changes in the mortgagors' housing
needs, job transfers and unemployment.
As with fixed rate obligations generally, the rate of prepayment on a pool
of mortgage loans with fixed rates such as the Home Equity Loans in the Fixed
Rate Group is affected by prevailing market rates for mortgage loans of a
comparable term and risk level. When the market interest rate is below the
mortgage coupon, mortgagors may have an increased incentive to refinance their
mortgage loans. Depending on prevailing market rates, the future outlook for
market rates and economic conditions generally, some mortgagors may sell or
refinance mortgaged properties in order to realize their equity in the mortgaged
properties, to meet cash flow needs or to make other investments.
All of the Home Equity Loans in the Adjustable Rate Group are
adjustable-rate mortgage loans. As is the case with conventional fixed-rate
mortgage loans, adjustable-rate mortgage loans may be subject to a greater rate
of principal prepayments in a declining interest rate environment. For example,
if prevailing interest rates fall significantly, adjustable-rate mortgage loans
could be subject to higher prepayment rates than if prevailing interest rates
remain constant because the availability of fixed-rate mortgage loans at
competitive interest rates may encourage mortgagors to refinance their
adjustable-rate mortgage loan to "lock in" a lower fixed interest rate. However,
no assurance can be given as to the level of prepayments that the Home Equity
Loans will experience.
In addition to the foregoing factors affecting the weighted average life of
each Class of the Class A Certificates, the subordination provisions of the
Trust result in a limited acceleration of the Class A Certificates relative to
the amortization of the Home Equity Loans in early months of the transaction.
The accelerated amortization is achieved by the application of certain excess
interest and principal to the payment of the Class A Certificate Principal
Balance. This acceleration feature creates overcollateralization which results
from the excess of the aggregate Loan Balances of the Home Equity Loans over the
Class A Certificate Principal Balance. Once the required level of
overcollateralization is reached, the acceleration feature will cease, unless
necessary to maintain the required level of overcollateralization.
MANDATORY PREPAYMENT
In the event that at the end of the Funding Period, not all of the Original
Pre-Funded Amount has been used to acquire Subsequent Home Equity Loans for
inclusion in the Fixed Rate Group, then the Fixed Rate Certificates then
entitled to receive payments of principal will receive a partial prepayment on
the Payment Date in ______ 199_.
Although no assurances can be given, the Depositor intends that the
principal amount of Subsequent Home Equity Loans sold to the Trust for inclusion
in the Fixed Rate Group will require the application of substantially all the
amount on deposit in the Pre-Funding Account and that there should be no
material principal prepaid to the Owners of the Fixed Rate Certificates.
PROJECTED PREPAYMENT AND YIELD FOR CLASS A CERTIFICATES
As indicated above, if purchased at other than par, the yield to maturity
on a Class A Certificate will be affected by the rate of the payment of
principal of the Home Equity Loans. If the actual rate of payments on the Home
Equity Loans is slower than the rate anticipated by an investor who purchases a
Class A Certificate at a discount, the actual yield to such investor will be
lower than such investor's anticipated yield. If the actual rate of payments on
the Home Equity Loans is faster than the rate anticipated by an investor who
purchases a Class A Certificate at a premium, the actual yield to such investor
will be lower than such investor's anticipated yield.
The "Final Scheduled Payment Date" for each Class of the Class A
Certificates is as follows: Class A-1, _______, ____, Class A-2, _______, ____,
Class A-3, ____________, ____, Class A-4, ____________, ____, Class A-5,
___________, ____ and Class A-6, ____________, ____. These dates are the dates
on which the "Initial Certificate Principal Balance" set forth in the summary
hereof for the related Class as of the Closing Date less all amounts previously
distributed to the Owners on account of principal (such amount as to any Class
of the Class A Certificates and as of any time, the related "Class A Certificate
Principal Balance" and as to the Class A Certificates collectively, the
"Certificate Principal Balance" or the "Class A Certificate Principal Balance")
would be reduced to zero assuming that no Prepayments are received on the Home
Equity Loans, that scheduled monthly payments of principal of and interest on
each of the Home Equity Loans are timely received and no Net Monthly Excess
Cashflow will be used to make accelerated payments of principal (i.e.,
Subordination Increase Amounts) to the Owners of the Class A Certificates. The
Final Scheduled Payment Date for the Class A-5 Certificates is the thirteenth
Payment Date following the calendar month in which the Loan Balances of all Home
Equity Loans (including Subsequent Home Equity Loans) in the Fixed Rate Group
have been reduced to zero assuming that the Home Equity Loans in such Group pay
in accordance with their terms. The Final Scheduled Payment Date for the Class
A-6 Certificates is the thirteenth Payment Date following the calendar month in
which the Loan Balances of all Home Equity Loans in the Adjustable Rate Group
have been reduced to zero assuming that the Home Equity Loans in such Group pay
in accordance with their terms. The weighted average life of the Class A
Certificates is likely to be shorter than would be the case if payments actually
made on the Home Equity Loans conformed to the foregoing assumptions, and the
final Payment Date with respect to the Class A Certificates could occur
significantly earlier than the related Final Scheduled Payment Date because (i)
Prepayments are likely to occur and (ii) the owners of the Class R Certificates
and, in limited circumstances, the Certificate Insurer may cause a termination
of the Trust when the aggregate outstanding Loan Balance of the Home Equity
Loans is less than __% of the Maximum Collateral Amount thereof.
"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 life of any
Class of the Class A Certificates will be influenced by the rate at which
principal of the Home Equity Loans in the related Home Equity Loan Group is
paid, which may be in the form of scheduled amortization or prepayments (for
this purpose, the term "prepayment" includes Prepayments and liquidations due to
default).
It is very unlikely that the Home Equity Loans will prepay at rates
consistent with the Prepayment Assumption until maturity or that all of the Home
Equity Loans in the related Home Equity Loan Group will prepay at the same rate.
There will be discrepancies between the actual characteristics of the Home
Equity Loans included in the Trust and the assumed characteristics used in
preparing the following tables. Any discrepancy may have an effect upon the
percentages of Initial Certificate Principal Balance outstanding set forth in
the table and weighted average lives of the Class A Certificates.
The model used in this Prospectus Supplement is the prepayment assumption
(the "Prepayment Assumption") which represents an assumed rate of prepayment
each month relative to the then outstanding principal balance of a pool of
mortgage loans for the life of such mortgage loans. With respect to the Fixed
Rate Certificates, a ___% Prepayment Assumption assumes conditional prepayment
rates of _% per annum of the then outstanding principal balance of the Home
Equity Loans in the Fixed Rate Group in the first month of the life of the
mortgage loans and an additional _____% (precisely _____%) per annum in each
month thereafter until the twelfth month. Beginning in the thirteenth month and
in each month thereafter during the life of the mortgage loans, ___% Prepayment
Assumption assumes a conditional prepayment rate of __% per annum each month.
With respect to the Adjustable Rate Certificates, a ___% Prepayment Assumption
assumes a conditional prepayment rate of __% per annum of the then outstanding
principal balance of the Home Equity Loans in the Adjustable Rate Group. As used
in the table below, _% Prepayment Assumption assumes prepayment rates equal to
_% of the Prepayment Assumption i.e., no prepayments. Correspondingly, ___%
Prepayment Assumption assumes prepayment rates equal to ___% of the Prepayment
Assumption, and so forth. The Prepayment Assumption does not purport to be a
historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of mortgage loans, including the Home
Equity Loans. The Depositor believes that no existing statistics of which it is
aware provide a reliable basis for holders of Class A Certificates to predict
the amount or the timing of receipt of prepayments on the Home Equity Loans.
Since the tables were prepared on the basis of the assumptions in the
following paragraph, there are discrepancies between the characteristics of the
actual Home Equity Loans and the characteristics of the Home Equity Loans
assumed in preparing the tables. Any such discrepancy may have an effect upon
the percentages of the Certificate Principal Balances outstanding and weighted
average lives of the Class A Certificates set forth in the tables. In addition,
since the actual Home Equity Loans in the Trust have characteristics which
differ from those assumed in preparing the tables set forth below, the
distributions of principal on the Class A Certificates may be made earlier or
later than as indicated in the tables.
For the purpose of the tables below, it is assumed that: (i) the Home
Equity Loans of each Home Equity Loan Group which consist of pools of loans with
level-pay and balloon amortization methodologies, Cut-Off Date Loan Balances,
mortgage rates (net of Retained Yield, if any), net mortgage rates, original and
remaining terms to maturity, and original amortization terms as applicable, are
as set forth below, (ii) the Closing Date for the Certificates occurs on
_________, 199_, (iii) distributions on the Certificates are made on the 15th
day of each month regardless of the day on which the Payment Date actually
occurs, commencing in _________ 199_ in accordance with the priorities described
herein, (iv) the difference between the Gross Coupon Rate (net of Retained
Yield, if any) and the Net Coupon Rate is equal to the Servicing Fee and the Net
Coupon Rate is further reduced by the Premium Amount and the Trustee Fee, (v)
the Home Equity Loans' prepayment rates are a multiple of the applicable
Prepayment Assumption, (vi) prepayments include 30 day's interest thereon, (vii)
no optional termination or mandatory termination is exercised, (viii) the
"Specified Subordinated Amount" (as defined under "Credit Enhancement --
Overcollateralization Provisions") for each Home Equity Loan Group is set
initially as specified in the Pooling and Servicing Agreement and thereafter
decreases in accordance with the provisions of the Pooling and Servicing
Agreement, (ix) all of the Pre-Funded Amount is used to acquire Subsequent Home
Equity Loans for inclusion in the Fixed Rate Group on ___________, 199_ and
prior to such date, the Pre-Funded Amount accrued interest at a rate of ____%
per annum for one month, (x) the Coupon Rate for each Home Equity Loan in the
Adjustable Rate Group is adjusted on its next rate adjustment date (and on
subsequent rate adjustment dates, if necessary) to equal the sum of (a) an
assumed level of the applicable index _____% and (b) the respective gross margin
(such sum being subject to the applicable periodic adjustment cap and maximum
interest rate) and (xi) the Class A-6 Pass- Through Rate remains constant at
_____%.
<PAGE>
<TABLE>
<CAPTION>
FIXED RATE GROUP
----------------
INITIAL HOME EQUITY LOANS
ORIGINAL REMAINING
TERM TO TERM TO ORIGINAL
POOL PRINCIPAL GROSS COUPON NET COUPON MATURITY MATURITY AMORTIZATION AMORTIZATION
NUMBER BALANCE RATE RATE (IN MONTHS) (IN MONTHS) TERM (IN MONTHS) METHOD
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
SUBSEQUENT HOME EQUITY LOANS
ORIGINAL REMAINING
TERM TO TERM TO ORIGINAL
POOL PRINCIPAL GROSS COUPON NET COUPON MATURITY MATURITY AMORTIZATION AMORTIZATION
NUMBER BALANCE RATE RATE (IN MONTHS) (IN MONTHS) TERM (IN MONTHS) METHOD
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ADJUSTABLE RATE GROUP
---------------------
ORIGINAL REMAINING
MAXIMUM TERM TO TERM TO ORIGINAL
POOL PRINCIPAL GROSS COUPON NET COUPON MONTHS TO INTEREST MATURITY MATURITY AMORTIZATION AMORTIZATION
NUMBER BALANCE RATE RATE RATE CHANGE MARGIN RATE (IN MONTHS) (IN MONTHS) TERM (IN MONTHS) METHOD
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
<PAGE>
The following tables set forth the percentages of the initial principal
amount of the Class A Certificates that would be outstanding after each of the
dates shown, based on a rate equal to _%, __%, __%, ___%, ___% and ___% of the
Prepayment Assumption (as defined above).
<TABLE>
<CAPTION>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
CLASS A-1 CLASS A-2 Class A-3
Payment Date 0% 50% 75% 100% 125% 150% 0% 50% 75% 100% 125% 150% 0% 50% 75% 100% 125% 150%
-- --- --- ---- ---- ---- -- --- -- ---- ---- ---- -- --- --- --- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS A-4 CLASS A-5 Class A-6
Payment Date 0% 50% 75% 100% 125% 150% 0% 50% 75% 100% 125% 150% 0% 50% 75% 100% 125% 150%
-- --- --- ---- ---- ---- -- --- -- ---- ---- ---- -- --- --- --- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
- ---------------
(1) The weighted average life of the Class A Certificates is determined by (i)
multiplying the amount of each principal payment by the number of years
from the date of issuance to the related Payment Date, (ii) adding the
results, and (iii) dividing the sum by the initial respective Certificate
Principal Balance for such Class of Class A Certificate.
<PAGE>
PAYMENT LAG FEATURE OF CLASS A CERTIFICATES
Pursuant to the Pooling and Servicing Agreement, an amount equal to
Mortgagor payments with respect to each Home Equity Loan (net of the Servicing
Fee and Retained Yield) received by the Servicer during each Remittance Period
is to be remitted to the Trustee on or prior to the related Monthly Remittance
Date; the Trustee will not be required to distribute any such amounts to the
Owners until the next succeeding Payment Date. As a result, the monthly
distributions to the Owners generally reflect Mortgagor payments during the
prior calendar month, and the first Payment Date will not occur until
____________, 199_. Thus, the effective yield to the Owners of the Class A
Certificates will be below that otherwise produced by the related Pass-Through
Rate because the distribution of the Class A Distribution Amount in respect of
any given month will not be made until on or about the 25th day of the following
month.
FORMATION OF THE TRUST AND TRUST PROPERTY
_____________ Home Equity Loan Trust 199__-__ (the "Trust") will be created
and established pursuant to the Pooling and Servicing Agreement. The Depositor
will convey without recourse the Home Equity Loans to the Trust and the Trust
will issue the Class A Certificates and the Subordinate Certificates.
The property of the Trust will include (a) the Home Equity Loans (other
than the Retained Yield and payments received on the Home Equity Loans on or
prior to the Cut-off Date) together with the related Home Equity Loan documents
and the Seller's interest in any Property which secures a Home Equity Loan and
all payments thereon and proceeds of the conversion, voluntary or involuntary,
of the foregoing, (b) such amounts as may be held by the Trustee in the
Certificate Account, the Pre-Funding Account, the Capitalized Interest Account
and any other accounts held by the Trustee for the Trust together with
investment earnings on such amounts and such amounts as may be held in the name
of the Trustee in the Principal and Interest Account, if any, exclusive of
investment earnings thereon (except as otherwise provided ) whether in the form
of cash, instruments, securities or other properties, (c) the Certificate
Insurance Policy and (d) proceeds of all the foregoing (including, but not by
way of limitation, all proceeds of any hazard insurance and title insurance
policy relating to the Home Equity Loans, cash proceeds, accounts, accounts
receivable, notes, drafts, acceptances, chattel paper, checks, deposit accounts,
rights to payment of any and every kind, and other forms of obligations and
receivables which at any time constitute all or part of or are included in the
proceeds of any of the foregoing) to pay the Certificates as specified in the
Pooling and Servicing Agreement (collectively, the "Trust Estate").
The Class A Certificates will not represent an interest in or an obligation
of, nor will the Home Equity Loans be guaranteed by, the Depositor, the Seller,
the Servicer or any of their affiliates.
Prior to its formation the Trust will have had no assets or obligations.
Upon formation, the Trust will not engage in any business activity other than
acquiring, holding and collecting payments on the Home Equity Loans, issuing the
Certificates and distributing payments thereon. The Trust will not acquire any
receivables or assets other than the Home Equity Loans and the rights
appurtenant thereto and will not have any need for additional capital resources.
To the extent that borrowers make scheduled payments under the Home Equity
Loans, the Trust will have sufficient liquidity to make distributions on the
Certificates. As the Trust does not have any operating history and will not
engage in any business activity other than issuing the Certificates and making
distributions thereon, there has not been included any historical or pro forma
ratio of earnings to fixed charges with respect to the Trust.
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Initial Home Equity
Loans and the Properties is based upon the pool as constituted at the close of
business on the Cut-Off Date, as adjusted for the scheduled principal payments
due on or before such date. Prior to the issuance of the Class A Certificates,
Initial Home Equity Loans may be removed from the pool as a result of incomplete
documentation or non-compliance with representations and warranties set forth in
the Pooling and Servicing Agreement, if the Depositor deems such removal
necessary or appropriate. A limited number of other Initial Home Equity Loans
may be included in the pool prior to the issuance of the Certificates.
A current report on Form 8-K will be available to purchasers of the Class A
Certificates and will be filed and incorporated by reference to the Registration
Statement together with the Pooling and Servicing Agreement with the Securities
and Exchange Commission within fifteen days after the initial issuance of the
Class A Certificates.
In the event Initial Home Equity Loans are removed from or added to the
pool as set forth in the preceding paragraph, such removal or addition will be
noted in the current report on Form 8-K.
DESCRIPTION OF THE CLASS A CERTIFICATES
GENERAL
Each Certificate will represent certain undivided, fractional ownership
interests in the Trust Estate created and held pursuant to the Pooling and
Servicing Agreement, subject to the limits and the priority of distribution
described therein.
As described in "The Home Equity Loan Pool" herein, the Home Equity Loan
Pool is divided into two Groups, the Fixed Rate Group, which contains only fixed
rate Home Equity Loans and the Adjustable Rate Group, which contains only
adjustable rate Home Equity Loans. For each Home Equity Loan Group, the related
Class of Class A Certificates will evidence the right to receive on each Payment
Date the Class A Distribution Amount for such Class of Class A Certificates, in
each case until the related Class A Certificate Principal Balance has been
reduced to zero.
PAYMENT DATES
On each Payment Date, the Owners of each Class of the Class A Certificates
will be entitled to receive, from amounts then on deposit in the certificate
account established and maintained by the Trustee in accordance with the Pooling
and Servicing Agreement (the "Certificate Account") and until the Certificate
Principal Balance of such Class of Class A Certificates is reduced to zero, the
aggregate Class A Distribution Amount as of such Payment Date, allocated among
the Classes of the Class A Certificates as described below. Distributions will
be made in immediately available funds to Owners of Class A Certificates by wire
transfer or otherwise, to the account of such Owner at a domestic bank or other
entity having appropriate facilities therefor, if such Owner has so notified the
Trustee, or by check mailed to the address of the person entitled thereto as it
appears on the register (the "Register") maintained by the Trustee as registrar
(the "Registrar"). Beneficial Owners may experience some delay in the receipt of
their payments due to the operations of DTC. See "Risk Factors--Book Entry
Registration" in the Prospectus and "Description of the Class A
Certificates--Book Entry Registration of the Class A Certificates" herein and
"Description of the Certificates--Book Entry Registration" in the Prospectus.
The Pooling and Servicing Agreement will provide that an Owner, upon
receiving the final distribution on such Owner's Certificate, will be required
to send such Certificate to the Trustee. The Pooling and Servicing Agreement
additionally will provide that, in any event, any Certificate as to which the
final distribution thereon has been made shall be deemed canceled for all
purposes under or pursuant to the Pooling and Servicing Agreement and the
Certificate Insurance Policy.
Each Owner of record of the related Class of the Class A Certificates will
be entitled to receive such Owner's Percentage Interest in the amounts due such
Class on such Payment Date. The "Percentage Interest" of a Class A Certificate
as of any date of determination will be equal to the percentage obtained by
dividing the principal balance of such Certificate as of the Cut-Off Date by the
Certificate Principal Balance for the related Class of the Class A Certificates
as of the Cut-Off Date.
DISTRIBUTIONS
Upon receipt, the Trustee will be required to deposit into the Certificate
Account, (i) the total of the principal and interest collections on the Home
Equity Loans, including any Net Liquidation Proceeds, remitted by the Servicer,
together with any Substitution Amount and any Loan Purchase Price amount, (ii)
any Insured Payment, and (iii) the proceeds of any liquidation of the Trust
Estate. The Trustee will also be required to deposit into the Certificate
Account any Pre-Funded Amounts to be distributed as a prepayment at the end of
the Funding Period.
The Pooling and Servicing Agreement establishes a pass-through rate on each
Class of the Class A Certificates (each, a "Pass- Through Rate") as set forth in
the Summary herein under "Certificates Offered"; the Pooling and Servicing
Agreement establishes a pass- through rate on each Class of the Class A
Certificates (each, a "Pass-Through Rate") as set forth in the Summary herein
under "Certificates Offered"; provided, further, the Pass-Through Rate with
respect to the Class A-5 Certificates shall be the lower of ____% and the
weighted average of the Coupon Rates of each Home Equity Loan less ____%
representing the sum of the rates at which the amount distributable with respect
to the Servicing Fee, the Premium Amount and the Trustee Fee are calculated
(except as otherwise provided in the Pooling and Servicing Agreement).
Approximately, ____% of the Initial Home Equity Loans in the Fixed Rate Group by
Loan Balance as of the Cut-Off Date bear interest at Coupon Rates which, after
deduction of ____% representing the sum of the rates at which the amount
distributable with respect to the Servicing Fee, the Premium Amount and the
Trustee Fee are calculated, would be lower than ____%. As a result, it is
unlikely that such weighted average will be less than ____%; provided, further,
that the Pass-Through Rate with respect to the Class A-6 Certificates will equal
the lesser of (i) the London interbank offered rate for one-month United States
dollar deposits (calculated as described under "-- Calculation of LIBOR" below)
as of the second to last business day prior to the immediately preceding Payment
Date (or as of the second to last business day prior to the Closing Date with
respect to the _________ 199_ Payment Date) (the "LIBOR Determination Date")
plus ____% per annum, and (ii) the weighted average of the Coupon Rates of the
Home Equity Loans in the Adjustable Rate Group less ____% per annum, calculated
as of the first day of the related Remittance Period.
On each Payment Date, the Trustee is required to make the following
disbursements and transfers from moneys then on deposit in the Certificate
Account as specified below in the following order of priority of each such
transfer and disbursement:
(i) first, on each Payment Date out of Total Monthly Excess Spread
for the related Group, the Trustee shall disburse the pro rated
Premium Amount determined by the relative Certificate Principal
Balance of the related Classes of Class A Certificates for such
Payment Date to the Certificate Insurer.
(ii) second, on each Payment Date, the Trustee shall allocate an
amount equal to the sum of (x) the Total Monthly Excess Spread
with respect to such Home Equity Loan Group and Payment Date plus
(y) any Subordination Reduction Amount with respect to such Home
Equity Loan Group and Payment Date (such sum (net of the Trustee
Fees with respect to such Home Equity Loan Group then payable
under clause (iv)(C) below and the amounts payable to the
Certificate Insurer with respect to such Home Equity Loan Group
(the "Premium Amount") as described in clause (i) above) being
the "Total Monthly Excess Cashflow" with respect to such Home
Equity Loan Group and Payment Date) in the following order of
priority
(A) first, such Total Monthly Excess Cashflow shall be allocated
to the payment of the Class A Distribution Amount pursuant
to clauses (iv)(A) and (B) below on such Payment Date with
respect to the related Home Equity Loan Group in an amount
equal to the amount, if any, by which (x) the Class A
Distribution Amount (determined for this purpose only by
reference to clause (b) of the definition of Principal
Distribution Amount and without any Subordination Increase
Amount) for such Payment Date exceeds (y) the Available
Funds with respect to such Home Equity Loan Group for such
Payment Date (the amount of such difference with respect to
a Home Equity Loan Group being an "Available Funds
Shortfall" for such Home Equity Loan Group);
(B) second, any portion of the Total Monthly Excess Cashflow
with respect to such Home Equity Loan Group remaining after
the application described in clause (A) above shall be
allocated against any Available Funds Shortfall with respect
to the other Home Equity Loan Group;
(C) third, any portion of the Total Monthly Excess Cashflow
with respect to such Home Equity Loan Group remaining after
the allocations described in clauses (A) and (B) above shall
be paid to the Certificate Insurer in respect of amounts
owed on account of any Reimbursement Amount owed to the
Certificate Insurer with respect to the related Home Equity
Loan Group; and
(D) fourth, any portion of the Total Monthly Excess Cashflow
with respect to such Home Equity Loan Group remaining after
the allocations described in clauses (A), (B) and (C) above
shall be paid to the Certificate Insurer in respect of any
Reimbursement Amount with respect to the other Home Equity
Loan Group.
(iii) third, on each Payment Date the amount, if any, of the Total
Monthly Excess Cashflow with respect to such Home Equity Loan
Group on a Payment Date remaining after the allocations described
in clause (ii) above (the "Net Monthly Excess Cashflow" with
respect to such Home Equity Loan Group for such Payment Date) is
required to be applied in the following order or priority:
(A) first, such Net Monthly Excess Cashflow shall be used to
reduce to zero, through the allocation of a Subordination
Increase Amount to the payment of the Class A Distribution
Amount pursuant to clause (iv) below, any Subordination
Deficiency Amount (as defined in the Pooling and Servicing
Agreement) with respect to such Home Equity Loan Group as of
such Payment Date;
(B) second, any Net Monthly Excess Cashflow remaining after the
application described in clause (A) above shall be used to
reduce to zero, through the payment of a Subordination
Increase Amount, the Subordination Deficiency Amount, if
any, with respect to the other Home Equity Loan Group; and
(C) third, any Net Monthly Excess Cashflow remaining after the
application described in clauses (A) and (B) above shall be
paid to the Servicer to the extent of any unreimbursed
Delinquency Advances and unreimbursed Servicing Advances.
(iv) fourth, following the making by the Trustee of all allocations,
transfers and disbursements described above from amounts then on
deposit in the Certificate Account with respect to the related
Home Equity Loan Group, the Trustee shall distribute:
(A) To the Owners of the Class A Certificates of the related
Group, the related Class A Current Interest, on a pro rata
basis without any priority among such Class A Certificates;
(B) To the Owners of the related Class of Class A Certificates,
(I) the Principal Distribution Amount applicable to the
Fixed Rate Group shall be distributed as follows: (a) first,
to ----- the Owners of the Class A-1 Certificates until the
Class A-1 Certificate Principal Balance is reduced to zero;
(b) second, to the Owners of the Class A-2 Certificates,
until the ------ Class A-2 Certificate Principal Balance is
reduced to zero; (c) third, to the Owners of the ----- Class
A-3 Certificates, until the Class A-3 Certificate Principal
Balance is reduced to zero; (d) fourth, to the Owners of the
Class A-4 Certificates, until the Class A-4 -----
Certificate Principal Balance is reduced to zero; and (e)
fifth, to the Owners of the Class ----- A-5 Certificates,
until the Class A-5 Certificate Principal Balance is reduced
to zero and (II) the Principal Distribution Amount
applicable to the Adjustable Rate Group shall be distributed
to the Owners of the Class A-6 Certificates until the Class
A-6 Certificate Principal Balance has been reduced to zero;
(C) To the Trustee, the Trustee Fees with respect to such
Home Equity Loan Group then due; and
(D) To the Owners of the Subordinate Certificates, all
remaining distributable amounts as specified in the Pooling
and Servicing Agreement.
"Available Funds" as to any Home Equity Loan Group and Payment Date is the
amount on deposit in the Certificate Account on such Payment Date (net of Total
Monthly Excess Cashflow and disregarding the amounts of any Insured Payments
with respect to a Home Equity Loan Group to be made on such Payment Date).
"Total Available Funds" as to any Home Equity Loan Group and Payment Date
is (x) the amount on deposit in the Certificate Account (net of Total Monthly
Excess Cashflow) on such Payment Date plus (y) any amounts of Total Monthly
Excess Cashflow with respect to a Home Equity Loan Group to be applied on such
Payment Date (disregarding the amount of any Insured Payment with respect to a
Home Equity Loan Group to be made on such Payment Date) plus, in the case of the
Fixed Rate Group, (z) any deposit to the Certificate Account from the
Pre-Funding Account and Capitalized Interest Account expected to be made in
accordance with the Pooling and Servicing Agreement.
The Trustee or Paying Agent shall (i) receive as attorney-in-fact of each
Owner of Class A Certificates any Insured Payment from the Certificate Insurer
and (ii) disburse the same to each Owner of Class A Certificates. The Pooling
and Servicing Agreement will provide that to the extent the Certificate Insurer
makes Insured Payments, either directly or indirectly (as by paying through the
Trustee or Paying Agent), to the Owners of such Class A Certificates, if any,
the Certificate Insurer will be subrogated to the rights of such Owners of Class
A Certificates with respect to such Insured Payments, and shall receive
reimbursement for such Insured Payments as provided in the Pooling and Servicing
Agreement, but only from the sources and in the manner provided in the Pooling
and Servicing Agreement for the payment of the Class A Distribution Amount to
Owners of Class A Certificates, if any; such subrogation and reimbursement will
have no effect on the Certificate Insurer's obligations under the Certificate
Insurance Policy.
The Pooling and Servicing Agreement provides that the term "Available
Funds" does not include Insured Payments and does not include any amounts that
cannot be distributed to the Owners of Class A Certificates, if any, by the
Trustee as a result of proceedings under the United States Bankruptcy Code.
Each Owner of a Class A Certificate will be required promptly to notify the
Trustee in writing upon the receipt of a court order relating to a Preference
Amount and will be required to enclose a copy of such order with such notice to
the Trustee.
PRE-FUNDING ACCOUNT
On the Closing Date, the Original Pre-Funded Amount will be deposited in
the Pre-Funding Account, which account shall be in the name of and maintained by
the Trustee and shall be part of the Trust. During the Funding Period, the
Pre-Funded Amount will be maintained in the Pre-Funding Account. The Original
Pre-Funded Amount will be reduced during the Funding Period by the amount
thereof used to purchase Subsequent Home Equity Loans for addition to the Fixed
Rate Group in accordance with the Pooling and Servicing Agreement. Any
Pre-Funded Amount remaining at the end of the Funding Period will be distributed
to the Owners of the Fixed Rate Certificates then entitled to receive principal
in accordance with the terms of the Pooling and Servicing Agreement on the
Payment Date that immediately follows the end of the Funding Period in reduction
of the Certificate Principal Balance of such Owner's Certificates, thus
resulting in a principal prepayment of such Class of Fixed Rate Certificates.
Amounts on deposit in the Pre-Funding Account will be invested in Eligible
Investments. All interest and any other investment earnings on amounts on
deposit in the Pre-Funding Account will be deposited in the Capitalized Interest
Account prior to each Payment Date during the Funding Period. The Pre-Funding
Account will not be an asset of the REMIC.
CAPITALIZED INTEREST ACCOUNT
On the Closing Date cash will be deposited in the Capitalized Interest
Account, which account shall be in the name of and maintained by the Trustee and
shall be part of the Trust. The amount on deposit in the Capitalized Interest
Account, including reinvestment income thereon and amounts deposited thereto
from the Pre-Funding Account, will be used by the Trustee to fund the excess, if
any, of (i) the sum of the amount of interest accruing at the weighted average
Pass-Through Rate on all Fixed Rate Certificates on the amount by which the
aggregate Certificate Principal Balance of the Fixed Rate Certificates exceeds
the aggregate Loan Balance of the Home Equity Loans in the Fixed Rate Group plus
the Trustee Fees and Premium Amount with respect to the Fixed Rate Group
accruing on such excess balance over (ii) the amount of any reinvestment income
on monies on deposit in the Pre- Funding Account; such amounts on deposit will
be so applied by the Trustee on each Payment Date in the Funding Period to fund
such excess, if any. Any amounts remaining in the Capitalized Interest Account
at the end of the Funding Period and not needed for such purpose will be paid to
the Depositor and will not thereafter be available for distribution to the
Owners of the Fixed Rate Certificates.
Amounts on deposit in the Capitalized Interest Account will be invested in
Eligible Investments. The Capitalized Interest Account will not be an asset of
the REMIC.
CALCULATION OF LIBOR.
On each LIBOR Determination Date (as defined above), the Trustee will
determine LIBOR for the next Accrual Period for the Class A-6 Certificates.
"LIBOR" means, as of any LIBOR Determination Date, the rate for deposits in
United States dollars for a period equal to the relevant Accrual Period
(commencing on the first day of such Accrual Period) which appears in the
Telerate Page 3750 as of 11:00 a.m., London time, on such date. If such rate
does not appear on Telerate Page 3750, the rate for that day will be determined
on the basis of the rates at which deposits in United States dollars are offered
by the Reference Banks at approximately 11:00 a.m., London time, on that day to
prime banks in the London interbank market for a period equal to the relevant
Accrual Period (commencing on the first day of such Accrual Period). The Trustee
will request the principal London office of each of the Reference Banks to
provide a quotation of its rate. If at least two such quotations are provided,
the rate for that day will be the arithmetic mean of the quotations. If fewer
than two quotations are provided as requested, the rate for that day will be the
arithmetic mean of the rates quoted by major banks in New York City, selected by
the Servicer, at approximately 11:00 a.m., New York City time, on that day for
loans in United States dollars to leading European banks for a period equal to
the relevant Accrual Period (commencing on the first day of such Accrual
Period).
"Telerate Page 3750" means the display page currently so designated on the
Dow Jones Telerate Service (or such other page as may replace that page on that
service for the purpose of displaying comparable rates or prices) and "Reference
Banks" means leading banks selected by the Trustee and engaged in transactions
in Eurodollar deposits in the international Eurocurrency market.
BOOK ENTRY REGISTRATION OF THE CLASS A CERTIFICATES
The Class A Certificates will be book-entry Certificates (the "Book-Entry
Certificates"). Persons acquiring beneficial ownership interests in such
Book-Entry Certificates ("Beneficial Owners") may elect to hold their Book-
Entry Certificates directly through DTC in the United States, or CEDEL or
Euroclear (in Europe) if they are participants of such systems ("Participants")
, or indirectly through organizations which are Participants. The Book- Entry
Certificates will be issued in one or more certificates per class of Class A
Certificates which in the aggregate equal the principal balance of such Class A
Certificates and will initially be registered in the name of Cede & Co., the
nominee of DTC. CEDEL and Euroclear will hold omnibus positions on behalf of
their Participants through customers' securities accounts in CEDEL's and
Euroclear's names on the books of their respective depositaries which in turn
will hold such positions in customers' securities accounts in the depositaries'
names on the books of DTC. Citibank will act as depositary for CEDEL and Morgan
will act as depositary for Euroclear (in such capacities, individually the
"Relevant Depositary" and collectively the "European Depositaries"). Investors
may hold such beneficial interests in the Book-Entry Certificates in minimum
denominations representing principal amounts of $____ and in integral multiples
in excess thereof. Except as described below, no Beneficial Owner will be
entitled to receive a physical certificate representing such Certificate (a
"Definitive Certificate"). Unless and until definitive Certificates are issued,
it is anticipated that the only "Owner" of such Book-Entry Certificates will be
Cede & Co., as nominee of DTC. Beneficial Owners will not be Owners as that term
is used in the Pooling and Servicing Agreement. Beneficial Owners are only
permitted to exercise their rights indirectly through Participants and DTC.
The Beneficial Owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
Beneficial Owner's account for such purpose. In turn, the Financial
Intermediary's Ownership of such Book-Entry Certificate will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the Beneficial Owner's Financial Intermediary is not a DTC Participant and on
the records of CEDEL or Euroclear, as appropriate).
Beneficial Owners will receive all distributions of principal of, and
interest on, the Book-Entry Certificates from the Trustee through DTC and DTC
Participants. While such Certificates are outstanding (except under the
circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required to
make book-entry transfers among Participants on whose behalf it acts with
respect to such Certificates and is required to receive and transmit
distributions of principal of, and interest on, such Certificates. Participants
and indirect participants with whom Beneficial Owners have accounts with respect
to Book-Entry Certificates are similarly required to make book-entry transfers
and receive and transmit such distributions on behalf of their respective
Beneficial Owners. Accordingly, although Beneficial Owners will not possess
certificates, the Rules provide a mechanism by which Beneficial Owners will
receive distributions and will be able to transfer their interest.
Beneficial 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, Beneficial 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 such 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 such 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 Beneficial Owners.
Because of time zone differences, credits of securities received in CEDEL
or Euroclear as a result of a transaction with a Participant will be made during
subsequent securities settlement processing and dated the business day following
the DTC settlement date. Such credits or any transactions in such securities
settled during such processing will be reported to the relevant Euroclear or
CEDEL Participants on such business day. Cash received in CEDEL or Euroclear as
a result of sales of securities by or through a CEDEL Participant (as defined
below) or Euroclear Participant (as defined below) to a DTC Participant will be
received with value on the DTC settlement date but will be available in the
relevant CEDEL or Euroclear cash account only as of the business day following
settlements in DTC. For information with respect to tax documentation procedures
relating to the Certificates, see "Certain Federal Income Tax Consequences --
Taxation of Certain Foreign Investors" and "-- Backup Withholding" in the
Prospectus and "Global Clearance, Settlement and Tax Documentation
Procedures--Certain U.S. Federal Income Tax Documentation Requirements" in Annex
I hereto.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. CEDEL Participants and Euroclear Participants may not deliver instructions
directly to the European Depositaries.
DTC, which is a New York-chartered limited purpose trust company, performs
services for its Participants ("DTC Participants"), some of which (and/or their
representatives) own DTC. In accordance with its normal procedures, DTC is
expected to record the positions held by each DTC Participant in the Book-Entry
Certificates, whether held for its own account or as a nominee for another
person. In general, beneficial ownership of Book- Entry Certificates will be
subject to the rules, regulations and procedures governing DTC and DTC
Participants as in effect from time to time.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participant organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes in
accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to CEDEL is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a CEDEL Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 32 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by 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 of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions on the Book-Entry Certificates will be made on each Payment
Date by the Trustee to DTC. DTC will be responsible for crediting the amount of
such payments to the accounts of the applicable DTC Participants in accordance
with DTC's normal procedures. Each DTC Participant will be responsible for
disbursing such payment to the Beneficial Owners of the Book-Entry Certificates
that it represents and to each Financial Intermediary for which it acts as
agent. Each such Financial Intermediary will be responsible for disbursing funds
to the Beneficial Owners of the Book-Entry Certificates that it represents.
Under a book-entry format, Beneficial Owners of the Book-Entry Certificates
may experience some delay in their receipt of payments, since such payments will
be forwarded by the Trustee to Cede. Distributions with respect to Certificates
held through CEDEL or Euroclear will be credited to the cash accounts of CEDEL
Participants or Euroclear Participants in accordance with the relevant system's
rules and procedures, to the extent received by the Relevant Depositary. Such
distributions will be subject to tax reporting in accordance with relevant
United States tax laws and regulations. Because DTC can only act on behalf of
Financial Intermediaries, the ability of a Beneficial Owner to pledge Book-Entry
Certificates to persons or entities that do not participate in the Depository
system, or otherwise take actions in respect of such Book-Entry Certificates,
may be limited due to the lack of physical certificates for such Book- Entry
Certificates. In addition, issuance of the Book-Entry Certificates in book-entry
form may reduce the liquidity of such Certificates in the secondary market since
certain potential investors may be unwilling to purchase Certificates for which
they cannot obtain physical certificates.
Monthly and annual reports on the Trust provided by the Servicer to Cede,
as nominee of DTC, may be made available to Beneficial Owners upon request, in
accordance with the rules, regulations and procedures creating and affecting the
Depository, and to the Financial Intermediaries to whose DTC accounts the
Book-Entry Certificates of such Beneficial Owners are credited.
DTC has advised the Trustee that, unless and until Definitive Certificates
are issued, DTC will take any action permitted to be taken by the holders of the
Book-Entry Certificates under the Pooling and Servicing Agreement only at the
direction of one or more Financial Intermediaries to whose DTC accounts the
Book-Entry Certificates are credited, to the extent that such actions are taken
on behalf of Financial Intermediaries whose holdings include such Book-Entry
Certificates. CEDEL or the Euroclear Operator, as the case may be, will take any
action permitted to be taken by an Owner under the Pooling and Servicing
Agreement on behalf of a CEDEL Participant or Euroclear Participant only in
accordance with its relevant rules and procedures and subject to the ability of
the Relevant Depositary to effect such actions on its behalf through DTC. DTC
may take actions, at the direction of the related Participants, with respect to
some Class A Certificates which conflict with actions taken with respect to
other Class A Certificates.
Definitive Certificates will be issued to Beneficial Owners of the
Book-Entry Certificates, or their nominees, rather than to DTC, only if (a) DTC
or the Depositor advises the Trustee in writing that DTC is no longer willing,
qualified or able to discharge properly its responsibilities as a nominee and
depository with respect to the Book-Entry Certificates and the Depositor or the
Trustee is unable to locate a qualified successor, (b) the Depositor, at its
sole option, elects to terminate a book-entry system through DTC or (c) DTC, at
the direction of the Beneficial Owners representing a majority of the
outstanding Percentage Interests of the Class A Certificates, advises the
Trustee in writing that the continuation of a book-entry system through DTC (or
a successor thereto) is no longer in the best interests of Beneficial Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all Beneficial
Owners of the occurrence of such event and the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the global certificate or
certificates representing the Book- Entry Certificates and instructions for
re-registration, the Trustee will issue Definitive Certificates, and thereafter
the Trustee will recognize the holders of such Definitive Certificates as Owners
under the Pooling and Servicing Agreement.
Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Certificates among Participants of DTC,
CEDEL and Euroclear, they are under no obligation to perform or continue to
perform such procedures and such procedures may be discontinued at any time.
ASSIGNMENT OF RIGHTS
An Owner may pledge, encumber, hypothecate or assign all or any part of its
right to receive distributions under any Certificate, but such pledge,
encumbrance, hypothecation or assignment shall not constitute a transfer of an
ownership interest sufficient to render the transferee an Owner of the Trust
without compliance with the provisions of the Pooling and Servicing Agreement
described above. Notwithstanding the foregoing, the Pooling and Servicing
Agreement provides that the Certificate Insurer may, in connection with a
subrogation of the Certificate Insurer to the rights of the Owners of the Class
A Certificates to an amount equal to Insured Payments for which the Certificate
Insurer has not received reimbursement, be considered to be an "Owner" to the
extent (but only to the extent) of such rights.
THE CERTIFICATE INSURER
The information set forth in this section and in the financial statements
of the Certificate Insurer set forth in Appendix B and Appendix C hereto have
been provided by the Certificate Insurer. No representation is made by any
Underwriter, the Seller, the Servicer, the Depositor or any of their affiliates
as to the accuracy or completeness of any such information.
The Certificate Insurer will issue its Certificate Insurance Policy for the
Class A Certificates. The Certificate Insurance Policy unconditionally
guarantees the payment of principal and scheduled interest on the Class A
Certificates. The Certificate Insurer will make each required Insured Payment to
the Trustee on the later of (i) the Payment Date on which such Insured Payment
is distributable to the Owners of the Class A Certificates pursuant to the
Pooling and Servicing Agreement and (ii) the Business Day next following the day
on which the Certificate Insurer shall have received telephonic or telegraphic
notice, subsequently confirmed in writing, or written notice by registered or
certified mail, from the Trustee, specifying that an Insured Payment is due in
accordance with the terms of the Certificate Insurance Policy.
The Certificate Insurer's obligation under the Certificate Insurance Policy
will be discharged to the extent that funds are received by the Trustee for
distribution to the Owners of the Class A Certificates, whether or not such
funds are properly distributed by the Trustee.
For purposes of the Certificate Insurance Policy, the Owner of a Class A
Certificate as to a particular Certificate, does not and may not include the
Trust, the Servicer, any Subservicer, the Seller or the Depositor.
The Certificate Insurance Policy does not guarantee to the Owners of the
Class A Certificates any specified rate of prepayments of principal of the Home
Equity Loans or any specified return.
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 is a wholly-owned subsidiary of _______________
(the "Corporation"), a Delaware holding company. The Corporation is a subsidiary
of ______________________________ ("_______________"). Neither the Corporation
nor _______________ is obligated to pay the debts of or the claims of the
Certificate Insurer.
The Certificate Insurer, a New York stock insurance company, is a monoline
financial guaranty insurance company which, since January 1984, has been a
leading insurer of bonds issued by municipal governmental subdivisions and
agencies thereof. The Certificate Insurer also insures a variety of
non-municipal structured debt obligations. The Certificate Insurer is authorized
to write insurance in 50 states and the District of Columbia and is also
authorized to carry on general insurance business in the United Kingdom and to
write credit and guaranty insurance in France. The Certificate Insurer is
subject to regulation by the State of New York Insurance Department.
The Certificate Insurer and the Corporation, are subject to regulation by
each jurisdiction in which the Certificate Insurer is licensed to write
insurance. These regulations vary from jurisdiction to jurisdiction, but
generally require insurance holding companies and their insurance subsidiaries
to register and file certain reports, including information concerning their
capital structure, ownership and financial condition and require prior approval
by the insurance department of their states of domicile, of changes in control,
of certain dividends and other intercorporate transfer of assets and of
transactions between insurance companies, their parents and other affiliates.
The Certificate Insurer is required to file quarterly and annual statutory
financial statements and is subject to statutory restrictions concerning the
types and quality of investments, the use of policy forms, premium rates and the
size of risk that it may insure, subject to reinsurance. Additionally, the
Certificate Insurer is subject to triennial audits by the State of New York
Insurance Department.
The Certificate Insurer considers its role in providing insurance to be
credit enhancement rather than credit substitution. The Certificate Insurer only
insures securities that the Certificate Insurer considers to be of investment
grade quality. With respect to each category of obligations considered for
insurance, the Certificate Insurer has established and maintains its own
underwriting standards that are based on those aspects of credit quality that
the Certificate Insurer deems important for the category and that take into
account criteria established for the category typically used by rating agencies.
Credit criteria for evaluating securities include economic and social trends,
debt management, financial management and legal and administrative factors, the
adequacy of anticipated cash flow, including the historical and expected
performance of assets pledged for payment of securities under varying economic
scenarios, underlying levels of protection such as insurance or
overcollateralization, and, particularly in the case of long-term municipal
securities, the importance of the project being financed.
The Certificate Insurer also reviews the security features and reserves
created by the financing documentation, as well as the financial and other
covenants imposed upon the credit backing the issue. In connection with the
underwriting of new issues, the Certificate Insurer sometimes requires, as a
condition to insuring an issue, that collateral be pledged or, in some
instances, that a third- party guarantee be provided for a term of the insured
obligation by a party of acceptable credit quality obligated to make payment
prior to any payment by the Certificate Insurer.
Insurance written by the Certificate Insurer insures the full and timely
payment of principal and interest on insured debt securities and scheduled
payments due in respect of pass-through securities such as the Class A
Certificates. If the issuer of a security insured by the Certificate Insurer
defaults on its obligations to pay the insured amounts, or, in the case of a
pass-through security, available funds are insufficient to pay the insured
amounts, the Certificate Insurer will make the scheduled insured payments,
without regard to any acceleration of the securities which may have occurred,
and will be subrogated to the rights of security holders to the extent of its
payments. Securities insured to maturity by the Certificate Insurer are rated
"AAA" or "AAAr" by S&P and Aaa by Moody's.
In consideration for issuing its insurance, the Certificate Insurer
receives a premium which is generally paid in full upon issuance of the policy
or on an annual, semiannual or monthly basis. The premium rates charged depend
principally on the credit strength of the securities as judged by the
Certificate Insurer according to its internal credit rating system and the type
of issue.
Committees of senior officers of the Certificate Insurer must approve all
issues for insurance with the exception of certain small exposures, which may be
approved by the Director of Public Finance. These committees review reports
prepared by credit analysts on the staff of the Certificate Insurer assigned to
review such issues. Prior to its presentation to a committee, the recommendation
for insurance in such report must be reviewed by the director of the group
responsible for the underwriting of the type of security under consideration.
As of ________, 199_ and ___________, 199_ the Certificate Insurer had
written directly, or assumed through reinsurance, guaranties of approximately
$_____ billion and $_____ billion par value of securities, respectively (of
which approximately __ percent constituted guaranties of municipal bonds), for
which it had collected gross premiums of approximately $____ billion and $____
billion, respectively. As of ________, 199_, the Certificate Insurer had
reinsured approximately __ percent of the risks it had written, __ percent
through quota share reinsurance and __ percent through facultative arrangements.
The following table sets forth capitalization of the Certificate Insurer as
of ___________, 199_, ___________, 199_ and ________, 199_ respectively, on the
basis of generally accepted accounting principles. No material adverse change in
the capitalization of the Certificate Insurer has occurred since ________, 199_.
<TABLE>
<CAPTION>
(unaudited)
------------, ------------, ------------,
199 (2) 199 199
------ --- ---
(IN MILLIONS) (in millions) (in millions)
<S> <C> <C> <C>
Unearned Premiums.............................
Other Liabilities(1)..........................
Stockholder's Equity
Common Stock..................................
Additional Paid-in Capital.................
Unrealized Gains (Losses)..................
Foreign currency translation adjustment....
Retained Earnings..........................
Total Stockholder's Equity....................
Total Liabilities and Stockholder's Equity....
</TABLE>
- ------------------
(1) Including any short-term liabilities.
(2) The financial information presented has been adjusted to reflect the effect
of Statement of Financial Accounting Standards No. 113 "Accounting and
Reporting for Reinsurance of Short-Duration and Long- Duration Contracts",
which the Certificate Insurer adopted during 199_.
(3) Effective______, 199_, the common stock par value was changed from $___ per
share to $_____ per share.
(4) Effective ___________, 199_, the Certificate Insurer adopted the provisions
of Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities."
(5) In 199_, the Certificate Insurer changed its method of accounting for
retrospectively rated reinsurance contracts.
For further financial information concerning the Certificate Insurer, see
the audited financial statements of the Certificate Insurer included as Appendix
B of this Prospectus Supplement and the unaudited interim financial statements
of the Certificate Insurer included in Appendix C of this Prospectus Supplement.
Copies of the Certificate Insurer's quarterly and annual statutory
statements filed by the Certificate Insurer with the New York Insurance
Department are available upon request to __________________________,
_______________, New York, New York 10006, Attention: Corporate Communications
Department. The Certificate Insurer's telephone number is (_____)
- ---------------.
The Certificate Insurer does not accept any responsibility for the accuracy
or completeness of this Prospectus Supplement or the Prospectus or any
information or disclosure contained herein, or omitted herefrom, other than with
respect to the accuracy of information in this Prospectus Supplement regarding
the Certificate Insurer and the Certificate Insurance Policy set forth under the
heading "The Certificate Insurer" and in Appendix B and Appendix C.
CREDIT ENHANCEMENT
CERTIFICATE INSURANCE POLICY
The Certificate Insurer in consideration of the payment of the premium and
subject to the terms of the Certificate Insurance Policy thereby unconditionally
and irrevocably guarantees to any Owner that an amount equal to each full and
complete Insured Payment will be received by the Trustee, as trustee for the
Owners, on behalf of the Owners, for distribution by the Trustee to each Owner
of each Owner's proportionate share of the Insured Payment. The Certificate
Insurer's obligations under the Certificate Insurance Policy with respect to a
particular Insured Payment shall be discharged to the extent funds equal to the
applicable Insured Payment are received by the Trustee, whether or not such
funds are properly applied by the Trustee. Insured Payments shall be made only
at the time set forth in the Certificate Insurance Policy, and no accelerated
Insured Payments shall be made regardless of any acceleration of the Class A
Certificates, unless such acceleration is at the sole option of the Certificate
Insurer.
Notwithstanding the foregoing paragraph, the Certificate Insurance Policy
does not cover shortfalls, if any, attributable to the liability of the Trust,
the REMIC or the Trustee for withholding taxes, if any (including interest and
penalties in respect of any such liability).
OVERCOLLATERALIZATION PROVISIONS
OVERCOLLATERALIZATION RESULTING FROM CASH FLOW STRUCTURE. The Pooling and
Servicing Agreement requires that, on each Payment Date, Net Monthly Excess
Cashflow with respect to a Home Equity Loan Group be applied on such Payment
Date as an accelerated payment of principal on the related Classes of Class A
Certificates, but only to the limited extent hereafter described. Net Monthly
Excess Cashflow equals the excess of (i) the excess, if any of (x) the interest
which is collected on the Home Equity Loans in such Home Equity Loan Group
during a Remittance Period (net of the Servicing Fee, the Trustee Fee, the
Premium Amount and Retained Yield with respect to such Home Equity Loan Group)
plus any Delinquency Advances and Compensating Interest paid by the Servicer
with respect to such Remittance Period over (y) the sum of the interest which
accrues on the related Class of Class A Certificates during the related Accrual
Period (such difference, the "Total Monthly Excess Spread" with respect to such
Home Equity Loan Group), over (ii) the portion of the Total Monthly Excess
Cashflow that is used to cover shortfalls in Available Funds on such Payment
Date in the related Home Equity Loan Group.
This has the effect of accelerating the amortization of the related Class A
Certificates relative to the amortization of the Home Equity Loans in the
related Home Equity Loan Group. To the extent that any Net Monthly Excess
Cashflow is not so used (and is not required to satisfy requirements with
respect to the other Home Equity Loan Group), the Pooling and Servicing
Agreement provides that it will be used to reimburse the Servicer with respect
to any amounts owing to it, or paid to the Owners of the Subordinate
Certificates.
Pursuant to the Pooling and Servicing Agreement, each Home Equity Loan
Group's Net Monthly Excess Cashflow will be applied as an accelerated payment of
principal on the related Classes of Class A Certificates until the Subordinated
Amount has increased to the level required. "Subordinated Amount" means, with
respect to each Home Equity Loan Group and Payment Date, the excess, if any, of
(x) the sum of (i) the aggregate principal balances of the Home Equity Loans in
such Home Equity Loan Group as of the close of business on the last day of the
preceding Remittance Period and (ii) with respect to the Fixed Rate Group only,
any amount on deposit in the Pre-Funding Account at such time over (y) the
related Class A Certificate Principal Balance as of such Payment Date after
taking into account the payment of the Class A Distribution Amount (except for
any Subordination Deficit or Subordination Increase Amount with respect to such
Group on such Payment Date). With respect to each Home Equity Loan Group, any
amount of Net Monthly Excess Cashflow actually applied as an accelerated payment
of principal is a "Subordination Increase Amount." The required level of the
Subordinated Amount for each Home
Equity Loan Group with respect to a Payment Date is the "Specified
Subordinated Amount." The Pooling and Servicing Agreement generally provides
that the Specified Subordinated Amount may, over time, decrease, or increase,
subject to certain floors, caps and triggers.
In the event that the required level of the Specified Subordinated Amount
with respect to a Home Equity Loan Group is permitted to decrease or "step down"
on a Payment Date in the future, the Pooling and Servicing Agreement provides
that a portion of the principal which would otherwise be distributed to the
Owners of the related Class A Certificates on such Payment Date may be
distributed to the Owners of the Subordinate Certificates on such Payment Date.
This has the effect of decelerating the amortization of Class A Certificates
relative to the amortization of the Home Equity Loans and of reducing the
related Subordinated Amount. With respect to any Home Equity Loan Group and
Payment Date, the excess, if any, of (x) the Subordinated Amount on such Payment
Date after taking into account all distributions to be made on such Payment Date
(except for any distributions of Subordination Reduction Amounts as described in
this paragraph) over (y) the Specified Subordinated Amount is the "Excess
Subordinated Amount" for such Home Equity Loan Group and Payment Date. If, on
any Payment Date, the Excess Subordinated Amount is, or, after taking into
account all other distributions to be made on such Payment Date would be,
greater than zero (i.e., the Subordinated Amount is or would be greater than the
related Specified Subordinated Amount), then any amounts relating to principal
which would otherwise be distributed to the Owners of the related Class A
Certificates on such Payment Date shall instead be distributed to the Owners of
the Subordinate Certificates in an amount equal to the lesser of (x) the Excess
Subordinated Amount and (y) the amount available for distribution on account of
principal with respect to the Class A Certificates on such Payment Date; such
amount being the "Subordination Reduction Amount" with respect to the related
Home Equity Loan Group for such Payment Date. As a result of the cash flow
structure of the Trust, Subordination Reduction Amounts may result even prior to
the occurrence of any decrease or "step down" in the Specified Subordinated
Amount. That is because the Owners of the Class A Certificates will, except for
the provisions relating to the Subordination Amount, be entitled to receive ___%
of collected principal with respect to the related Home Equity Loan Group even
though the Class A Certificate Principal Balance, following the accelerated
amortization resulting from the application of the Net Monthly Excess Cashflow,
will be less than ___% of the related Home Equity Loan Group's aggregate Loan
Balance. Accordingly, in the absence of the provisions relating to Subordination
Reduction Amounts the Subordinated Amount would increase above the Specified
Subordinated Amount requirements even without the further application of any Net
Monthly Excess Cashflow.
The Pooling and Servicing Agreement provides generally that, on any Payment
Date, all amounts collected on account of principal (other than any such amount
applied to the payment of a Subordination Reduction Amount) with respect to a
Home Equity Loan Group during the prior Remittance Period will be distributed to
the Owners of the related Class A Certificates on such Payment Date. If any Home
Equity Loan became a Liquidated Loan during such prior Remittance Period, the
Net Liquidation Proceeds related thereto and allocated to principal may be less
than the principal balance of the related Home Equity Loan; the amount of any
such insufficiency is a "Realized Loss." In addition, the Pooling and Servicing
Agreement provides that the principal balance of any Home Equity Loan which
becomes a Liquidated Loan shall thenceforth equal zero. The Pooling and
Servicing Agreement does not contain any provisions which requires that the
amount of any Realized Loss be distributed to the Owners of the Class A
Certificates on the Payment Date which immediately follows the event of loss;
i.e., the Pooling and Servicing Agreement does not require the current recovery
of losses. However, the occurrence of a Realized Loss will reduce the
Subordinated Amount with respect to the related Home Equity Loan Group, which,
to the extent that such reduction causes the Subordinated Amount to be less than
the Specified Subordinated Amount applicable to the related Payment Date, will
require the payment of a Subordination Increase Amount on such Payment Date (or,
if insufficient funds are available on such Payment Date, on subsequent Payment
Dates, until the Subordinated Amount equals the related Specified Subordinated
Amount). The effect of the foregoing is to allocate losses to the Owners of the
Subordinate Certificates by reducing, or eliminating entirely, payments of
Monthly Excess Spread and of Subordination Reduction Amounts which such Owners
would otherwise receive.
OVERCOLLATERALIZATION AND THE CERTIFICATE INSURANCE POLICY. The Pooling and
Servicing Agreement defines a "Subordination Deficit" with respect to a Home
Equity Loan Group and Payment Date to be the amount, if any, by which (x) the
aggregate of the related Class A Certificate Principal Balances, after taking
into account all distributions to be made on such Payment Date (except for the
amount of any Subordination Deficit), exceeds (y) the sum of (a) the aggregate
principal balances of the Home Equity Loans in the related Home Equity Loan
Group as of the close of business on the last day of the related Remittance
Period and (b) with respect to the Fixed Rate Group only, the amount, if any, on
deposit in the Pre-Funding Account on the last day of the related Remittance
Period. The Pooling and Servicing Agreement requires the Trustee to make a claim
for an Insured Payment under the Certificate Insurance Policy not later than the
third Business Day prior to any Payment Date as to which the Trustee has
determined that a Subordination Deficit will occur for the purpose of applying
the proceeds of such Insured Payment as a payment of principal to the Owners of
the Class A Certificates entitled to such Insured Payment on such Payment Date.
The Certificate Insurance Policy is similar to the overcollateralization
provisions described above insofar as the Certificate Insurance Policy
guarantees ultimate, rather than current, payment of the amounts of any Realized
Losses to the Owners of the Class A Certificates. Investors in the Class A
Certificates should realize that, under extreme loss or delinquency scenarios
applicable to the Home Equity Loans, they may temporarily receive no
distributions of principal when they would otherwise be entitled thereto under
the principal allocation provisions described herein. Nevertheless, the exposure
to risk of loss of principal of the Owners of the Class A Certificates depends
in part on the ability of the Certificate Insurer to satisfy its obligations
under the Certificate Insurance Policy. In that respect and to the extent that
the Certificate Insurer satisfies such obligations, the Owners of the Class A
Certificates are insulated from shortfalls in Available Funds that may arise.
CROSSCOLLATERALIZATION PROVISIONS
In addition to the use of Total Monthly Excess Spread and Net Monthly
Excess Cashflow with respect to a Home Equity Loan Group to cover related
Subordination Increase Amounts, Available Funds Shortfalls and Subordination
Deficits, such Total Monthly Excess Spread and Net Monthly Excess Cashflow will
be available to cover such requirements for the other Home Equity Loan Group as
described under the caption "Description of the Class A Certificates --
Distributions" herein.
THE POOLING AND SERVICING AGREEMENT
In addition to the provisions of the Pooling and Servicing Agreement
summarized elsewhere in the Prospectus and this Prospectus Supplement, there is
set forth below a summary of certain other provisions of the Pooling and
Servicing Agreement. Covenant of the Seller to Take Certain Actions with Respect
to the Home Equity Loans in Certain Situations
Pursuant to the Pooling and Servicing Agreement, upon the discovery by the
Depositor, Seller, the Servicer, the Certificate Insurer, any Sub-Servicer, any
Owner or the Trustee that any representations and warranties with respect to the
Home Equity Loans were untrue in any material respect as of the Closing Date
with the result that the interests of the Owners or of the Certificate Insurer
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 Seller's discovery, its receipt of notice
of breach from any of the other parties or such time as a situation resulting
from an existing statement which is untrue materially and adversely affects the
interests of the Owners or the Certificate Insurer, the Seller will be required
promptly to cure such breach in all material respects or, on the second Monthly
Remittance Date next succeeding such discovery, receipt of notice or such time,
the Seller shall (i) substitute in lieu of each Home Equity Loan which has given
rise to the requirement for action by the Seller a Qualified Replacement
Mortgage (as such term is defined in the Pooling and Servicing Agreement) and
deliver the Substitution Amount to the Trustee on behalf of the Trust as part of
the Monthly Remittance remitted by the Servicer on such Monthly Remittance Date
or (ii) purchase such Home Equity Loan from the Trust at a purchase price equal
to the Loan Purchase Price (as defined below) thereof. Notwithstanding any
provision of the Pooling and Servicing Agreement to the contrary, with respect
to any Home Equity Loan which is not in default or as to which no default is
imminent, no such repurchase or substitution will be made unless the Seller
obtains for the Trustee and the Certificate Insurer an opinion of counsel
experienced in federal income tax matters and acceptable to the Certificate
Insurer to the effect that such a repurchase or substitution would not
constitute a Prohibited Transaction for the Trust or otherwise subject the Trust
to tax and would not jeopardize the status of the REMIC Pool as a REMIC (a
"REMIC Opinion") addressed to the Trustee and the Certificate Insurer and
acceptable to the Trustee and the Certificate Insurer. Any Home Equity Loan as
to which repurchase or substitution was delayed pursuant to the Pooling and
Servicing Agreement shall be repurchased or substituted for (subject to
compliance with the provisions of the Pooling and Servicing Agreement) upon the
earlier of (a) the occurrence of a default or imminent default with respect to
such Home Equity Loan and (b) receipt by the Trustee and the Certificate Insurer
of a REMIC Opinion. In connection with any breach of a representation, warranty
or covenant or defect in documentation giving rise to such repurchase or
substitution obligation, the Seller agrees that it shall, at its expense,
furnish the Trustee and the Certificate Insurer with a REMIC Opinion as a result
of any such repurchase or substitution. The obligation of the Seller so to
substitute or purchase any Home Equity Loan as to which such a statement set
forth below is untrue in any material respect and S-52 has not been remedied
constitutes the sole remedy respecting a discovery of any such statement which
is untrue in any material respect available to the Owners, the Trustee and the
Certificate Insurer.
"Loan Purchase Price" means the outstanding principal balance of the
related Home Equity Loan on the Cut-Off Date (assuming that all scheduled
principal payments due prior to the Cut-Off Date have been made), less any
principal amounts previously distributed to the Owners relating to such Home
Equity Loan (such amount, the "Loan Balance" of such Home Equity Loan) as of the
date of purchase (assuming that the Monthly Remittance remitted by the Servicer
on such Monthly Remittance Date has already been remitted), plus one month's
interest at the Coupon Rate less the Retained Yield together with the aggregate
amount of all unreimbursed Delinquency Advances and Servicing Advances
theretofore made with respect to such Home Equity Loan, all Delinquency Advances
and Servicing Advances which the Servicer has theretofore failed to remit with
respect to such Home Equity Loan and all reimbursed Delinquency Advances to the
extent that reimbursement is not made from the Mortgagor or from Liquidation
Proceeds from the respective Home Equity Loan.
ASSIGNMENT OF HOME EQUITY LOANS
Pursuant to the Pooling and Servicing Agreement, the Seller on the Closing
Date will transfer, assign, set over and otherwise convey without recourse to
the Depositor and the Depositor will transfer, assign, set over and otherwise
convey without recourse to the Trustee in trust all of its respective right,
title and interest in and to each Home Equity Loan (other than any Retained
Yield) and all its respective right, title and interest in and to principal and
interest due (other than any Retained Yield) on each such Home Equity Loan after
the Cut-Off Date; provided, however, that the Seller will reserve and retain all
its right, title and interest in and to principal (including Prepayments) and
interest due on each Home Equity Loan on or prior to the Cut-Off Date. Purely as
a protective measure and not to be construed as contrary to the parties' intent
that the transfer on the Closing Date is a sale, the Seller has also been deemed
to have granted to the Depositor and the Depositor has also been deemed to have
granted to the Trustee a security interest in the Trust Estate in the event that
the transfer of the Trust Estate is deemed to be a loan and not a sale.
In connection with the transfer and assignment of the Initial Home Equity
Loans on the Closing Date and the Subsequent Home Equity Loans on each
Subsequent Transfer Date, the Seller will be required to:
(i) deliver without recourse to the Trustee on the Closing
Date with respect to each Initial Home Equity Loan or on each Subsequent
Transfer Date with respect to each Subsequent Home Equity Loan identified
in the related schedule of Home Equity Loans (A) the original Notes or
certified copies thereof, endorsed in blank or to the order of the Trustee,
(B) the original title insurance policy or a copy certified by the issuer
of the title insurance policy, or the attorney's opinion of title, (C)
originals or certified copies of all intervening assignments, showing a
complete chain of title from origination to the Trustee, if any, including
warehousing assignments, with evidence of recording thereon, (D) originals
of all assumption and modification agreements, if any and (E) either: (1)
the original Mortgage, with evidence of recording thereon (if such original
Mortgage has been returned to Seller from the applicable recording office)
or (2) a copy of the Mortgage certified by the public recording office in
those instances where the original recorded Mortgage has been lost;
(ii) cause, within 60 days following the Closing Date with respect
to the Initial Home Equity Loans, or Subsequent Transfer Date with respect
to the Subsequent Home Equity Loans, assignments of the Mortgages to
"___________________________, as Trustee of _______________ Home Equity
Loan Trust 199__-__ under the Pooling and Servicing Agreement dated as of
________, 199_" to be submitted for recording in the appropriate
jurisdictions; provided, however, that the Seller shall not be required to
prepare any assignment of Mortgage for a Mortgage with respect to which the
original recording information is lacking or to record an assignment of a
Mortgage if the Seller furnishes to the Trustee and the Certificate
Insurer, on or before the Closing Date, with respect to the Initial Home
Equity Loans, or Subsequent Transfer Date with respect to the Subsequent
Home Equity Loans at the Seller's expense an opinion of counsel with
respect to the relevant jurisdiction that such recording is not required to
perfect the Trustee's interests in the related Mortgages Loans (in form
satisfactory to the Certificate Insurer and the Rating Agencies);
(iii) deliver the title insurance policy, the original Mortgages and
such recorded assignments, together with originals or duly certified copies
of any and all prior assignments, to the Trustee within 15 days of receipt
thereof by the Seller (but in any event, with respect to any Mortgage as to
which original recording information has been made available to the Seller
within one year after the Closing Date with respect to the Initial Home
Equity Loans, or Subsequent Transfer Date with respect to the Subsequent
Home Equity Loans); and
(iv) furnish to the Trustee and the Certificate Insurer, at the
Seller's expense, an opinion of counsel with respect to the sale and
perfection of all Subsequent Home Equity Loans delivered to the Trust in
form and substance satisfactory to the Trustee and the Certificate Insurer.
The Trustee will agree, for the benefit of the Owners, to review each File
within 45 days after the Closing Date or Subsequent Transfer Date (or the date
of receipt of any documents delivered to the Trustee after such date) to
ascertain that all required documents (or certified copies of documents) have
been executed and received.
If the Trustee during such 45-day period finds any document constituting a
part of a File which is not properly executed, has not been received, is
unrelated to the Home Equity Loans or that any Home Equity Loan does not conform
in a material respect to the description thereof as set forth in the Schedule of
Home Equity Loans, the Trustee will be required to promptly notify the
Depositor, the Seller and the Certificate Insurer. The Seller will agree in the
Pooling and Servicing Agreement to use reasonable efforts to remedy a material
defect in a document constituting part of a File of which it is so notified by
the Trustee. If, however, within 60 days after the Trustee's notice to it
respecting such defect the Seller shall not have remedied the defect and the
defect materially and adversely affects the interest in the related Home Equity
Loan of the Owners or of the Certificate Insurer, the Seller will be required on
the next succeeding Monthly Remittance Date to (or will cause an affiliate of
the Seller to) (i) substitute in lieu of such Home Equity Loan another Home
Equity Loan of like kind (a "Qualified Replacement Mortgage," as such term is
defined in the Pooling and Servicing Agreement) and deliver any "Substitution
Amount" (the excess, if any, of the Loan Balance of a Home Equity Loan being
replaced over the outstanding principal balance of a replacement Home Equity
Loan plus accrued and unpaid interest) to the Trustee on behalf of the Trust as
part of the Monthly Remittance remitted by the Servicer on such Monthly
Remittance Date or (ii) purchase such Home Equity Loan at a purchase price equal
to the Loan Purchase Price thereof, which purchase price shall be delivered to
the Trust along with the Monthly Remittance remitted by the Servicer on such
Monthly Remittance Date.
In addition to the foregoing, the Trustee has agreed to make a review
during the 18th month after the Closing Date indicating the current status of
the exceptions previously noted by the Trustee (the "Final Certification").
After delivery of the Final Certification, the Trustee and the Servicer shall
provide to Certificate Insurer no less frequently than monthly updated
certifications indicating the then current status of exceptions, until all such
exceptions have been eliminated.
SERVICING AND SUB-SERVICING
The Servicer is required to service the Home Equity Loans in accordance
with the Pooling and Servicing Agreement and the servicing standards set forth
in FNMA's Servicing Guide (the "FNMA Guide"); provided, however, that to the
extent such standards, such obligations or the FNMA Guide is amended by FNMA
after the date of the Pooling and Servicing Agreement and the effect of such
amendment would be to impose upon the Servicer any material additional costs or
other burdens relating to such servicing obligations, the Servicer may, at its
option, determine not to comply with such amendment.
The Servicer is entitled to the Servicing Fee to the extent received. In
addition, the Servicer will be entitled to retain additional servicing
compensation in the form of prepayment charges, release fees, bad check charges,
assumption fees, late payment charges, or any other servicing-related fees, Net
Liquidation Proceeds not required to be deposited in the Principal and Interest
Account pursuant to the Pooling and Servicing Agreement, and similar items.
The Servicer is required to create, or cause to be created, in the name of
the Trustee at one or more depository institutions a principal and interest
account maintained as a trust account in the trust department of such
institution (the "Principal and Interest Account"). All funds in the Principal
and Interest Account are required to be held (i) uninvested or (ii) invested in
Eligible Investments (as defined in the Pooling and Servicing Agreement). Any
investment of funds in the Principal and Interest Account must mature or be
withdrawable at par on or prior to the immediately succeeding Monthly Remittance
Date. Any investment earnings on funds held in the Principal and Interest
Account are for the account of, and any losses therein are also for the account
of and must be promptly replenished by, the Servicer.
The Servicer is required to deposit to the Principal and Interest Account,
within one business day following receipt, all principal collections on the Home
Equity Loans received, and interest collections on the Home Equity Loans accrued
after the Cut-Off Date, including any Prepayments, the proceeds of any
liquidation of a Home Equity Loan net of expenses and unreimbursed Delinquency
Advances ("Net Liquidation Proceeds"), any income from REO Properties and
Delinquency Advances, but net of (i) the Servicing Fee with respect to each Home
Equity Loan and other servicing compensation, (ii) principal collected and
interest accrued on any Home Equity Loan prior to the Cut-Off Date, (iii) Net
Liquidation Proceeds to the extent that such Net Liquidation Proceeds exceed the
sum of (I) the Loan Balance of the related Home Equity Loan, plus (II) accrued
and unpaid interest on such Home Equity Loan (net of the Servicing Fee) to the
date of such liquidation, (iv) the Retained Yield on any Home Equity Loan
actually received by the Servicer, (v) reimbursements for Delinquency Advances,
and (vi) reimbursement for amounts deposited in the Principal and Interest
Account representing payments of principal and/or interest on a Note by a
Mortgagor which are subsequently returned by a depository institution as unpaid
(all such net amounts being referred to herein as the "Daily Collections").
The Servicer may make withdrawals for its own account from the amounts on
deposit in the Principal and Interest Account with respect to each Home Equity
Loan Group, in the following order and only for the following purposes:
(i) to withdraw interest paid with respect to any Home Equity
Loans that had accrued for periods on or prior to the Cut-Off Date;
(ii) to withdraw investment earnings on amounts on deposit
in the Principal and Interest Account;
(iii) to reimburse itself for unrecovered Delinquency
Advances and Servicing Advances;
(iv) to withdraw amounts that have been deposited to the
Principal and Interest Account in error; and
(v) to clear and terminate the Principal and Interest Account
following the termination of the Trust.
The Servicer will remit to the Trustee for deposit in the Certificate
Account the Daily Collections allocable to a Remittance Period not later than
the related Monthly Remittance Date, and Loan Purchase Prices and Substitution
Amounts two Business Days following the related purchase or substitution, as the
case may be.
If the amount on deposit in the Certificate Account as of any Monthly
Remittance Date is less than the sum of (I) the Interest Remittance Amount (as
defined in the Pooling and Servicing Agreement) and (II) the Principal
Remittance Amount (as defined in the Pooling and Servicing Agreement) on such
Monthly Remittance Date, the Servicer is required to remit to the Trustee for
deposit to the Certificate Account a sufficient amount of its own funds to make
the total amount remitted to the Trustee equal to such sum. Such amounts of the
Servicer's own funds so deposited are "Delinquency Advances", including but not
limited to any amount advanced due to the invocation by a Mortgagor of the
relief provisions provided by the Soldiers' and Sailors' Civil Relief Act of
1940. The Servicer may reimburse itself, for any Delinquency Advances paid from
the Servicer's own funds, from collections on the Home Equity Loans with respect
to the related Home Equity Loan Group or from Net Monthly Excess Cashflow with
respect to the related Home Equity Loan Group as specified in the Pooling and
Servicing Agreement.
Notwithstanding the foregoing, if the Servicer determines that the
aggregate unreimbursed Delinquency Advances exceed the aggregate remaining
scheduled payments due from the Mortgagor on the Home Equity Loans, the Servicer
shall not be required to make any future Delinquency Advances and shall be
entitled to reimbursement for such aggregate unreimbursed Delinquency Advances
as provided in the immediately prior sentence. The Servicer shall give written
notice of such determination to the Trustee and the Certificate Insurer; the
Trustee shall promptly furnish a copy of such notice to the Owners of the
Subordinate Certificates; provided, further, that the Servicer shall be entitled
to recover any unreimbursed Delinquency Advances from the Liquidation Proceeds
for the related Home Equity Loans.
The Servicer will be required to pay all "out of pocket" costs and expenses
incurred in the performance of its servicing obligations, including, but not
limited to, (i) expenditures in connection with a foreclosed Home Equity Loan
prior to the liquidation thereof, including, without limitation, expenditures
for real estate property taxes, hazard insurance premiums, property restoration
or preservation ("Preservation Expenses"), (ii) the cost of any enforcement or
judicial proceedings, including foreclosures and (iii) the cost of the
management and liquidation of Property acquired in satisfaction of the related
Mortgage. Such costs will constitute "Servicing Advances." The Servicer may
recover a Servicing Advance (x) to the extent permitted by the Home Equity Loans
or, if not theretofore recovered from the Mortgagor on whose behalf such
Servicing Advance was made, from Liquidation Proceeds realized upon the
liquidation of the related Home Equity Loan or (y) from Net Monthly Excess
Cashflow as specified in the Pooling and Servicing Agreement. Except as provided
above, in no case may the Servicer recover Servicing Advances from the principal
and interest payments on any other Home Equity Loan.
A full month's interest at the related Coupon Rate less the Retained Yield,
if any, and the Servicing Fee will be due to the Trust on the outstanding Loan
Balance of each Home Equity Loan as of the beginning of each Remittance Period.
If a Prepayment of a Home Equity Loan occurs during any calendar month, any
difference between the interest collected from the Mortgagor in connection with
such prepayment and the full month's interest at the Coupon Rate less the
Retained Yield that is due and the Servicing Fee ("Compensating Interest") plus
any Date-of-Payment interest shortfalls (but not in excess of the aggregate
Servicing Fee for the related Accrual Period), will be required to be deposited
to the Principal and Interest Account on the Monthly Remittance Date by the
Servicer and shall be included in the Monthly Remittance to be made available to
the Trustee on the next succeeding Monthly Remittance Date.
The Servicer, and in the absence of the exercise thereof by the Servicer,
the Certificate Insurer, will have the right and the option, but not the
obligation, to purchase for its own account any Home Equity Loan which becomes
delinquent, in whole or in part, as to four consecutive monthly installments or
any Home Equity Loan as to which enforcement proceedings have been brought by
the Servicer. The purchase price for any such Home Equity Loan is equal to the
Loan Purchase Price thereof, which purchase price shall be delivered to the
Trustee.
The Servicer is required to cause to be liquidated any Home Equity Loan
relating to a Property as to which ownership has been effected in the name of
the Servicer on behalf of the Trust and which has not been liquidated within 23
months of such effecting of ownership at such price as the Servicer deems
necessary to comply with this requirement, or within such period of time as may,
in the opinion of counsel nationally recognized in federal income tax matters,
be permitted under the Code.
If so required by the terms of any Home Equity Loan, the Servicer will be
required to cause hazard insurance to be maintained with respect to the related
Property and to advance sums on account of the premiums therefor if not paid by
the Mortgagor if permitted by the terms of such Home Equity Loan.
The Servicer will have the right under the Pooling and Servicing Agreement
to accept applications of Mortgagors for consent to (i) partial releases of
Mortgages, (ii) alterations and (iii) removal, demolition or division of
Properties. No application for approval may be considered by the Servicer
unless: (i) the provisions of the related Note and Mortgage have been complied
with; (ii) the loan-to-value ratio and debt-to-income ratio after any release
does not exceed the maximum loan-to-value ratio and debt-to-income ratio
established in accordance with the underwriting standards set forth under the
caption "The Seller and Servicer--Credit and Underwriting Guidelines" herein to
be applicable to such Home Equity Loan; and (iii) the lien priority of the
related Mortgage is not affected.
The Servicer will be permitted under the Pooling and Servicing Agreement to
enter into Sub-Servicing Agreements for any servicing and administration of Home
Equity Loans with any institution which (i) is a FHLMC or FNMA approved
Seller-Servicer for second mortgage loans and has equity of at least $_________
or (ii) is an affiliate of the Servicer.
Notwithstanding any Sub-Servicing Agreement, the Servicer will not be
relieved of its obligations under the Pooling and Servicing Agreement and the
Servicer will be obligated to the same extent and under the same terms and
conditions as if it alone were servicing and administering the Home Equity
Loans. The Servicer shall be entitled to enter into any agreement with a
Sub-Servicer for indemnification of the Servicer by such Sub-Servicer and
nothing contained in such Sub-Servicing Agreement shall be deemed to limit or
modify the Pooling and Servicing Agreement.
The Servicer (except _______________________________ if it is required to
succeed the Servicer under the Pooling and Servicing Agreement) agrees to
indemnify and hold the Trustee, the Certificate Insurer, and each Owner harmless
against any and all claims, losses, penalties, fines, forfeitures, legal fees
and related costs, judgments, and any other costs, fees and expenses that the
Trustee, the Certificate Insurer, and any Owner may sustain in any way related
to the failure of the Servicer to perform its duties and service the Home Equity
Loans in compliance with the terms of the Pooling and Servicing Agreement. The
Servicer shall immediately notify the Trustee, the Certificate Insurer, and each
Owner if a claim is made by a third party with respect to the Pooling and
Servicing Agreement, and the Servicer shall assume (with the consent of the
Trustee) the defense of any such claim and pay all expenses in connection
therewith, including reasonable counsel fees, and promptly pay, discharge and
satisfy any judgment or decree which may be entered against the Servicer, the
Trustee, the Certificate Insurer and/or Owner in respect of such claim. The
Trustee may, if necessary, reimburse the Servicer from amounts otherwise
distributable on the Subordinate Certificates for all amounts advanced by it
pursuant to the preceding sentence except when the claim relates directly to the
failure of the Servicer to service and administer the Home Equity Loans in
compliance with the Pooling and Servicing Agreement.
The Servicer will be required to deliver to the Trustee, the Certificate
Insurer, and the Rating Agencies: (1) on or before March 31 of each year,
commencing in 199_, an officers' certificate stating, as to each signer thereof,
that (i) a review of the activities of the Servicer during such preceding
calendar year and of performance under the Pooling and Servicing Agreement has
been made under such officers' supervision, and (ii) to the best of such
officers' knowledge, based on such review, the Servicer has fulfilled all its
obligations under the Pooling and Servicing Agreement for such year, or, if
there has been a default in the fulfillment of all such obligation, specifying
each such default known to such officers and the nature and status thereof
including the steps being taken by the Servicer to remedy such default; and (2)
on or before ________, 199_ and on or before _______ of any year commencing in
199_, a letter or letters of a firm of independent, nationally recognized
certified public accountants reasonably acceptable to the Certificate Insurer
dated as of ___________, 199_ in the case of the 199_ letter and as of the date
of the Servicer's fiscal audit for each subsequent letter stating that such firm
has examined the Servicer's overall servicing operations in accordance with the
requirements of the Uniform Single Audit Program for Mortgage Bankers, and
stating such firm's conclusions relating thereto.
REMOVAL AND RESIGNATION OF SERVICER
The Certificate Insurer or the Owners, with the consent of the Certificate
Insurer, will have the right pursuant to the Pooling and Servicing Agreement, to
remove the Servicer upon the occurrence of: (a) certain acts of bankruptcy or
insolvency on the part of the Servicer; (b) certain failures on the part of the
Servicer to perform its obligations under the Pooling and Servicing Agreement;
or (c) the failure to cure material breaches of the Servicer's representations
in the Pooling and Servicing Agreement.
The Pooling and Servicing Agreement also provides that the Certificate
Insurer may remove the Servicer upon the occurrence of certain additional
events.
The Servicer is not permitted to resign from the obligations and duties
imposed on it under the Pooling and Servicing Agreement except upon
determination that its duties thereunder are no longer permissible under
applicable law or are in material conflict by reason of applicable law with any
other activities carried on by it, the other activities of the Servicer so
causing such conflict being of a type and nature carried on by the Servicer on
the date of the Pooling and Servicing Agreement. Any such determination
permitting the resignation of the Servicer is required to be evidenced by an
opinion of counsel to such effect which shall be delivered to the Trustee and
the Certificate Insurer.
Upon removal or resignation of the Servicer, the Trustee (x) may solicit
bids for a successor servicer and (y) pending the appointment of a successor
Servicer as a result of soliciting such bids, shall serve as Servicer. The
Trustee, if it is unable to obtain a qualifying bid and is prevented by law from
acting as servicer, will be required to appoint, or petition a court of
competent jurisdiction to appoint, any housing and home finance institution,
bank or mortgage servicing institution designated as an approved seller-servicer
by the Federal Home Loan Mortgage Corporation ("FHLMC") or the Federal National
Mortgage Association ("FNMA") having equity of not less than $_________, and
acceptable to the Certificate Insurer and the Owners of the Class R Certificates
(provided that if the Certificate Insurer and such Owners cannot agree as to the
acceptability of such successor Servicer, the decision of the Certificate
Insurer shall control) as the successor to the Servicer in the assumption of all
or any part of the responsibilities, duties or liabilities of the Servicer.
No removal or resignation of the Servicer will become effective until the
Trustee or a successor servicer shall have assumed the Servicer's
responsibilities and obligations in accordance with the Pooling and Servicing
Agreement.
The Trustee _______________________________, a _______________ banking
corporation, having its principal corporate trust office at
___________________________ will be named as Trustee under the Pooling and
Servicing Agreement. Reporting Requirements
On each Payment Date the Trustee is required to report in writing to each
Owner and the Certificate Insurer:
(i) the amount of the distribution with respect to the
related Class of the Class A Certificates and the Subordinate Certificates
(based on a Certificate in the original principal amount of $_____);
(ii) the amount of such distribution allocable to principal on
the Home Equity Loans in each Group, separately identifying the aggregate
amount of any Prepayments or other recoveries of principal included
therein, with respect to the Fixed Rate Group, any Pre-Funded Amounts
distributed as a Prepayment at the end of the Funding Period (based on a
Certificate in the original principal amount of $_____) and any
Subordination Increase Amount with respect to each such Group;
(iii) the amount of such distribution allocable to interest on
the related Home Equity Loans in each Group (based on a Certificate in the
original principal amount of $_____);
(iv) if the distribution (net of any Insured Payment) to the
Owners of any Class of the Class A Certificates on such Payment Date was
less than the related Class A Distribution Amount on such Payment Date, the
Carry-Forward Amount and the allocation thereof to the related Classes of
the Class A Certificates resulting therefrom;
(v) the amount of any Insured Payment included in the amounts
distributed to the Owners of each Class of the Class A Certificates on such
Payment Date;
(vi) the principal amount of each Class of the Class A
Certificate (based on a Certificate in the original principal amount of
$_____) which will be outstanding after giving effect to any payment of
principal on such Payment Date;
(vii) the aggregate Loan Balance of all Home Equity Loans, the
aggregate Loan Balance of the Home Equity Loans in each Group and, in the
case of the Fixed Rate Group only, the aggregate Loan Balance of the
Initial Home Equity Loans and the Subsequent Home Equity Loans, in each
case after giving effect to any payment of principal on such Payment Date;
(viii) the Subordinated Amount and Subordination Deficit for each
Group, if any, remaining after giving effect to all distributions and
transfers on such Payment Date;
(ix) based upon information furnished by the Seller such
information as may be required by Section 6049(d)(7)(C) of the Code and the
regulations promulgated thereunder to assist the Owners in computing their
market discount;
(x) the total of any Substitution Amounts or Loan Purchase
Price amounts included in such distribution with respect to each Group;
(xi) the weighted average Coupon Rate of the Home Equity
Loans with respect to each Group;
(xii) such other information as the Certificate Insurer may
reasonably request with respect to delinquent Home Equity Loans;
(xiii) the largest Home Equity Loan balance outstanding; and
(xiv) for Payment Dates during the Funding Period, the
remaining Pre-Funded Amount.
Certain obligations of the Trustee to provide information to the Owners are
conditioned upon such information being received from the Servicer.
In addition, on each Payment Date the Trustee will be required to
distribute to each Owner and the Certificate Insurer, together with the
information described above, the following information prepared by the Servicer
and furnished to the Trustee for such purpose and with respect to each Home
Equity Loan Group;
(a) the number and aggregate principal balances of Home Equity
Loans (i) 30-59 days delinquent, (ii) 60-89 days delinquent and (ii) 90 or
more days delinquent, as of the close of business on the last business day
of the calendar month next preceding the Payment Date and the Class A
Certificate Principal Balance as of such Payment Date and the number and
aggregate Loan Balances of all Home Equity Loans and related data;
(b) the status and the number and dollar amounts of all Home
Equity Loans in foreclosure proceedings as of the close of business on the
last business day of the calendar month next preceding such Payment Date;
(c) the number of Mortgagors and the Loan Balances of the
related Mortgages involved in bankruptcy proceedings as of the close of
business on the last business day of the calendar month next preceding such
Payment Date;
(d) the existence and status of any Properties as to which title
has been taken in the name of, or on behalf of the Trustee, as of the close
of business of the last business day of the month next preceding the
Payment Date;
(e) the book value of any real estate acquired through
foreclosure or grant of a deed in lieu of foreclosure as of the close of
business on the last business day of the calendar month next preceding the
Payment Date; and
(f) the amount of cumulative Realized Losses.
REMOVAL OF TRUSTEE FOR CAUSE
The Trustee may be removed upon the occurrence of any one of the following
events (whatever the reason for such event and whether it shall be voluntary or
involuntary or be effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body) on the part of the Trustee: (1) failure to
make distributions of available amounts; (2) certain breaches of covenants and
representations by the Trustee; (3) certain acts of bankruptcy or insolvency on
the part of the Trustee; and (4) failure to meet the standards of Trustee
eligibility as set forth in the Pooling and Servicing Agreement.
If any such event occurs and is continuing, then and in every such case (i)
the Certificate Insurer or (ii) with the prior written consent of the
Certificate Insurer (which is required not to be unreasonably withheld) (x) the
Seller or (y) the Owners of a majority of the Percentage Interests represented
by the Class A Certificates or, if there are no Class A Certificates then
Outstanding, by a majority of the Percentage Interests represented by the Class
R Certificates, may appoint a successor trustee.
GOVERNING LAW
The Pooling and Servicing Agreement and each Certificate will be construed
in accordance with and governed by the laws of the State of _______________
applicable to agreements made and to be performed therein.
AMENDMENTS
The Trustee, the Depositor, the Seller and the Servicer with the consent of
the Certificate Insurer may, at any time and from time to time and without
notice to or the consent of the Owners, amend the Pooling and Servicing
Agreement, and the Trustee will be required to consent to such amendment, for
the purposes of (i) if accompanied by an approving opinion of counsel
experienced in federal income tax matters, removing the restriction against the
transfer of a Class R Certificate to a Disqualified Organization (as such term
is defined in the Code), (ii) complying with the requirements of the Code
including any amendments necessary to maintain REMIC status, (iii) curing any
ambiguity and (iv) correcting or supplementing any provisions therein which are
inconsistent with any other provisions therein.
The Pooling and Servicing Agreement may also be amended by the Trustee, the
Depositor, the Seller and the Servicer at any time and from time to time, with
the prior written approval of the Certificate Insurer and not less than a
majority of the Percentage Interest 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 of the Pooling and
Servicing Agreement or of modifying in any manner the rights of the Owners
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 Owner without the consent of the Owner of such Certificate,
(b) change the percentages of Percentage Interest which are required to consent
to any such amendments, without the consent of the Owners of all Certificates of
the Class or Classes affected then outstanding or (c) which affects in any
manner the terms or provisions of the Certificate Insurance Policy.
The Trustee will be required to furnish written notification of the
substance of any such amendment to each Owner in the manner set forth in the
Pooling and Servicing Agreement.
TERMINATION OF THE TRUST
The Pooling and Servicing Agreement provides that the Trust will terminate
upon the payment to the Owners of all Certificates from amounts other than those
available under the Certificate Insurance Policy of all amounts required to be
paid to such Owners upon the last to occur of (a) the final payment or other
liquidation (or any advance made with respect thereto) of the last Home Equity
Loan, (b) the disposition of all property acquired in respect of any Home Equity
Loan remaining in the Trust Estate and (c) at any time when a Qualified
Liquidation of the Trust Estate is effected as described below. To effect a
termination pursuant to clause (c) above, the Owners of all Certificates then
outstanding will be required (i) unanimously to direct the Trustee on behalf of
the REMIC to adopt a plan of complete liquidation, as contemplated by Section
860F(a)(4) of the Code and (ii) to furnish to the Trustee an opinion of counsel
experienced in federal income tax matters acceptable to the Certificate Insurer
and the Trustee to the effect that such liquidation constitutes a Qualified
Liquidation.
OPTIONAL TERMINATION
By Owners of Class R Certificates. At their option, the Owners of a
majority of the Percentage Interest represented by the Class R Certificates then
outstanding or in certain limited circumstances the Certificate Insurer may, on
any Payment Date when the aggregate outstanding Loan Balances of the Home Equity
Loans is less than __% of the Maximum Collateral Amount, purchase from the Trust
all (but not fewer than all) remaining Home Equity Loans, in whole only, and
other property acquired by foreclosure, deed in lieu of foreclosure, or
otherwise then constituting the Trust Estate (i) on terms agreed upon between
the Certificate Insurer and such Class R Certificate Owners, or (ii) in the
absence of such agreement at a price equal to ___% of the aggregate Loan Balance
of the related Home Equity Loans as of the day of purchase minus amounts
remitted from the Principal and Interest Account to the Certificate Account
representing collections of principal on the Home Equity Loans during the
current Remittance Period, plus one month's interest on such amount computed at
the Adjusted Pass-Through Rate (as defined in the Pooling and Servicing
Agreement), plus all accrued and unpaid Servicing Fees plus the aggregate amount
of any unreimbursed Delinquency Advances and Servicing Advances and Delinquency
Advances which the Servicer has theretofore failed to remit.
Termination Upon Loss of REMIC Status. Following a final determination by
the Internal Revenue Service or by a court of competent jurisdiction, in either
case from which no appeal is taken within the permitted time for such appeal, or
if any appeal is taken, following a final determination of such appeal from
which no further appeal can be taken, to the effect that the REMIC does not and
will no longer qualify as a "REMIC" pursuant to Section 860D of the Code (the
"Final Determination"), at any time on or after the date which is 30 calendar
days following such Final Determination the Certificate Insurer or the Owners of
a majority in Percentage Interests represented by the Class A Certificates then
Outstanding with the consent of the Certificate Insurer may direct the Trustee
on behalf of the Trust to adopt a plan of complete liquidation, as contemplated
by Section 860F(a)(4) of the Code.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is the opinion of Stroock & Stroock & Lavan LLP, special
counsel to the Depositor as to certain of the material federal income tax
consequences of the purchase, ownership and disposition of the Class A
Certificates and is to be considered only in connection with "Certain Federal
Income Tax Consequences" in the Prospectus. The discussion herein and in the
Prospectus is based upon laws, regulations, rulings and decisions now in effect,
all of which are subject to change. The discussion below and in the Prospectus
does not purport to deal with all federal tax consequences applicable to all
categories of investors, some of which may be subject to special rules.
Investors should consult their own tax advisors in determining the federal,
state, local and any other tax consequences to them of the purchase, ownership
and disposition of the Class A Certificates.
REMIC ELECTION
Pursuant to the Pooling and Servicing Agreement, the Trustee will elect to
treat the Trust Estate (other than the Pre-Funding Account and the Capitalized
Interest Account) as a REMIC for federal income tax purposes. The REMIC will
issue the Class A Certificates and the Subordinate Certificates (other than the
Class R Certificates) which will be designated as regular interests in the REMIC
and the Class R Certificates which will be designated as the residual interest
in the REMIC. See "Formation of the Trust and Trust Property" herein.
The Fixed Rate Certificates are expected to be sold at a discount. See
"Certain Federal Income Tax Consequences -- Taxation of Regular Certificates --
Original Issue Discount" in the Prospectus.
Qualification as a REMIC requires ongoing compliance with certain
conditions. Stroock & Stroock & Lavan LLP, special tax counsel to the Depositor,
is of the opinion that, for federal income tax purposes, assuming (i) the REMIC
election is made and (ii) compliance with the Pooling and Servicing Agreement,
the REMIC will be treated as a REMIC, the Class A Certificates will be treated
as "regular interests" in the REMIC and the Class R Certificates will be the
sole "residual interest" in the REMIC. Except as indicated below and in the
Prospectus, for federal income tax purposes, regular interests in a REMIC are
treated as debt instruments issued by the REMIC on the date on which those
interests are created, and not as ownership interests in the REMIC or its
assets. Owners of the Class A Certificates that otherwise report income under a
cash method of accounting will be required to report income with respect to such
Class A Certificates under an accrual method.
The prepayment assumption for each Class of the Class A Certificates for
calculating original issue discount is ___% of the applicable Prepayment
Assumption. See "Prepayment and Yield Considerations -- Projected Prepayment and
Yield for Class A Certificates" herein.
As a result of the qualification of certain specified assets of the Trust
as a REMIC, the Trust will not be subject to federal income tax except with
respect to (i) income from prohibited transactions, (ii) "net income from
foreclosure property" and (iii) certain contributions to the Trust after the
Closing Date (see "Certain Federal Income Tax Consequences" in the Prospectus).
Under the laws of New York State and New York City, an entity that is
treated for federal income tax purposes as a REMIC generally is exempt from
entity level taxes imposed by those jurisdictions. This exemption does not
apply, however, to the income on the Class A Certificates.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes certain restrictions on employee benefit plans subject to ERISA
("Plans") and on persons who are parties in interest or disqualified persons
("parties in interest") with respect to such Plans. Certain employee benefit
plans, such as governmental plans and church plans (if no election has been made
under section 410(d) of the Code), are not subject to the restrictions of ERISA,
and assets of such plans may be invested in the Certificates without regard to
the ERISA considerations described below, subject to other applicable federal
and state law. However, any such governmental or church plan which is qualified
under section 401(a) of the Code and exempt from taxation under section 501(a)
of the Code is subject to the prohibited transaction rules set forth in section
503 of the Code.
Investments by Plans are subject to ERISA's general fiduciary requirements,
including the requirement of investment prudence and diversification and the
requirement that a Plan's investments be made in accordance with the documents
governing the Plan.
Section 406 of ERISA prohibits parties in interest with respect to a Plan
from engaging in certain transactions ("prohibited transactions") involving a
Plan and its assets unless a statutory or administrative exemption applies to
the transaction. Section 4975 of the Code imposes certain excise taxes (or, in
some cases, a civil penalty may be assessed pursuant to section 502(i) of ERISA)
on parties in interest which engage in non-exempt prohibited transactions.
The United States Department of Labor ("DOL") has issued a final regulation
(29 C.F.R. Section 2510.3- 101) containing rules for determining what
constitutes the assets of a Plan. This regulation provides that, as a general
rule, the underlying assets and properties of corporations, partnerships, trusts
and certain other entities in which a Plan makes an "equity investment" will be
deemed for purposes of ERISA to be assets of the Plan unless certain exceptions
apply.
Under the terms of the regulation, the Trust may be deemed to hold plan
assets by reason of a Plan's investment in a Certificate; such plan assets would
include an undivided interest in the Home Equity Loans and any other assets held
by the Trust. In such an event, persons providing services with respect to the
assets of the Trust, may be parties in interest, subject to the fiduciary
responsibility provisions of Title I of ERISA, including the prohibited
transaction provisions of Section 406 of ERISA (and of Section 4975 of the
Code), with respect to transactions involving such assets unless such
transactions are subject to a statutory or administrative exemption.
One such exception applies if the class of equity interests in question is
(i) "widely held", (ii) freely transferable, and (iii) sold as part of an
offering pursuant to (A) an effective registration statement under the
Securities Act of 1933, and then subsequently registered under the Securities
Exchange Act of 1934 or (B) an effective registration statement under Section
12(b) or 12(g) of the Securities Exchange Act of 1934 ("Publicly Offered
Securities"). In addition the regulation provides that if at all times more than
__% of the value of classes of equity interests in the Trust are held by
investors other than benefit plan investors (which is defined as including plans
subject to ERISA, government plans and individual retirement accounts), the
investing Plan's assets will not include any of the underlying assets of the
Trust.
An additional exemption may also be available. The DOL has granted an
administrative exemption to [Underwriters] (PTE 91-14, Exemption Application No.
D-7958, 56 Fed. Reg. 7414) (the "Exemption") which exempts from the application
of certain of the Prohibited Transaction rules of ERISA transactions relating to
(i) the initial purchase, the holding and the subsequent resale by Plans of
certificates representing interests in certain asset- backed pass-through trusts
with respect to which such Underwriter or any of its affiliates is the sole
underwriter or the manager or co-manager of the underwriting syndicate; and (ii)
the servicing, operation and management of such asset-backed pass-through
trusts, provided that the general conditions and certain other conditions set
forth in the Exemption are satisfied.
The general conditions which must be satisfied for the Exemption by a Plan
of the Class A Certificates are the following:
(i) the acquisition of the Class A Certificates by a Plan is on
terms (including the price for the Class A Certificates) that are at least
as favorable to the Plan as they would be in an arm's length transaction
with an unrelated party;
(ii) the rights and interests evidenced by the Class A
Certificates acquired by the Plan are not subordinated to the rights and
interests evidenced by other certificates of the Trust;
(iii) the Class A Certificates acquired by the Plan have
received a rating at the time of such acquisition that is in one of the
three highest generic rating categories from any of S&P, Moody's, Fitch
Investors Service, Inc. or Duff & Phelps Credit Rating Co.;
(iv) the Trustee is not an affiliate of [Underwriters], the
Depositor, the Seller, the Servicer, the Certificate Insurer, any borrower
whose obligations under one or more Home Equity Loans constitute more than
_% of the aggregate unamortized principal balance of the assets in the
Trust, or any of their respective affiliates (the "Restricted Group");
(v) the sum of all payments made to, and retained by,
[Underwriters] in connection with the distribution of the Class A
Certificates represents not more than reasonable compensation for
underwriting the Class A Certificates; the sum of all payments made to and
retained by the Depositor pursuant to the sale of the Home Equity Loans to
the Trust represents not more than the fair market value of such Home
Equity Loans; and the sum of all payments made to and retained by the
Servicer represents not more than reasonable compensation for the
Servicer's services under the Pooling and Servicing Agreement and
reimbursement of the Servicer's reasonable expenses in connection
therewith; and
(vi) the Plan investing in the Class A 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. A fiduciary of a Plan considering whether to purchase any Class A
Certificates should individually determine that the Plan satisfied the
conditions described in clauses (i) and (vi) above. The Depositor believes
that the Trust will satisfy the conditions described in the other clauses
above.
Section I.A of the Exemption would provide an exemption from the
restrictions of sections 406(a) and 407(a) of ERISA as well as the excise taxes
imposed by sections 4975(a) and (b) of the Code by reason of sections
4975(c)(1)(A) through (D) of the Code with respect to a Plan's investment in the
Class A Certificates upon their initial offering or in the secondary market
therefor and the Plan's continued holding of such Certificates if the
above-described general conditions of the Exemptions are satisfied.
Section I.B of the Exemption would provide an exemption from the
restrictions of sections 406(b)(1) and 406(b)(2) of ERISA as well as the excise
taxes imposed by sections 4975(a) and (b) of the Code by reason of section
4975(c)(1)(E) of the Code with respect to a Plan's investment in the Class A
Certificates upon their initial offering or in the secondary market therefor and
the Plan's continued holding of such Certificates if, in addition to the
above-described general conditions of the Exemption, the following conditions
are satisfied: (i) such Plan is not sponsored by a member of the Restricted
Group; (ii) at least __% of the Class A Certificates is acquired by persons
independent of the Restricted Group and at least __% of the aggregate interest
in the Trust is acquired by persons independent of the Restricted Group; (iii)
the total investment of such Plan in the Class A Certificates does not exceed
__% of all the Class A Certificates outstanding at the time of the acquisition;
and (iv) immediately after such investment, no more than __% of the assets of
such Plan are invested in certificates representing an interest in a trust
containing assets sold or serviced by the same entity. A fiduciary intending to
cause a Plan to purchase any Class A Certificates to which the exemption
described in this paragraph is applicable should individually ascertain
satisfaction of the conditions described in clauses (i) and (iv) above.
Section I.C of the Exemption would provide an exemption from the
restrictions of sections 406(a), 406(b) and 407(a) of ERISA as well as the
excise taxes imposed by sections 4975(a) and (b) of the Code by reason of
section 4975(c) of the Code with respect to the servicing, management and
operation of the Trust if, in addition to the above-described general conditions
of the Exemption, the following conditions are satisfied: (i) such transactions
are carried out in accordance with the terms of the Pooling and Servicing
Agreement, and (ii) the Pooling and Servicing Agreement is made available to
investors prior to their investment in the Trust. The Depositor intends to
comply with the foregoing conditions.
Section I.D of the Exemption would provide an exemption from the
restrictions of sections 406(a) and 407(a) of ERISA as well as the excise taxes
imposed by sections 4975(a) and (b) of the Code by reason of sections
4975(c)(1)(A) through (D) of the Code with respect to transactions to which
those restrictions or taxes would otherwise apply merely because a person is
deemed to be a party in interest or a disqualified person (including a
fiduciary) with respect to a Plan by virtue of providing services to the Plan
(or by virtue of having a relationship to such service provider described in
section 3(14)(F), (G), (H) or (I) of ERISA or section 4975(e)(2)(F), (G), (H),
or (I) of the Code), solely because of the Plan's ownership of the Certificates.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code and the potential consequences to
their specific circumstances, prior to making an investment in the Certificates.
Moreover, each Plan fiduciary should determine whether under the general
fiduciary standards of investment procedure and diversification an investment in
the Certificate is appropriate for the Plan, taking into account the overall
investment of the Plan and the composition of the Plan's investment portfolio.
RATINGS
It is a condition of the issuance of the Class A Certificates that the
Class A Certificates receive ratings of "AAA" by S&P and "Aaa" by Moody's. The
ratings assigned to the Class A Certificates will be based primarily on the
claims-paying ability of the Certificate Insurer. 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. Such
ratings will be the views only of such rating agencies. There is no assurance
that any such ratings will continue for any period of time or that such ratings
will not be revised or withdrawn. Any such revision or withdrawal of such
ratings may have an adverse effect on the market price of the Class A
Certificates. A security rating is not a recommendation to buy, sell or hold
securities.
Ratings which are assigned to securities such as the Class A-7IO
Certificates generally evaluate the ability of the seller (i.e., the Trust) and
any guarantor (i.e., the Certificate Insurer) to make payments, as required by
such securities. The amounts distributable on the Class A-7IO Certificates
consist only of interest. In general, the ratings address credit risk and not
prepayment risk. If all of the Home Equity Loans were to prepay in the initial
month, with the result that investors in the Class A-7IO Certificates receive
only a single month's interest and thus suffer a nearly complete loss of their
investment, all amounts "due" to such Owners will nevertheless have been paid,
and such result is consistent with the "AAAr/Aaa" ratings received on the Class
A-7IO Certificates.
The "r" symbol is appended to the rating by Standard & Poor's of the Class
A-7IO Certificates because they are interest-only Certificates that Standard &
Poor's believes may experience high volatility or high variability in expected
returns due to non-credit risks created by the terms of such Certificates. The
absence of an "r" symbol in the rating of the other Classes of Class A
Certificates should not be taken as an indication that such Certificates will
experience no volatility or variability in total return.
LEGAL INVESTMENT CONSIDERATIONS
[Although the Fixed Rate Certificates are expected to be rated "AAA" by S&P
and "Aaa" by Moody's, such Certificates will not constitute "mortgage related
securities" for purposes of SMMEA because the Home Equity Loans in the Fixed
Rate Group include second liens. Accordingly, many institutions with legal
authority to invest in comparably rated securities based on first mortgage loans
may not be legally authorized to invest in the Class A Certificates.]
The Class [A/A-6] Certificates will constitute "mortgage related
securities" for purposes of SMMEA for so long as they are rated in one of the
two highest rating categories by one or more nationally recognized statistical
rating organizations. As such, such Classes of Certificates will be legal
investments for certain entities to the extent provided in SMMEA, subject to
state laws overriding SMMEA. In addition, institutions whose investment
activities are subject to review by federal or state regulatory authorities may
be or may become subject to restrictions, which may be retroactively imposed by
such regulatory authorities, on the investment by such institutions in certain
forms of mortgage related securities. Furthermore, certain states have enacted
legislation overriding the legal investment provisions of SMMEA. In addition,
institutions whose activities are subject to review by federal or state
regulatory authorities may be or may become subject to restrictions, which may
be retroactively imposed by such regulatory authorities, on the investment by
such institutions in certain forms of mortgage related securities.]
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
relating to the Certificates (the "Underwriting Agreement"), the Depositor has
agreed to cause the Trust to sell to each of the Underwriters named below (the
"Underwriters"), and each of the Underwriters has severally agreed to purchase,
the principal amount or Percentage Interest of the Class A Certificates set
forth opposite its name below:
Class A-1 Certificates
UNDERWRITERS PRINCIPAL AMOUNT
------------ ----------------
[Underwriters] $________________
Class A-2 Certificates
UNDERWRITERS PRINCIPAL AMOUNT
------------ ----------------
[Underwriters] $________________
Class A-3 Certificates
UNDERWRITERS PRINCIPAL AMOUNT
------------ ----------------
[Underwriters] $________________
Class A-4 Certificates
UNDERWRITERS PRINCIPAL AMOUNT
------------ ----------------
[Underwriters] $________________
Class A-5 Certificates
UNDERWRITERS PRINCIPAL AMOUNT
------------ ----------------
[Underwriters] $________________
Class A-6 Certificates
UNDERWRITERS PRINCIPAL AMOUNT
------------ ----------------
[Underwriters] $________________
The Depositor has agreed to indemnify the Underwriters against certain
liabilities, including civil liabilities under the Securities Act, or contribute
to payments which the Underwriters may be required to make in respect thereof.
REPORT OF EXPERTS
The financial statements of __________________________, for the year ended
___________, 199_, appearing in Appendix B of this Prospectus Supplement, have
been audited by _______________, independent auditors, as set forth in their
report thereon appearing in Appendix B, and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
The financial statements of __________________________ included in this
Prospectus Supplement in Appendix B, as of ___________, 199_ and 199_ and for
each of the years in the two year period then ended, have been included in
reliance upon the report of ________________________, independent certified
public accountants, appearing in Appendix B, upon the authority of such firm as
experts in accounting and auditing.
The report of ________________________ covering the ___________, 199_ and
199_ financial statements refers to changes, in 199_, in accounting methods for
multiple-year retrospectively rated reinsurance contracts, and for the adoption
of the provisions of the Financial Accounting Standards Board's Statement of
Financial Accounting Standards No. 113, "Accounting and Reporting for
Reinsurance of Short-Duration and Long-Duration Contracts" and No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
CERTAIN LEGAL MATTERS
Certain legal matters relating to the validity of the issuance of the
Certificates will be passed upon for the Seller by Stroock & Stroock & Lavan
LLP, New York, New York and by Alan L. Langus, Esquire, Chief Counsel for the
Depositor. Certain legal matters relating to insolvency issues and certain
federal income tax matters concerning the Certificates will be passed upon for
the Depositor by Stroock & Stroock & Lavan LLP.
<PAGE>
ANNEX I
TO PROSPECTUS SUPPLEMENT
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered
_______________ Home Equity Loan Trust 199__-__ Home Equity Loan Pass-Through
Certificates, Class A (the "Global Securities") will be available only in
book-entry form. Investors in the Global Securities may hold such Global
Securities through any of DTC, CEDEL or Euroclear. The Global Securities will be
tradeable as home market instruments in both the European and U.S. domestic
markets. Initial settlement and all secondary trades will settle in same- day
funds.
Secondary market trading between investors through CEDEL and Euroclear will
be conducted in the ordinary way in accordance with the normal rules and
operating procedures of CEDEL and Euroclear and in accordance with conventional
eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors through DTC will be conducted
according to DTC's rules and procedures applicable to U.S. corporate debt
obligations.
Secondary cross-market trading between CEDEL or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of CEDEL and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the Global Securities will
be represented through financial institutions acting on their behalf as direct
and indirect Participants in DTC. As a result, CEDEL and Euroclear will hold
positions on behalf of their participants through their Relevant Depositary
which in turn will hold such positions in their accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will follow
DTC settlement practices. Investor securities custody accounts will be credited
with their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through CEDEL or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior mortgage
loan asset-backed certificates issues in same-day funds.
Trading between CEDEL and/or Euroclear Participants. Secondary market
trading between CEDEL Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
Trading between DTC, Seller and CEDEL or Euroclear Participants. When
Global Securities are to be transferred from the account of a DTC Participant to
the account of a CEDEL Participant or a Euroclear Participant, the purchaser
will send instructions to CEDEL or Euroclear through a CEDEL Participant or
Euroclear Participant at least one business day prior to settlement. CEDEL or
Euroclear will instruct the Relevant Depositary, as the case may be, to receive
the Global Securities against payment. Payment will include interest accrued on
the Global Securities from and including the last coupon payment date to and
excluding the settlement date, on the basis of the actual number of days in such
accrual period and a year assumed to consist of 360 days. For transactions
settling on the 31st of the month, payment will include interest accrued to and
excluding the first day of the following month. Payment will then be made by the
Relevant Depositary to the DTC Participant's account against delivery of the
Global Securities. After settlement has been completed, the Global Securities
will be credited to the respective clearing system and by the clearing system,
in accordance with its usual procedures, to the CEDEL Participant's or Euroclear
Participant's account. The securities credit will appear the next day (European
time) and the cash debt will be back-valued to, and the interest on the Global
Securities will accrue from, the value date (which would be the preceding day
when settlement occurred in New York). If settlement is not completed on the
intended value date (i.e., the trade fails), the CEDEL or Euroclear cash debt
will be valued instead as of the actual settlement date.
CEDEL Participants and Euroclear Participants will need to make available
to the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within CEDEL or Euroclear. Under this approach,
they may take on credit exposure to CEDEL or Euroclear until the Global
Securities are credited to their account one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit to
them, CEDEL Participants or Euroclear Participants can elect not to preposition
funds and allow that credit line to be drawn upon to finance settlement. Under
this procedure, CEDEL Participants or Euroclear Participants purchasing Global
Securities would incur overdraft charges for one day, assuming they cleared the
overdraft when the Global Securities were credited to their accounts. However,
interest on the Global Securities would accrue from the value date. Therefore,
in many cases the investment income on the Global Securities earned during that
one-day period may substantially reduce or offset the amount of such overdraft
charges, although the result will depend on each CEDEL Participant's or
Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for crediting Global Securities
to the respective European Depositary for the benefit of CEDEL Participants or
Euroclear Participants. The sale proceeds will be available to the DTC seller on
the settlement date. Thus, to the DTC Participants a cross-market transaction
will settle no differently than a trade between two DTC Participants.
Trading between CEDEL or Euroclear Seller and DTC Purchaser. Due to time
zone differences in their favor, CEDEL Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Securities are to be transferred by the respective clearing system, through the
respective Depositary, to a DTC Participant. The seller will send instructions
to CEDEL or Euroclear through a CEDEL Participant or Euroclear Participant at
least one business day prior to settlement. In these cases CEDEL or Euroclear
will instruct the respective Depositary, as appropriate, to credit the Global
Securities to the DTC Participant's account against payment. Payment will
include interest accrued on the Global Securities from and including the last
coupon payment to and excluding the settlement date on the basis of the actual
number of days in such accrual period and a year assumed to consist to 360 days.
For transactions settling on the 31st of the month, payment will include
interest accrued to and excluding the first day of the following month. The
payment will then be reflected in the account of CEDEL Participant or Euroclear
Participant the following day, and receipt of the cash proceeds in the CEDEL
Participant's or Euroclear Participant's account would be back-valued to the
value date (which would be the preceding day, when settlement occurred in New
York). Should the CEDEL Participant or Euroclear Participant have a line of
credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the back-valuation
will extinguish any overdraft incurred over that one-day period. If settlement
is not completed on the intended value date (i.e., the trade fails), receipt of
the cash proceeds in the CEDEL Participant's or Euroclear Participant's account
would instead be valued as of the actual settlement date.
Finally, day traders that use CEDEL or Euroclear and that purchase Global
Securities from DTC Participants for delivery to CEDEL Participants or Euroclear
Participants should note that these trades would automatically fail on the sale
side unless affirmative action is taken. At least three techniques should be
readily available to eliminate this potential problem:
(a) borrowing through CEDEL or Euroclear for one day (until the purchase
side of the trade is reflected in their CEDEL or Euroclear accounts) in
accordance with the clearing system's customary procedures;
(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 __% U.S. withholding tax that generally applies to payments of
interest (including original issue discount) on registered debt issued by U.S.
Persons (as defined below), unless (i) each clearing system, bank or other
financial institution that holds customers' securities in the ordinary course of
its trade or business in the chain of intermediaries between such beneficial
owner and the U.S. entity required to withhold tax complies with applicable
certification requirements and (ii) such beneficial owner takes one of the
following steps to obtain an exemption or reduced tax rate:
Exemption for Non-U.S. Persons (Form W-8). Beneficial Owners of Global
Securities that are Non-U.S. Persons (as defined below) can obtain a complete
exemption from the withholding tax by filing a signed Form W-8 (Certificate of
Foreign Status). If the information shown on Form W-8 changes, a new Form W-8
must be filed within 30 days of such change.
Exemption for Non-U.S. Persons with effectively connected income (Form
4224). A Non-U.S. Person (as defined below), including a non-U.S. corporation or
bank with a U.S. branch, for which the interest income is effectively connected
with its conduct of a trade or business in the United States, can obtain an
exemption from the withholding tax by filing Form 4224 (Exemption from
Withholding of Tax on Income Effectively Connected with the Conduct of a Trade
or Business in the United States).
Exemption or reduced rate for Non-U.S. Persons resident in treaty countries
(Form 1001). Non-U.S. Persons residing in a country that has a tax treaty with
the United States can obtain an exemption or reduced tax rate (depending on the
treaty terms) by filing Form 1001 (Ownership, Exemption or Reduced Rate
Certificate). If the treaty provides only for a reduced rate, withholding tax
will be imposed at that rate unless the filer alternatively files Form W-8. Form
1001 may be filed by Certificate Owners or their agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Owner of a Global Security
or, in the case of a Form 1001 or a Form 4224 filer, his agent, files by
submitting the appropriate form to the person through whom it holds the security
(the clearing agency, in the case of persons holding directly on the books of
the clearing agency). Form W-8 and Form 1001 are effective for three calendar
years and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation, partnership or other entity organized in or under
the laws of the United States or any political subdivision thereof or (iii) an
estate or trust that is subject to U.S. federal income tax regardless of the
source of its income. The term "Non-U.S. Person" means any person who is not a
U.S. Person. This summary does not deal with all aspects of U.S. Federal income
tax withholding that may be relevant to foreign holders of the Global
Securities. Investors are advised to consult their own tax advisors for specific
tax advice concerning their holding and disposing of the Global Securities.
<PAGE>
===============================================================================
No dealer, salesperson or other person has been authorized to give any
information or to make any representation not contained in this Prospectus
Supplement or the Prospectus and, if given or made, such information or
representation must not be relied upon as having been authorized by the
Depositor or by the Underwriters. This Prospectus Supplement and the Prospectus
do not constitute an offer to sell, or a solicitation of an offer to buy any of
the securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such offer in such jurisdiction. Neither the delivery of this
Prospectus Supplement or the Prospectus nor any sale made hereunder shall, under
any circumstances, create any implication that information herein is correct as
of any time subsequent to the date hereof or that there has been no change in
the affairs of the Depositor since such date.
TABLE OF CONTENTS
Page
PROSPECTUS SUPPLEMENT
SUMMARY OF TERMS.........................................................1
RISK FACTORS............................................................12
THE PORTFOLIO OF HOME EQUITY LOANS......................................15
USE OF PROCEEDS.........................................................17
THE DEPOSITOR...........................................................17
PREPAYMENT AND YIELD CONSIDERATIONS.....................................25
FORMATION OF THE TRUST
AND TRUST PROPERTY....................................................30
ADDITIONAL INFORMATION..................................................30
DESCRIPTION OF THE CLASS A CERTIFICATES.................................31
THE CERTIFICATE INSURER.................................................37
CREDIT ENHANCEMENT......................................................40
THE POOLING AND SERVICING AGREEMENT.....................................42
CERTAIN FEDERAL INCOME
TAX CONSEQUENCES......................................................49
ERISA CONSIDERATIONS....................................................50
RATINGS.................................................................52
LEGAL INVESTMENT CONSIDERATIONS.........................................52
UNDERWRITING............................................................53
CERTAIN LEGAL MATTERS...................................................54
===============================================================================
===============================================================================
__________________ HOME EQUITY
LOAN TRUST 199____-___
$---------------------
$---------------------
Class A-1 Certificates
$---------------------
Class A-2 Certificates
$---------------------
Class A-3 Certificates
$---------------------
Class A-4 Certificates
$---------------------
Class A-5 Certificates
$---------------------
Class A-6 Certificates
____________Home Equity Loan
Pass-Through Certificates, Series
199____-__
===============================================================================
<PAGE>
SUBJECT TO COMPLETION DATED __________ ___, 199_ VERSION 2
PROSPECTUS SUPPLEMENT
(To Prospectus Dated _________ __, 199_,
CTS TITLE I HOME IMPROVEMENT LOAN
TRUST $_______________ Class A Certificates
$_______________ Class S-A Interest Only
Certificates
Pass-Through Certificates
Series 199__-__
CONTISECURITIES ASSET FUNDING CORP.
DEPOSITOR
The CTS Title I Home Improvement Loan Pass-Through Certificates, Series
199__-__ (the "Certificates") will consist of the Class A Certificates and the
Class S-A Certificates (collectively, the "Offered Certificates") and the Class
R Certificates. Only the Offered Certificates are offered hereby.
[Guarantor Logo]
On or before the issuance of the Certificates, ContiSecurities Asset
Funding Corp. (the "Depositor") will obtain from _________________________ (the
"Certificate Insurer") a certificate guaranty insurance policy, relating to the
Offered Certificates (the "Policy") in favor of the Trustee. The Certificate
Insurance Policy will provide for 100% coverage of the principal amount of, and
scheduled interest due on, the Offered Certificates.
As more fully described herein, interest distributions on the Offered
Certificates will be based on the Certificate Principal Balance of the related
Class A Certificates or the aggregate outstanding principal amount of the
Mortgage loans (the "Notional Principal Balance") and the then applicable
Pass-Through Rate.
For a discussion of significant matters affecting investment in the
Certificates, see "Risk Factors" beginning on page S-14 herein, and beginning on
page 6 in the Prospectus. (cover continued on next page)
THE OFFERED CERTIFICATES REPRESENT BENEFICIAL INTERESTS IN THE TRUST ONLY AND
DO NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF CONTISECURITIES ASSET FUNDING
CORP., ANY ORIGINATORS OR ANY OF THEIR AFFILIATES. NEITHER THE OFFERED
CERTIFICATES NOR THE MORTGAGE LOANS ARE INSURED OR
GUARANTEED BY ANY GOVERNMENTAL AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
[THE 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.]
The Offered Certificates will be purchased by the Underwriters from the
Depositor and will be offered by the Underwriters from time to time to the
public in negotiated transactions or otherwise at varying prices to be
determined at the time of sale.
Proceeds to the Depositor will be approximately $____________ from the sale
of the Offered Certificates, before deducting expenses payable by the Depositor
estimated to be approximately $_______ in the aggregate.
The Offered Certificates are offered subject to prior sale, when, as, and
if accepted by the Underwriters and subject to the approval of certain legal
matters. It is expected that delivery of the Offered Certificates in book-entry
form will be made on or about ____________ ___, 199___ only through the Same Day
Funds Settlement System of The Depository Trust Company.
[UNDERWRITERS]
The date of this Prospectus Supplement is __________, 199__.
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
[Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This preliminary prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of any
such State.]
<PAGE>
(Cover continued from previous page)
The Certificates represent undivided ownership interests in a pool of
fixed-rate residential first and junior lien home improvement mortgage loans
(the "Mortgage Loans") partially insured by the Federal Housing Administration
(the "FHA") of the United States Department of Housing and Urban Development
under Title I of the National Housing Act of 1934, all monies due thereunder
after ____________ __, 199__ (the "Cut-Off Date"), security interests in the
properties which secure the Mortgage Loans (the "Mortgaged Properties"), a
certificate guaranty insurance policy and certain other property. The Mortgage
Loans will be held in the CTS Title I Home Improvement Loan Trust 199___-___
(the "Trust"). The Trust will be created pursuant to a Pooling and Servicing
Agreement dated as of ______________ __, 199__ (the "Agreement") among the
Depositor in its capacity as sponsor of the Trust, ContiTrade Services
Corporation (the "Company"), ___________________, in its capacity as the master
servicer and claims administrator of the Mortgage Loans (the "Master Servicer"
and "Claims Administrator"), and _______________________________, in its
capacity as Trustee (the "Trustee"). On or prior to the Closing Date, the
Company will cause the Mortgage Loans to be acquired from Originators, as
described herein. The obligations of the Depositor with respect to the
Certificates will be limited to its respective contractual obligations under the
Agreement.
Distributions of interest will be made to holders (the "Owners") of the
Certificates on the ___the day of each month, (or, if such day is not a business
day, the next following business day) beginning __________ __, 199__. Interest
will be passed through on each Distribution Date to the Owners of the Class A
Certificates based on the Class A Certificate Principal Balance (as defined
herein) at the pass-through rate thereon (the "Class A Pass- Through Rate") and
to the Owners of the Class S-A Certificates based on the Notional Principal
Balance (as defined herein) at the pass-through rate thereon (the "Class S-A
Pass-Through Rate") and principal will also be passed through to the Owners of
the Class A Certificates on each Distribution Date as described herein. The
final scheduled Distribution Date of the Offered Certificates will be __________
20, _____. The Class S-A Certificates are interest only Certificates. The yield
to investors on the Class S-A Certificates will be extremely sensitive to the
rate and timing of principal payments (including prepayments, repurchases,
defaults and liquidations) on the Mortgage Loans, which may vary over time. A
rapid rate of principal payments (including prepayments, repurchases, defaults
and liquidations) on the Mortgage Loans could result in the failure of investors
in the Class S- A Certificates to recover their initial investments. See
"Summary - - Nature of Class S-A Certificates," "Certain Yield, Prepayment and
Weighted Average Life Considerations" herein and "Risk Factors" and "Yield,
Prepayment and Maturity Considerations" in the Prospectus.
It is a condition to issuance of the Offered Certificates that the Offered
Certificates be rated "Aaa" by Moody's Investor Service and "AAA" by Standard &
Poors.
An election will be made to treat the Trust as a real estate mortgage
investment conduit (a "REMIC") for federal income tax purposes. As described
more fully herein, each Class of Offered Certificates will constitute "regular
interests" in the REMIC. See "Certain Federal Income Tax Consequences" in the
Prospectus.
Prior to their issuance there has been no market for the Offered
Certificates nor can there be any assurance that one will develop, or if it does
develop, that it will provide the Owners of the Offered Certificates with
liquidity or will continue for the life of the Offered Certificates. The
Underwriters intend, but are not obligated, to make a market in the Offered
Certificates.
[IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE OFFERED
CERTIFICATES AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.]
UNTIL __________, 199___, ALL DEALERS EFFECTING TRANSACTIONS IN THE OFFERED
CERTIFICATES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS SUPPLEMENT AND THE PROSPECTUS TO WHICH IT RELATES. THIS
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT
AND PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS. --------------------
The Certificates offered by this Prospectus Supplement will be part of a
separate series of Certificates being offered by the Company pursuant to its
Prospectus dated ____________ __, 199__ of which this Prospectus Supplement is a
part and which accompanies this Prospectus Supplement. The Prospectus contains
important information regarding this offering which is not contained herein, and
prospective investors are urged to read the Prospectus and this Prospectus
Supplement in full.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission a
Registration Statement under the Securities Act of 1933 with respect to the
Certificates. This Prospectus Supplement and the related Prospectus, which form
a part of the Registration Statement, omit certain information contained in such
Registration Statement pursuant to the Rules and Regulations of the Commission.
The Registration Statement can be inspected and copied at the Public Reference
Room of the Commission at 450 Fifth Street, N.W., Washington, D.C., and the
Commission's regional offices at Seven World Trade Center, 13th Floor, New York,
New York, 10048, and Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such materials can be obtained at
prescribed rates from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549.
REPORTS TO CERTIFICATEHOLDERS
The Trustee will mail monthly reports concerning the Offered Certificates
to all registered Owners.
<PAGE>
TABLE OF CONTENTS
AVAILABLE INFORMATION.......................................................2
REPORTS TO CERTIFICATEHOLDERS...............................................2
SUMMARY.....................................................................4
RISK FACTORS...............................................................16
USE OF PROCEEDS............................................................17
THE DEPOSITOR..............................................................17
THE TITLE I LOAN PROGRAM AND THE CONTRACT OF INSURANCE.....................17
THE ORIGINATORS............................................................18
THE MASTER SERVICER AND CLAIMS ADMINISTRATOR...............................18
THE TRUSTEE AND CONTRACT OF INSURANCE HOLDER...............................18
THE MORTGAGE LOAN POOL.....................................................19
PREPAYMENT AND YIELD CONSIDERATIONS........................................21
ADDITIONAL INFORMATION.....................................................24
DESCRIPTION OF THE OFFERED CERTIFICATES....................................24
THE POLICY.................................................................28
THE CERTIFICATE INSURER....................................................30
OVERCOLLATERALIZATION PROVISIONS...........................................31
THE POOLING AND SERVICING AGREEMENT........................................32
CERTAIN FEDERAL INCOME TAX CONSEQUENCES....................................41
ERISA CONSIDERATIONS.......................................................42
RATINGS....................................................................44
LEGAL INVESTMENT CONSIDERATIONS............................................44
UNDERWRITING...............................................................44
REPORT OF EXPERTS..........................................................45
CERTAIN LEGAL MATTERS......................................................45
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
DETAILED INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS. REFERENCE IS MADE TO THE INDEX OF PRINCIPAL DEFINED
TERMS FOR THE LOCATION OF THE DEFINITIONS OF CERTAIN CAPITALIZED TERMS.
Issuer........................... CTS Title I Home Improvement Loan Trust,
Series 199__-__ (the "Trust").
Certificates Offered:............ CTS Title I Home Improvement Loan
Certificates, Series 199__-__, Class A
Certificates (the "Class A Certificates") and
Class S-A Interest- Only Certificates (the
"Class S-A Certificates" and collectively
with the Class A Certificates the "Offered
Certificates").
Depositor:....................... ContiSecurities Asset Funding Corp. (the"
Depositor"), a Delaware corporation having
its principal executive offices at 277 Park
Avenue, 38th Floor, New York, New York 10172.
Trustee:......................... ____________________, a __________ banking
corporation having its principal corporate
trust offices at ____________________.
Master Servicer and
Claims Administrator:............ ______________, a _______________ corporation
having its principal executive offices at
______________________________.
The Originators:................. Each of the Mortgage Loans to be acquired by
the Trust from the Depositor were acquired
directly or indirectly by the Depositor from
ContiTrade Services L.L.C. (the "Company")
which previously acquired the Mortgage Loans
from the entity that either originated or
acquired such Mortgage Loans (each such
entity an "Originator"). Each Mortgage Loan
has been re-underwritten by the Depositor or
an entity engaged by the Depositor for the
purpose of determining whether each such
Mortgage Loan was originated in accordance
with the FHA Title I home improvement loan
program by an Originator approved for such
program by the United States Department of
Housing and Urban Development ("HUD") and
holding a valid Title I contract of
insurance.
Cut-Off Date:.................... _______________ __, 199__.
Closing Date:.................... _______________ __, 199___.
Description of the Certificates.. The Pass-Through Certificates consist of the
Offered Certificates and the Class R
Certificates. The Certificates will be issued
pursuant to a pooling and servicing agreement
to be dated __________, 199__ (the
"Agreement"), among the Depositor, the
Company, the Master Servicer and Claims
Administrator and the Trustee. Only the
Offered Certificates are offered hereby.
The Offered Certificates represent fractional
undivided ownership interests in the Trust,
having the rights described in the Agreement.
The Trust assets will include a pool of fixed
rate residential first and junior lien home
improvement mortgage loans (the "Mortgage
Loans") partially insured by the Federal
Housing Administration (the "FHA") of the
Department of Housing and Urban Development
("HUD") under Title I of the National Housing
Act of 1934 (the "Title I Program"), all
monies due thereunder after the Cut-Off Date,
security interests in the properties which
secure the Mortgage Loans (the "Mortgage
Properties"), the Policy and certain other
property.
The final scheduled Distribution Date on the
Offered Certificates is _________ __, ____,
although it is expected that the actual final
Distribution Date for the Offered
Certificates will occur significantly earlier
than the final scheduled Distribution Date.
See "Prepayment and Yield Considerations"
herein.
Original Class A Certificate
Principal Balance................ $____________.
Original Class S-A Notional
Principal Balance................ $____________.
Class A Pass-Through Rate:....... ___% per annum.
Class S-A Pass-Through Rate:..... ___% per annum.
Denominations:................... The Class A Certificates are issuable in
denominations of original principal amounts
of $__________ and integral multiples
thereof. The Class S-A Certificates will be
issued in [book entry fully registered,
definitive form in percentage interests of
ownership of such class of not less than
___%.
The Mortgage Loans............... Unless otherwise noted, all references to the
dollar amount of the Mortgage Loans and the
related statistical percentages in this
Prospectus Supplement are based on the
principal balances of the Mortgage Loans as
of the close of business on the Cut-Off Date.
The Mortgage Loans to be conveyed to the
Trust consist of ________ mortgages or deeds
of trust (the "Mortgages") and the related
notes and retail installment sales contracts
(the "Notes") on residences (which may be
condominiums, townhouses, homes in
one-to-four-family and multi-family
residences or manufactured homes which have
permanent foundations and qualify as real
property), including investment properties,
located in ____ states, and having an
original Aggregate Principal Balance of
$______________. The Mortgage Loans are not
insured by primary mortgage insurance
policies, nor does any pool insurance insure
the Mortgage Loans; however, the Mortgage
Loans are partially insured under the FHA
Title I Program. See "The Title I Loan
Program and the Contract of Insurance"
herein. The Mortgage Loans are not guaranteed
by the Depositor, the Company or any
affiliate thereof. The Agreement requires the
Master Servicer to service the Mortgage Loans
in accordance with the standards and
procedures required by the FHA under the
Title I Program. [Each Originator may act as
sub-servicer of the Mortgage Loans that they
originate.] The FHA Title I insurance claims
administration will be performed by the
Claims Administrator.
Class A Distributions............ On the ___the day of each month, or if such a
day is not a Business Day, then the next
succeeding Business Day,
commencing______________ __, 199__ (each such
day being a "Distribution Date"), the Trustee
will be required to distribute out of the
Amount Available (as defined below), pro rata
to the Owners of the Class A Certificates of
record as of the last day of the calendar
month immediately preceding the calendar
month in which such Distribution Date occurs
(the "Record Date"), the sum of (a) the Class
A Interest Distribution (as defined below)
and (b) the Class A Guaranteed Principal
Distribution Amount (as defined below), and
(c) to the extent of the Distribution Amount
(as defined below), the Class A Monthly
Principal Distributable Amount (as defined
below) in excess of any amounts described in
clause (b) above.
Interest......................... "Class A Interest Distribution" means, with
respect to any Distribution Date, the sum of
(a) the "Class A Monthly Interest
Distributable Amount" (i.e., 30 days interest
at the Pass-Through Rate on the Class A
Certificate Balance as of the close of
business on the preceding Distribution Date
(or, in the case of the first Distribution
Date, on the Closing Date)) and (b) any Class
A Interest Carryover Shortfall (i.e., the
excess of the Class A Monthly Interest
Distributable Amount for the preceding
Distribution Date and any outstanding Class A
Interest Carryover Shortfall on such
preceding Distribution Date, over the amount
in respect of interest that was actually
distributed to the Class A Certificateholders
on such preceding Distribution Date, plus
interest on such excess, to the extent
permitted by law, at the Pass-Through Rate
from such preceding Distribution Date through
the current Distribution Date).
Principal........................ "Class A Guaranteed Principal Distribution
Amount" means, with respect to any
Distribution Date, the positive excess, if
any, of (i) the aggregate of the Outstanding
Class A Certificate Balances of all
Outstanding Class A Certificates as of such
Distribution Date (taking into account
distributions of the Class A Principal
Distribution on such Distribution Date) over
(ii) the aggregate of the Class A Guaranteed
Certificate Balance (as defined below) as of
such Distribution Date. "Class A Monthly
Principal Distributable Amount" means, with
respect to any Distribution Date, the amount
equal to the sum of the following amounts
(without duplication) with respect to the
immediately preceding Due Period (as defined
below): (i) that portion of all Mortgage
Payments allocable to principal, including
all full and partial principal prepayments
(excluding such amounts in respect of
Mortgage Loans included in clause (ii) for a
prior Distribution Date), (ii) the Principal
Balance of all Mortgage Loans that became
Defaulted Mortgage Loans during the related
Due Period, (iii) the portion of the Purchase
Amount allocable to principal of all Mortgage
Loans that became Purchased Mortgage Loans as
of the immediately preceding Monthly Cut-Off
Date excluding such amounts in respect of
Mortgage Loans included in clause (ii) for a
prior Distribution Date and, in the sole
discretion of the Certificate Insurer, the
Principal Balance as of the immediately
preceding Monthly Cut-Off Date of all
Mortgage Loans that were required to be
purchased or repurchased as of the
immediately preceding Monthly Cut-Off Date
pursuant to the Servicing Agreement but were
not so purchased, (iv) the aggregate amount
of Cram Down Losses (as defined herein) that
shall have occurred during the related Due
Period (v) the amount of Distributable Excess
Spread (as defined below) in respect of such
Distribution Date and (vi) amounts, if any,
delivered by the Certificate Insurer to the
Trustee for deposit in the Certificate
Account and distribution in respect of the
Class A Certificates in accordance with the
Insurance Agreement; provided, however, that
if with respect to any Distribution Date,
Distributable Excess Spread is zero, the
Class A Monthly Principal Distributable
Amount shall equal such portion of the sum of
the amounts included in clauses (i) through
(iv) above such that following distribution
in reduction of the Aggregate Class A
Certificate Balance the Required OC Test (as
defined herein) would be satisfied.
"Class A Guaranteed Certificate Balance"
means, with respect to any outstanding Class
A Certificate as of any date of
determination, the hypothetical Class A
Certificate Balance equal to the initial
Class A Certificate Balance of such Class
Certificate set forth on the face thereof,
reduced by the pro rata portion allocable to
such Class A Certificate of the aggregate of
the Class A Minimum Principal Distributable
Amounts with respect to all Distribution
Dates on or prior to such date of
determination.
Distributions to the Class A
Certificateholders of Distributable Excess
Spread will result in acceleration of
principal payments to the Owners of the Class
A Certificates and reduce the weighted
average life of the Class A Certificates to a
lesser number than would be the case if such
Distributable Excess Spread were instead
distributed to the Class R
Certificateholders. See
"Overcollateralization Provisions" and
"Prepayment and Yield Considerations" herein.
"Class A Minimum Principal Distributable
Amount" means, with respect to any
Distribution Date, the amount set forth on
the schedule to the Agreement for such
Distribution Date.
"Due Period" means, with respect to any
Distribution Date, the calendar month
immediately preceding such Distribution Date.
"Excess Spread" means, with respect to any
Distribution Date, the positive excess, if
any, of (x) the aggregate amount of the
Mortgage Payments (or amounts deposited by
Depositor if it elects to acquire the
Mortgage Loans at the time the outstanding
balance of the Mortgage Loans is less than
10% of the Initial Principal Balance with
respect to the related Due Period) over (y)
the sum of (A) the amount required to be
distributed pursuant to priorities (i)
through (vii) set forth under the heading
"Description of Offered Certificates -
Distributions" herein on such Distribution
Date plus (B) the sum of any outstanding
Class A Principal Carryover Shortfall as of
the close of the preceding Distribution Date
plus (C) the sum of the amounts described in
clauses (i) through (iv) of the definition of
Class A Monthly Principal Distributable
Amount (as set forth above) for such
Distribution Date.
"Distributable Excess Spread" means with
respect to any Distribution Date, such
portion (not greater than 100%) of Excess
Spread with respect to such Distribution
Date, which, if distributed in accordance
with clause (v) of the definition of Class A
Monthly Principal Amount, would cause
Required OC Test (as defined under the
"Overcollateralization Provisions") to be
satisfied with respect to such Distribution
Date, after giving effect to all
distributions on such Distribution Date,
provided, however, that if the Required OC
Multiple (as defined herein) is unlimited,
Distributable Excess Spread shall equal 100%
of Excess Spread; provided, further, that so
long as an Insurer Default (as defined in the
Agreement) shall not have occurred and be
continuing, Distributable Excess Spread may,
in the discretion of the Certificate Insurer
with respect to any Distribution Date with
respect to which the Required OC Multiple is
greater than 100%, be a portion of Excess
Spread which is less than would otherwise be
determinable pursuant to this definition but
which is not less than the portion of Excess
Spread that would be determinable pursuant to
this definition if the Required OC Multiple
were equal to 100%.
"Cram Down Loss" means with respect to a
Mortgage Loan, if a court of appropriate
jurisdiction in an insolvency proceeding
shall have issued an order reducing the
Principal Balance of such Mortgage Loan, the
amount of such reduction. A "Cram Down Loss"
shall be deemed to have occurred on the date
of issuance of such order.
Class S-A Distributions.......... The Class S-A Certificates are interest-only
certificates which will not be entitled to
any distribution of principal, but will be
entitled to interest on the "Notional
Principal Balance," which is equal to the
aggregate outstanding principal balance, from
time to time, of the Mortgage Loans. The
interest due with respect to the Class S-A
Certificate will be the interest which has
accrued thereon at the Class S- A
Pass-Through Rate during the calendar month
in which such Distribution Date occurs (the
"Class S-A Interest Distribution"). See
"Description of the Offered Certificates -
The Class S-A Distributions" and "Prepayment
and Yield Considerations - Yield Sensitivity
of the Class S-A Certificates."
The Certificate Insurer does not directly or
indirectly guarantee any specified rate of
prepayments, nor does it guarantee a
Certificate holders investment in the Class
S-A Certificates that might be adversely
affected by such prepayments. All
calculations of interest on the Offered
Certificates will be made on the basis of a
360-day year assumed to consist of twelve
30-day months.
Credit Enhancement............... The Credit Enhancement provided for the
benefit of the Owners of the Offered
Certificates consists of (x) FHA Title I
insurance, (y) the overcollateralization
mechanics which utilize the internal cash
flows of the Trust and (z) the Policy.
FHA Insurance Program and Contract of
Insurance: The insurance provided by the FHA
pursuant to the Title I Program (the "FHA
Insurance") available to the Claims
Administrator is limited to an amount (the
"FHA Insurance Amount") currently equal to
___% of the outstanding principal balance as
of the Cut-Off Date of all Title I loans
originated or purchased and currently
reported for FHA Insurance by the Contract of
Insurance Holder, less the sum of (i) annual
reductions (the "Annual Reductions") of 10%
of the then outstanding FHA Insurance amount
available to the Contract of Insurance
Holder, commencing October 1, _____ (the
October following the fifth year in which the
Contract of Insurance Holder's contract of
insurance has been in effect); provided,
however, that in no case shall the amount of
FHA Insurance be reduced below $50,000, and
(ii) insurance claims previously paid to the
Contract of Insurance Holder by the FHA,
including payments in respect of loans other
than the Mortgage Loans; and increased by an
amount equal to 10% of the lesser of the
original principal balance of or the purchase
price paid for Title I loans subsequently
originated or purchased and owned of record
by the Contract of Insurance Holder. Such
amount of insurance is reflected in an
insurance reserve account maintained by FHA
in the name of the Contract of Insurance
Holder. See "The Title I Loan Program - FHA
Insurance" in the Prospectus.
The Contract of Insurance Holder will be the
Trustee for the benefit of the Trust and for
the benefit of all past and subsequent series
of trusts to which loans are sold by the
Seller (the "Related Series Trusts"). The
Secretary of HUD will not earmark the
insurance reserves held for the Trustee for
the benefit of any particular trust held by
the Trustee, although the Trustee has agreed
not to hold other Title I Mortgage Loans that
would be qualified for Title I insurance
coverage other than mortgage loans included
in Related Series Trusts (the "Related Series
Mortgage Loans").
Subject to the then remaining FHA Insurance
Amount each Mortgage Loan will be insured by
the FHA in an amount currently equal to 90%
of the sum of the following: (i) the unpaid
principal and uncollected interest earned to
the date of default, calculated on the
actuarial method, reduced by certain amounts
received by the Contract of Insurance Holder
in connection with enforcing a lien on the
Mortgaged Property prior to the lien of the
related Mortgage Loan; (ii) the unpaid amount
of interest on the unpaid principal from the
date of default submission to the FHA for
payment plus 15 calendar days, but not for
any period greater than nine months from the
date of default, calculated at 7% per annum;
and (iii) the amount of certain uncollected
court costs, attorneys' fees, and expenses
for recording the assignment of the related
Mortgage Loan to the United States of
America. See "The Title I Loan Program -
General" in the Prospectus. Since the
adequacy of the FHA Insurance Amount is
dependent upon future events, including
Annual Reductions and reductions for the
payment of claims, no assurance can be given
that the FHA Insurance Amount is or will be
adequate to cover 90% of all potential losses
on the Mortgage Loans.
On the Closing Date, the Trustee will hold
for the benefit of the Trust the FHA Contract
of Insurance relating to some of but not all
the Mortgage Loans. With respect to those
Mortgage Loans that are not covered by the
Trustee's Contract of Insurance on the
Closing Date, each of the related Originators
will be required to cause the related reserve
accounts maintained by FHA to be transferred
on the FHA's books from the related
Originator's contract of insurance to the
Trustee's Contract of Insurance. To
accomplish this transfer, on or after the
date on which the Originators receive the FHA
Title I Case Numbers for the Mortgage Loans,
the Originators will be required to submit a
sale report to the FHA regarding the
conveyance of the Mortgage Loans to the
Trustee. If the Insurance Reserves relating
to any Mortgage Loans have not be transferred
to the Contract of Insurance on or before 120
days following the Closing Date, the
Depositor will be required to repurchase such
Mortgage Loans.
If a Mortgage Loan is assigned to the Claims
Administrator for submission to the FHA, the
Claims Administrator will be required to
submit a claim with respect to such Mortgage
Loan to the FHA. The Owners of the
Certificates will not have any direct right
to receive the FHA Insurance proceeds from
the FHA. All FHA Insurance Proceeds received
in respect of such FHA Claims shall be
deposited into the Collection Account.
FHA Insurance Premium Account: A separate
account (the "FHA Premium Account") shall be
established by the Trustee into which an
initial deposit of $_______ (the "Initial FHA
Premium Account Deposit") shall be made on
the Closing Date. No later than the Business
Day following each Determination Date, the
Trustee will deposit into the FHA Premium
Account FHA insurance premiums received from
Mortgagors on Invoiced Mortgage Loans. The
Trustee will also deposit into the FHA
Premium Account, to the extent of the
Distribution Amount Available, an amount
equal to the greater of (i) ___% of the
aggregate principal balance of each
outstanding Mortgage Loan, other than
Invoiced Mortgage Loans (as defined below),
divided by 12 and (ii) the positive excess,
if any, of (A) the amount of premium and
other charges due under the Contract of
Insurance for the next succeeding Due Period
and (B) the balance in the FHA Premium
Account as of the related Determination Date
(the "FHA Premium Account Deposit").
"Invoiced Mortgage Loans" are Mortgage Loans
with respect to which the related Mortgagee
is required to pay the premium on FHA
Insurance with respect to such Mortgage Loan.
Overcollateralization: Distributions to the
Class A Certificateholders of Distributable
Excess Spread will result in a limited
acceleration of the payment of the Class A
Certificates relative to the amortization of
the principal of the related Mortgage Loans
in the early months of the transaction and
overcollateralization of the Class A
Certificates. Once the required level of
overcollateralization is reached, and subject
to the provisions described in the next
paragraph, the acceleration feature will
cease, unless necessary to maintain the
required level of overcollateralization.
The Agreement provides that, subject to
certain floors, caps and triggers, the
required level of overcollateralization (the
"Required OC Test," as defined herein) may
increase or decrease over time. An increase
would cause a temporary period of accelerated
amortization of the Class A Certificates
until the actual level of
overcollateralization reached its required
level; whereas, a decrease would cause a
temporary period of decelerated amortization
to reduce the actual level of
overcollateralization to its required level.
See "Overcollateralization Provisions"
herein.
The Policy....................... _______________________ (the "Certificate
Insurer") will issue a certificate guaranty
insurance policy (the "Policy") pursuant to
which it will irrevocably and unconditionally
guarantee payment on each Distribution Date
to the Trustee for the benefit of the Owners
of the Offered Certificates of the Class A
Interest Distribution and the Class S-A
Interest Distribution for such Distribution
Date and the Class A Guaranteed Principal
Distribution Amount for such Distribution
Date. So long as (i) there does not exist a
continuing failure by the Certificate Insurer
to make a required payment under the Policy
and (ii) certain bankruptcy related events
specified in the Agreement have not occurred
in respect of the Certificate Insurer (any of
the events described in these clauses (i) and
(ii), a "Certificate Insurer Default"), the
Certificate Insurer shall have the exclusive
right to exercise certain rights under the
Agreement, such as the right to remove the
Master Servicer upon the occurrence of
certain Servicer Termination Events specified
in the Agreement and to appoint a successor
thereto. In addition, to the extent of
unreimbursed payments under the Policy
("Insurance Payments"), the Certificate
Insurer will be subrogated to the rights of
the holders of the Offered Certificates with
respect to which such Insurance Payments were
made. In connection with each Insurance
Payment on an Offered Certificate, the
Trustee as attorney- in-fact for the holder
thereof will be required to assign to the
Certificate Insurer the rights of such
holders with respect to the Offered
Certificates, to the extent of such Insurance
Payment, including, without limitation, in
respect of any amounts due to such holders as
a result of any securities law violation
arising from the offer and sale of such
Offered certificate. Payments to the
Certificate Insurer in respect of such
assignment shall be subject to and
subordinate to the rights of the Holders to
receive Guaranteed Distributions with respect
to the Certificate. See "The Policy" herein.
The Certificate Insurer.......... The Certificate Insurer is a New York
monoline insurance company engaged
exclusively in the business of writing
financial guaranty insurance, principally in
respect of securities offered in domestic and
foreign markets. The Certificate Insurer's
claims paying ability is rated Aaa by Moody's
Investors Service, Inc. ("Moody's") and "AAA"
by Standard and Poor's Rating Group, a
division of McGraw Hill ("S&P"). See "The
Certificate Insurer" herein.
Nature of Class S-A Certificates. General Character as an Interest-Only
Security. The Owners of the Class S-A
Certificateholders will be entitled to
receive monthly distributions equal to
one-month's interest at the Class S-A Pass-
Through Rate on the Notional Principal Amount
then outstanding. The Owners of the Class S-A
Certificates will not be entitled to receive
any distributions of principal collected on
the Mortgage Loans. Because they will not
receive any distributions of principal, the
Owners of the Class S-A Certificates will be
affected by prepayments, liquidations and
other dispositions of the Mortgage Loans to a
greater degree than will the Owners of the
Class A Certificates. As an extreme
illustration, in the event that the entire
Mortgage Pool prepays in full during the
first month, then on the initial Distribution
Date the Owners of the Class A Certificates
will receive the full par value of their
Certificates while the Owners of the Class
S-A Certificates will suffer nearly a
complete loss (except for one month's
interest) on their investment. Because,
however, the Mortgage Pool contains
approximately _____ Mortgage Loans, the
prepayment experience of any one Mortgage
Loan is not expected to be material to an
investor's overall return.
In general, liquidations due to losses,
repurchases by the Company and other
dispositions of Mortgage Loans from the Trust
will have the same effect on the Owners of
the Class S-A Certificates as do prepayments
of principal, and are collectively referred
to as "Prepayments."
Because the yield to the Class S-A
Certificateholders is sensitive to certain
constant rates of prepayment, it is advisable
for potential investors in the Class S-A
Certificates to consider carefully, and to
make their own evaluation of, the effect of
any particular assumption regarding the rates
and the timing of prepayments. In general,
when interest rates decline, prepayments in a
pool of receivables such as the Mortgage
Loans will increase as borrowers seek to
refinance at lower rates. This will have the
effect of reducing the future stream of
payments on an interest-only security based
on such receivables pool, thus adversely
affecting yield. Conversely, when interest
rates increase prepayments will tend to
decrease (because attractive refinancing
opportunities are not available) and the
future stream of payments available to such
an owner of an interest-only security may not
decline as rapidly as originally anticipated
thus positively affecting yield. See "Risk
Factors - Prepayment Consideration" in the
Prospectus for other factors which may also
influence prepayment rates.
Applicability of Credit Enhancement to the
Class S-A Certificates. The
overcollateralization/subordination feature
of the Trust includes provisions which
subordinate the Class R Certificates for each
Distribution Date for the purpose, inter
alia, of funding the full amounts due on each
Class of Offered Certificates, including the
Class S-A Certificates, on each Distribution
Date. The Policy will provide for the funding
of an amount equal to the Insured
Distribution Amount due on the Offered
Certificates.
In general, the protection afforded by the
overcollateralization/subordination feature
and by the Policy is for credit risk and not
for prepayment risk. The
overcollateralization/subordination feature
does not, nor may a claim be made under the
Policy to, guarantee or insure that any
particular rate of prepayment is experienced
by the Trust. If the entire pool were to
prepay in the initial month, with the result
that the Owners of the Class S-A Certificates
receive only a single month's interest and
thus suffer a nearly complete loss on their
investments, no amounts would be available
from the overcollateralization/subordination
feature or from the Policy to mitigate such
loss.
Accrual of "Original Issue Discount." The
Class S-A Certificates may be issued with
"original issue discount" within the meaning
of the Code. As a result, in certain rapid
prepayment environments the effect of the
rules governing the accrual of original issue
discount may require Owners of the Class S-A
Certificates to accrue original issue
discount at a rate in excess of the rate at
which distributions are received by such
Certificateholders. See "Certain Federal
Income Tax Consequences" herein and in the
Prospectus.
Monthly Servicing Fees........... The Master Servicer will retain a fee equal
to ___% per annum for Master Servicer and
Claims Administration duties (the "Master
Servicing Fee") and each subservicer will
retain a fee equal to _____% per annum (the
"Servicing Fees"), in each case payable
monthly at one- twelfth the annual rate, of
the principal amount of each Mortgage Loan
outstanding as of the close of business on
the last day of the second preceding month
serviced pursuant to the related servicing
agreement as of the first day of each
calendar month.
Advances......................... The Master Servicer will be obligated to make
advances ("Delinquency Advances") with
respect to delinquent payments of interest
(at the related Coupon Rate less the
Servicing Fee Rate, as defined below) and
scheduled principal due on each Mortgage Loan
to the extent that such Delinquency Advances
are recoverable from (i) future collections
on the Mortgage Loan which gave rise to the
Delinquency Advance, (ii) Liquidation
Proceeds for such Mortgage Loans, and (iii)
from certain excess moneys which would
otherwise be paid to the Owners of the Class
R Certificates.
The Master Servicer will also be required to
advance certain amounts in respect of
foreclosure expenses that the Master Servicer
determines in its good faith judgment are
recoverable from liquidation proceeds.
Foreclosure Advances are recoverable from all
related Mortgage Payments.
Book-Entry Registration of the
Offered Certificates............. The Offered Certificates initially will be
represented by physical certificates
registered in the name of Cede & Co.
("Cede"), as the nominee of The Depository
Trust Company ("DTC"). No person acquiring an
interest in the Offered Certificates (a
"Beneficial Owner") will be entitled to
receive a definitive certificate representing
such person's interest in the Trust, except
in the event that Physical Certificates are
issued under certain limited circumstances.
For each Offered Certificate held by DTC, DTC
will effect payments to, and transfers of
such Offered Certificates among, Beneficial
Owners by means of its electronic record
keeping services, acting through
organizations that participate in DTC. This
arrangement may result in certain delays in
receipt of distributions by Beneficial Owners
and may restrict a Beneficial Owner's ability
to pledge the Offered Certificates
beneficially owned by it. All references
herein to the Owners of Offered Certificates
shall mean and include the rights of
Beneficial Owners, as such rights may be
exercised through DTC and its participating
organizations. See "Description of the
Offered Certificates - Book Entry
Registration of the Class A Certificates"
herein and "Description of the Certificates -
Book Entry Registration" in the Prospectus.
Optional Termination............. On any Distribution Date on or after the date
on which the aggregate Principal Balance of
the Mortgage Loans remaining in the Trust is
less than 10% of the aggregate Principal
Balance of the Mortgage Loans as of the
Cut-Off Date, the Depositor will have the
option, subject to certain conditions set
forth in the Agreement, to purchase all, but
not less than all, the remaining Mortgage
Loans at the purchase price described herein.
The payment of such purchase price will
result in the retirement of the then
outstanding Certificates.
Ratings.......................... It is a condition of the original issuance of
the Offered Certificates that the Offered
Certificates receive ratings of AAA by S&P,
and Aaa by Moody's. A security rating is not
a recommendation to buy, sell or hold
securities, and may be subject to revision or
withdrawal at any time by the assigning
entity. See "Ratings" herein.
Ratings of the Class S-A Certificates. The
Class S-A Certificates will, upon initial
issuance, receive ratings of "AAA" by S&P and
of "Aaa" by Moody's. Ratings which are
assigned to securities such as the Class S-A
Certificates generally evaluate the ability
of the issuer (i.e., the Trust) and any
guarantor (i.e., the Certificate Insurer) to
make timely payments when such payments are
due, as required by such securities. As
described above, such amounts with respect to
the Class S-A Certificates consist only of
interest. In general, the ratings thus
address credit risk and not prepayment risk.
See "Ratings" herein.
Federal Tax Aspects.............. For Federal income tax purposes an election
will be made to treat the Trust as a "real
estate mortgage investment conduit" (a
"REMIC"). Each Class of Offered Certificates
will be designated as "regular interests" in
the related REMIC and generally will be
treated as debt instruments of the Trust for
federal income tax purposes. The REMIC will
issue the Class R Certificates, which will be
designated as the sole class of "residual
interests" in the REMIC. See "Certain Federal
Income Tax Consequences" herein and in the
Prospectus.
[ERISA Considerations............ As described under "ERISA Considerations"
herein, the Class A Certificates may be
purchased by employee benefit plans that are
subject to the Employee Retirement Income
Security Act of 1974, as amended. See "ERISA
Considerations." herein and in the
Prospectus.]
Risk Factors..................... Credit Considerations. For information with
regard to the Mortgage Loans and their
related risks, see "The Mortgage Loan Pool"
herein.
Prepayment Considerations. For information
regarding the consequences of prepayments,
particularly for Owners of the Class S-A
Certificates, see "Prepayment and Yield
Considerations" herein.
Other. For a discussion of certain risk
factors that should be considered by
prospective investors in the Offered
Certificates, see "Risk Factors" herein and
in the Prospectus.
Legal Investment Considerations.. Although the Offered Certificates are
expected to be rated "AAA" by S&P and "Aaa"
by Moody's, the Offered Certificates will not
constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA") because the
Mortgage Loans include junior liens.
Accordingly, many institutions with legal
authority to invest in comparably rated
securities based on first mortgage loans may
not be legally authorized to invest in the
Offered Certificates.
Certain Legal Matters............ Certain legal matters relating to the
validity of the issuance of the Certificates
will be passed upon for the Depositor by
Stroock & Stroock & Lavan LLP, New York, New
York. Certain legal matters relating to
insolvency issues and certain federal income
tax matters concerning the Certificates will
be passed upon for the Depositor by Stroock &
Stroock & Lavan LLP. Certain legal matters
relating to the validity of the issuance of
the Certificates will be passed upon for the
Underwriters by ____________________,
_______________. Certain legal matters
relating to the Certificate Insurer and the
Policy will be passed upon for the Insurer by
____________________.
<PAGE>
RISK FACTORS
Prospective investors in the Offered Certificates should consider the
following risk factors (as well as the risk factors set forth under "Risk
Factors" in the Prospectus) in connection with the purchase of the Offered
Certificates.
Nature of Collateral. Because a substantial amount of the Mortgage Loans
are secured by junior liens subordinate to the rights of the mortgagee(s) or
beneficiary under the related senior mortgages or deeds of trust, the proceeds
from any liquidation, insurance or condemnation proceedings with respect to such
Mortgage Loans will be available to satisfy the outstanding balance of a
Mortgage Loan only to the extent that the claims of such senior mortgagees or
beneficiary(ies) have been satisfied in full, including any related foreclosure
costs. Furthermore, Title I loans generally are not required to be written with
any equity in the Mortgaged Property above the aggregate amount of the mortgage
liens (including the amount of the related Title I lien on the Mortgage
Property). In addition, a junior mortgagee may not foreclose on the property
securing a junior mortgage unless it forecloses subject to the senior
mortgage(s), in which case it must either pay the entire amount due on the
senior mortgage(s) to the senior mortgagee at or prior to the foreclosure sale
or undertake the obligation to make payments on the senior mortgage(s) in the
event the mortgagor is in default thereunder. In servicing Title I mortgages in
their portfolios, it is not the Master Servicer's or the related Servicers'
practices to satisfy the senior mortgage(s) at or prior to the foreclosure sale,
nor to advance funds to keep the senior mortgage(s) current. The Trust will have
no source of funds (and may not be permitted under the REMIC provisions of the
Code) to satisfy the senior mortgage(s) or make payments due to the senior
mortgagee(s), and therefore, investors in the Class A Certificates should not
expect that any senior mortgage(s) will be kept current by the Trust for the
purpose of protecting the Trust's junior lien. See "The Pooling and Servicing
Agreement - Master Servicer and Subservicers" herein.
An overall decline in the residential real estate market, the general
condition of a Mortgaged Property, or other factors, could adversely affect the
values of the Mortgaged Properties such that the outstanding balances of the
Mortgage Loans, together with any senior liens on the Mortgaged Properties,
equal or exceed the value of the Mortgaged Properties. A decline in the value of
a Mortgaged Property would affect the interest of the Trust in the Mortgaged
Property before having any effect on the interest of the related first
mortgagee, and could cause the Trust's interest in the Mortgaged Property to be
extinguished. If such a decline occurs, the actual rates of delinquencies,
foreclosures and losses on the Mortgage Loans could be higher than those
currently experienced in the mortgage lending industry in general. In addition,
adverse economic conditions (which may or may not affect real property values)
may affect the timely payment by borrowers of scheduled payments of principal
and interest on the Mortgage Loans and, accordingly, the actual rates of
delinquencies, foreclosures and losses with respect to the Trust.
[Risk of Higher Default Rates Associated with __________ or __________ Real
Property. Since a substantial portion of the Mortgaged Properties are located in
__________ or __________, an overall decline in the __________ or __________
residential real estate markets could adversely affect the values of the
Mortgaged Properties securing such Mortgage Loans such that the Principal
Balances of the related Mortgage Loans, together with any primary financing on
such Mortgaged Properties, equal or exceed the value of such Mortgaged
Properties. As the residential real estate market is influenced by many factors,
including the general condition of the economy and interest rates, no assurances
may be given that the __________ or __________ real estate market will not
weaken further. If the __________ or __________ residential real estate market
should experience an overall decline in property values after the dates of
origination of the Mortgage Loans, the rates of losses on the Mortgage Loans may
be expected to increase, and may increase substantially. [To be modified if the
Mortgage Loans for a Series includes a concentration within regions, counties or
other subdivisions of a state whose adverse economic conditions are greater than
those of the state as a whole.]
Limitations on FHA Insurance. The availability of FHA Insurance following a
default on a Mortgage Loan is subject to a number of conditions, including
strict compliance by the Trustee, the Claims Administrator, the Master Servicer,
any subservicers, and the Originators with FHA Regulations in originating and
servicing the Mortgage Loan and limits on the aggregate insurance coverage
available with respect to all FHA Title I loans then owned and reported for FHA
Insurance by the Trustee, as Contract of Insurance Holder. Although the Trustee
and the Depositor have obtained representations from the Originators that they
have complied with all FHA Regulations, such regulations are susceptible to
substantial interpretation. The Trustee, as Contract of Insurance Holder, is not
required to obtain, and has not obtained, approval from FHA of the origination
and servicing practices of the Originators. Failure to comply with all FHA
Regulations may result in a denial of FHA Insurance claims, and there can be no
assurance that FHA's enforcement of its regulations will not become stricter in
the future. In addition, any claim paid by FHA will cover only 90% of the sum of
the unpaid principal on the Mortgage Loan, a portion of the unpaid interest and
certain other liquidation costs. The Depositor has agreed in the Agreement to
purchase from the Trust any Mortgage Loan that is rejected by the FHA for
insurance benefits under the Contract of Insurance.
The FHA Insurance available to the Trustee, as Contract of Insurance
Holder, is limited to an amount, currently equal to ____% of the principal
balance of all Title I loans originated or purchased and currently reported for
FHA Insurance by the Trustee, as Contract of Insurance Holder, less amounts for
annual reductions as described below and for insurance claims previously paid to
the Trustee, as Contract of Insurance Holder, by the FHA, Mortgage Loans, and
increased by an amount equal to 10% of the lesser of the outstanding principal
balance as of the Cut-Off Date and the purchase price paid for Title I loans
subsequently originated or purchased of record by the Trustee, as Contract of
Insurance Holder. On each October 1, commencing five years after an entity's FHA
contract of insurance has been in effect, such entity's available FHA Insurance
is reduced by 10% of the then outstanding FHA Insurance amount available to the
Trustee, as Contract of Insurance Holder, as of each such October 1. The
Trustee, as Contract of Insurance Holder, has had an FHA contract of insurance
since __________. Accordingly, on each October 1, commencing October 1, 199___,
the FHA Insurance available to the Claims Administrator will be reduced by 10%
of the then outstanding FHA Insurance amount; provided, however, that in no case
shall such amount be reduced below $50,000.
The Contract of Insurance will be held by the Trustee for the benefit of
the Trust and for the benefit of Related Series Trusts. The Secretary of HUD
will not earmark the insurance reserves held for the Trustee for the benefit of
any particular Related Series Trust held by the Trustee, although the Trustee
has agreed not to hold Related Series Mortgage Loans.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Class A Certificates
will be used to purchase the Mortgage Loans from the Seller.
THE DEPOSITOR
The Depositor was incorporated in the State of Delaware on January 31, 1991
and is a wholly-owned subsidiary of the ContiFinancial Corporation. The
Depositor maintains its principal offices at 277 Park Avenue, New York, New York
10172. Neither the Depositor, the Company nor any of their affiliates will
insure or guarantee distribution on the Certificates.
THE TITLE I LOAN PROGRAM AND THE CONTRACT OF INSURANCE
On the Closing Date, the Trustee will hold for the benefit of the Trust and
all Related Series Trusts the FHA Contract of Insurance in an amount equal to
____% of the outstanding Principal Balance of all Mortgage Loans held by the
Trust and the Related Series Trusts as of the Cut-Off Date acknowledged by the
FHA as having been transferred to the Trustee (the "Initial FHA Insurance
Amount"). With respect to those Mortgage Loans that are not covered by the
Trustee's Contract of Insurance on the Closing Date, each of the related
Originators will be required to cause the related reserve accounts maintained by
the Secretary of HUD to be transferred on the FHA's books from the related
Originator's Contract of Insurance to the Trustee's Contract of Insurance. To
accomplish this transfer, on or after the date on which the Originators receive
the FHA Title I Case Numbers for the Mortgage Loans, the Originators will be
required to submit a sale report to the Secretary of HUD regarding the
conveyance of the Mortgage Loans to the Trustee. The "FHA Insurance Amount"
shall mean the Initial FHA Insurance Amount less (i) the aggregate amount of all
Annual Reductions applicable to the Contract of Insurance plus all reserves
subsequently transferred by the Secretary of HUD and (ii) the amount of FHA
Insurance proceeds previously received with respect to the Mortgage Loans and
any Related Series Mortgage Loans (as described below) since the related
Transfer Date. The Claims Administrator shall not submit any claim to the FHA if
the amount of such claim would exceed the FHA Insurance Amount applicable to the
Contract of Insurance. All FHA Insurance Proceeds received in respect of such
FHA Claims shall be deposited into the Collection Account.
THE ORIGINATORS
[To Be Provided]
THE MASTER SERVICER AND CLAIMS ADMINISTRATOR
The Master Servicer and Claims Administrator is _____________________, a
_________________ corporation. ____________ is principally engaged in the
business of servicing, on behalf of third party investors, residential single
family mortgages secured by properties located in
______________________________. As of _____________ __, 199___, the Master
Servicer was master servicing more than ___________ mortgage loans representing
an aggregate outstanding principal balance of approximately $____ billion. No
specific delinquency or foreclosure data relating to ________'s servicing
portfolio is provided because ___________'s servicing experience with FHA Title
I Mortgage Loans is not sufficient to be indicative of the delinquency and
foreclosure that might be expected with respect to the Mortgage Loans.
The following tables set forth information relating to the delinquency,
loan loss and foreclosure experience of the Master Servicer for its servicing
portfolio of Mortgage Loans for the past three years.
THE TRUSTEE AND CONTRACT OF INSURANCE HOLDER
_________________________________, a __________ banking corporation located
in ____________________, will be named as Trustee and Contract of Insurance
Holder under the Agreement.
The Trustee will at all times be required to be a corporation or national
banking association organized and doing business under the laws of the United
States of America or of any state authorized under such laws to exercise
corporate trust powers, subject to supervision or examination by federal or
state authority and either (i) having a combined capital and surplus of at least
$50,000,000 or (ii) being a wholly-owned subsidiary of a bank holding company
having such a capital and surplus. If at any time the Trustee shall cease to be
eligible in accordance with the provisions described in this paragraph, it will
be required to resign immediately.
No resignation or removal of the Trustee or the Contract of Insurance
Holder, as the case may be, and no appointment of a successor thereto shall
become effective until the acceptance of appointment by a successor trustee.
The Trustee or the Contract of Insurance Holder, as the case may be, or any
trustees or contract of insurance holders, respectively, hereafter appointed,
may resign at any time in the manner set forth in the Agreement. Upon receiving
notice of resignation, the Master Servicer with the prior written consent of the
Certificate Insurer is required promptly to appoint a successor trustee or
Contract of Insurance Holder, as the case may be, acceptable to the Certificate
Insurer by written instrument meeting the eligibility requirements in the manner
set forth in the Agreement. If no successor trustee or Contract of Insurance
Holder, as the case may be, shall have been appointed and have accepted
appointment within 30 days after the giving of such notice of resignation, the
resigning Trustee or Contract of Insurance Holder, as the case may be, may
petition any court of competent jurisdiction for the appointment of a successor
trustee.
If at any time the Trustee or the Contract of Insurance Holder, as the case
may be, shall cease to meet the eligibility requirements, or if, as determined
by a court of competent jurisdiction in a proceeding in which the Trustee has
been given an opportunity to be heard, the Trustee has failed to perform any
obligation under the Agreement and such failure materially and adversely affects
the Owners of the Certificates, and, in either such case, the Trustee shall fail
to resign after written request therefor by the Master Servicer, or if at any
time the Trustee shall become incapable of acting, or shall be adjusted as
bankrupt or insolvent, or a receiver of the Trustee or of its property shall be
appointed, or any public officer shall take charge or control of the Trustee or
of its property or affairs for the purpose of rehabilitation, conservation or
liquidation, then, in any such case the Master Servicer may with the prior
written consent of the Certificate Insurer or at the written request of the
Certificate Insurer shall remove the Trustee and appoint a successor trustee
acceptable to the Certificate Insurer by written instrument, in duplicate, one
copy of which instrument shall be delivered to the Trustee so removed and one
copy to the successor trustee.
The Depositor will be required to give notice of any removal of the Trustee
to the Owners, which notice will be required to include the name of the
successor trustee and the address of its corporate trust office. The Depositor
also will be required to give notice to the Owners of the acceptance by a
successor of its appointment.
THE MORTGAGE LOAN POOL
General
The Mortgage Loans to be transferred to the Trust on the Closing Date will
consist of _____ fixed-rate FHA home improvement loans evidenced by promissory
notes or retail installment sales contracts (the "Notes") secured by first and
junior lien deeds of trust, security deeds or mortgages, which are located in
___ states. The Properties securing the Mortgage Loans consist of residences
(which may be detached, part of a two-to-four family dwelling, a condominium
unit, a unit in a planned unit development, multi-unit properties or
manufactured homes (to the extent such homes are considered real estate under
applicable state law)). All the Mortgage Loans are partially insured by the FHA
under Title I. The Properties may be owner-occupied (which includes second and
vacation homes) and non-owner occupied investment properties. All Mortgage Loans
were originated on or after _____________ __, 199___.
As of the Cut-Off Date, the average Principal Balance of the Mortgage Loans
was $___________; the Coupon Rates of the Mortgage Loans ranged from _____% to
_____%; the weighted average Coupon Rate of the Mortgage Loans was _____%; the
weighted average remaining term to maturity of the Mortgage Loans was _____
months. The remaining terms to maturity as of the Cut-Off Date of the Mortgage
Loans ranged from 8 months to ____ months. The maximum Principal Balance as of
the Cut-Off Date was $________. No Mortgage Loan will mature later than
_____________ __, 199__. The Mortgage Loans relate to properties in ___ states.
Geographic Distribution of Mortgaged Properties
The geographic distribution of Mortgage Loans by State was as follows:
Original Aggregate
STATE NO. PERCENT PRINCIPAL BALANCE PERCENT
Total
<PAGE>
Cut-Off Date Loan Rates
The Coupon Rates borne by the Notes relating to the Mortgage Loans were
distributed as follows as of the Cut-Off Date:
Original Aggregate
COUPON RATE (%) NO. PERCENT PRINCIPAL BALANCE PERCENT
Total
Cut-Off Date Loan Balances
The distribution of the outstanding principal amounts of the Mortgage Loans
as of the Cut-Off Date was as follows: Principal Amount
Principal Amount Original Aggregate
CUT-OFF DATE NO. PERCENT PRINCIPAL BALANCE PERCENT
Total
Distribution of Months Since Origination
The distribution of the number of months since origination of the Mortgage
Loans as of the Cut-Off Date was as follows:
Original Aggregate
MONTHS NO. PERCENT PRINCIPAL BALANCE PERCENT
Total
Distribution of Remaining Term to Maturity
The distribution of the number of months remaining to maturity of the
Mortgage Loans as of the Cut-Off Date was as follows:
Original Aggregate
MONTHS NO. PERCENT PRINCIPAL BALANCE PERCENT
Total
Interest Payments on the Mortgage Loans
The Mortgage Loans are actuarial loans which provide that interest is
charged to the Mortgagors thereunder, and payments are due from such Mortgagors,
as of a scheduled day of each month which is fixed at the time of origination.
Each payment made by the Mortgagor is, therefore, treated as containing
predetermined amount of interest and principal. Scheduled monthly payments made
by the Mortgagors on the Mortgage Loans either earlier or later than the
scheduled due dates thereof will not affect the amortization schedule or the
relative application of such payments to principal and interest.
PREPAYMENT AND YIELD CONSIDERATIONS
General
The weighted average life of, and, if purchased at other than par
(disregarding, for purposes of this discussion, the effects on an investor's
yield resulting from the timing of the settlement date and those considerations
discussed below under "Payment Lag Feature of Class A Certificates"), the yield
to maturity on a Offered Certificate will be directly related to the rate of
payment of principal of the Mortgage Loans including for this purpose
Prepayments, liquidations due to defaults, casualties and condemnations, and
repurchases of Mortgage Loans by the Company. The actual rate of principal
prepayments on pools of mortgage loans is influenced by a variety of economic,
tax, geographic, demographic, social, legal and other factors and has fluctuated
considerably in recent years. In addition, the rate of principal prepayments may
differ among pools of mortgage loans at any time because of specific factors
relating to the mortgage loans in the particular pool, including, among other
things, the age of the mortgage loans, the geographic locations of the
properties securing the loans and the extent of the mortgagors' equity in such
properties, and changes in the mortgagors' housing needs, job transfers and
unemployment.
The timing of changes in the rate of prepayments may significantly affect
the actual yield to investors, even if the average rate of principal prepayments
is consistent with the expectations of investors. In general, the earlier the
payment of principal of the Mortgage Loans the greater the effect on an
investor's yield to maturity. As a result, the effect on an investor's yield of
principal prepayments occurring at a rate higher (or lower) than the rate
anticipated by the investor during the period immediately following the issuance
of the Offered Certificates will not be offset by a subsequent like reduction
(or increase) in the rate of principal prepayments. Investors must make their
own decisions as to the appropriate prepayment assumptions to be used in
deciding whether to purchase any of the Offered Certificates. The Company makes
no representations or warranties as to the rate of prepayment or the factors to
be considered in connection with such determination.
Certain Yield, Prepayment and Weighted Average Life Considerations
If purchased at other than par, the yield to maturity on an Offered
Certificate will be affected by the rate of the payment of principal of the
Mortgage Loans. If the actual rate of payments on the Mortgage Loans is slower
than the rate anticipated by an investor who purchases an Offered Certificate at
a discount, the actual yield to such investor will be lower than such investor's
anticipated yield. If the actual rate of payments on the Mortgage Loans is
faster than the rate anticipated by an investor who purchases an Offered
Certificate at a premium, the actual yield to such investor will be lower than
such investor's anticipated yield.
The rate of prepayments with respect to conventional fixed rate mortgage
loans has fluctuated significantly in recent years. In general, if prevailing
interest rates fall significantly below the interest rates on fixed rate
mortgage loans, such mortgage loans are likely to be subject to higher
prepayment rates than if prevailing rates remain at or above the interest rate
on such mortgage loans. However, the monthly payment on a home improvement 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
rates on fixed rate mortgage loans, such mortgage loans are likely to experience
a lower prepayment rate than if prevailing rates remain at or below the interest
rates on such mortgage loans.
The final scheduled Distribution Date for the Class A Certificates is
_____________ __, 20__, which is the date on which the original principal amount
of the Class A Certificates as of the Closing Date less all amounts previously
distributed to the Owners on account of principal (such amount as of any time,
the "Class A Principal Balance") would be reduced to zero, assuming that no
Prepayments are received on the Mortgage Loans and that payments of principal of
and interest on each of the Mortgage Loans are timely received. The weighted
average life of the Class A Certificates is likely to be shorter than would be
the case if payments actually made on the Mortgage Loans conformed to the
foregoing assumptions, and the final Distribution Date with respect to the Class
A Certificates could occur significantly earlier than the final scheduled
Distribution Date because (i) Distributable Excess Spread will be used to make
accelerated payments of principal to the Owners of the Class A Certificates,
which payments will have the effect of shortening the weighted average lives of
the Class A Certificates, (ii) Prepayments are likely to occur, and (iii) the
Depositor and, in limited circumstances, the Certificate Insurer, may cause a
termination of the Trust when the aggregate outstanding principal balance of the
Mortgage Loans is 10% or less of the aggregate principal balance of the Mortgage
Loans in the Trust as of the Cut-Off Date.
Weighted Average Life of the Class A Certificates
"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 life of the
Class A Certificates will be influenced by the rate at which principal of the
Mortgage Loans is paid, which may be in the form of scheduled amortization or
prepayments (for this purpose, the term "prepayment" includes Prepayments and
liquidations due to default). Prepayments on mortgage loans are commonly
measured relative to a prepayment standard or model. In the model used in this
Prospectus Supplement, the constant prepayment rate ("CPR") represents an
assumed annualized rate of payment relative to the then outstanding principal
balance of a pool of new mortgage loans.
Based upon the foregoing assumptions, the following table indicates the
projected weighted average life of the Class A Certificates, at various CPR
assumptions.
Class A Certificates
Weighted Average Earliest Retirement at
CPR LIFE (YEARS)* CLASS R OWNER'S OPTION**
- -------------
* The weighted average life of a Certificate is determined by (i)
multiplying the amount of each distribution in reduction of the
outstanding principal amount of such Certificate by the number of years
from the date of issuance of the Certificates to the related
Distribution Date, (ii) adding the results and (iii) dividing the sum
by the initial principal amount of the Certificate.
** Assuming early retirement of the Class A Certificates upon termination
of the Trust on the second Distribution Date following the Remittance
Date on which the aggregate unpaid Principal Balance of the Mortgage
Loans declines to a level less than 10% of the aggregate principal
balance of the Mortgage Loans in the Trust as of the Cut-Off Date.
There is no assurance that Prepayments will occur, or, if they do occur,
that they will occur at any constant percentage of CPR.
Payment Lag Feature of Class A Certificates
An amount equal to Mortgagor payments with respect to each Mortgage Loan
(net of the Servicing Fee and Master Servicer Fee) received during each Due
Period is to be remitted to the Trustee within two Business Days of receipt
thereof; however, the Trustee will be required to distribute such amounts to the
Owners on the Distribution Date following such Due Period. The first
Distribution Date will not occur until _____________ __, 199__, and will include
Mortgagor payments for the Due Period ending on _____________ __, 199__. Thus,
the effective yield to the Owners will be below that otherwise produced by the
Pass-Through Rate because the distributions to the Class A Owners in respect of
any given month will not be made until on or about the 20th day of the following
month.
Yield Sensitivity of the Class S-A Certificates
Because amounts distributable to Owners of the Class S-A Certificates
consist entirely of interest, the yield to maturity of the Class S-A
Certificates will be extremely sensitive to the repurchase, prepayment and
default experience of the Mortgage Loans, and prospective investors should fully
consider the associated risks, including the risk that such investors may not
fully recover their initial investment. In particular, investors in the Class
S-A Certificates should be aware that Depositor may cause a termination of the
Trust when the aggregate outstanding principal balance of the Mortgage Loans has
declined to ___% or less of the aggregate pool balance of the Mortgage Loans as
of the Cut-Off Date.
The following table indicates certain relationships between the assumed
purchase price and the yield to maturity on the Class S-A Certificates, stated
on a corporate bond equivalent basis. Such table also indicates such
relationships on the assumption that (a) the Trust is not terminated by the
Depositor pursuant to its __% "clean-up call", and (b) the Trust is so
terminated.
Sensitivity of the Class S-A Certificates to Prepayments
PREPAYMENT SCENARIO 0% CPR % CPR % CPR % CPR % CPR
I
II
III
IV
V
On the basis of approximately __% CPR, and a purchase price of ____%, no
termination of the Trust by the Company pursuant to its __% "clean-up call" and
the other assumptions described above, the pre-tax yield to maturity of the
Class S-A Certificates would be approximately __%. If the actual prepayment rate
were to exceed approximately __% CPR, based on such assumptions, an investor in
the Class S-A Certificates as to which such percentage of CPR was exceeded would
not fully recover the initial purchase price thereof.
On the basis of approximately ___% CPR, a purchase price of _______%,
termination of the Trust by the Company pursuant to its __% "clean-up call" and
the other assumptions described above, the pre-tax yield to maturity of the
Class S-A Certificates would be approximately __%. If the actual prepayment rate
were to exceed approximately __% CPR based on such assumptions, an investor in
the Class S-A Certificates as to which such percentage of CPR was exceeded would
not fully recover the initial purchase price thereof.
It is highly unlikely that the Mortgage Loans will prepay at a constant
rate until maturity or that all of the Mortgage Loans will prepay at the same
rate. In fact, Mortgage Loans will prepay at different rates.
The yields set forth in the preceding tables were calculated by determining
the monthly discount rates which, when applied to the assumed stream of cash
flow to be paid on the Class S-A Certificates, would cause the discounted
present value of such assumed cash flows to equal the assumed purchase price of
such Class S-A Certificates and by converting such monthly rates to corporate
bond equivalent rates. Such calculations do not take into account variations
that may occur in the interest rates at which investors may be able to reinvest
funds received by them as distributions on the Class S-A Certificates and
consequently do not purport to reflect the return on any investment in the Class
S-A Certificates when such reinvestment rates are considered.
The Mortgage Loans will not necessarily have the characteristics assumed
above, and there can be no assurance the (i) the Mortgage Loans will prepay at
any of the rates shown in the table or at any other particular rate or will
prepay proportionately, (ii) the pre-tax yield on the Class S-A Certificates
will correspond to any of the pre-tax yields shown above or (iii) the aggregate
purchase price of the Class S-A Certificates will be equal to the purchase price
assumed.
Scheduled Final Distribution Date. The scheduled final Distribution Date
for the Class S-A Certificates is ----------- --, ----.
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Mortgage Loans and the
Mortgaged Properties is based upon the pool as constituted at the close of
business on the Cut-Off Date, as adjusted for the scheduled principal payments
due on or before such date. Prior to the issuance of the Offered Certificates,
Mortgage Loans may be removed from the pool as a result of incomplete
documentation or non-compliance with representations and warranties set forth in
the Agreement, if the Depositor deems such removal necessary or appropriate. A
limited number of other Mortgage Loans may be included in the pool prior to the
issuance of the Offered Certificates.
A current report on Form 8-K will be available to purchasers of the Offered
Certificates and will be filed and incorporated by reference to the Registration
Statement together with the Agreement with the Securities and Exchange
Commission within fifteen days after the initial issuance of the Offered
Certificates. In the event Mortgage Loans are removed from or added to the
mortgage pool as set forth in the preceding paragraph, such removal or addition
will be noted in the current report on Form 8-K.
DESCRIPTION OF THE OFFERED CERTIFICATES
General
The Class A Certificates will be available in minimum denominations of
$________________ and integral multiples of $1,000 in excess thereof, except
that one Class A Certificate may be issued in any amount. The Class S-A
Certificate will be issuable in minimum Percentage Interests of 10% and integral
multiples of 1% in excess thereof.
As described in "The Mortgage Loan Pool" herein, the Mortgage Loans include
first and junior lien Mortgage Loans. Each Class A Certificate will evidence the
right to receive on each Distribution Date the Class A Interest Distribution and
the Class A Principal Distribution until the Class A Certificate Balance has
been reduced to zero and each Class S-A Certificate, which is an interest-only
Certificate, will evidence the right to receive on each Distribution Date the
Class S-A Interest Distribution.
One-hundred percent of the Class A Distribution Amount and the Class S-A
Interest Distribution due to the related Owners of the Offered Certificates on
each Distribution Date is insured by the Certificate Insurer pursuant to the
Policy. See "The Policy" herein.
Distribution Dates
On each Distribution Date each Owner of Class A Certificates will be
entitled to receive, from amounts then on deposit in the Certificate Account and
until the Class A Certificate Balance is reduced to zero, to the extent of the
Amount Available on such Distribution Date, the Class A Interest Distribution
and, to the extent of the Distribution Amount on such Distribution Date, the
Class A Monthly Principal Distributable Amount as of such Distribution Date and
each Owner of a Class S-A Certificate will be entitled to receive, from amounts
then on deposit in the Certificate Account, to the extent of the Amount
Available on such Distribution Date, the Class S-A Interest Distribution as of
such Distribution Date. Distributions will be made in immediately available
funds to Owners of Offered Certificates by wire transfer or otherwise, to the
account of such Owner at a domestic bank or other entity having appropriate
facilities therefor, if such Owner has so notified the Trustee, or by check
mailed to the address of the person entitled thereto as it appears on the
register (the "Certificate Register") maintained by the Trustee as registrar
(the "Certificate Registrar").
Distributions
Upon receipt, the Trustee will be required to deposit into the Certificate
Account (i) the total of the principal and interest collections on the Mortgage
Loans required to be remitted by the Master Servicer or the related subservicers
on each Business Day, together with any Purchase Price Amount, (ii) any
Insurance Payment and (iii) the proceeds of any liquidation of Mortgage Loans.
On each Distribution Date, the Trustee is required to make the following
disbursements and transfers from moneys then on deposit in the Certificate
Account in the following order of priority:
(i) from the Distribution Amount, for deposit in the FHA Premium
Account, the FHA Premium Account Deposit for such Distribution Date;
(ii) from the Distribution Amount, to the Master Servicer, the Master
Servicer Fee for such Distribution Date;
(iii) from the Distribution Amount, to the Master Servicer, any amount
in respect of reimbursement of Delinquency Advances or Foreclosure Advances
to which the Master Servicer is entitled with respect to such Distribution
Date;
(iv) from the Distribution Amount, to the Trustee, the Trustee Fee for
such Distribution Date;
(v) from the Distribution Amount, Priority Expenses to the Persons
entitled thereto on such Distribution Date;
(vi) from the Amount Available, to the Owners of the Class A
Certificates, an amount equal to the Class A Interest Distribution for such
Distribution Date and to the Owners of the Class S-A Certificates, an
amount equal to the Class S-A Interest Distribution for such Distribution
Date;
(vii) from the Distribution Amount, to the Certificate Insurer, any
amounts owing to the Certificate Insurer under the Insurance Agreement and
not paid, whether or not any other Person is obligated to pay such amounts;
(viii) from the Distribution Amount, to the Owners of the Class A
Certificates, the Class A Principal Distribution for such Distribution
Date;
(ix) from the Amount Available, to the Owners of the Class A
Certificates, an amount equal to the Class A Guaranteed Principal
Distribution Amount, if any, for such Distribution Date;
(x) from the Distribution Amount, to any successor Master Servicer,
such fee, if any, for such Distribution Date payable in accordance with the
Pooling and Servicing Agreement in addition to the Master Servicer Fee; and
(xi) the balance of any Distribution Amount, to the Owners of the
Class R Certificates.
The Trustee's Fee as of each Distribution Date will be one-twelfth of the
product of ___% and the aggregate Class A Certificate Balance as of the close of
business on the last day of the second month before such Distribution Date, and
prior to the distribution of the Class A Principal Distribution on such
Distribution Date.
The Class A Distributions
On each Distribution Date, the Class A Certificateholders will be entitled
to receive the sum of (a) the Class A Interest Distribution and (b) the Class A
Guaranteed Principal Distribution Amount, and (c) to the extent of the
Distribution Amount available after the distribution pursuant to clauses (i)
through (viii) above, the Class A Monthly Principal Distributable Amount in
excess of any amounts described in clause (b) above.
"Class A Interest Distribution" means, with respect to any Distribution
Date, the sum of (a) the "Class A Monthly Interest Distributable Amount" (i.e.,
30 days interest at the Pass-Through Rate on the Class A Certificate Balance as
of the close of business on the preceding Distribution Date (or, in the case of
the first Distribution Date, on the Closing Date)) and (b) any Class A Interest
Carryover Shortfall (i.e., the excess of the Class A Monthly Interest
Distributable Amount for the preceding Distribution Date and any outstanding
Class A Interest Carryover Shortfall on such preceding Distribution Date over
the amount in respect of interest that is actually distributed to the Class A
Certificateholders on such preceding Distribution Date, plus interest on such
excess, to the extent permitted by law, at the Pass-Through Rate from such
preceding Distribution Date through the current Distribution Date).
"Class A Guaranteed Principal Distribution Amount" means, with respect to
any Distribution Date, the positive excess, if any, of (i) the aggregate of the
Outstanding Class A Certificate Balances of all Outstanding Class A Certificates
as of such Distribution Date (taking into account distributions on such
Distribution Date pursuant to clause (viii) above) over (ii) the aggregate of
the Class A Guaranteed Certificate Balances as of such Distribution Date.
"Class A Monthly Principal Distributable Amount" means, with respect to any
Distribution Date, the amount equal to the sum of the collateral amounts
(without duplication) with respect to the immediately preceding Due Period: (i)
that portion of all Mortgage Payments allocable to principal, including all full
and partial principal prepayments (excluding such amounts in respect of Mortgage
Loans included in clause (ii) for a prior Distribution Date), (ii) the Principal
Balance of all Mortgage Loans that became Defaulted Mortgage Loans during the
related Due Period, (iii) the portion of the Purchase Amount allocable to
principal of all Mortgage Loans that became Purchased Mortgage Loans as of the
immediately preceding Monthly Cut-Off Date excluding such amounts in respect of
Mortgage Loans included in clause (ii) for a prior Distribution Date and, in the
sole discretion of the Certificate Insurer, the Principal Balance as of the
immediately preceding Monthly Cut-Off Date of all Mortgage Loans that were
required to be purchased or repurchased as of the immediately preceding Monthly
Cut-Off Date pursuant to the Agreement but were not so purchased, (iv) the
aggregate amount of Cram Down Losses that shall have occurred during the related
Due Period, (v) the amount of Distributable Excess Spread in respect of such
Distribution Date and (vi) amounts, if any, delivered by the Certificate Insurer
to the Trustee for deposit in the Certificate Account and distribution in
respect of the Class A Certificates in accordance with the Insurance Agreement;
provided, however, that, if with respect to any Distribution Date, Distributable
Excess Spread is zero, the Class A Monthly Principal Distributable Amount shall
equal such portion of the sum of the amounts included in clauses (i) through
(iv) above such that following distribution in reduction of the Aggregate Class
A Certificate balance the Required OC Test would be satisfied.
"Class A Guaranteed Certificate Balance" means with respect to any
outstanding Class A Certificate as of any date of determination, the
hypothetical Class A Certificate Balance equal to the initial Class A
Certificate Balance of such Class A Certificate set forth on the face thereof,
reduced by the pro rata portion allocable to such Class A Certificate of the
aggregate of the Class A Minimum Principal Distributable Amounts with respect to
all Distribution Dates on or prior to such date of determination.
"Class A Minimum Principal Distributable Amount" means with respect to any
Distribution Date, the amount set forth on the schedule to the Agreement for
such Distribution Date
"Due Period" means with respect to any Distribution Date, the calendar
month immediately preceding such Distribution Date.
"Excess Spread" means with respect to any Distribution Date, the positive
excess, if any, of (x) the aggregate amount of the Mortgage Payments or amounts
deposited by the Depositor if it elects to acquire the Mortgage Loans at the
time the outstanding balance of the Mortgage Loans is less than 10% of the
Initial Principal Balance with respect to the related Due Period over (y) the
sum of (A) the amount required to be distributed pursuant to priorities (i)
through (vii) under "Distributions" above on such Distribution Date plus (B) the
sum of any outstanding Class A Principal Carryover Shortfall as of the close of
the preceding Distribution Date plus (C) the sum of the amounts described in
clauses (i) through (iv) of the definition of Class A Monthly Principal
Distributable Amount (set forth above) for such Distribution Date.
"Distributable Excess Spread" means with respect to any Distribution Date,
such portion (not greater than 100%) of Excess Spread with respect to such
Distribution Date, which if distributed in accordance with clause (v) of the
definition of Class A Monthly Principal Amount would cause the Required OC Test
to be satisfied with respect to such Distribution Date, after giving effect to
all distributions on such Distribution Date, provided, however, that if the
Required OC Multiple is unlimited, Distributable Excess Spread shall equal 100%
of Excess Spread; provided, further, however, that so long as an Insurer Default
(as defined in the Agreement) shall not have occurred and be continuing,
Distributable Excess Spread may, in the discretion of the Certificate Insurer
with respect to any Distribution Date with respect to which the Required OC
Multiple is greater than 100%, be a portion of Excess Spread which is less than
would otherwise be determinable pursuant to this definition but which is not
less than the portion of Excess Spread that would be determinable pursuant to
this definition if the Required OC Multiple were equal to 100%.
The Class S-A Distributions
The Class S-A Certificates are interest-only certificates which will not be
entitled to any distribution of principal, but will be entitled to interest on
the Notional Principal Balance. The interest due with respect to the Class S-A
Certificate will be the interest which has accrued thereon at the Class S-A
Pass-Through Rate during the calendar month in which such Distribution Date
occurs (the "Class S-A Interest Distribution").
The Agreement will provide that, to the extent the Certificate Insurer
makes Guaranteed Distributions, either directly or indirectly (as by paying
through the Trustee or Paying Agent), to the Owners of such Offered
Certificates, if any, the Certificate Insurer will be subrogated to the rights
of such Owners of Offered Certificates with respect to such Guaranteed
Distributions. The Certificate Insurer shall receive reimbursement for such
Guaranteed Distribution as provided in the Agreement, but only from the same
sources and in the same manner provided in the Agreement for the payment of the
Class A Distribution Amount to Owners of Class A Certificates and the Class S-A
Interest Distribution, if any. The subrogation and reimbursement will have no
effect on the Certificate Insurer's obligations under the Policy.
Book Entry Registration of the Offered Certificates
The Offered Certificates will be represented by a single certificate
registered in the name of the nominee of The Depository Trust Company (the
"Clearing Agency"). The Clearing Agency will maintain book entry records of
ownership, transfers and pledges of such Certificates only in the names of its
participants and indirect participants (the "Clearing Agency Participants"),
which include securities brokers and dealers, banks and trust companies and
clearing corporations and may include certain other organizations. Prior to Book
Entry Termination (as defined below), Beneficial Owners who are not Clearing
Agency Participants may transfer and pledge their interests in the Offered
Certificates, and exercise any other rights and remedies of Certificateholders,
only through Clearing Agency Participants or other entities that maintain
relationships with Clearing Agency Participants. The Clearing Agency may charge
its customary fee to Clearing Agency Participants in connection with any such
transfers and pledges. In addition, prior to Book Entry Termination,
distributions on the Offered Certificates will be made to Beneficial Owners only
through the Clearing Agency and its Clearing Agency Participants. Consequently,
Beneficial Owners may experience some delay in the receipt of their payments.
See "Risk Factors - Book Entry Registration" and "Description of the
Certificates - Book Entry Registration" in the Prospectus.
The Offered Certificates will be issued in definitive, registered form to
Beneficial Owners or their nominees, and thereupon such Beneficial Owners will
become Owners of the Certificates, if, and only if, one of the following events
shall occur (any such event being referred to as "Book Entry Termination"): (i)
the Clearing Agency or the Depositor advises the Trustee in writing that the
Clearing Agency is no longer willing or able properly to discharge its
responsibilities as a clearing corporation with respect to the Offered
Certificates and the Depositor and the Trustee are unable to engage a qualified
successor to serve as the Clearing Agency, or (ii) the Clearing Agency, at the
direction of Beneficial Owners representing a majority of the outstanding
principal amount of the Offered Certificates, advise the Trustee in writing that
the continuation of a book entry system is no longer in the best interests of
Beneficial Owners, or (iii) the Depositor, at its option, advises the Trustee
that it elects to terminate the book entry system. Upon Book Entry Termination,
Beneficial Owners will become registered Certificateholders and will deal
directly with the Trustee with respect to transfers, notices and payments.
The Clearing Agency has advised the Depositor and the Trustee that, prior
to Book Entry Termination, the Clearing Agency will take any action permitted to
be taken by a Certificate holders under the Agreement only at the direction of
one or more Clearing Agency Participants to whom the Offered Certificates are
credited in an account maintained by the Clearing Agency. The Clearing Agency
has advised that it will take such action with respect to any principal amount
of the Offered Certificates only at the direction of and on behalf of Clearing
Agency Participants with respect to those principal amounts of such Offered
Certificates.
Issuance of the Offered Certificates in book entry form rather than as
physical Certificates may adversely affect the liquidity of such Offered
Certificates in the secondary market and the ability of Offered
Certificateholders to pledge them. In addition, since distributions on the
Offered Certificates will be made by the Trustee to the Clearing Agency and the
Clearing Agency will credit such distributions to the accounts of its
Participants, which will further credit them to the accounts of indirect
participants of the Offered Certificateholders such Offered Certificateholders
may experience delays in the receipt of such distributions.
Certain Activities
The Trust has not and will not: (i) issue securities (except for the
Certificates); (ii) borrow money; (iii) make loans; (iv) invest in securities
for the purpose of exercising control; (v) underwrite securities; (vi) except as
provided in the Pooling and Servicing Agreement, engage in the purchase and sale
(or turnover) of investments; (vii) offer securities in exchange for property
(except Certificates for the Mortgage Loans); or (viii) repurchase or otherwise
reacquire its securities. See "Pooling and Administration -- Reports to
Certificateholders" in the Prospectus for information regarding reports to the
Owners.
THE POLICY
The following summary of the terms of the Policy does not purport to be
complete and is qualified in its entirety by reference to the Policy.
Simultaneously with the issuance of the Offered Certificates, the
Certificate Insurer will deliver the Policy to the Trustee for the benefit of
each Offered Certificate holders. Under the Policy, the Certificate Insurer
unconditionally and irrevocably guarantees to the Trustee for the benefit of
each Certificate holders the full and complete payment of (i) Guaranteed
Distributions (as defined below) with respect to the Offered Certificates; and
(ii) the amount of any Guaranteed Distribution which subsequently is avoided in
whole or in part as a preference payment under applicable law.
"Guaranteed Distributions" means, with respect to each Distribution Date,
the distribution to be made to Certificateholders in an aggregate amount equal
to the Class A Interest Distributable Amount due and payable on such
Distribution Date, the Class A Guaranteed Principal Distribution Amount, if any,
and the Class S-A Interest Distribution, if any, due and payable on such
Distribution Date, in each case in accordance with the original terms of the
Certificates when issued and without regard to any amendment or modification of
the Certificates or the Agreement which has not been consented to by the
Certificate Insurer.
Payment of Claims on the Policy made in respect of Guaranteed Distributions
will be made by the Certificate Insurer following Receipt by the Certificate
Insurer of the appropriate notice for payment on the later to occur of (a) 12:00
noon, New York time, on the third Business Day following Receipt of such notice
for payment, and (b) 12:00 noon, New York City time, on the Distribution Date
such payment was due on the Certificates.
If payment of any amount avoided as a preference under applicable
bankruptcy, insolvency, receivership or similar law is required to be made under
the Policy, the Certificate Insurer shall cause such payment to be made no
earlier than the first to occur of (a) the fourth Business Day following Receipt
by the Certificate Insurer from the Trustee of (i) a certified copy of the order
(the "Order") of the court or other governmental body which exercised
jurisdiction to the effect that the Certificate holders is required to return
principal or interest distributed with respect to the Certificates during the
term of the Policy because such distributions were avoidable as preference
payments under applicable bankruptcy law, (ii) a certificate of the Certificate
holders that the Order has been entered and is not subject to any stay, and
(iii) an assignment duly executed and delivered by the Certificate holders, in
such form as is reasonably required by the Certificate Insurer and provided to
the Certificate holders by the Certificate Insurer, irrevocably assigning to the
Certificate Insurer all rights and claims of the Certificate holders relating to
or arising under the Certificates against the debtor which made such preference
payment or otherwise with respect to such preference payment, or (b) the date of
Receipt by the Certificate Insurer from the Trustee of the items referred to in
clauses (i), (ii) and (iii) 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 Certificate holders directly (unless a Certificate
holders has previously paid such amount to the receiver, conservator,
debtor-in-possession or trustee in bankruptcy names in the Order, in which case
such payment shall be disbursed to the Trustee for distribution to such
Certificate holders upon proof of such payment reasonably satisfactory to the
Certificate Insurer).
The terms "Receipt" and "Received," with respect to the Policy, shall mean
actual delivery to the Certificate Insurer, 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 Receipt on the next
succeeding Business Day. If any notice or certificate given under the 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 shall promptly so advise the Trustee and the Trustee may submit an
amended notice.
Under the 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 are
authorized or obligated by law or executive order to be closed.
The Certificate Insurer's obligations under the Policy in respect of
Guaranteed Distributions shall be discharged to the extent funds are transferred
to the Trustee as provided in the Policy whether or not such funds are properly
applied by the Trustee.
The Certificate Insurer shall be subrogated to the rights of each
Certificate holders to receive payments of principal and interest with respect
to the Guaranteed Distributions to the extent of any payment by the Certificate
Insurer under the Policy.
Claims under the Policy constitute direct, unsecured and unsubordinated
obligations of the Certificate Insurer ranking not less than pari passu with
other unsecured and unsubordinated indebtedness of the Certificate Insurer for
borrowed money. Claims against the Certificate Insurer under each other
financial guaranty insurance policy issued thereby constitutes pari passu claims
against the general assets of the Certificate Insurer. The terms of the Policy
cannot be modified or altered by any other agreement or instrument, or by the
merger, consolidation or dissolution of the Depositor. The Policy may not be
canceled or revoked prior to distribution in full of all Guaranteed
Distributions with respect to the Certificates. The Policy is not covered by the
property/casualty insurance security fund specified in Article 76 of the New
York Insurance Law. The Policy is governed by the laws of the State of New York.
[Insurance and Indemnity Agreement
The Depositor and the Certificate Insurer will enter into an Insurance and
Indemnity Agreement (the "Insurance Agreement") pursuant to which the Depositor
will agree to reimburse, with interest, the Certificate Insurer for certain
amounts paid pursuant to claims under the Policy. The Depositor will further
agree to pay the Certificate Insurer all reasonable charges and expenses which
the Certificate Insurer may pay or incur relative to any amounts paid under the
Policy or otherwise in connection with the transaction and to indemnify the
Certificate Insurer against certain liabilities.]
THE CERTIFICATE INSURER
The following information has been furnished by the Certificate Insurer for
use herein. Reference is made to Appendix for a specimen of the Policy.
General
[The Certificate Insurer is a monoline insurance company incorporated on
___________ __, ____ under the laws of the State of New York. The Certificate
Insurer received its New York State insurance license and commenced operations
on __________ __, _____. The Certificate Insurer and its two wholly owned
subsidiaries are 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 exclusively 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 principal executive offices of the Certificate Insurer are located at
______________________, and its telephone number at that location is
________________. At _________________, the Certificate Insurer and its
subsidiaries had ____ employees.
Reinsurance
Pursuant to an intercompany agreement, liabilities on financial guaranty
insurance written by the Certificate Insurer or either of its 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 "Aaa" by Moody's
and "AAA" by S&P. 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. See
"Ratings."
Capitalization
The following table sets forth the capitalization of the Certificate
Insurer and its wholly owned subsidiaries on the basis of generally accepted
accounting principles as of __________ __, 199__ (in thousands):
(Unaudited)
Unearned Premium Reserve (net of prepaid reinsurance premiums) $
Shareholder's Equity:
Common Stock
Additional Paid-In Capital
Retained Earnings
Total Shareholder's Equity
Total Unearned Premium Reserve and Shareholder's Equity $
For further information concerning the Certificate Insurer, see the
Consolidated Financial Statements of the Certificate Insurer and Subsidiaries,
and the notes thereto, included as Appendices C and D in this Prospectus
Supplement. 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.
Insurance Regulation
The Certificate Insurer and its insurance subsidiaries are licensed and
subject to regulation as insurance corporations under the laws of the State of
New York, the jurisdiction of organization of the Certificate Insurer. 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 liability for borrowings.
OVERCOLLATERALIZATION PROVISIONS
On each Distribution Date, Distributable Excess Spread will be applied on
such Distribution Date as an accelerated payment of principal on the Class A
Certificates. This has the effect of accelerating the amortization of the Class
A Certificates relative to the amortization of the Mortgage Loans. To the extent
that any Excess Spread is not so used, it will be paid to the Owners of the
Class R Certificates.
Excess Spread will be applied as an accelerated payment of principal on the
Class A Certificates until the Required OC Test is satisfied. The "Required OC
Test" is met (i) if on the Closing Date the aggregate of the Principal Balances
of the Mortgage Loans as of the Cut-Off Date is _______% of the aggregate Class
A Certificate Balance as of the Closing Date and (ii) on a subsequent
Distribution Date, the Aggregate Principal Balance with respect to such
Distribution Date, exceeds the aggregate Class A Principal Balance by an amount
which is equal to the greater of (i) $_______ and (ii) the Required OC Multiple
with respect to such Distribution Date, times:
(x) in the case of a Distribution Date on or prior to the
Midpoint Date, the amount which is equal to ___% of the Aggregate Class
A Certificate Balance as of the Closing Date;
(y) in the case of a Distribution Date after the Midpoint
Date, in the event that the Required OC Multiple is greater than 100%
on the Midpoint Date, the amount which is equal to ___% of the Original
Aggregate Class A Certificate Balance as of the Closing Date; and
(z) in the case of a Distribution Date after the Midpoint
Date, in the event that the Required OC Multiple is equal to 100% on
the Midpoint Date, the amount equal to ___% of the Aggregate Class A
Certificate Balance as of the Closing Date plus ___% of the Aggregate
Class A Certificate Balance on such Distribution Date (prior to giving
effect to any distributions on such date).
"Midpoint Date" means the Determination Date next succeeding the end of the
____the full calendar month following the Closing Date. A "Determination Date"
is the fifth Business Day preceding the related Distribution Date.
"Required OC Multiple" means with respect to any Distribution Date, the
percentage set forth in the Collateral Performance Matrix which corresponds to
the data with respect to the applicable Collateral Performance Tests set forth
in the Master Servicer Certificate with respect to the related Determination
Date. The "Collateral Performance Matrix" in the Agreement sets forth various
levels for the Required OC Multiple which are a function of certain delinquency
and default characteristics of the Mortgage Loans existing on each Determination
Date.
In the event that the required level of overcollateralization is permitted
to decrease or "step down" on any Distribution Date, the Agreement provides that
a portion of the principal of the Mortgage Loans which would otherwise be
distributed to the Owners of the Class A Certificates on such Distribution Date
shall be distributed to the Owners of the Class R Certificates on such
Distribution Date. This has the effect of decelerating the amortization of Class
A Certificates relative to the amortization of the Mortgage Loans and of
reducing the amount of overcollateralization.
THE POOLING AND SERVICING AGREEMENT
In addition to the provisions of the Agreement summarized elsewhere in this
Prospectus Supplement, there is set forth below a summary of certain other
provisions of the Agreement.
Formation of the Trust
Pursuant to the Agreement, the Trust will be created and established, the
Trust will acquire the Mortgage Loans without recourse to the Depositor and the
Trust will issue the Offered Certificates.
The property of the Trust shall include all (a) the Mortgage Loans together
with the related Mortgage Loan documents and the Depositor's interest in any
Mortgaged Property which secures a Mortgage Loan and all payments thereon and
proceeds of the conversion, voluntary or involuntary, of the foregoing, (b) the
FHA Insurance reserves attributable to the Mortgage Loans as of the Cut-Off
Date, (c) such amounts as may be held by the Trustee in the Certificate Account
together with investment earnings on such amounts and such amounts may be held
by the Trustee in the Certificate Account, if any, whether in the form of cash,
instruments, securities or other properties, (d) the Policy, and (e) proceeds of
all the foregoing (including, but not by way of limitation, all proceeds of any
mortgage insurance, hazard insurance and title insurance policy relating to the
Mortgage Loans, cash proceeds, accounts, accounts receivable, notes, drafts,
acceptances, chattel paper, checks, deposit accounts, rights to payment of any
and every kind, and other forms of obligations and receivables which at any time
constitute all or part of or are included in the proceeds of any of the
foregoing) to pay the Certificates as specified in the Agreement (collectively,
the "Trust Property").
The Certificates do not represent an interest in or obligation of the
Depositor, Trustee, Master Servicer, or any of their respective affiliates. The
Certificates will not be savings accounts or deposits and neither the
Certificates nor the underlying mortgage loans will be insured or guaranteed by
any governmental agency, except that the Mortgage Loans are partially insured by
the FHA. The obligations of the FHA with respect to insurance concerning the
Mortgage Loans are not unlimited or unconditional obligations of the FHA, but
are limited contractually to the amount of insurance coverage described herein.
Covenant of Company to Take Certain Actions with Respect to the Mortgage Loans
in Certain Situations
Pursuant to the Agreement, upon the discovery by the Depositor, the
Company, the Master Servicer, the Certificate Insurer or the Trustee that any
representatives and warranty with respect to the Mortgage Loans (including the
related Mortgages and Notes) were materially and adversely untrue as of the
Closing Date with the result that the interests of the Owners in the related
Mortgage Loan or the interests of the Certificate Insurer are materially and
adversely affected, or any required document constituting a part of any Mortgage
File was not delivered to the Trustee by the time required to be so delivered or
was defective in any material respect when so delivered, the party discovering
such breach is required to give prompt written notice to the other parties and
the Certificate Insurer.
If any such omission of or defect in any document constituting part of the
Mortgage File or any such breach of any representation or warranty made by the
Company is not cured, in the opinion of the Certificate Insurer, for any reason,
within 60 days of the receipt of notice thereof, the Company shall be obligated,
if so requested by the Certificate Insurer in its discretion, on the Monthly
Cut-Off Date next succeeding the expiration of such 60 day period, to repurchase
the affected Mortgage Loan. The Certificate Insurer and the Trustee on behalf of
the Owners of the Certificates agree that, if a Mortgage Loan is a Defective
Mortgage Loan because a document as specified in the Agreement is not included
in the Mortgage File, such defect shall be deemed to be cured if the Trustee
shall have received during such sixty day period, a written statement addressed
to it from the Director of HUD Title I Insurance Division that such document
would not be required in connection with a claim for FHA Insurance with respect
to such Mortgage Loan. If the FHA has not assigned a case number under the
Contract of Insurance to a Mortgage Loan to indicate that such Mortgage Loan is
eligible for Title I Insurance coverage under the Contract of Insurance, on or
before the 90th day after the Closing Date, the Company shall be obligated, on
the Monthly Cut Off Date next succeeding such 90th day, to repurchase such
Mortgage Loan. If the FHA reserve amount with respect to a Mortgage Loan has not
been transferred to the FHA Insurance Coverage Reserve Account on or before the
120th day after the Closing Date, the Company shall be obligated, on the Monthly
Cut-Off Date next succeeding such 120th day, to repurchase such Mortgage Loan.
If the Company is required to repurchase any Mortgage Loan on a Monthly Cut-Off
Date that is not a Business Day, such repurchase shall be made on the last
Business Day preceding such Monthly Cut-Off Date. Any Mortgage Loan that is
required to be purchased or repurchased as described above is referred to as a
"Defective Mortgage Loan."
Within two years after the Closing Date, the Company may elect in lieu of
the purchase or repurchase of a Defective Mortgage Loan, to substitute a
Substitute Mortgage Loan for the Defective Mortgage Loan. A "Substitute Mortgage
Loan" is a Mortgage Loan: (i) having such characteristics such that the
representations relating to Mortgage Loans as set out in the Agreement would
have been true and correct had such Mortgage Loan originally been a Mortgage
Loan, (ii) each scheduled Mortgage Payment with respect to such Mortgage Loan
shall be greater than or equal to the scheduled Mortgage Payment due in the same
Due Period on the Mortgage Loan for which Substitute Mortgage Loan is being
substituted; (iii) the Maturity Date with respect to such Mortgage Loan shall be
no later than the Maturity Date for the Mortgage Loan for which such Maturity
Date is being substituted,(iv) as of the date of substitution, the Principal
Balance of such Mortgage Loan is greater than or equal to the Principal Balance
of the Mortgage Loan for which such Substitute Mortgage Loan is being
substituted, (v) the Coupon Rate with respect to such Mortgage Loan is not less
by an amount greater than ___% than the Coupon Rate of the Mortgage Loan for
which such Substitute Mortgage Loan is being substituted, and (vi) if in excess
of $__________ in Principal Balance (at the time of substitution) of Mortgage
Loans has previously been substituted pursuant to the Agreement, the
substitution of such Mortgage Loan has been approved in advance in writing by
the Certificate Insurer.
Sale of Mortgage Loans
Pursuant to the Agreement, the Depositor will transfer, assign, set over
and otherwise convey without recourse to the Trustee in trust all right, title
and interest of the Depositor in and to each Mortgage Loan and all the right,
title and interest in and to principal and interest due to the trust on each
such Mortgage Loan after the Cut-Off Date; provided, however, that the Depositor
will reserve and retain all its right, title and interest in and to principal
(including Prepayments) and interest due on each Mortgage Loan on or prior to
the Cut-Off Date. Purely as a protective measure and not to be construed as
contrary to the parties intent that the transfer on the Closing Date is a sale,
the Depositor has also been deemed to have granted to the Trustee a security
interest in the Trust Property in the event that the transfer of the Trust
Property is deemed to be a loan and not a sale.
In connection with the transfer and assignment of the Mortgage Loans on the
Closing Date, the following documents will be delivered to the Trustee (the
"Mortgage File"):
(i) The Mortgage Note, showing a complete chain of endorsements or
assignments from the named payee to the Depositor and endorsed without
recourse to the order of the Trustee which latter endorsement may be
executed with a facsimile signature of an officer of the Depositor;
(ii) The original Mortgage with evidence of recording indicated
thereon (except that a true copy thereof certified by an appropriate public
official may be substituted);
(iii) The original assignment of Mortgage to the Trustee, in
recordable form;
(iv) All intermediate assignments of the Mortgage, with evidence of
recording thereon (or true copies thereof certified by appropriate public
officials may be substituted);
(v) An original of each assumption or modification agreement, if any,
relating to such Mortgage Loan; and
(vi) (A) An original notice signed by the Mortgagor acknowledging HUD
insurance, (B) an original or copy of (1) truth-in-lending disclosure, (2)
credit application, (3) consumer credit report, (4) verification of
employment and income or verification of self-employment income, (5)
evidence of the Mortgagor's interest in the Mortgaged Property, (6)
contract of work or written description with cost estimates, (7) completion
certificate, if in existence on the Closing Date, (8) report on inspection
of improvements to the Mortgaged Property, if in existence on the Closing
Date, (9) notice of non-compliance, if applicable, (10) to the extent not
included in (2), a written verification that the Mortgagor at the time of
origination was not more than 30 days delinquent on any senior mortgage or
deed of trust on the Mortgaged Property (11) with respect to each Mortgage
Loan with an initial principal balance in excess of $15,000, an appraisal
of the Mortgaged Property as of the time of origination of the Mortgage
Loan, (12) a title search as of the time of origination with respect to the
Mortgaged Property, and (C) any other documents required for the submission
of a claim with respect to the Mortgage Loan to the FHA.
If the Trustee has not received (i) the original assignment of Mortgage or
(ii) any intermediate assignments of Mortgage (in each case of (i) and (ii),
with evidence of recording thereon (or true copies thereof certified by
appropriate public officials) the Depositor covenants and agrees to take any and
all actions necessary to effect the proper execution, filing and recordation of
the such assignment of the Mortgage and all intermediate assignments of
Mortgage, in the appropriate jurisdiction.
Acceptance by Trustee
The Trustee will acknowledge conveyance of the Trust Property and will hold
all assets included in the Trust Property from time to time in trust for the use
and benefit of all present and future Owners of the Certificates.
The Trustee will also agree for the benefit of the Certificateholders and
the Certificate Insurer to review each Mortgage File within 30 days of the
Closing Date to confirm that all the documents and instruments required to be
included in each Mortgage File are so included and have been executed (and that
documents which are required to be originals bear original signatures) and that
such documents and instruments relate to the Mortgage Loans identified in the
Mortgage Loan Schedule and are what they purport to be on their face. Promptly
upon completion of such review, the Trustee will also prepare and deliver a list
of any such missing documents to the Master Servicer and the Certificate
Insurer. The Trustee also agrees to review each Mortgage File within 90 days of
the Closing Date to confirm that all documents and instruments required to be
included in each Mortgage File are so included and have been executed where
required.
Master Servicer and Subservicers
The Master Servicer will agree to manage, service, administer and make
collections on the Mortgage Loans, and perform the other actions required by the
Master Servicer under the Agreement. In performing such obligations, the Master
Servicer will be required to act in good faith in a commercially reasonable
manner in accordance with all requirements of the FHA applicable to the
servicing of the Mortgage Loans, and to service and administer the Mortgage
Loans in accordance with Title I, the terms of the Agreement and the respective
Mortgage Loans. The Master Servicer will have full power and authority, acting
alone and/or through subservicers, if any, subject only to the specific
requirements and prohibitions of Title I, the Agreement and the respective
Mortgage Loans, to do any and all things in connection with such servicing and
administration which are consistent with the manner in which it services FHA
Title I home improvement mortgage loans owned by the Master Servicer or any of
its affiliates or serviced by the Master Servicer for others and which are
consistent with the ordinary practices of prudent mortgage lending institutions.
Servicing Record. The Master Servicer will be required to establish and
maintain books and records (the "Servicing Record") in which the Master Servicer
will record all Mortgage Payments received or collected by or on behalf of the
Master Servicer or received by the Trustee, the Company or the Depositor in
respect of each Mortgage Loan and each foreclosed property and all amounts owing
to the Master Servicer and subservicers in compensation for services rendered or
in reimbursement of certain costs and expenses incurred. In addition, the Master
Servicer will be required to establish and maintain records for the Insurance
Record (which shall be part of such Servicing Record) in which the Master
Servicer shall record all claims made under the Contract of Insurance, all
payments received from the FHA for each such claim and the amount of insurance
coverage remaining.
The Master Servicer must separately record various amounts as of the
related Determination Date (i.e., the fifth Business Day preceding the related
Distribution Date) or Distribution Date, as applicable, in the Servicing Record
generally including the following:
(i) the unpaid Master Servicing Fee due the Master Servicer on the
next Distribution Date;
(ii) all subservicing fees which are entitled to be retained by the
subservicers, if any, with respect to the preceding Due Period; all fees
retained during the preceding Due Period by any Independent Contractor
hired by the Master Servicer to operate and manage a Foreclosed Property;
and amounts retained by subservicers in respect of Mortgage Payments
representing less than a Monthly Payment if the related Mortgage Loan is
not a Defaulted Mortgage Loan;
(iii) all amounts due as of the preceding Monthly Cut-Off Date in
reimbursement of Delinquency Advances in respect of prior Distribution
Dates;
(iv) all amounts due as of the preceding Monthly Cut-Off Date in
reimbursement of Foreclosure Advances previously advanced by the Master
Servicer (separately identifying the amount of each then due);
(v) all Priority Expenses required to be distributed on the next
succeeding Distribution Date;
(vi) the aggregate amount of the Master Servicer Fee paid to Master
Servicer on such Distribution Date in respect of each Mortgage Loan;
(vii) the aggregate amount of Delinquency Advances and Foreclosure
Advances reimbursed to the Master Servicer on such Distribution Date;
(viii) all unpaid Trustee Fees due the Trustee as of the preceding
Monthly Cut-Off Date;
(ix) on or prior to each Determination Date, the Principal Balance of
Mortgage Loans that became Defaulted Mortgage Loans during the prior Due
Period;
(x) on or before each Determination Date, the 30+ Delinquency
Percentage and the 60+ Delinquency Percentage; the Annual Default
Percentage and such other data as is required by the Trustee to determine
the Required OC Multiple; and
(xi) on or before each Determination Date, any other information with
respect to the Mortgage Loans required by the Trustee to determine the
Class A Principal Distribution with respect to the next succeeding
Distribution Date or otherwise to determine the amount of required
distributions pursuant to the Agreement.
Review of Master Servicer Activities. The Master Servicer will be required
to deliver to the Trustee and the Certificate Insurer on or before __________ of
each year, beginning on __________ of the calendar year following the calendar
year in which the Closing Date occurs, an officer's certificate signed by a
responsible officer of the Master Servicer generally to the effect that based
upon a review of the Master Servicer's activities during the preceding calendar
year, the Master Servicer has fulfilled its obligations under the Agreement, or
there has been a default in the fulfillment of such obligation and specifying
each such default, the nature and status thereof and the action the Master
Servicer proposes to take with respect thereto.
The Master Servicer will cause a firm of nationally recognized independent
certified public accountants, who may also render other services to the Master
Servicer, to deliver to the Trustee and the Certificate Insurer on or before
__________ (or 90 days after the end of the Master Servicer's fiscal year of
each year), beginning ____________ __, 19__ with respect to the twelve months
ended the immediately preceding __________ (or other applicable date) (i) an
opinion by a firm of independent certified public accountants as to the
financial position of the Master Servicer in accordance with generally accepted
accounting standards; and (ii) a statement from the firm of independent
certified public accountants to the effect that, based on an examination of
certain specified documents and records relating to the servicing of the Master
Servicer's mortgage loan portfolio conducted in compliance with certain
Applicable Accounting Standards (as defined in the Agreement), such firm is of
the opinion that such servicing has been conducted in compliance with such
Applicable Account Standards.
Access to Records. The Master Servicer must provide to representatives of
the Trustee and the Certificate Insurer and holders of a majority in principal
amount of the Certificates reasonable access to the documentation regarding the
Mortgage Loans. The Master Servicer must provide such access to any other
Certificate holders only in such cases where the Master Servicer is required by
applicable statutes or regulations (whether applicable to the Master Servicer or
to such Certificate holders) to permit such Certificate holders to review such
documentation. Any Certificate holders, by its acceptance of a Certificate (or
by acquisition of its beneficial interest therein), will be deemed to have
agreed to keep confidential and not to use for its own benefit any information
obtained by it, except as may be required by applicable law.
Master Servicer Advances. With respect to each Mortgage Loan (other than a
Defaulted Mortgage Loan) and each Distribution Date, the Master Servicer must
advance from its own funds and deposit into the Certificate Account no later
than the related Determination Date, the positive excess, if any, of (i) the
portion of the Monthly Payment due (net of any subservicing fee and Master
Servicing Fee) with respect to such Mortgage Loan in the related Due Period
allocable to interest calculated at the related Net Coupon Rate over (ii) the
amount deposited into the Certificate Account with respect to such Mortgage Loan
and such Due Period. A "Defaulted Mortgage Loan" is any Mortgage Loan with
respect to which: (i) a claim has been submitted pursuant to the Contract of
Insurance, (ii) foreclosure proceedings have been commenced, (iii) any portion
of a Monthly Payment is more than 120 days past due (without giving effect to
any grace period) or (iv) the Master Servicer has determined in good faith in
accordance with customary mortgage loan servicing practices that all amounts
which it expects to receive with respect to the Mortgage Loan have been
received.
The Master Servicer will be entitled to be reimbursed for previously
unreimbursed Delinquency Advances with respect to a Mortgage Loan on
Distribution Dates subsequent to the Distribution Date in respect of which such
Delinquency Advance was made from Mortgage Payments with respect to such
Mortgage Loan. If a Mortgage Loan shall become a Defaulted Loan and the Master
Servicer shall not have been fully reimbursed for any Delinquency Advances with
respect to such Mortgage Loan, the Master Servicer shall be entitled to be
reimbursed for the outstanding amount of such Delinquency Advances from
unrelated Mortgage Loans. No interest shall be due to the Master Servicer in
respect of any Delinquency Advance for any period prior to the reimbursement
thereof.
The Master Servicer must advance from its own funds the following amounts
in respect of any Mortgage Loan on foreclosed property (collectively,
"Foreclosure Advances"):
(i) all third party costs and expenses (including legal fees and costs
and expenses relating to bankruptcy or insolvency proceedings in respect of
any Mortgagor) associated with the institution of foreclosure proceedings
in respect of any Mortgage Loan;
(ii) all insurance premiums due and payable in respect of each
Foreclosed Property, prior to the date on which the related insurance
policy would otherwise be terminated;
(iii) all real estate taxes and assessments in respect of each
Foreclosed Property that have resulted in the imposition of a lien thereon,
other than amounts that are due but not yet delinquent;
(iv) all costs and expenses necessary to maintain each Foreclosed
Property;
(v) all fees and expenses payable to any independent contractor hired
to operate and manage a Foreclosed Property, other than fees and expenses
retained by such independent contractor from the proceeds of the operation
of such Foreclosed Property;
(vi) all third party costs to prepare and file FHA claims; and
(vii) all fees and expenses of any independent appraiser or other real
estate expert retained by the Trustee.
The Master Servicer shall be entitled to be reimbursed from related
Mortgage Payments for Foreclosure Advances advanced on or prior to the related
Monthly Cut-Off Date.
The Master Servicer must advance the Foreclosure Advances described in
clauses (i) through (v) above if, but only if, the Master Servicer would make
such an advance if it or an affiliate held the affected Mortgage Loan or
Foreclosed Property for its own account and, in the Master Servicer's good faith
judgment, such amounts will be recoverable from related Mortgage Payments.
Modifications, Waivers and Amendments. The Master Servicer may not agree to
any modification, waiver or amendment of any provision of any Mortgage Loan
unless, in the Master Servicer's good faith opinion, such modification, waiver
or amendment (i) would minimize the loss that might otherwise be experienced
with respect to such Mortgage Loan and complies with the requirements of Title I
or (ii) is required by Title I. Notwithstanding the foregoing, so long as an
Insurer Default shall not have occurred and be continuing, the Master Servicer
may not agree, without the prior written consent of the Certificate Insurer,
during any period of twelve consecutive Due Periods to modifications, waivers or
amendments of the provisions of Mortgage Loans having (at the time of such
modification, waiver or amendment) an aggregate Principal Balance greater than
one percent (1%) of the Aggregate Principal Balance as of the Determination Date
in the first of such Due Periods.
Enforcement of "Due-On-Sale" and "Due on Encumbrance." If any Mortgage Loan
contains a provision, in the nature of a "due-on-sale" clause, the Master
Servicer, on behalf of the Trustee will exercise any right the Trustee may have
as the mortgagee of record with respect to such Mortgage Loan (x) to accelerate
the payments thereon or (y) to withhold its consent to any such sale or to the
transfer, in a manner consistent with the servicing standard set forth in the
Agreement.
If any Mortgage Loan contains a provision, in the nature of a
"due-on-encumbrance" clause, the Master Servicer, on behalf of the Trustee, will
exercise any right the Trustee may have as the Mortgagee of record with respect
to such Mortgage Loan (x) to accelerate the payments thereon or (y) to withhold
its consent to the creation of any such lien or other encumbrance, in a manner
consistent with the servicing standard.
FHA Insurance Claims; Foreclosures. If any Monthly Payment due under any
Mortgage Loan is not paid when the same becomes due and payable, or if the
Mortgagor fails to perform any other covenant or obligation under the Mortgage
Loan and such failure continues beyond any applicable grace period, the Master
Servicer must take such action (consistent with Title I, including efforts to
cure the default of such Mortgage Loan) as it shall deem to be in the best
interest of the Trust. If the maturity of the related Mortgage Note has been
accelerated pursuant to the requirements under Title I following the Master
Servicer's efforts to cure the default of the Mortgage Loan (and such Mortgage
Loan is not required to be purchased pursuant to the Agreement) and (i) if an
FHA Insurance Coverage Insufficiency does not exist at the time, the Master
Servicer must initiate, on behalf of the Trust, a claim under the Contract of
Insurance for reimbursement for loss on such Mortgage Loan pursuant to Title I
or (ii) if an FHA Insurance Coverage Insufficiency exists at the time, the
Master Servicer may proceed against the Mortgaged Property securing the Mortgage
Loan pursuant to the Agreement, and if thereafter an FHA Insurance Coverage
Insufficiency does not exist, may submit a claim under the Contract of Insurance
with respect to such Mortgage Loan if it has obtained the prior approval of the
Secretary of HUD.
If the FHA rejects or refuses to pay any claim made under the Contract of
Insurance (including a rejection of a previously paid claim and a demand by the
FHA of a return of the FHA Insurance Payment Amount for such Mortgage Loan) for
a Mortgage Loan (other than a refusal or rejection for clerical error in
computing the claim amount), upon receipt of the FHA's rejection notice and
determination by the Master Servicer that the rejection was not due to clerical
error, then (i) the Master Servicer must promptly notify the Trustee (if the
Trustee shall not initially have received such notice), the Depositor and the
Certificate Insurer of such fact, and (ii) if the FHA indicates rejection due to
other than a failure to service such Mortgage Loan in accordance with Title I,
the Depositor shall be liable on or before the Monthly Cut-Off Date next
following the date of such notice from the Master Servicer to repurchase such
Mortgage. If the FHA shall have indicated in writing in connection with its
rejection or refusal to pay a claim that such rejection or refusal is due in
whole to a failure to service such Mortgage Loan in accordance with Title I, the
Master Servicer shall notify the Depositor and the Certificate Insurer of such
determination, and the Master Servicer must on or before the next succeeding
Monthly Cut-Off Date repurchase such Mortgage Loan for the Purchase Price.
If the Master Servicer, on behalf of the Trustee, may, at any time,
institute foreclosure proceedings, exercise any power of sale to the extent
permitted by law, obtain a deed in lieu of foreclosure, or otherwise acquire
possession of or title to any Mortgaged Property, by operation of law or
otherwise; the Master Servicer shall comply with the requirements under Title I,
the REMIC regulations and the Agreement, shall follow such practices and
procedures in a manner which is consistent with the Master Servicer's procedure
for foreclosure and operation of the foreclosed property with respect to FHA
Title I property improvement mortgage loans held in the Master Servicer's
portfolio for its own account or, if there are no such loans, FHA Title I
property improvement mortgage loans serviced by the Master Servicer for others,
giving due consideration to accepted mortgage servicing practices of prudent
lending institutions, and shall sell or liquidate the Mortgage Loan or Mortgaged
Property.
The Trustee must deposit in the Certificate Account on the day of receipt
all amounts received from the FHA (to the extent FHA Insurance Payment Amounts
are not sent by the FHA directly to the Master Servicer), or any other Person
with respect to the Mortgage Loans or any other assets of the Trust.
If prior to the Termination Date, the FHA rejects an insurance claim, in
whole or part, under the Contract of Insurance after previously paying such
insurance claim and the FHA demands that the Trustee repurchase such Mortgage
Loan, the Master Servicer must pursue such appeals with the FHA as are
reasonable. If the FHA continues to demand that the Trustee repurchase such
Mortgage Loan after the Master Servicer exhausts such administrative appeals as
are reasonable, then notwithstanding that the Depositor, the Master Servicer or
any other person is required to repurchase such Mortgage Loan the Master
Servicer must notify the Trustee of such fact and the Trustee shall cause the
Trust to repurchase such Mortgage Loan from funds available in the Certificate
Account.
The Depositor will reimburse the Trustee for any amounts paid by the
Trustee to the FHA in order to repurchase Mortgage Loans for which the FHA has
rejected an insurance claim for any reason other than a failure to comply with
FHA servicing requirements. The Master Servicer will reimburse the Trustee for
any amounts paid by the Trustee to FHA in order to repurchase Mortgage Loans for
which the FHA has rejected an insurance claim as a result of a failure to
service such Mortgage Loan in accordance with Title I.
Any sale of a Foreclosed Property shall be without recourse to the Trustee,
the Master Servicer or the Trust, and neither the Master Servicer nor the
Trustee shall have any liability to any Certificate holders with respect to the
purchase price therefor accepted by the Master Servicer or the Trustee.
Maintenance of Insurance. The Master Servicer must maintain or cause to be
maintained with respect to each Mortgaged Property at least such insurance as is
required with respect thereto by Title I. The Master Servicer will be required
to maintain or cause to be maintained such other insurance (including title
insurance) as shall be required by the Certificate Insurer or that the Master
Servicer shall deem reasonable.
The Master Servicer must maintain a fidelity bond in such form and amount
as is customary for entities acting as custodian of funds and documents in
respect of mortgage loans on behalf of institutional investors.
Removal and Resignation of Master Servicer
The Master Servicer has covenanted and agreed to act as such for an initial
term, commencing on the Closing Date and ending on ______________ ___, 19__,
which term shall be extendible by the Certificate Insurer (unless a Servicer
Termination Event shall have occurred) for successive quarterly terms (or,
pursuant to revocable written standing instructions from time to time to the
Master Servicer and the Trustee, for any specified number of terms greater than
one), until the termination of the Trust.
The Certificate Insurer or the Owners, with the consent of the Certificate
Insurer, will have the right to remove the Master Servicer upon the occurrence
of any of the following events (each, a "Servicer Termination Event"):
(a) (i) except with respect to Mortgage Payments representing less than a
Monthly Payment if the related Mortgage Loan is not a Defaulted Mortgage Loan,
failure by the Master Servicer to deposit or cause the related subservicer to
deposit all Mortgage Payments in the related Collection Account no later than
the Business Day following receipt thereof by the Master Servicer or
subservicer, which failure continues unremedied for three Business Days or (ii)
failure by the Master Servicer to deposit or cause the related subservicer to
deposit amounts with respect to Mortgage Payments representing less than a
Monthly Payment if the related Mortgage Loan is not a Defaulted Mortgage Loan
within two Business Days of the date of required deposit therefor; or
(b) failure on the part of the Master Servicer duly to observe or perform
in any material respect any of its other covenants or agreements contained in
the Agreement that continues unremedied for a period of thirty days after the
date on which written notice of such failure, requiring the same to be remedied,
shall be given to the Master Servicer and the Trustee pursuant to a Certificate
Class Vote as provided in the Agreement; provided, however, that if such failure
shall be of a nature that it cannot be cured within 30 days, such failure shall
not constitute a Servicer Termination Event if within such 30-day period the
Master Servicer shall have given notice to the Certificate Insurer of corrective
action it proposes to take, which corrective action is agreed to in writing by
the Certificate Insurer in its sole discretion to be satisfactory, and the
Master Servicer shall thereafter pursue such corrective action diligently until
such default is cured; or
(c) failure by the Master Servicer to deliver to the Trustee and (so long
as an Insurer Default shall not have occurred and be continuing) the Certificate
Insurer the Master Servicer Certificate by the fourth Business Day prior to each
Distribution Date, or failure on the part of the Master Servicer to comply with
or service the Mortgage Loans in accordance with Title I;
(d) the entry of a decree or order for relief by a court or regulatory
authority having jurisdiction in respect of the Master Servicer in an
involuntary case under the federal bankruptcy laws, as now or hereafter in
effect, or another present or future federal or state, bankruptcy, insolvency or
similar law, or appointing a receiver, liquidator, assignee, trustee, custodian,
sequestrator or other similar official of the Master Servicer or of any
substantial part of their respective properties or ordering the winding up or
liquidation of the affairs of the Master Servicer and the continuance of any
such decree or order unstayed and in effect for a period of 60 consecutive days
or the commencement of an involuntary case under the federal bankruptcy laws, as
now or hereinafter in effect, or another present or future federal or state
bankruptcy, insolvency or similar law and such case is not dismissed within 60
days; or
(e) the commencement by the Master Servicer of a voluntary case under the
federal bankruptcy laws, as now or hereinafter in effect, or any other present
or future, federal or state bankruptcy, insolvency or similar law, or the
consent by the Master Servicer to the appointment of or taking possession by a
receiver, liquidator, assignee, trustee, custodian, sequestrator or other
similar official of the Master Servicer or of any substantial part of its
property or the making by the Master Servicer of an assignment for the benefit
of creditors or the failure by the Master Servicer generally to pay its debts as
such debts become due or the taking of corporate action by the Master Servicer
in furtherance of any of the foregoing; or
(f) any representation, warranty or statement of the Master Servicer made
in the Agreement or any certificate, report or other writing delivered pursuant
hereto shall prove to be incorrect in any material respect as of the time when
the same shall have been made, and the incorrectness of such representation,
warranty or statement has a material adverse effect on the Trust and, within 30
days after written notice thereof shall have been given to the Master Servicer
by the Trustee or the Certificate Insurer (or, if an Insurer Default shall have
occurred and be continuing, an Owner of a Certificate), the circumstances or
condition in respect of which such representation, warranty or statement was
incorrect shall not have been eliminated or otherwise cured; or
(g) so long as an Insurer Default shall not have occurred and be
continuing, the Certificate Insurer shall not have delivered a servicer
extension notice; or
(h) a claim is made under the Policy.
Consequences of a Servicer Termination Event
If a Servicer Termination Event shall occur and be continuing, the
Certificate Insurer (or, if an Insurer Default shall have occurred and be
continuing, either the Trustee or the Owners of Certificates evidencing not less
than a majority of the Certificates outstanding), by notice given in writing to
the Master Servicer (and to the Trustee if given by the Certificate Insurer or
the Owners of the Certificates) may terminate all the rights and obligations of
the Master Servicer under the Agreement. On or after the receipt by the Master
Servicer of such written notice, and the appointment of and acceptance by a
successor Master Servicer, all authority, power, obligations and
responsibilities of the Master Servicer under the Agreement, whether with
respect to the Certificates or the Trust or otherwise, shall pass to, be vested
in and become obligations and responsibilities of the successor Master Servicer.
The successor Master Servicer shall have no liability with respect to any
obligation which was required to be performed by the Master Servicer prior to
the date that the successor Master Servicer becomes the Master Servicer or any
claim of a third party based on any alleged action or inaction of the prior
Master Servicer. The prior Master Servicer is required to cooperate with the
successor Master Servicer in effecting the termination of the responsibilities
and rights of the prior Master Servicer.
After the Master Servicer receives a notice of termination or upon the
resignation of the Master Servicer the Certificate Insurer must appoint a
successor Master Servicer by written instrument. The Certificate Insurer
(without limiting its obligations under the Policy) will have no liability to
the Trustee, the Depositor, the person then serving as Master Servicer, any
Owner of a Certificate or any other person related to such appointment. Any
resignation or removal of the Master Servicer will become effective only upon
acceptance of appointment by the successor Master Servicer.
Any successor Master Servicer shall be entitled to such compensation
(whether payable out of the Distribution Amount or otherwise) as the Master
Servicer would have been entitled to if the Master Servicer had not resigned or
been terminated. The Certificate Insurer and a successor Master Servicer may
agree on additional compensation to be paid to such successor Master Servicer as
described under "Description of the Offered Certificates - Distributions." In
addition, any successor Master Servicer shall be entitled to reasonable
transition expenses incurred in acting as successor Master Servicer.
Upon any termination of the Master Servicer or appointment of a successor
to the Master Servicer, the Trustee must give prompt written notice thereof to
Owners of the Certificates at their respective addresses appearing in the
Certificate Register.
Waiver of Past Defaults
The Certificate Insurer (or, if an Insurer Default shall have occurred and
be continuing the Owners of the Certificates pursuant to a certificate class
vote) may, on behalf of all Certificateholders, waive any default by the Master
Servicer in the performance of its obligations and its consequences. Upon any
such waiver of a past default, such default shall cease to exist, and any
Servicer Termination Event arising therefrom shall be deemed to have been
remedied.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is the opinion of Stroock & Stroock & Lavan LLP, special
counsel to the Depositor as to certain of the material federal income tax
consequences of the purchase, ownership and disposition of the Offered
Certificates and is to be considered only in connection with "Certain Federal
Income Tax Consequences" in the Prospectus. The discussion herein and in the
Prospectus is based upon laws, regulations, rulings and decisions now in effect,
all of which are subject to change. The discussion below and in the Prospectus
does not purport to deal with all federal tax consequences applicable to all
categories of investors, some of which may be subject to special rules.
Investors should consult their own tax advisors in determining the federal,
state, local and any other tax consequences to them of the purchase, ownership
and disposition of the Offered Certificates.
REMIC Election
The Trustee will cause an election to be made to treat the Trust as a "real
estate mortgage investment conduit" ("REMIC") for federal income tax purposes.
Stroock & Stroock & Lavan LLP, special tax counsel, is of the opinion that, for
federal income tax purposes, assuming (i) the REMIC election is made and (ii)
compliance with the Agreement, the Trust will be treated as a REMIC, the Offered
Certificates will be treated as "regular interests" in the REMIC and the Class R
Certificates will be treated as the sole class of "residual interests" in the
REMIC. For federal income tax purposes, regular interests in a REMIC generally
are treated as debt instruments issued by the REMIC on the date on which those
interests are created, and not as ownership interests in the REMIC or its
assets. Owners of Offered Certificates that otherwise report income under a cash
method of accounting will be required to report income with respect to such
Offered Certificates under an accrual method. The Offered Certificates may be
issued with "original issue discount" for federal income tax purposes. The
prepayment assumption to be used in determining whether Class A Certificates are
issued with original issue discount and the rate of accrual of original issue
discount is ___% of CPR. No representation is made that any of the Mortgage
Loans will prepay at this rate or any other rate. See "Certain Federal Income
Tax Consequences - Federal Income Taxation for REMIC Certificates" and "Taxation
of Regular Certificates" in the Prospectus.
Although not free from doubt, it is anticipated that the Class S-A
Certificates will be treated as issued with original issue discount in an amount
equal to the excess of all payments thereon over their issue price (including
accrued interest), and the Trustee intends to report income in respect of such
Class of Certificates in this manner. Under this method, any "negative" amounts
of original issue discount attributable to rapid prepayments would not be
deductible currently, but would be offset against future positive accruals of
original issue discount, if any. A Class S-A Certificate holders may be entitled
to a loss deduction, which may be a capital loss, to the extent it becomes
certain that such holder will not recover a portion of its remaining basis in
the Class S-A Certificate, assuming no further prepayments.]
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes certain requirements on those employee benefit plans and individual
retirement arrangements to which it applies ("Plan") and on those persons who
are fiduciaries with respect to such Plans. Any Plan fiduciary which proposes to
cause a Plan to acquire any of the Offered Certificates should consult with
counsel with respect to the consequences under ERISA and the Code of the Plan's
acquisition and ownership of such Certificates. See "ERISA Considerations" in
the Prospectus.
[The DOL has issued to ____________________ an individual prohibited
transaction exemption, Prohibited Transaction Exemption ___________________ (the
"Exemption"), which generally exempts from the application of the prohibited
transaction provision of Section 406(a), Section 406(b)(1) and Section 406(b)(2)
of ERISA and the excise taxes imposed pursuant to Sections 4975(a) and (b) of
the Code, with respect to the initial purchase, the holding and the subsequent
resale by Plans of certificates in pass-through trusts that consist of certain
receivables, loans and other obligations that meet the conditions and
requirements of the Exemption. The loans covered by the Exemption include
mortgage loans such as the Mortgage Loans.
Among the conditions that must be satisfied for the Exemption to apply are
the following:
(1) the acquisition of the certificates by a Plan is on terms
(including the price for the certificates) that are at least as favorable
to the Plan as they would be in an arms-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 either S&P, Moody's, Duff & Phelps Credit Rating Co.
("D&P") or Fitch Investors Service, Inc. ("Fitch");
(4) the Trustee must not be an affiliate of any other member of the
Restricted Group (as defined below);
(5) the sum of all payments made to and retained by the Underwriter in
connection with the distribution of the certificates represents not more
than reasonable compensation for underwriting the certificates; the sum of
all payments made to and retained by the Depositor pursuant to the
assignment of the loans to the Trust Estate represents not more than the
fair market value of such loans; the sum of all payments made to and
retained by the Master Servicer and any subservicer represents not more
than reasonable compensation for such person's services under the Agreement
and reimbursement of such person's reasonable expenses in connection
therewith; and
(6) the Plan investing in the certificates is an "accredited investor"
as defined in Rule 501(a)(1) of Regulation D of the Securities and Exchange
Commission under the Securities Act of 1933.
The Trust Estate must also meet the following requirements:
(i) the corpus of the Trust Estate must consist solely of assets of
the type that have been included in other investment pools;
(ii) certificates in such other investment pools must have been rated
in one of the three highest rating categories of S&P, Moody's, Fitch or D&P
for at least one year prior to the Plan's acquisition of certificates; and
(iii) certificates evidencing interests in such other investment pools
must have been purchased by investors other than Plans for at least one
year prior to the Plan's acquisition of certificates.
Moreover, the Exemption provides relief from certain self-dealing/conflict
of interest prohibited transactions that may occur when the Plan fiduciary
causes a Plan to acquire certificates in a trust in which the fiduciary (or its
affiliate) is an obligor on the receivables held in the trust; provided that,
among other requirements, (i) in the case of an acquisition in connection with
the initial issuance of certificates, at least fifty percent of each class of
certificates in which Plans have invested is acquired by persons independent of
the Restricted Group and at least fifty percent of the aggregate interest in the
trust is acquired by persons independent of the Restricted Group; (ii) such
fiduciary (or its affiliate) is an obligor with respect to five percent or less
of the fair market value of the obligations contained in the trust; (iii) the
Plan's investment in certificates of any class does not exceed twenty-five
percent of all of the certificates of that class outstanding at the time of the
acquisition; and (iv) immediately after the acquisition, no more than
twenty-five percent of the assets of the Plan with respect to which such person
is a fiduciary are invested in certificates representing an interest in one or
more trusts containing assets sold or serviced by the same entity. The Exemption
does not apply to Plans sponsored by the Company, the Depositor, the Certificate
Insurer, the Underwriter, the Trustee, the Master Servicer, any obligor with
respect to Mortgage Loans included in the Trust Estate constituting more than
five percent of the aggregate unamortized principal balance of the assets in the
Trust Estate, or any affiliate of such parties (the "Restricted Group").
The Depositor believes that the Exemption will apply to the acquisition and
holding of Offered Certificates by Plans and that all conditions of the
Exemption other than those within the control of the investors will be met. In
addition, as of the date hereof, there is no single Mortgage Loan included in
the Trust Estate that constitutes more than five percent of the aggregate
unamortized principal balance of the assets of the Trust Estate.]
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code[, the applicability of PTCE
_________ and the Exemption,] and the potential consequences in their specific
circumstances, prior to making an investment in the Offered Certificates.
Moreover, each Plan fiduciary should determine whether under the general
fiduciary standards of investment procedure and diversification an investment in
the Offered Certificates is appropriate for the Plan, taking into account the
overall investment policy of the Plan and the composition of the Plan's
investment portfolio.
RATINGS
It is a condition of the issuance of the Offered Certificates that the
Offered Certificates receive ratings of AAA by S&P and Aaa by Moody's. The
ratings assigned to the Offered Certificates will be based primarily on the
claims-paying ability of the Certificate Insurer. Explanations of the
significance of such ratings may be obtained from Moody's Investors Service, 99
Church Street, New York, New York and Standard & Poor's Ratings Group, a
division of McGraw Hill, 25 Broadway, New York, New York 10004. Such ratings
will be the views only of such rating agencies. There is no assurance that any
such ratings will continue for any period of time or that such ratings will not
be revised or withdrawn. Any such revision or withdrawal of such ratings may
have an adverse effect on the market price of the Offered Certificates. A
security rating is not a recommendation to buy, sell or hold securities.
LEGAL INVESTMENT CONSIDERATIONS
Although the Offered Certificates are expected to be rated "AAA" by S&P,
and "Aaa" by Moody's, the Offered Certificates will not constitute "mortgage
related securities" for purposes of the Secondary Mortgage Market Enhancement
Act of 1984 ("SMMEA") because some of the Mortgage Loans may be secured by
junior liens. Accordingly, many institutions with legal authority to invest in
comparably rated securities based on first mortgage loans may not be legally
authorized to invest in the Offered Certificates.
UNDERWRITING
Under the terms and subject to the conditions set forth in the Underwriting
Agreement for the sale of the Offered Certificates, the Depositor has agreed to
cause the Trust to sell and ___________________ (the "Underwriters") has agreed
to purchase the Offered Certificates.
The Underwriters have advised the Depositor that they propose to offer the
Offered Certificates for sale from time to time in one or more registered
transactions or otherwise, at market prices prevailing at the time of sale, at
prices related to such market prices or at negotiated prices. The Underwriters
may effect such transactions by selling such Certificates to or through dealers,
and such dealers may receive compensation in the form of underwriting discounts,
concessions or commissions from the Underwriters or purchasers of the Offered
Certificates for whom they may act as agent. Any dealers that participate with
the Underwriters in the distribution of the Offered Certificates purchased by
the Underwriters may be deemed to be underwriters, and any discounts or
commissions received by them or the Underwriters and any profit on the resale of
Class A Certificates by them or the Underwriters may be deemed to be
underwriting discounts or commissions under the Securities Act.
The Company has agreed to indemnify the Underwriters against certain
liabilities including liabilities under the Securities Act of 1933, as amended.
The Company has been advised by the Underwriters that the Underwriters
currently intend to make a market in the Offered Certificates, as permitted by
applicable laws and regulations. The Underwriter is not obligated, however, to
make a market in the Offered Certificates and such market-making may be
discontinued at any time at the sole discretion of the Underwriter. Accordingly,
no assurance can be given as to the liquidity of, or trading markets for, the
Offered Certificates.
REPORT OF EXPERTS
The financial statements of the Certificate Insurer,
_________________________________, for each of the two years in the periods
ending , 199 and 199 , appearing in Appendix B of this Prospectus Supplement
have been audited by _____________________, independent accountants, as
indicated in their report thereonappearing elsewhere herein and in the
Registration Statement, and are included in reliance upon such report and upon
the authority of such firm as experts in accounting and auditing.
CERTAIN LEGAL MATTERS
Certain legal matters relating to the validity of the issuance of the
Certificates will be passed upon for the Depositor by Stroock & Stroock & Lavan
LLP, New York, New York and by Alan L. Langus, Chief Counsel for the Company.
Certain legal matters relating to insolvency issues and certain federal income
tax matters concerning the Certificates will be passed upon for the Depositor by
Stroock & Stroock & Lavan LLP. Certain legal matters relating to the validity of
the issuance of the Certificates will be passed upon for the Underwriters by
____________________, __________. Certain legal matters relating to the
Certificate Insurer and the Certificate Insurance Policies will be passed upon
for the Certificate Insurer by ____________________, __________.
<PAGE>
APPENDIX A
INDEX OF LOCATION OF PRINCIPAL DEFINED TERMS
Agreement..................................................................1
Beneficial Owner..........................................................13
Book Entry Termination....................................................28
Business Day..............................................................29
Certificate Insurer.......................................................11
Certificate Insurer Default...............................................11
Certificate Register......................................................25
Certificate Registrar.....................................................25
Claims Administrator.......................................................1
Class A Certificates.......................................................4
Class A Guaranteed Certificate Balance.....................................7
Class A Guaranteed Principal Distribution Amount...........................6
Class A Interest Carryover Shortfall.......................................6
Class A Interest Distribution..............................................6
Class A Minimum Principal Distributable Amount.............................7
Class A Monthly Interest Distributable Amount.............................26
Class A Monthly Principal Distributable Amount.............................6
Class S-A Certificates.....................................................4
Class S-A Interest Distribution............................................8
Clearing Agency...........................................................27
Clearing Agency Participants..............................................27
Closing Date...............................................................1
Company....................................................................1
Contract of Insurance Holder...............................................9
CPR.......................................................................22
Cram Down Loss.............................................................8
Cut-Off Date...............................................................1
Defaulted Mortgage Loan...................................................37
Defective Mortgage Loan...................................................33
Delinquency Advances......................................................13
Depositor..................................................................1
Determination Date........................................................32
Distributable Excess Spread................................................8
Distribution Date..........................................................6
Due Period.................................................................7
ERISA.....................................................................42
Excess Spread..............................................................7
FHA........................................................................1
FHA Insurance..............................................................9
FHA Insurance Amount.......................................................9
FHA Premium Account.......................................................10
Foreclosure Advances......................................................37
HUD........................................................................4
Initial FHA Insurance Amount..............................................17
Initial FHA Premium Account Deposit.......................................10
Insurance Agreement......................................................30
Insurance Payments.......................................................11
Invoiced Mortgage Loans..................................................10
Master Servicer...........................................................1
Master Servicing Fee.....................................................13
Midpoint Date............................................................32
Moody's..................................................................11
Mortgage File............................................................34
Mortgage Loans............................................................1
Mortgaged Properties......................................................1
Mortgages.................................................................5
Notes.....................................................................5
Notional Principal Balance.............................................1, 8
Offered Certificates......................................................1
Originator................................................................4
Plan.....................................................................42
Policy....................................................................1
Prepayments..............................................................12
Receipt..................................................................29
Received.................................................................29
Record Date...............................................................6
regular interests........................................................14
Related Series Mortgage Loans.............................................9
Related Series Trusts.....................................................9
REMIC....................................................................14
Required OC Multiple.....................................................32
Required OC Test.........................................................11
residual interests.......................................................14
S&P......................................................................11
Servicing Fees...........................................................13
Servicing Record.........................................................35
SMMEA....................................................................15
Substitute Mortgage Loan.................................................33
Termination Event........................................................40
Title I Program...........................................................5
Trust Property...........................................................33
Trustee...................................................................1
Trustee's Fee............................................................26
Underwriters.............................................................44
Weighted average life....................................................22
<PAGE>
APPENDIX B
AUDITED FINANCIAL STATEMENTS OF CERTIFICATE INSURER
<PAGE>
APPENDIX C
SPECIMEN OF THE INSURANCE POLICY
<PAGE>
SUBJECT TO COMPLETION, DATED __________ ___, 199_ VERSION 3
PROSPECTUS SUPPLEMENT
(To Prospectus Dated ______________ __, 199___)
CTS Multifamily Mortgage Loan Trust 199__-__
$__________________ Class A-1 Certificates
$__________________ Class S-A Interest-only Certificates
$___________ Class B Certificates
Multifamily Mortgage Pass-Through Certificates
SERIES 199__-__
CONTISECURITIES ASSET FUNDING CORP.
DEPOSITOR
---------------------
Servicer
The CTS Multifamily Mortgage Pass-Through Certificates, Series 199__-__
(the "Certificates") will consist of the Class A-1 senior certificates (the
"Class A-1 Certificates"), the Class S-A senior certificates (the "Class S-A
Certificates" and, together with the Class A-1 Certificates (the "Senior
Certificates"), the Class B subordinate certificates (the "Class B
Certificates"), the Class C subordinate Certificates (the "Class C
Certificates") and the Class R residual certificates (the "Class R
Certificates"); (together with the Class B Certificates, and the Class C
Certificates, the "Subordinate Certificates"). Only the Senior Certificates and
Class B Certificates (collectively, the "Offered Certificates") are being
offered hereby.
As more fully described herein, interest distributions on the Offered
Certificates will be based on the Certificate Principal Balance of the related
Class or the aggregate principal balance of the Mortgage Loans or another
specified Class of Certificates (the "Notional Principal Balance") and the then
applicable Pass-Through Rate.
The Pass-Through Rate for the Class A-1 Certificates will be _____% per
annum, for the Class B Certificates will be ___% per annum and for the S-A
Certificates will be ___% per annum. The Class S-A Certificates are
interest-only Certificates. The yield to investors on the Class S-A Certificates
will be extremely sensitive to the rate and timing of principal payments
(including prepayments, repurchases, defaults and liquidations) on the Mortgage
Loans, which may vary over time. A rapid rate of such principal payments on the
Mortgage Loans could result in the failure of investors in the Class S-A
Certificates to recover their initial investments.
For a discussion of significant matters affecting investment in the
Certificates, see "Risk Factors" beginning on page S-10 herein and on page 6 in
the Prospectus.
(Cover continued on next page)
THE OFFERED CERTIFICATES REPRESENT BENEFICIAL INTERESTS IN THE TRUST ONLY
AND DO NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF CONTISECURITIES
ASSET FUNDING CORP., ANY ORIGINATORS OR ANY OF THEIR AFFILIATES.
NEITHER THE OFFERED CERTIFICATES NOR THE MORTGAGE LOANS ARE
INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.[THE 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.]
---------------------
The Offered Certificates will be purchased by the Underwriters from the
Depositor and will be offered by the Underwriters from time to time to the
public in negotiated transactions or otherwise at varying prices to be
determined at the time of sale. Proceeds to the Depositor from the sale of the
Offered Certificates will be approximately $____________, before deducting
expenses payable by the Depositor estimated to be approximately $_______ in the
aggregate. See "Plan of Distribution" in this Prospectus Supplement.
The Offered Certificates are offered subject to prior sale, when, as, and
if accepted by the Underwriters and subject to the approval of certain legal
matters. It is expected that delivery of the Senior Certificates in book-entry
form will be made on or about ____________, 199___ only through the Same Day
Funds Settlement System of The Depository Trust Company and that delivery of the
Class B Certificates will be made at the offices of ____________, on or about
__, 199_ against payment therefor in immediately available funds.
[UNDERWRITERS]
The date of this Prospectus Supplement is __________, 199__.
<PAGE>
The Certificates will evidence, in the aggregate, 100% of the beneficial
ownership interest in one of two trust funds established pursuant to a Pooling
and Servicing Agreement dated as of _____________, 199_ (the "Agreement"), among
the Depositor, in its capacity as sponsor of the Trust (the "Depositor"),
ContiTrade Services L.L.C., (the "Company"), ____________ as the servicer (the
"Servicer"), and __________, as trustee (the "Trustee"). One trust fund (the
"Trust Fund") will consist of the "regular interests" (and all the proceeds
thereof) in a separate trust fund (the "Mortgage Trust" and, together with the
Trust Fund, the "Trusts") that will consist primarily of a pool of mortgage
loans (the "Mortgage Loans") secured by first [and junior] liens on multi-family
residential (including multi-family/retail mixed-use) properties located in ___
states (the "Mortgaged Properties"). Each of the Mortgage Loans bear
[fixed/adjustable] rates of interest and contain level pay amortization
schedules extending beyond such Mortgage Loans, scheduled maturity date, with a
"balloon" payment on the maturity date equal to the remaining principal balance
of such Mortgage Loans and any accrued and unpaid interest thereon ending no
later than the Final Scheduled Distribution Date.
The Class A-1 and Class S-A Certificates represent the senior interests in
the Trust Fund. As described herein, the rights of the holders of the Class B
Certificates and Class C Certificates to receive distributions from the Trust
Fund will be subordinate to the rights of the holders of the Class A
Certificates and the rights of the holders of the Class C Certificates will also
be subordinated to the rights of the holders of the Class B Certificates,
respectively, to receive distributions from the Trust Fund.
Principal of and interest on the Offered Certificates are payable on the
___th 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 The last
scheduled Distribution Date for the Class A-1 Certificates is _____________ ___,
____. It is expected that the actual last Distribution Date for each Class of
Certificates will occur significantly earlier than such scheduled Distribution
Dates. The yield to maturity on the Offered Certificates will depend on, among
other things, the price at which the Certificates are acquired and the rate and
timing of principal payments (including prepayments, repurchases, defaults and
liquidations) on the Mortgage Loans, which rate may vary significantly over
time. See "Yield, Prepayment and Maturity Considerations" in this Prospectus
Supplement.
It is a condition to the issuance of the Offered Certificates that the
Senior Certificates be rated "___" and "___," and the Class B Certificates be
rated "___" and "___," by Moody's Investor Service and Standard & Poor's.
<PAGE>
(Cover continued from previous page)
As described herein, the Trustee will cause elections to be made to treat
the Mortgage Trust and Trust Fund as "real estate mortgage investment conduits"
("REMICs" or, in the alternative, the "Lower Tier REMIC" and the "Upper Tier
REMIC," respectively) for federal income tax purposes. Each class of the Offered
Certificates will be designated as a "regular interest" in the Upper Tier REMIC
and the Class R Certificates and the Class RL Certificates will be designated as
the sole class of "residual interest" in the Upper Tier REMIC and the Lower Tier
REMIC, respectively. See "Certain Federal Income Tax Considerations" herein and
in the Prospectus.
Prior to their issuance there has been no market for the Offered
Certificates nor can there be any assurance that one will develop, or if it does
develop, that it will provide the Owners of the Offered Certificates with
liquidity or will continue for the life of the Offered Certificates. The
Underwriters intend, but are not obligated, to make a market in the Offered
Certificates.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE OFFERED
CERTIFICATES AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
UNTIL _________, 199_ ALL DEALERS EFFECTING TRANSACTIONS IN THE OFFERED
CERTIFICATES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS SUPPLEMENT AND THE PROSPECTUS TO WHICH IT RELATES. THIS
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT
AND PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS. -----------------
The Certificates offered by this Prospectus Supplement will be part of a
separate series of Certificates being offered by the Depositor pursuant to its
Prospectus dated ____________, 199__ of which this Prospectus Supplement is a
part and which accompanies this Prospectus Supplement. The Prospectus contains
important information regarding this offering which is not contained herein, and
prospective investors are urged to read the Prospectus and this Prospectus
Supplement in full.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission a
Registration Statement under the Securities Act of 1933, as amended, with
respect to the Certificates. This Prospectus Supplement and the related
Prospectus, which form a part of the Registration Statement, omit certain
information contained in such Registration Statement pursuant to the Rules and
Regulations of the Commission. The Registration Statement can be inspected and
copied at the Public Reference Room of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and the Commission's regional offices at Seven World
Trade Center, 13th Floor, New York, New York 10048, and Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of
such materials can be obtained at prescribed rates from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549.
REPORTS TO CERTIFICATEHOLDERS
The Trustee will mail monthly reports concerning the Offered Certificates
to all registered Owners.
<PAGE>
TABLE OF CONTENTS
AVAILABLE INFORMATION.......................................................S-3
REPORTS TO CERTIFICATEHOLDERS...............................................S-3
SUMMARY.....................................................................S-1
RISK FACTORS...............................................................S-10
THE MORTGAGE TRUST.........................................................S-14
DISTRIBUTION OF MORTGAGE RATES.............................................S-17
ADDITIONAL INFORMATION.....................................................S-21
THE DEPOSITOR..............................................................S-21
THE COMPANY................................................................S-21
THE SERVICER...............................................................S-21
MASTER SERVICER............................................................S-21
DESCRIPTION OF THE OFFERED CERTIFICATES....................................S-21
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS..............................S-27
DESCRIPTION OF THE POOLING AND SERVICING AGREEMENT.........................S-31
CERTAIN FEDERAL INCOME TAX CONSEQUENCES....................................S-39
ERISA CONSIDERATIONS.......................................................S-40
LEGAL INVESTMENT CONSIDERATIONS............................................S-42
RATINGS....................................................................S-42
UNDERWRITING...............................................................S-43
LEGAL MATTERS..............................................................S-43
APPENDIX A - INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS
EXHIBIT A - MORTGAGE LOAN SCHEDULE
<PAGE>
SUMMARY
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus Supplement and the
accompanying Prospectus. Reference is made to the Index of Principal Defined
Terms for the location in the Prospectus of the definitions of certain
capitalized terms.
Issuer CTS Multifamily Mortgage Loan Trust, 199__-
(the "Trust").
Certificates Offered The Class A-1 Certificates and the Class S-A
Certificates (collectively, the "Senior
Certificates") and the Class B Certificates
(collectively with the Senior Certificates, the
"Offered Certificates") evidence undivided
beneficial ownership interests in the Trust Fund.
The Class A-1 Certificates have an original
aggregate principal balance (the "Original Class
A-1 Principal Balance") of $_________. The Class
S-A Certificates are interest-only Certificates
and have no principal balance. The Class S-A
Certificates will accrue interest on the Notional
Principal Balance, as described herein. The Class
B Certificates have an original aggregate
principal balance of $________.
Depositor ContiSecurities Asset Funding Corp., a Delaware
corporation, having its principal executive office
at 277 Park Avenue, New York, New York 10172 (the
"Depositor").
Servicer _________________, a _________ corporation
(the "Servicer"). The Servicer's principal
executive offices are located at ________.
Trustee ____________________, a __________ banking
association, the ("Trustee"). The Trustee's
principal executive offices are located at
___________________.
Master Servicer corporation (the "Master Servicer").
The Master Servicer's principal executive
offices are located at ____________________.
[Special Servicer ___________________ a ___________ corporation
(the "Special Servicer"). The Special Servicer's
principal executives offices are located at
__________]
Cut-Off Date _____________, 199___.
Closing Date ________________, 199__.
Description of the
Certificates The CTS Multifamily Mortgage Pass-Through
Certificates, Series 199__-__ (the "Certificates")
will consist of the Offered Certificates, the
Class C Certificates, which have an original
aggregate principal balance of $________, the
Class R residual certificates (the "Class R
Certificates"), which represent the residual
interest in the Trust Fund, the Class RL residual
certificates (the "Class RL Certificates") which
represent the residual interest in the Mortgage
Trust (the "Class R Certificates" and the "Class
RL Certificates" are referred to collectively as
the "Residual Certificates"). The Class C
Certificates and the Residual Certificates are not
offered hereby, and may be offered for sale in
privately negotiated transactions. The
Certificates represent in the aggregate the entire
beneficial ownership interest in two trust funds
established pursuant to the Agreement. One trust
fund (the "Trust Fund") will consist of all the
"regular interests" (and all proceeds thereof) in
a separate trust fund (the "Mortgage Trust" and,
together with the Trust Fund, the "Trusts") that
will consist primarily of a pool of loans (the
"Mortgage Loans") secured by [first] liens on
multi- family residential (including family/retail
mixed-use) properties located in ___states (the
"Mortgaged Properties").
Denominations The Class A-1 Certificates will be issued in
book-entry form in denominations of original
principal amounts of $_____ and integral multiples
of $_____ in excess thereof. The Class S-A
Certificates will be issued in [book entry/fully
registered, definitive form] in percentage
interests of ownership of such class of not less
than ___%. The Class B Certificates will be
issuable in fully registered, certificated form in
denominations of $_______ and integral multiples
in excess thereof and one Class B Certificate
evidencing an additional amount equal to the
remainder of the Original Certificate Principal
Balance of such Class. See "Description of the
Offered Certificates-- General" and "Description
of the Offered Certificates-- Book-Entry
Registration of the Senior Certificates" herein.
The Mortgage Loans The Mortgage Loans will have a Cut-Off Date
aggregate principal balance outstanding, after the
deduction of payments of principal due on such
date, of approximately $ ______. The Mortgage
Loans were originated by in accordance with the
Company's Underwriting Guidelines, as described
herein. See "The Mortgage Trust-Underwriting
Standards" herein. As of the date of origination,
the weighted average Mortgage Rate of the Mortgage
Loans (weighted by the aggregate principal balance
thereof) was approximately ___%. All the Mortgage
Loans were originated on or after __________,
199__. As of the Cut-Off Date, the Mortgage Loans
had an average remaining term to maturity
(weighted by aggregate principal balance thereof)
of approximately _______. As of their date of
origination, the Mortgage Loans had an average
principal balance of approximately $_________.
Each Mortgage Loan is secured by a mortgage
creating a [first/junior] lien on the related
Mortgaged Property. The Mortgaged Properties will
consist of a total of ___ multi-family (including
___ multi-family/retail mixed-use) apartment
complexes. Each of the Mortgage Loans bears
interest at a [fixed/adjustable] rate of interest
and had an original term to maturity of 3, 5 or 7
years, and all of the Mortgage Loans require
monthly payments of principal based on a ___- year
amortization schedule. The Maturity Dates of the
Mortgage Loans will fall between ___________ and
__________, inclusive. None of the Mortgage Loans
are insured or guaranteed by any governmental
entity or private insurer. [All of the Mortgage
Loans are non-recourse loans.] See "The Mortgage
Trust -- Mortgage Loan Characteristics" herein.
Originators Each of the Mortgage Loans to be acquired by
the Trust from the Depositor were acquired by the
Depositor from ContiTrade Services L.L.C. (the
"Company"), which previously originated or
acquired the Mortgage Loans from the related
originator (each an "Originator").
Class A-1 Pass-Through
Rate ____% per annum.
Class S-A Pass-Through
Rate ___% per annum on the Notional Principal
Balance.
Class B Pass-Through
Rate ___% per annum.
Distributions on the
Certificates Distributions of interest and principal, if
any, on the Class A-1, Class S-A
Certificates and the Class B Certificates
will be made by the Trustee on each
Distribution Date (i.e., the __th day of
each month or if such __th day is not a
business day, then the business day next
following such __th day), commencing in
199__, to the Owners of Certificates of
record as of the close of business on the
last business day of the month preceding
such Distribution Date (each, a "Record
Date").
Amount of Distributions On each Distribution Date,
the Trustee will apply the aggregate of
amounts distributed [in respect of the Lower
Tier Interest] on such Distribution Date in
the following order of priority:
(i) first, concurrently, to the Owners of the
Class A-1 Certificates, the Class A-1 Monthly
Interest (as defined below); and to the
Owners of the Class S- A Certificates, Class
S-A Monthly Interest, any shortfall being
allocated among the Class A-1 Certificates
and the Class S-A Certificates in proportion
to their respective amounts of Class A-1
Monthly Interest and Class S-A Monthly
Interest;
(ii) second, to the Owners of the Class A-1
Certificates, the Class A-1 Principal
Distribution Amount (as defined below) until
the Class A-1 Principal Balance has been
reduced to zero;
(iii) third, to the Owners of the Class B
Certificates, the Class B Monthly Interest;
(iv) fourth, to the Owners of the Class A-1
Certificates, any Unpaid Delinquent Maturity
Amount (as defined below) until the Class A-1
Principal Balance has been reduced to zero;
(v) fifth, to the Owners of the Class B
Certificates, the Class B Principal
Distribution Amount until the Class Principal
Balance has been reduced to zero;
(vi) sixth, to the Owners of the Class C
Certificates, the Class C Monthly Interest;
(vii) seventh, to the Owners of the Class C
Certificates, the Class C Principal
Distribution Amount until the Class C
Principal Balance has been reduced to zero;
and
(viii) eighth, to the Owners of the Class R
Certificates, all remaining Available Funds,
if any.
The "Class A-1 Principal Distribution Amount," as
to any Distribution Date, will equal the sum of
the items set forth below and, if Available Funds
should be less than such sum, any partial
distribution shall be with respect to such items
in the order of priority set forth below:
(i) the product of (x) the Class A Percentage
and (y-1) prior to the Subordination
Termination Date, the sum of (A) the
aggregate of the Unpaid Principal Balance of
all Mortgage Loans which ceased to be
Outstanding Mortgage Loans as of such
Distribution Date other than Mortgage Loans
that were subject to a Principal Prepayment
In Full prior to the end of the preceding
calendar month and (B) all scheduled
principal payments on the Mortgage Loans due
on the related Due Date; or (y-2) on and
after the Subordination Termination Date, the
sum of the amounts described in (y-1)(A) and
(y-1)(B) above, but only to the extent such
amounts are actually received by the Trustee
prior to the Distribution Date;
(ii) all Principal Prepayments made on or
before the related Determination Date; and
(iii) any Unpaid Principal Shortfall
allocable to the Class A-1 Certificates.
The "Class B Principal Distribution Amount" as to
any Distribution Date, will equal the sum of the
items set forth below and, if Available Funds
should be less than such sum, any partial
distribution shall be with respect to such items
in the order of priority set forth below:
(i) the product of (x) the Class B Percentage
and the sum of (A) the aggregate of the
Unpaid Principal Balance of all Mortgage
Loans which ceased to be Outstanding Mortgage
Loans as of such Distribution Date other than
Mortgage Loans that were subject to a
Principal Prepayment In Full prior to the end
of the preceding calendar month and (B) all
scheduled principal payments on the Mortgage
Loans due on the related Due Date;
(ii) after the Class A-1 Termination Date,
all Principal Prepayments made on or before
the related Determination Date; and
(iii) any Unpaid Principal Shortfall
allocable to the Class B Certificates.
[In addition, on each Distribution Date, the
Trustee will withdraw from the Prepayment Premium
Account (as defined herein) an amount equal to the
aggregate of all Prepayment Premiums deposited
therein during the previous calendar month and
will distribute such amount (i) on each
Distribution Date prior to the Class A Termination
Date, (a) if prior to __________, to the Owners of
Class A Certificates, allocated ___% to the Class
A-1 Certificates and ___% to the Class S-A
Certificates, and (b) if after __________, solely
to the Owners of Class A-1 Certificates, (ii) on
the Class A-1 Termination Date, to the Owners of
Class A Certificates (in accordance with the
allocations described in subclauses (a) and (b)
(as the case may be) of clause (i) above, only if
the Class A-1 Termination Date is prior to
__________) and Class B Certificates in proportion
to the distributions of principal made in respect
of the Class A-1 and Class B Certificates,
respectively, (iii) on each Distribution Date
thereafter, to the Owners of Class B
Certificates.]
Interest for the Class A and Class B Certificates
for any given Distribution Date is equal to one
month's interest accrued at the applicable
Pass-Through Rate, on the Class A-1 or Class B
Principal Balance, as the case may be, immediately
prior to such Distribution Date. See "Description
of the Offered Certificates-- Amounts of
Distribution" herein.
Monthly Advances In the event that a monthly payment on a
Mortgage Loan has not been received by the
Servicer as of the close of business on the
Determination Date immediately preceding
the related Distribution Date, the Servicer
will be obligated to advance, for deposit
in the Certificate Account, the aggregate of
payments of principal (other than any
Balloon Payment) and interest on the
Mortgage Loans that were due on the related
Due Date and that is allocable to the Class
A Certificates, less the aggregate amount of
any such delinquent payments that the
Servicer has determined in its sole,
reasonable judgment would constitute a
nonrecoverable advance if made (a "Monthly
Advance"). The Servicer will be entitled to
be reimbursed from the Certificate Account
for all such Monthly Advances.
The obligation to make Monthly Advances with
respect to any Mortgage Loan shall continue
until the earliest to occur of (i) payment
thereof in full, (ii) liquidation of the
related Mortgaged Property and (iii) the
purchase or repurchase thereof from the
Mortgage Trust pursuant to any applicable
provision of the Agreement. If the rights
and obligations of the Servicer under the
Agreement are terminated upon the occurrence
of an event of default that remains uncured,
the [Trustee/Master Servicer] will be the
successor in all respects (with certain
exceptions relating to the repurchase of
Mortgage Loans under certain
circumstances)to the Servicer in its
capacity as servicer under the Agreement,
including the obligation to make all
required Monthly Advances.
Subordination of the
Subordinate Certificates The rights of the Owners of the
Class B Certificates and the Class C
Certificates to receive distributions with
respect to the Mortgage Loans will be
subordinated to such rights of the holders
of the Class A Certificates to the extent
described below. The subordination
provided to the Class A Certificates by the
Class B Certificates and the Class C
Certificates is intended to enhance the
likelihood of timely receipt by the Owners
of the Class A Certificates of the full
amount of their scheduled monthly payments
and to afford such Owners protection against
losses resulting form Liquidated Mortgage
Loans.
The rights of the Owners of the Class C
Certificates to receive distributions with
respect to the Loans will be subordinated to
such rights of the Owners of the Class B
Certificates to the extent described below.
The subordination provided to the Class B
Certificates by the Class C Certificates is
intended to enhance the likelihood of timely
receipt by the Owners of the Class B
Certificates of the full amount of their
scheduled monthly payments and to afford
such Owners protection against losses
resulting form Liquidated Mortgage Loans.
The protection afforded to the Owners of
Class A Certificates by means of the
subordination of the Class B Certificates
and the Class C Certificates will be
accomplished by the preferential right of
such Owners to receive, prior to any
distribution being made on a Distribution
Date in respect of the Class B Certificates
and the Class C Certificates, the Class A-1
Monthly Interest and the Class S-A Monthly
Interest, respectively, and to the Owners
ofthe Class A Certificates the Class A-1
Principal Distribution Amount. The Class B
Certificates will, however, receive the
Class B Monthly Interest before the Owners
of the Class A Certificates receive any
Unpaid Delinquent Maturity Amount. There
will be no other form of Credit Enhancement
available for the benefit of the Offered
Certificates. See "Description of the
Offered Certificates -- Subordination of the
Subordinate Certificates" herein.
Allocation of Losses Subject to the limitations described
herein, losses of principal and interest
realized on the Mortgage Loans ("Realized
Losses") will be allocated, first, to the
Class R Certificates and, then to the Class
C Certificates and, then to the Class B
Certificates, as described herein, prior to
allocation thereof to the Senior
Certificates. See "Description Of The
Offered Certificates--Subordination of
Subordinate Certificates" herein.
Servicing Fee With respect to each Distribution Date, the
Servicer shall be entitled to withhold from
deposit into the Certificate Account, with
respect to each Mortgage Loan (for which a
Monthly Payment was received) that was an
Outstanding Mortgage Loan as of such
Distribution Date, an amount equal to
one-twelfth of the product of (i) the rate set
forth in the Mortgage Loan Schedule (the
"Servicing Fee Rate") and (ii) the Unpaid
Principal Balance of such Mortgage Loan as
of such Distribution Date. The Servicer
will be entitled to retain additional
servicing compensation in the form of
assumption fees, late payment charges or
extension and other administrative charges
to the extent collected.
Optional Termination At its option the Depositor may
repurchase all the Mortgage Loans at any
time when the Pool Principal Balance is
less than 10% of the Cut-Off Date Pool
Principal Balance. The payment of such
purchase price will be applied to the early
retirement of the Class A-1, Class S-A,
Class B and Class C Certificates. See
"Description of the Pooling and Servicing
Agreement -- Termination; Retirement of the
Certificates" herein.
Final Scheduled Distribution
Date Scheduled Payments on the Mortgage Loans
will be sufficient to distribute interest
on the Offered Certificates at the
applicable Pass-Through Rate and to reduce
the principal amount of the Offered
Certificates to zero not later than the
"Final Scheduled Distribution Date" set
forth on the cover page hereof, determined
as described herein. the rate of
distributions of principal on the Offered
Certificates will depend on the rate of
payment (including prepayments) of the
principal of the Mortgage Loans and on the
timing of receipt of Liquidation Proceeds
and Insurance Proceeds with respect to the
Mortgage Loans, the actual final
Distribution Date for each Class of the
Offered Certificates may be earlier, and
could be substantially earlier, or may be
later, than the Final Scheduled
Distribution Date. See "Description Of The
Offered Certificates -- Final Scheduled
Distribution Date" and "Yield, Prepayment
and Maturity Considerations" herein.
Nature of Class S-A
Certificates General Character as an Interest-Only
Security. The owners of the Class S-A
Certificates will be entitled to receive
monthly distributions equal to one- month's
interest at the Class S-A Pass-Through Rate
on the Notional Principal Balance then
outstanding. The Class S-A
Certificateholders will not be entitled to
receive any distributions of principal
collected on the Mortgage Loans. Because
they will not receive any distributions of
principal, the Class S-A Certificateholders
will be affected by prepayments,
liquidations and other dispositions of the
Mortgage Loans to a greater degree than will
the Class A Certificateholders. As an
extreme illustration, in the event that the
entire Mortgage Pool prepays in full during
the first month, then on the initial
Distribution Date the Owners of the Class A
Certificates will receive the full par
value of their Certificates while the Owners
of the Class S-A Certificates will suffer
nearly a complete loss (except for one
month's interest) on their investment.
In general, liquidations due to losses,
repurchases by the Company and other
dispositions of Mortgage Loans from the
Trust Fund will have the same effect on
Class S-A Certificateholders as do
prepayments of principal, liquidations due
to losses, repurchases by the Company and
other dispositions of Mortgage Loans from
the Trust, and are collectively referred to
as "Prepayments."
Because the yield to the Class S-A
Certificateholders is sensitive to certain
constant rates of prepayment, it is
advisable for potential investors in the
Class S-A Certificates to consider
carefully, and to make their own evaluation
of, the effect of any particular assumption
regarding the rates and the timing of
prepayments. In general, when interest rates
decline, prepayments in a pool of
receivables such as the Mortgage Loans will
increase as borrowers seek to refinance at
lower rates. This will have the effect of
reducing the future stream of payments
available to an owner of an interest-only
security based on such receivables pool,
thus adversely affecting such investor's
yield. Conversely, when interest rates
increase prepayments will tend to decrease
(since attractive refinancing opportunities
are not available) and the future stream of
payments available to such an owner of an
interest-only security may increase, thus
positively affecting such investor's yield.
Accrual of "Original
Issue Discount." The Class S-A Certificates may be issued
with "original issue discount" within the
meaning of the Code. As a result, in
certain rapid prepayment environments the
effect of the rules governing the accrual of
original issue discount may require such
Certificateholders to accrue original issue
discount at a rate in excess of the rate at
which distributions are received by such
Certificateholders or not to be able to accrue
economically realized losses. See "Certain
Federal Income Tax Consequences" herein and in the
Prospectus.
Ratings. It is a condition to the issuance of the
Offered Certificates that the Class A-1 and
Class S-A Certificates each be rated no
lower than "AAA" and that the Class B
Certificates be rated no lower than "___" by
Standard and Poor's Ratings Group, a
division of McGraw Hill ("S&P") and Moody's
Investors Service, Inc. ("Moody's")
(collectively, the "Rating Agencies"). The
Class C Certificates will not be rated. 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
"Ratings" herein.
Ratings of the
Class S-A Certificates. The Class S-A Certificates will,
upon initial issuance, receive ratings of
"___" by ___ and of "___" by __________.
Ratings which are assigned to securities
such as the Class S-A Certificates generally
evaluate the ability of the issuer (i.e.,
the Trust) to make timely payments when such
payments are due, as required by such
securities. As described above, such
amounts with respect to the Class S-A
Certificates consist only of interest. In
general, the ratings thus address credit
risk and not prepayment risk. See "Ratings"
herein.
Certain Federal Income
Tax Consequences. The Trustee will cause elections to be made
to treat the Mortgage Trust (also referred
to herein as "Lower Tier REMIC") and the
Trust Fund as "real estate mortgage
investment conduits" (each, a "REMIC") for
federal income tax purposes. The Lower Tier
A Interest and the Lower Tier B Interest
will be the "regular interests" in the
Lower Tier REMIC and the Class RL
Certificates will constitute the sole class
of "residual interests" in the Lower Tier
REMIC. The Class A-1, Class S-A and Class B
Certificates will be "regular interests" in
the Trust Fund and the Class R Certificates
will be the sole class of "residual
interests" in the Trust Fund. See "Certain
Federal Income Tax Consequences" herein and in
the Prospectus.
ERISA Considerations Any fiduciary of any employee benefit
plan (a "Plan") subject to the Employee
Retirement Income Security Act of 1974, as
amended ("ERISA"), who proposes to cause a
Plan to acquire any of the Offered
Certificates should consult with its own
counsel with respect to the applicability of
ERISA and the Internal Revenue Code of
1986, as amended (the "Code"), to such
investment.
Under current law the purchase and holding
of the Class B Certificates by or on behalf
of any Plan subject to the fiduciary
responsibility provisions of ERISA may
result in "prohibited transactions" within
the meaning of ERISA and the Code. [No
transfer of a Class B Certificate or any
interest therein may be made to any Plan or
other retirement arrangement, including
individual retirement accounts and
annuities, Keogh plans and collective
investment and separate accounts in which
such plans, accounts or arrangements are
invested that is subject to ERISA or the
Code unless the prospective transferee of
the Class B Certificate provides the Trustee
with a representation letter and an opinion
of counsel, each in the form required under
the Agreement. See "ERISA Considerations"
herein and in the Prospectus.]
Risk Factors Credit Considerations. For information with
regard to the Mortgage Loans and their
related risks, see "The Portfolio of
Mortgage Loans" herein.
Prepayment Considerations. For information regarding the
consequences of prepayments of the Mortgage
Loans, particularly Owners of Class S-A
Certificates, see "Prepayment and Yield
Considerations" herein.
Other For a discussion of other risk factors that
should be considered by prospective
investors in the Offered Certificates, see
"Risk Factors" herein and in the Prospectus.
Legal Investment
Considerations The Senior Certificates will [not]
constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA") [for so
long as they are rated in one of the two
highest rating categories by one or more
nationally recognized statistical rating
organizations. As such, the Senior
Certificates will be legal investments for
certain entities to the extent provided in
SMMEA, subject to state laws overriding
SMMEA. In addition, institutions whose
investment activities are subject to review
by federal or state regulatory authorities
may be or may become subject to
restrictions, which may be retroactively
imposed by such regulatory authorities, on
the investment by such institutions in
certain forms of mortgage related
securities. Furthermore, certain states have
enacted legislation overriding the legal
investment provisions of SMMEA.]
The Class B Certificates will not constitute
"mortgage related securities" for purposes
of SMMEA. As a result, the appropriate
characterization of the Class B Certificates
under various legal investment restrictions,
and thus the ability of investors subject to
these restrictions to purchase the Class B
Certificates, maybe subject to significant
interpretative uncertainties.
Prospective investors are advised to consult
their counsel as to qualification of the
Offered Certificates as legal investments
under any such laws, regulations, rules and
orders. See "Legal Investment Consideration"
herein and in the Prospectus.
<PAGE>
RISK FACTORS
Prospective investors in the Offered Certificates should consider the
following risk factors (as well as the risk factors set forth under "Risk
Factors" in the Prospectus) in connection with the purchase of the Offered
Certificates.
The Mortgage Loans
General. The Mortgage Loans were originated by the between _____ and
_______, inclusive. The Mortgage Loans are all secured by multi-family (or, in
some cases, multi-family/retail mixed-use) apartment buildings, each containing
five or more residential units. Owners of multi-family apartment buildings rely
on monthly lease payments from tenants to pay for maintenance and other
operating expenses of the building, to fund capital improvements and to service
the related Mortgage Loan and any other debt that may be secured by such
property. Various factors, many of which are beyond the control of the owner or
operator of an apartment building, may affect the economic viability of the
building.
Adverse economic conditions, either local or national, may limit the amount
of rent that can be charged and may result in a reduction in timely lease
payments or a reduction in occupancy levels. Occupancy and rent levels may also
be affected by construction of additional housing units and local politics,
including rent stabilization or rent control laws and policies. In addition, a
low level of mortgage rates may encourage tenants to purchase single-family
housing.
Changes in payment patterns by tenants may result from a variety of social,
legal and economic factors. Economic factors including the rate of inflation,
unemployment levels and relative rents offered for various types of housing may
be reflected in changes in payment patterns, including increased risks of
defaults by tenants and higher vacancy rates. The Depositor is unable to
determine and has no basis to predict whether, or to what extent, economic,
legal or social factors will affect future rental or payment patterns.
Environmental Risks. Under the laws of certain states where Mortgaged
Properties are located, violation of applicable environmental laws may give may
rise to a "superlien" on the Mortgaged Property (i.e., a lien prior to the lien
of the related mortgage) to assure the payment of the costs of cleanup. In
addition, under the laws of several states and under the federal Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA") a lender may
be liable, as an "owner" or "operator", for cleanup costs on mortgaged property
containing hazardous wastes if agents or employees of the lender have become
involved in the operations of the borrower, regardless of whether a previous
owner caused the environmental damage. If the lender actually takes possession
of the property, it may, more clearly, be liable for cleanup costs pursuant to
CERCLA. Under certain recent court decisions, even very little involvement by
the lender has led to liability for cleanup costs and efforts by the Federal
Environmental Protection Agency to clarify questions relating to lender
liability through rulemaking have been rejected. The Depositor will generally
require the preparation of environmental assessments; however, there can be no
assurance as to the ultimate level of protection, if any, afforded by any such
assessment. Although the lender can bring an action for contribution against the
owner who created the environmental hazard, any amounts awarded to the lender
under such an action may not be collectible if the owner is bankrupt or
otherwise judgment-proof. See "Risk Factors -- Certain Legal Aspects of the
Mortgage Loans--Environmental Risks" in the Prospectus.
The Agreement provides that the Servicer may not, on behalf of the Trustee,
obtain title to (as a result of foreclosure or in lieu of foreclosure or
otherwise), or take possession of or other actions with respect to, a Mortgaged
Property unless the Servicer has previously determined, based on a report
prepared by a person who regularly conducts environmental audits, that (i) the
Mortgaged Property is in compliance with applicable environmental laws or, if it
is not, that it would be in the best economic interest of the holders of the
Certificates to take the actions necessary to bring the Mortgaged Property into
compliance with such laws and (ii) circumstances relating to the use, management
or disposal of certain hazardous materials either are not present at the
Mortgaged Property or should be addressed if to do so would be in the best
economic interest of the holders of the Certificates. See "Description of the
Pooling and Servicing Agreement -- Realization upon Defaulted Mortgage Loans"
herein.
Environmental studies were commissioned by the Company or its correspondent
originators prior to the origination of each Mortgage Loan. The reports
indicated that no material environmental conditions existed with respect to any
of the Mortgaged Properties. [Identified environmental conditions which may
result in liability to the issuer will be disclosed in a separate risk factor.]
Mortgagor Default. The Mortgage Loans are not insured or guaranteed against
Mortgagor default by any governmental entity or by any private mortgage insurer.
The amount recoverable upon the occurrence of a default may be affected by,
among other things, a decline in real estate values or a change in mortgage
market interest rates. If the multifamily residential real estate market should
experience an overall decline in property values such that the outstanding
balances of the Mortgage Loans exceed the value of the related Mortgaged
Properties, the actual rates of delinquencies, foreclosures and losses could be
higher than those anticipated by investors.
The Agreement also contains limitations on the ability of the Servicer to
foreclose on a Mortgaged Property, to modify the terms of the related Mortgage
Loan as an alternative to foreclosure, and to rehabilitate a Mortgaged Property
acquired by the Mortgage Trust upon foreclosure. These limitations may delay or
otherwise adversely affect recoveries in respect of a defaulted Mortgage Loan.
See "Description of the Pooling and Servicing Agreement--Realization Upon
Defaulted Mortgage Loans".
Nonrecourse Mortgage Loans. All the Mortgage Loans are nonrecourse loans,
as to which, in the event of a Mortgagor default, recourse will be available
solely against the related Mortgaged Property, and not against any other assets
of the Mortgagor, to pay amounts due under the related Mortgage Loan. In the
case of a nonrecourse Mortgage Loan, a decrease in the value of the related
Mortgaged Property will directly reduce the amount of gross liquidation proceeds
that may be realized in respect thereof and, after the deduction of liquidation
expenses, applied to payment of such Mortgage Loan. [In addition, the laws of
some states prohibit obtaining a personal judgment against a mortgagor for any
deficiency in the net liquidation proceeds following a foreclosure of a
defaulted mortgage loan.]
Liquidation Risks. Even assuming that the Mortgaged Properties provide
adequate security for the Mortgage Loans, substantial delay could be encountered
in connection with the liquidation of defaulted Mortgage Loans and corresponding
delays in the receipt of related proceeds by Owners of the Offered Certificates
could occur. Further, liquidation expenses (such as legal fees, real estate
taxes, and maintenance and preservation expenses) will reduce the proceeds
payable to holders of the Offered Certificates and thereby reduce the security
for the Mortgage Loans. In the event any Mortgaged Properties fail to provide
adequate security for the related Mortgage Loans and the protection provided by
the subordination described herein is exhausted or unavailable, holders of
Offered Certificates could experience a loss on their investment.
Other Risks of Multifamily Residential Lending. Multifamily residential
lending is generally viewed as exposing the lender to a greater risk of loss
than one-to-four-family residential lending. Multifamily residential lending
typically involves a larger loan to a single obligor than a residential one- to
four- family mortgage loan. Furthermore, the repayment of loans secured by
income producing properties is typically dependent upon the successful operation
of the related real estate project. If the net operating income from the project
is reduced (for example, if tenant leases are not obtained or renewed), the
obligor's ability to repay the loan may be impaired. Multifamily residential
real estate can be affected significantly by supply and demand in the market for
the type of property securing the loan and, therefore, may be subject to adverse
economic conditions. Market values may vary as a result of economic events or
governmental regulations outside the control of the borrower or lender, such as
the imposition of rent control or changes in the laws which impact the future
cash flow of the property. Market values may also be influenced by the relative
affordability of single-family housing in the area in which the multifamily
residential housing is located.
The successful operation of a multifamily project is also dependent upon
the management of such project.
The project manager, in conjunction with the owner of the project, is
responsible for responding to changes in the local rental market, planning and
implementing the rental market, planning and implementing the rental structure,
including establishing levels of rental rates, and insuring that maintenance and
capital improvements are carried out in a timely fashion. Management errors may
adversely affect the long-term viability of a project. There can be no assurance
that such errors by the property manager will not ultimately cause a default on
the related Mortgage Loan. See "Security for the Certificates -- The Mortgage
Loans" herein.
Mortgage Loan Concentration. The ______ largest Mortgage Loans, with an
aggregate Scheduled Principal Balance as of the Cut-Off Date of approximately
$__________, comprise approximately ___% of the aggregate Scheduled Principal
Balance of the Mortgage Loans on such date. The largest of such Mortgage Loans
has a Scheduled Principal Balance of approximately $__________, or approximately
___% of the aggregate Scheduled Principal Balance of the Mortgage Loans as of
the Cut-Off Date. As a result of this relative concentration of the Mortgage
Loans, Losses, prepayments or modifications (including an extension of the final
Due Date) on any such Mortgage Loans are likely to have a greater effect on the
yield to Holders of the Offered Certificates or the anticipated weighted average
lives of the Offered Certificates than if such concentration had not existed. In
addition (i) approximately ___% of the Mortgage Loans by aggregate Scheduled
Principal Balance are secured by Mortgaged Premises located in ________, (ii)
approximately __% by Mortgaged Premises located in _____, (iii) approximately
___% by Mortgaged Premises located in _____ and (iv) approximately ___% by
Mortgage Premises located in ---------.
As a result of this relative geographic concentration of the Mortgage
Loans, the performance of the Offered Certificates may be more dependent upon
the economic conditions in the noted states.
The Mortgage Loans are all secured by Mortgaged Premises that are either
newly constructed or have been recently substantially rehabilitated. As such,
each Mortgaged Premises has limited operating history on which the calculation
of the Debt Service Coverage Ratio was based. There can be no assurance that the
future operating history will be consistent with the limited recent operating
history. To the extent future Net Operating Income is less than the Net
Operating Income used in underwriting a Mortgage Loan, the likelihood of a
default on such Mortgage Loan increases, which may result in a Realized Loss.
Balloon Mortgage Loans and Extension Risk. Because all the Mortgage Loans
have amortization schedules extending significantly beyond their original terms
to maturity, substantial payments (that is "Balloon Payments") will be due on
the Mortgage Loans at their respective stated maturity dates. Such loans involve
a greater risk to lenders because a Mortgagor's ability to make a Balloon
Payment typically will depend upon its ability either to refinance such Mortgage
Loan or to sell the related Mortgaged Property. A mortgagor's ability to
accomplish either of these goals will be affected by the factors described above
under "The Mortgage Loans-- General" and by other factors including the level of
available mortgage rates at the time of sale or refinancing, the Mortgagor's
equity in the Mortgaged Property, the financial condition of the Mortgagor, the
operating history and physical condition of the Mortgaged Property, tax laws and
prevailing general economic conditions. A high interest rate environment may
make it more difficult for the Mortgagor to accomplish a refinancing or sale and
may result in delinquencies or defaults which, in turn, could cause delays in
distributions to holders of Offered Certificates.
There is no assurance that the values of the Mortgaged Properties at
maturity of the Mortgage Loans will be equal to or will exceed their values at
the date of origination of the Mortgage Loans. Since the Mortgage Loans require
Balloon Payments at maturity, holders of Offered Certificates will be assuming
the risk that the Mortgage Loans may not be paid off when the Balloon Payments
are due.
In addition, if certain conditions are satisfied, such as the absence of
any deferred maintenance, the satisfaction of a minimum debt service coverage
ratio, the absence of delinquencies and the good faith effort to secure
refinancing, the Servicer may extend a Mortgagor's Balloon Payment due date by
as much as ____ months if the Mortgagor needs more time to refinance. Such
extension of the scheduled maturity date of the loan may cause the weighted
average lives of the Offered Certificates to be longer than if the loan had been
paid under its original terms. See "Yield, Maturity and Prepayment
Considerations" herein.
Credit Risk of Subordinate Certificates
As described herein, the rights of the Subordinate Certificateholders to
receive payments of interest and principal will be subordinated to those of the
Holders of the Senior Certificates, and the rights of the Class C
Certificateholders to receive payments of interest and principal will be
subordinated to those of the Holders of the Class B Certificates.
Losses on the Mortgage Loans will first be charged to the Class C
Certificates. If as a consequence of such Losses the Class C Certificate
Principal Balance has been reduced to zero, any additional Losses will be
allocated first to reduce the principal balance of the Class B Certificates to
zero. Further, if as a consequence of such Losses the aggregate outstanding
principal balance of the Class B Certificates and Class C Certificates has been
reduced to zero, any additional Losses will reduce the outstanding principal
balance of the Class A-1 Certificates. See "Description of the Offered
Certificates -- Subordination of Subordinate Certificates" herein.
Certain Bankruptcy Issues
Each Borrower is a limited partnership, which limited partnership is a
special purpose entity with limited liability and limited capitalization. Under
certain circumstances, the bankruptcy of a general partner of a limited
partnership may result in the dissolution of such limited partnership. The
dissolution of a limited partnership, the winding-up of its affairs and the
distribution of its assets could result in an acceleration of its payment
obligations under the related Mortgage Loan, reducing the yield to the
Certificateholders in the same manner as a principal prepayment.
In addition, in the event of the bankruptcy of the general partner of a
Borrower, a trustee in bankruptcy for such general partner, such general partner
as a debtor-in-possession, or a creditor of such general partner could attempt
to seek an order from a court consolidating the assets and liabilities of the
related Borrower with those of the general partner. [Counsel for each Borrower
has delivered an opinion in respect of each Borrower concluding that a court
applying state partnership law should not issue an order, in some cases on the
basis of a reasoned analysis and subject to certain facts, assumptions and
qualifications specified therein. However, notwithstanding such opinion, if such
consolidation were to be permitted, the respective Mortgage, for example, would
likely become property of the estate of such bankrupt general partner. In such a
case, not only would the Mortgaged Property be available to satisfy the claims
of creditors of such general partner, but an automatic stay would apply to any
attempt by the Servicer on behalf of the Trustee to exercise remedies with
respect to such Mortgage. However, such an occurrence should not affect a
properly perfected security interest in the Mortgaged Property or the Trustee's
status as the holder of such security interest.]
[Certain limited liability general partners are affiliated with two or more
Borrowers. The two largest groups of affiliated general partner of the Borrowers
each represent between ___% and ___% of the aggregate principal balance of the
Mortgage Loans. In the event that one of such general partners or any of its
affiliates becomes the subject of a bankruptcy proceeding, the trustee in
bankruptcy for such entity, such entity as debtor-in- possession or a creditor
of such entity, could attempt to seek an order from a court consolidating the
assets and liabilities of one or more of those affiliated parties that are not
part of the bankruptcy proceeding with the assets and liabilities of such
entity. If successful, the number of Borrowers potentially affected by the
concerns addressed in the preceding two paragraphs could be increased
significantly. See also "Certain Legal Aspects of The Mortgage Loans" in the
Prospectus.
<PAGE>
THE MORTGAGE TRUST
General
The mortgage assets in the Mortgage Trust will consist primarily of
Mortgage Loans with a Cut-Off Date aggregate principal balance outstanding,
after the deduction of payments of principal due on such date, of approximately
$_______. Each Mortgage Loan is secured by a mortgage creating a [first/junior]
lien on the related Mortgaged Property. The Mortgaged Properties consist of a
total of ___ multifamily (including ___ multifamily/retail mixed-use) apartment
complexes. The Mortgage Loans had an original term to maturity of ____, ____ or
____ years, but all the Mortgage Loans require monthly payments of principal
based on a ___ or ___ year amortization schedule. Thus, Balloon Payments will be
due on each Mortgage Loan at its stated maturity date. The Maturity Dates of the
Mortgage Loans will fall between ________ and _________ inclusive. None of the
Mortgage Loans are insured or guaranteed by any governmental entity or private
insurer. All the Mortgage Loans are non-recourse loans. The Mortgage Loans to be
included in the Mortgage Trust will be acquired by the Trust from Depositor,
which will have acquired the Mortgage Loans from the Company. [All the Mortgage
Loans were underwritten in accordance with the Company's Underwriting standards,
as described under "Underwriting Standards" below.]
[The Mortgage Loans permit voluntary prepayment prior to maturity only upon
the payment by the Mortgagor of a prepayment penalty based on a [yield
maintenance formula/predetermined schedule reducing over time]. See "Certain
Yield, Prepayment and Maturity Considerations" herein.]
The Mortgaged Properties
The Mortgaged Properties consist of __ multifamily (including ____
multifamily/retail mixed-use) apartment complexes comprising a total of
approximately ___ rental units. The mortgage amount, name of Mortgagor, property
type and property address for each Mortgaged Property are set forth in the
schedule (the "Mortgage Loan Schedule") attached hereto as Exhibit A.
The Mortgage Loan Schedule also sets forth the appraised values for each of
the Mortgaged Properties and the resultant loan-to-value ratios based on the
principal balance of the Mortgage Loans attributable to each such Mortgaged
Property as of the Cut-Off Date.
The original loan-to-value ratio of a Mortgage Loan is the ratio of the
original principal balance of such Mortgage Loan (assuming disbursement of all
funds required or conditionally required to be disbursed thereunder) to the
appraised value of the related Mortgaged Property. The Mortgage Loans had a
weighted average original loan-to-value ratio of approximately _____%, with a
range from _____% of _____%.
<PAGE>
Delinquencies
Owned and Managed Servicing Portfolio. The following tables set forth
information relating to the delinquency, loan loss and foreclosure experience of
the Servicer for its servicing portfolio of fixed rate multifamily mortgage
loans for , 199 , , 199 and for each of the three prior years.
Delinquency and Foreclosure Experience of the Servicer's Owned and Managed
Servicing Portfolio of Multifamily Mortgage Loans
<TABLE>
<CAPTION>
As of Year End [ ],
199 199 199 199 198
--- --- --- --- ---
Number Dollar Number Dollar Number Dollar Number Dollar Number Dollar
of Amount of Amount of Amount of Amount of Amount
Loans (000) Loans (000) Loans (000) Loans (000) Loans (000)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Portfolio...........
Delinquent Loans(1).
31-60 (2).........
61-90.............
91 days or more...
Total......
Total Delinquency
Percentage........
REO Properties (3)..
- ----------------------
(1) The period of delinquency is based on the number of days payments are
contractually past due and includes all loans in foreclosure.
(2) Generally all Mortgage Loans 31 to 60 days or more delinquent are in
foreclosure.
(3) REO Properties (i.e., "real estate owned"
properties--properties relating to mortgages foreclosed or for which
deeds in lieu of foreclosure have been accepted and held by the
Servicer pending disposition).
</TABLE>
<PAGE>
Loan Loss Experience of the Servicer's Owned and Managed Servicing
Portfolio of Multifamily Mortgage Loans
[] Months Year End[ ]
Ending
199 199 199 199 198
(Dollars in Thousands)
Average Portfolio
Balance (1)
Net Losses (2)(3)...................
As a percentage of Average
Portfolio Balance.................
- -------------------------------
(1) Average Portfolio Balance equals the average of the portfolio balance
of the current period and the portfolio balance of the prior period.
(2) "Net Losses" means actual net profits realized with respect to the
disposition of REO property less net losses incurred with respect to
the liquidation or charge-off of mortgage loans. Net Losses are
presented only if a net loss has occurred or, as $0 if net profit has
occurred.
(3) Annualized for , 199 information.
Mortgage Loan Characteristics
The Mortgage Loans had the following characteristics:
The weighted average Mortgage Rate of the Mortgage Loans was approximately
per annum at origination. _____ of the Mortgage Loans have Mortgage Rates of ___
per annum (the lowest such rate). The highest Mortgage Rate of the other
Mortgage Loans is ____ per annum.
The weighted average remaining term to maturity of the Mortgage Loans was
approximately four years and two months as of the Cut-Off Date. All of the
Mortgage Loans were originated on or after _______ and before _________. All of
the Mortgage Loans had original terms to maturity of five, seven or ten years.
The Mortgage Loans had principal balances ranging from $______ to $________ at
origination and from $_____ to $______ as of the Cut-Off Date. The average
principal balance of the Mortgage Loans was $______ at origination and
approximately $ ______ as of the Cut-Off Date.
The original amortization of all the Mortgage Loans was either 20 or either
30 years, with a weighted average remaining amortization term of ____.
The debt service coverage ratios of the Mortgage Loans at origination
ranged from ___% to ___% (after the enhancements described in the next
sentence), with a weighted average of ___. Mortgage Loans with debt service
coverage ratios ranging from ___ to ___ (prior to any enhancement) have posted
letters of credit or cash reserve deposits in amounts sufficient to raise such
ratios to a range of ___ to ___.
The Mortgaged Properties contain between ___ and ___ units, the average
being ___. The Mortgage Loan balance per unit at origination was ___ on average,
with a range from $ ____ to -------.
The Mortgage Loan Schedule sets forth a description of certain other
characteristics of the Mortgage Loans as of the dates of origination of the
Mortgage Loans or as of the Cut-Off Date, as indicated.
<PAGE>
DISTRIBUTION OF LTV'S
AGGREGATE UNPAID NUMBER OF UNPAID % OF AGGREGATE
RANGE OF LTV'S MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------- ---------------- ----------------- -----------------
Total
The LTV's shown above were calculated based upon the appraised values of
the Mortgaged Properties at the time of origination (the "Appraised Values"). No
assurance can be given that such appraised values of the Mortgaged Properties
have remained or will remain at their levels on the dates of origination of the
related Mortgage Loans. If property values decline such that the outstanding
balances of the Mortgage Loans, [together with the outstanding balances of any
Senior Mortgage Loans,] become equal to or greater than the value of the
Mortgaged Properties, the actual rates of delinquencies, foreclosures and losses
could be higher than those heretofore experienced by the Servicer, as set forth
above under "The Portfolio of Mortgage Loans," and by the mortgage lending
industry in general.
DISTRIBUTION OF MORTGAGE RATES
RANGE OF AGGREGATE NUMBER AGGREGATE UNPAID % OF AGGREGATE
MORTGAGE RATES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------- ---------------- ----------------- -----------------
Total
DISTRIBUTION OF REMAINING TERMS TO MATURITY
RANGE OF NUMBER OF AGGREGATE UNPAID % OF AGGREGATE
MONTHS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------- ---------------- ----------------- -----------------
Total
<PAGE>
DISTRIBUTION OF PRINCIPAL BALANCES
RANGE OF NUMBER OF AGGREGATE UNPAID % OF AGGREGATE
PRINCIPAL BALANCES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------ -------------- ----------------- -----------------
Total
DEBT SERVICE COVERAGE RATIOS
RANGE OF DEBT SERVICE NUMBER OF AGGREGATE UNPAID % OF AGGREGATE
COVERAGE RATIOS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------ -------------- ----------------- -----------------
Total
GEOGRAPHIC DISTRIBUTION
NUMBER OF AGGREGATE UNPAID % OF AGGREGATE
STATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----- -------------- ----------------- -----------------
Total
[If the Mortgage Assets securing the Certificates of a Series include a
multifamily Mortgage Loan or Mortgage-Backed Security or a group of Mortgage
Loans or Mortgage-Backed Securities of a single obligor or affiliated obligors
representing: (a) 20% or more of the principal amount of such Certificates, the
financial statements of such obligor(s) will be included in accordance with Rule
3-14(a) of Regulation S-X; and (b) 10% or more but less than 20% of the
principal amount of such Certificates, information, including financial
information, sufficient for investors to assess the credit quality of the
obligor(s) will be included.
If the Mortgage Assets securing the Certificates of a Series include a
concentration of properties within regions, counties, or other subdivisions of a
state whose adverse economic conditions are greater than those of the state as a
whole, address such concentration in the prospectus supplement.
If the Mortgage Assets securing the Certificates of a Series include a
concentration of multifamily residential properties with brief or financially
troubled operating histories, such concentration will be discussed in the
prospectus supplement.]
Underwriting Standards
[The Company originates multifamily mortgage loans through a network of
approved correspondents; each correspondent is responsible for applying the
Company's standard loan underwriting guidelines and forwarding loan applications
to ___________________ only when guideline requirements concerning the borrower
and property are met. ___________________ verifies all data gathered by the
correspondent to ensure that guidelines are being applied in a consistent
manner.
The Company's underwriting guidelines (which were in effect at the time of
origination of the Mortgage Loans and were applied with respect to each of them)
are presented in detail in the ___________________ Approved Correspondent
Manual. In addition to listing the various documents that must be submitted to
___________________ by the correspondent, the guidelines focus on four major
components of the underwriting process:
1. Net Operating Income/Debt Service Coverage: ________________
requires that each property's net operating income exceed its debt service
by a factor of not less than _____. Net operating income is equal to gross
income (calculated using a current rent roll) less: (i) a vacancy factor of
not less than, generally, __%--or greater if the actual vacancy is greater
or if the appraisal (see below) uses a larger factor; and (ii) operating
expenses, including ___% management fee and a replacement reserve (____% of
adjusted gross income).
2. Appraisal/Loan-to-Value: ___________________ requires an
appraisal performed by an appraiser with a designation of the Society of
Real Estate Appraisers ("SREA"), Senior Real Property Appraiser ("SRPA") or
Member of Appraisal Institute ("MAI"); the appraiser must be independent
and approved by ___________________. The appraisal must use the three
traditional approaches to value and establish a current value for the
property such that the loan-to-value ratio does not exceed ____%. The
appraisal must also contain the following: location maps for the subject
and for the comparables, photographs of the subject and comparables, area
and neighborhood analysis, market analysis, site description and
information on current zoning and tax assessments.
3. Property Condition: The correspondent must inspect each
property to ensure that it is in acceptable physical condition. The
inspection focuses on: ongoing maintenance programs, common area upkeep,
laundry facility condition, mechanical systems and grounds maintenance.
4. Borrower Credit: ___________________ requires that a credit
investigation be completed for all prospective borrowers; the file must
include a credit report not more than 60 days old, three years of Federal
income tax returns and current financial statements.
Other important aspects of the Company's underwriting guidelines include:
(i) a requirement for a complete Phase I environmental report for each property,
(ii) a general prohibition against subordinate financing and (iii) a review of
the property's occupancy history.] [Describe any bulk acquisitions of Mortgage
Loans not underwritten in connection with the Company's program.]
Prepayment Provisions
The principal balance of any Mortgage Loan may be prepaid in whole or in
part upon the payment by the Mortgagor of: (a) interest accrued and unpaid on
the outstanding principal balance of the related note (the "Mortgage Note); (b)
all other sums due under the Mortgage Note and the Mortgage Loan; and (c) a
prepayment consideration [describe yield maintenance or prepayment charges].
In addition, if following the occurrence of any Event of Default (as
hereinafter defined) the Mortgagor shall tender payment of an amount sufficient
to satisfy the remaining sums due on the Mortgage Loan in whole or in part prior
to a foreclosure sale of the Mortgaged Property, such tender shall be deemed to
be a voluntary prepayment of the principal balance of the Mortgage Notes and the
Mortgagor shall, in addition to all sums due on the Mortgage Loan, be required
to pay the prepayment consideration.
Default Provisions
Each of the Mortgage Loans provides for certain events of default by the
Mortgagor ("Events of Default"). Upon the occurrence of any Event of Default the
remaining sums under the Mortgage Loan shall immediately become due and payable
and the Mortgagor will pay, from the date of such Event of Default, interest on
the unpaid principal balance of the Mortgage Note at the rate of interest (the
"Default Rate") equal to the greater of (i) __ above the applicable interest
rate on the Mortgage Note, or (ii) __% above the prime rate charged on corporate
loans or large U.S. money center banks and (b) the mortgagee shall have the
right to exercise any and all rights and remedies available at law and in
equity. If the Default Rate as calculated above is greater than the maximum rate
permitted by applicable law, then the Default Rate shall then be deemed to equal
to the maximum rate permitted by such applicable law.
Due-on-Sale and Due-on-Encumbrance Provisions
All the Mortgage Loans contain clauses requiring the consent of the
mortgagee to any sale or other transfer of the related Mortgaged Property with
the criteria for granting consent set forth in the related Mortgage Loan
documents and due-on-sale clauses entitling the mortgagee to accelerate payment
of a Mortgage upon any sale or other transfer of the related Mortgaged Property
without the consent of the Mortgagor. Furthermore, the Mortgage Loans contain
certain restrictions regarding further encumbrances on the Mortgaged Properties,
requiring the consent of the mortgagee to the creation of any other lien or
encumbrance on such Mortgaged Property and entitling the mortgagee to accelerate
payment of a Mortgage upon the imposition of any such additional lien or
encumbrance on such Mortgaged Property.
The Servicer, on behalf of the Owners of the Certificates, will be required
to exercise any right the Trustee may have as mortgagee of record of any such
Mortgage Loan to withhold its consent to any transfer or further encumbrance in
accordance with the general servicing standards described in the Agreement.
Hazard, Liability and Other Insurance
Each Mortgage requires the Mortgagor to keep the Mortgaged Property insured
against loss or damage by fire, flood and such other hazards, risks and matters,
including, without limitation, business interruption and/or rental loss, public
habituating and boiler damage and liability, as the mortgagee may from time to
time require in amounts required by the mortgagee, and shall pay the premiums
for such insurance as they become due and payable. All policies of insurance
(the "Policies") shall be issued by an insurer acceptable to the mortgagee and
be rated [A:V] by Best's Key Rating Guide and shall contain the standard New
York mortgagee non-contribution clause naming the mortgagee as the person to
which all payments made by such insurance company shall be paid. The Mortgagor
will assign and deliver the Policies to the mortgagee. Not later than thirty
(30) days prior to the expiration date of each of the Policies, the Mortgagor
will deliver evidence satisfactory to the mortgagee of the renewal of each of
the Policies.
The Servicer will be obligated to cause to be maintained for each Mortgage
Loan fire insurance with extended coverage (and, if applicable, federal flood
insurance) in an amount at least equal to the lesser of the current principal
balance of such Mortgage Loan and the replacement cost of the improvements which
are part of such property or, in lieu thereof, to maintain a blanket policy
insuring against hazard losses on the Mortgaged Properties, with a deductible
clause not in excess of a customary amount.
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the mortgage pool and the
Mortgaged Properties is based upon the mortgage pool as constituted at the close
of business on the Cut-Off Date, as adjusted for the scheduled principal
payments due on or before such date. Prior to the issuance of the Offered
Certificates, Mortgage Loans may be removed from the mortgage pool as a result
of incomplete documentation or non-compliance with representations and
warranties set forth in the Agreement, if the Depositor deems such removal
necessary or appropriate. A limited number of other mortgage loans may be
included in the mortgage pool prior to the issuance of the Offered Certificates.
A current report on Form 8-K will be available to purchasers of the Offered
Certificates and will be filed and incorporated by reference to the Registration
Statement together with the Agreement with the Securities and Exchange
Commission within fifteen days after the initial issuance of the Offered
Certificates. In the event Mortgage Loans are removed from or added to the
mortgage pool as set forth in the preceding paragraph, such removal or addition
will be noted in the current report on Form 8-K.
THE DEPOSITOR
The Depositor was incorporated in the State of Delaware on January 31, 1991
and is a wholly-owned subsidiary of ContiFinancial Corporation. The Depositor
maintains its principal executive offices at 277 Park Avenue, New York, New York
10172. Neither the Depositor, the Company nor any of their affiliates will
insure or guarantee distributions on the Certificates.
THE COMPANY
The Company, a Delaware limited liability company, is an affiliate of the
Depositor. The Company maintains its principal executive office at 277 Park
Avenue, New York, New York 10172.
THE SERVICER
[To be provided]
MASTER SERVICER
[To be provided]
SPECIAL SERVICER
[To be provided]
DESCRIPTION OF THE OFFERED CERTIFICATES
General
The Class A-1 will be available in minimum denominations of $___________
and integral multiples of $1,000 in excess thereof, except that one Certificate
of each class may be issued in any amount. The Class S-A Certificates will not
have a stated principal balance. The Class S-A Certificates will be issuable in
minimum Percentage Interests of ___% and integral multiples of ___% in excess
thereof. The Senior Certificates will be issued, maintained and transferred on
the book-entry records of DTC and its Participants as described below. The Class
B Certificates will be issuable in fully registered, certificated form in
denominations of $__________ and integral multiples in excess thereof and one
Class B Certificate evidencing an additional amount equal to the remainder of
the Original Certificate Principal Balance of such Class.
[Until Definitive Senior Certificates are issued, interest in such Classes
will be transferred on the book- entry records of DTC and its Participants. The
Class B Certificates may be transferred or exchanged, subject to certain
restrictions on the transfer of such Certificates to Plans (see "ERISA
Considerations" herein), at the offices of __________________ located at
_________________________________, without the payment of any service charges,
other than any tax or other governmental charge payable in connection therewith.
________________ will initially serve as registrar (in such capacity, the
"Certificate Registrar") for purposes of recording and otherwise providing for
the registration of the Offered Certificates and of transfers and exchanges of
the Class B and, if issued, the Definitive Senior Certificates.
Distributions on the Certificates
Distributions on the Certificates will be made on the ___ day of each
calendar month, or if such day is not a business day, the next succeeding
business day (each, a "Payment Date") commencing in __________ __, 199__, to
holders of record of the Certificates (the "Owners") as of the last day of the
calendar month immediately preceding the calendar month in which such Payment
Date occurs, whether or not such day is a business day (each, a "Record Date")
in an amount equal to the product of such Owner's Percentage Interest and the
amount distributed in respect of such Certificateholder's Class of such
Certificates on such Payment Date. The "Percentage Interest" represented by any
Offered Certificate will be equal to the percentage obtained by dividing the
Original Certificate Principal Balance of such Offered Certificate by the
Original Certificate Principal Balance of all Certificates of the same Class.
Book Entry Registration of the Senior Certificates
Each Class of the Senior Certificates will be represented by a single
certificate registered in the name of the nominee of The Depository Trust
Company (the "Clearing Agency"), [except that one Certificate of each Class of
the Class A Certificates may be issued in an amount of less than $1,000 and held
in fully registered definitive form directly by the applicable investor]. The
Clearing Agency will maintain book entry records of ownership, transfers and
pledges of such Certificates only in the names of its participants and indirect
participants (the "Clearing Agency Participants"), which include securities
brokers and dealers, banks and trust companies and clearing corporations and may
include certain other organizations. Prior to Book Entry Termination (as defined
below), Beneficial Owners who are not Clearing Agency Participants may transfer
and pledge their interests in the Offered Certificates, and exercise any other
rights and remedies of Certificateholders, only through Clearing Agency
Participants or other entities that maintain relationships with Clearing Agency
Participants. The Clearing Agency may charge its customary fee to Clearing
Agency Participants in connection with any such transfers and pledges. In
addition, prior to Book Entry Termination, distributions on the Offered
Certificates will be made to Beneficial Owners only through the Clearing Agency
and its Clearing Agency Participants. Consequently, Beneficial Owners may
experience some delay in the receipt of their payments. See "Risk Factors --
Book Entry Registration" and "Description of the Certificates - Book Entry
Registration" in the Prospectus.
The Senior Certificates will be issued in definitive, registered form to
Beneficial Owners or their nominees, and thereupon such Beneficial Owners will
become Certificateholders if, and only if, one of the following events shall
occur (any such event being referred to as "Book Entry Termination"): (i) the
Clearing Agency or the Depositor advises the Trustee in writing that the
Clearing Agency is no longer willing or able properly to discharge its
responsibilities as a clearing corporation with respect to the Senior
Certificates and the Depositor and the Trustee are unable to engage a qualified
successor to serve as the Clearing Agency, or (ii) the Clearing Agency, at the
direction of Beneficial Owners representing a majority of the outstanding
principal amount of the Senior Certificates, advise the Trustee in writing that
the continuation of a book entry system is no longer in the best interests of
Beneficial Owners, or (iii) the Depositor, at its option, advises the Trustee
that it elects to terminate the book entry system. Upon Book Entry Termination,
Beneficial Owners will become registered Certificateholders and will deal
directly with the Trustee with respect to transfers, notices and payments.
The Clearing Agency has advised the Depositor and the Trustee that, prior
to Book Entry Termination, the Clearing Agency will take any action permitted to
be taken by a Certificateholder under the Agreement only at the direction of one
or more Clearing Agency Participants to whom the Senior Certificates are
credited in an account maintained by the Clearing Agency. The Clearing Agency
has advised that it will take such action with respect to any principal amount
of the Senior Certificates only at the direction of and on behalf of Clearing
Agency Participants with respect to those principal amounts of such Senior
Certificates.
Issuance of the Senior Certificates in book entry form rather than as
physical Certificates may adversely affect the liquidity of such Senior
Certificates in the secondary market and the ability of Senior
Certificateholders to pledge them. In addition, because distributions on the
Senior Certificates will be made by the Trustee to the Clearing Agency and the
Clearing Agency will credit such distributions to the accounts of its
Participants, which will further credit them to the accounts of indirect
participants of the Senior Certificateholders such beneficial owners of the
Senior Certificates may experience delays in the receipt of such distributions.
Amounts of Distribution
On each Distribution Date, the Trustee will apply the aggregate of amounts
distributed in respect of the Lower Tier Interests on such Distribution Date in
the following order of priority:
(i) concurrently to the Owners of the Class A-1 Certificates,
Class A-1 Monthly Interest (as defined below) and to the Owners
of the Class S-A Certificates, Class S-A Monthly Interest, any
shortfall being allocated among the Class A-1 Certificates and
the Class S-A Certificates in proportion to their respective
amounts of Class A-1 Monthly Interest and Class S-A Monthly
Interest;
(ii) to the Owners of the Class A-1 Certificates, the Class A
Principal Distribution Amount until the Class A-1 Principal
Balance has been reduced to zero;
(iii) to the Owners of the Class B Certificates, the Class B
Monthly Interest;
(iv) to the Owners of the Class A-1 Certificates, any Unpaid
Delinquent Maturity Amount (as defined below) until the Class
A-1 Principal Balance has been reduced to zero;
(v) to the Owners of the Class B Certificates, the Class B
Principal Distribution Amount until the Class B Principal
Balance has been reduced to zero; and
(vi) sixth, to the Owners of the Class C Certificates, the
Class C Monthly Interest;
(vii) seventh, to the Owners of the Class C Certificates, the Class
C Principal Distribution Amount until the Class C Principal
Balance has been reduced to zero; and
(viii) eighth, to the Owners of the Class R Certificates, all
remaining Available Funds, if any.
In addition, on each Distribution Date, the Trustee shall withdraw from the
Prepayment Premium Account (as defined herein) an amount equal to the aggregate
of all Prepayment Premiums deposited therein during the previous calendar month
and shall distribute such amount (i) on each Distribution Date prior to the
Class A-1 Termination Date, (A) if such Distribution Date is prior to , to the
Owners of Class A Certificates, allocated ___% to the Class A-1 Certificates and
__% to the Class S-A Certificates, and (B) if such Distribution Date is after ,
solely to the Owners of Class A-1 Certificates, (ii) on the Class A-1
Termination Date, to the Holders of Class A-1 Certificates and the Class S-A
Certificates (in accordance with the allocations described in subclauses (a) and
(b) (as the case may be) of clause (i) above) and the Owners of [Class B]
Certificates in proportion to the distributions of principal made in respect of
the Class A-1 and Class B Certificates, respectively, on the Class A-1
Termination Date, to the Owners of Class [B Certificates].
"Monthly Interest" for the Class A-1, Class B and Class C Certificates for
any given Distribution Date is equal to one month's interest accrued at the
applicable Pass-Through Rate on the Certificate Principal Balance immediately
prior to such Distribution Date. Monthly Interest for the Class S-A Certificates
for any given Distribution Date is equal to the sum of (i) one month's interest
accrued at the Class S-A Pass-Through Rate on the Notional Principal Balance
immediately prior to such Distribution Date and (ii) any Unpaid Class S-A
Interest Shortfall (as defined herein).
The "Class Principal Balance" as to any Class of certificates other than
the Class S-A Certificates and the Residual Certificates, and as to any
Distribution Date, is the sum of (i) the applicable initial Class Principal
Balance thereof and (ii) the aggregate of all Interest Shortfalls for such Class
for previous Distribution Date, less all amounts distributed as principal of
such Class on previous Distribution Dates. The Class S-A Certificates and the
Residual Certificates have no Class Principal Balance.
An "Outstanding Mortgage Loan" is, as to any Distribution Date, a Mortgage
Loan which was not the subject of prepayment in full prior to the end of the
preceding calendar month, which did not become a Liquidated Mortgage Loan prior
to the end of such preceding calendar month, which was not repurchased by the
Company as a Defective Mortgage Loan on or prior to such Distribution Date or
which was not paid in full through the receipt of a Balloon Payment on or before
the related Determination Date.
The "Unpaid Principal Balance" is, as to any Mortgage Loan as of any
Distribution Date, the Cut-Off Date Principal Balance thereof, less (i) all
unscheduled payments by or on behalf of the Mortgagor allocable to principal
which were received prior to the end of the preceding calendar month; (ii) any
Balloon Payment or portion thereof received on or before the Determination Date
next preceding such Distribution Date; (iii) any Insurance Proceeds (other than
Liquidation Proceeds) applied in reduction of the principal balance of such
Mortgage Loan prior to the end of such preceding calendar month; (iv) the
principal component of any Monthly Payment which was due on the related Due Date
and received on or before the related Determination Date or, if delinquent on
such Determination Date, was included in a Monthly Advance made by the Servicer
in respect of such Distribution Date; (v) the aggregate of all REO Principal
Amortization Amounts prior to the end of such preceding calendar month; and (vi)
all amounts deemed to have been distributed to Holders of Class A-1 Certificates
on previous Distribution Dates with respect to such Mortgage Loans pursuant to
the definition of Unpaid Delinquent Maturity Amount.
The "Unpaid Delinquent Maturity Amount" is, with respect to any
Distribution Date, the aggregate of the Unpaid Principal Balances of all
Outstanding Mortgage Loans which had Maturity Dates on or before the preceding
Due Date and were delinquent as of the close of business on the related
Determination Date. For purposes of clause (vi) of the definition of "Unpaid
Principal Balance" any amounts distributed to Class A-1 Certificateholders on
account of an Unpaid Delinquent Maturity Amount will be allocated to particular
delinquent Outstanding Mortgage Loans in the chronological order of their
Maturity Dates, beginning with all such Outstanding Mortgage Loans with Maturity
Dates in the twenty-third preceding calendar month with any excess over the
Unpaid Principal Balances of such Outstanding Mortgage Loans being applied to
all such Outstanding Mortgage Loans with Maturity Dates in the __________
preceding calendar month and so forth.
An "Unpaid Principal Shortfall" is, as to any Distribution Date, the
amount, if any, by which the aggregate of the Principal Shortfalls for prior
Distribution Dates is in excess of the aggregate of the amounts distributed on
prior Distribution Dates pursuant to clause (iv) of the definition of Formula
Distribution Amount.
A Mortgage Loan becomes a "Liquidated Mortgage Loan" when the Servicer
determines that all amounts which it expects to recover from or on account of
such Mortgage Loan have been recovered.
Monthly Advances
In the event that a monthly payment on a Mortgage Loan has not been
received by the Servicer as of the close of business on the Determination Date
immediately preceding the related Distribution Date, the Servicer will be
obligated to advance, for deposit in the Certificate Account, the aggregate of
payments of principal (other than any Balloon Payment) and interest at the Loan
Rate (less the Servicing Fee Rate) on the Mortgage Loans that were due on the
related Due Date, less the aggregate amount of any such delinquent payments that
the Servicer has determined would constitute a nonrecoverable advance if made (a
"Monthly Advance"). If the Servicer determines that it is not obligated to make
the entire Monthly Advance because all or a lesser portion of such Monthly
Advance would not be recoverable from Insurance Proceeds, Liquidation Proceeds
or otherwise, the Servicer will deliver to the Trustee for the benefit of the
Certificateholders an officer's certificate setting forth the reasons for the
Servicer's determination. The Servicer will be entitled to be reimbursed from
the Certificate Account for all such Monthly Advances.
The obligation to make Monthly Advances with respect to any Mortgage Loan
shall continue until the earliest to occur of (i) payment thereof in full, (ii)
liquidation of the related Mortgaged Property and (iii) the purchase or
repurchase thereof from the Mortgage Trust pursuant to any applicable provision
of the Agreement.
If the rights and obligations of the Servicer under the Agreement are
terminated upon the occurrence of an event of default that remains uncured, the
Trustee will be the successor in all respects (with certain exceptions relating
to the repurchase of Mortgage Loans under certain circumstances) to the Servicer
in its capacity as servicer under the Agreement, including the obligation to
make all required Monthly Advances.
Subordination of the Subordinated Certificates
The rights of the Owners of the Subordinate Certificates to receive
distributions with respect to the Mortgage Loans will be subordinated to such
rights of the Owners of the Senior Certificates, in the case of the Class B
Certificates, and to the Owners of the Offered Certificates in the case of the
Class C Certificates. The subordination provided to the Senior Certificates by
the Class B Certificates and to the Class B Certificates by the Class C
Certificates is intended to enhance the likelihood of timely receipt by the
Owners of the respective Class of Certificates of the full amount of their
scheduled monthly payments and to afford such Owners protection against losses
resulting from Liquidated Mortgage Loans.
The protection afforded to the Owners of Senior Certificates by means of
the subordination of the Subordinate Certificates will be accomplished by the
preferential rights of such Owners to receive, prior to any distribution being
made on a Distribution Date in respect of the Subordinate Certificates, the
Class A-1 Monthly Interest and the Class S-A Monthly Interest, respectively, and
to the Class A-1 Certificateholders, the Class A Principal Distribution Amount.
The Class B Certificates will, however, receive the Class B Monthly Interest
before the Class A-1 Certificateholders receive any Unpaid Delinquent Maturity
Amount. The Class B Certificates will be entitled to the Class B Principal
Distribution Amount only after such time as the Class A-1 Principal Balance has
been reduced to zero through payment to the Class A-1 Certificateholders of the
Formula Principal Distribution Amount and then any Unpaid Delinquent Maturity
Amount.
Loss realized on the Mortgage Loans will not be allocated to the Owners of
the Class A-1 Certificates until the principal balances of the Class C
Certificates and then the Class B Certificates have both been reduced to zero.
Any losses allocated to the Class A-1 Certificates will be allocated pro rata to
all Owners of the Class A-1 Certificates. Any losses allocated to the Class B
Certificates will be allocated pro rata to all Owners of the Class B
Certificates.
Reports to Holders of the Certificates
The Trustee is required to prepare and mail to the Servicer, to each Owner
of a Class A-1, Class S-A and Class B Certificate a statement (a "Monthly
Report") setting forth:
(i) the Available Funds for such Distribution Date, including,
stated separately, any Monthly Advance component thereof;
(ii) the aggregate of all Principal Prepayments received during
the previous calendar month together with, stated
separately, the aggregate of all REO Principal Amortization
Amounts for such preceding calendar month;
(iii) all previously undistributed Balloon Payments or portions
thereof received on or before the preceding Determination
Date;
(iv) the aggregate Unpaid Principal Balances of all Mortgage
Loans and Foreclosed Mortgage Loans which became Liquidated
Mortgage Loans during the previous calendar month;
(v) the aggregate Unpaid Principal Balances of all Mortgage
Loans which are required to be purchased by the Company
prior to the related Distribution Date pursuant to the
Agreement;
(vi) the amount of all Prepayment Premiums received during
the previous calendar month;
(vii) the Formula Principal Distribution Amount for such
Distribution Date;
(viii) the Class A-1 Monthly Interest for such Distribution Date;
(ix) the Class S-A Monthly Interest for such Distribution Date;
(x) the Class B Monthly Interest for such Distribution Date;
(xi) the Class C Monthly Interest for such Distribution Date;
(xii) the Unpaid Delinquent Maturity Amount for such
Distribution Date;
(xiii) the Class A-1 Distribution Amount (exclusive of any
distribution from the Prepayment Premium Account) for such
Distribution Date;
(xiv) the Class B Distribution Amount for such Distribution Date;
(xv) the Class S-A Distribution Amount for such Distribution
Date;
(xvi) the Class C Distribution Amount for such Distribution Date;
(xvii) any Interest Shortfall for the Class A-1 or Class B
Certificates, dated separately;
(xviii) any Unpaid Class S-A Interest Shortfall immediately
following such Distribution Date together with the amount of
any Class S-A Interest Shortfall for such Distribution Date;
(xix) the Class A-1 Principal Balance immediately following
such Distribution Date;
(xx) the Class B Principal Balance immediately following
such Distribution Date;
(xxi) the Class C Principal Balance immediately following
such Distribution Date;
(xxii) any Unpaid Principal Shortfall for such Distribution
Date and any remaining Unpaid Principal Shortfall after
giving effect to such distribution;
(xxiii) the amount and allocation of any distribution from
the Prepayment Premium Account on such Distribution Date;
and
(xxiv) the Pool Principal Balance for the following Distribution
Date;
(xxv) the number, percentage and aggregate unpaid principal
balances of Mortgage Loans delinquent (a) 30 to 59 days and
(b) 60 days or more (including Foreclosed Mortgage Loans),
respectively, as of the end of the preceding calendar month
(separately stating the aggregate unpaid principal balances
of Foreclosed Mortgage Loans);
(xxvi) with respect to any Mortgage Loan included in (xxv) above,
the number of each such Mortgage Loan as set forth in the
Agreement and the Unpaid Principal Balance of each such
Mortgage Loan;
(xxvii) the number and aggregate principal balances of any REO
Properties;
(xxviii) with respect to each Mortgage Loan that has become an
REO Property included in (xxvii) above, the number of such
Mortgage Loan as set forth in the Agreement and the Unpaid
Principal Balance of each such REO Property;
(xxix) with respect to each Mortgage Loan that became a
Liquidated Mortgage Loan during the prior calendar month,
the number of such Mortgage Loan, as set forth in Exhibit
[G] to the Agreement, the Net Liquidation Proceeds with
respect to each such Mortgage Loan and the Unpaid Principal
Balance of each such Mortgage Loan; and
(xxx) such other information as is required by the Code and
regulations thereunder to be made available to Owners of the
Class A-1, Class S-A, Class B Certificates and Class C
Certificates.
The Trustee shall be under no duty to recalculate or verify the information
(set forth above in subclauses (i) through (vi) and (xxiv) through (xxiii))
provided to it by the Servicer in each Servicing Certificate and shall be
protected in relying upon such information in connection with the calculation of
all amounts and preparation of all reports and statements required to be
prepared by it pursuant to this Agreement. The Servicer shall indemnify the
Trustee for any loss, expense or cost incurred by it as a result of any such
reliance which is caused by the Servicer's gross negligence, willful misconduct
or bad faith.
In the case of information furnished pursuant to subclauses (viii), (x),
(xiii), (xiv), (xii), (xxv) and (xxvi) above, the amounts shall be expressed as
a dollar amount per Class A-1 Certificate and Class B Certificate, as
applicable, with a $1,000 denomination. In the case of the information furnished
pursuant to subclauses (ix), (xv) and (xix) above, the amount shall be expressed
as a dollar amount per Class S-A Certificate with a 100 Percentage Interest. Any
such statement furnished to an Owner of a Class A-1 Certificate, Class S-A
Certificate or Class B Certificate may, if requested by the Trustee, omit
information pertinent only to Certificates of Classes not held by such Owner.
Within 90 days after the end of each calendar year, the Trustee shall
prepare and mail to each Person who at any time during the calendar year was the
Owner of a Class A-1 Certificate, Class S-A Certificate, Class B Certificate or
Class C Certificate, a statement containing the information set forth in the
subclauses mentioned in the preceding paragraph, as applicable, aggregated for
such calendar year or, in the case of each Person who was an Owner of a
Certificate for a portion of such calendar year, setting forth such information
for each month thereof for the portion of the year during which such Person was
an Owner of a Certificate of such Class. Such obligation of the Trustee shall be
deemed to have been satisfied to the extend that substantially comparable
information shall be provided by the Trustee pursuant to any requirements of the
Code.
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
The yield to maturity on the Offered Certificates will be affected by the
rate of principal payments on the Mortgage Loans including, for this purpose,
prepayments, which may include amounts received by virtue of repurchase,
condemnation, insurance or foreclosure. The rate of principal payments on the
Offered Certificates will correspond to the rate of principal payments
(including prepayments) on the Mortgage Loans. Principal prepayments may be
influenced by a variety of economic, geographic, demographic, social, tax, legal
and other factors. In general, if prevailing interest rates fall significantly
below the interest rates on the Mortgage Loans, the Mortgage Loans are likely to
be subject to higher prepayments than if prevailing rates remain at or above the
interest rates on such Mortgage Loans. Conversely, if prevailing interest rates
rise above the interest rates on such Mortgage Loans, the rate of prepayment
would be expected to decrease. Other factors affecting prepayment of the
Mortgage Loans include the availability of mortgage financing, changes in tax
laws (including depreciation benefits), changes in Mortgagors' net equity in the
Mortgaged Properties, servicing decisions and prevailing general economic
conditions. The Mortgage Loans may be prepaid at any time subject to the payment
of a prepayment penalty. See "The Mortgage Trust--Prepayment Provisions" herein.
The effective yield to holders of the Offered Certificates will differ from
the yield otherwise produced by the applicable Pass-Through Rate and purchase
prices of such Offered Certificates because principal and interest distributions
will not be payable to such holders until at least the ___th day of the month
following the month of accrual (without any additional distribution of interest
or earnings thereon in respect of such delay).
If the purchaser of an Offered Certificate offered at a discount from its
initial principal amount calculates its anticipated yield to maturity based on
an assumed rate of payment of principal that is faster than that actually
experienced on the Mortgage Loans, the actual yield to maturity will be lower
than that so calculated. Conversely, if the purchaser of an Offered Certificate
offered at a premium calculates its anticipated yield to maturity based on an
assumed rate of payment of principal that is slower than that actually
experienced on the Mortgage Loans, the actual yield to maturity will be lower
than that so calculated.
The timing of changes in the rate of prepayments on the Mortgage Loans may
affect an investor's actual yield to maturity, even if the average rate of
principal payments is consistent with an investor's expectation. In general, the
earlier a prepayment of principal of the Mortgage Loans, the greater the effect
on an investor's yield to maturity. The effect on an investor's yield of
principal payments occurring at a rate higher (or lower) than the rate
anticipated by the investor during the period immediately following the issuance
of the Offered Certificates may not be offset by a subsequent like decrease (or
increase) in the rate of principal payments. An investor must make an
independent decision as to the appropriate prepayment scenario to be used in
deciding whether to purchase the Offered Certificates.
Voluntary prepayments of a Mortgage Loan can be made only upon the payment
by the Mortgagor of a prepayment penalty based on a [yield maintenance
formula/predetermined schedule]. See "The Mortgage Trust--Prepayment Provision"
for a description of such formula. The payment of such prepayment penalties by
Mortgagors should have the effect of reducing the risk of rapid rates of
voluntary prepayments. If, however, such penalties were to be uncollectible for
any reason, investors would have to bear the risk that prepayments on the
Mortgage Loans, and therefore of principal payments on the Offered Certificates,
could coincide with periods of low prevailing interest rates. In that event, the
effective interest rates on securities in which an investor might choose to
reinvest amounts received as principal payments on such investor's Certificate
might be lower than the applicable Pass-Through Rate.
Conversely, slow rates of prepayments on the Mortgage Loans, and therefore
of principal payments on the Offered Certificates, may coincide with periods of
high prevailing interest rates. During such periods, the amount of principal
payments available to an investor for reinvestment at such high prevailing
interest rates may be relatively low.
Many of the Mortgage Loans contain "due-on-sale" provisions, and the
Agreement obligates the Servicer, with certain exceptions, to enforce such
"due-on-sale" provisions.
Because amounts distributable to Owners of the Class S-A Certificates
consist of interest payable on the Mortgage Loans, the yield to maturity of the
Class S-A Certificates will be sensitive to the repurchase and default
experience of the Mortgage Loans, and prospective investors should fully
consider the associated risks, including the risk that such investors may not
fully recover their initial investment. In particular, investors in the Class
S-A Certificates should be aware that the Mortgage Loans may be required to be
repurchased in the event of certain breaches of representations and warranties
relating to certain events. [Other calamity calls] [With respect to voluntary
prepayments, however, Class S-A Certificateholders will be allocated a
percentage of the prepayment penalties discussed above. See also "Description of
the Certificates--Amounts of Distribution."]
Weighted Average Life of the Class A-1 and Class B Certificates
The following information is given solely to illustrate the effect of
prepayments of the Mortgage Loans on the weighted average lives of the Class A-1
and Class B Certificates under the stated assumptions and is not a prediction of
the prepayment rate that might actually be experienced by the Mortgage Loans.
"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 life of the
Class A-1 and Class B Certificates will be influenced by the rate at which
principal payments on the Mortgage Loans are paid, which may be in the form of
scheduled amortization or prepayments (for this purpose, the term "prepayment"
includes prepayments, condemnation, insurance and liquidations due to default).
Prepayments on mortgage loans are commonly measured relative to a prepayment
standard or model. In the model used in this Prospectus Supplement, the
"constant prepayment rate" ("CPR") represents an assumed annualized rate of
prepayment relative to the then outstanding principal balance of a pool of new
mortgage loans.
Based on the foregoing assumptions, the tables below indicate the weighted
average life of the Class A-1 and Class B Certificates, assuming that the
Mortgage Loans prepay according to the following CPR prepayment scenarios:
[CPR PREPAYMENT SCENARIOS
SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V
- ---------- ----------- ------------ ----------- ----------
Neither the CPR 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.]
WEIGHTED AVERAGE LIVES
Class A-1
CPR WEIGHTED EARLIEST RETIREMENT
PREPAYMENT AVERAGE LIFE (YEARS) DATE (1)
- ---------- -------------------- -------------------
Class B
CPR WEIGHTED EARLIEST RETIREMENT
PREPAYMENT AVERAGE LIFE (YEARS) DATE (1)
- ---------- -------------------- -------------------
- -------------------
(1) Assuming early termination or the Mortgage Loan Groups when the
aggregate Loan Balances decline to a level equal to 10% of the aggregate
principal balance of the Mortgage Loans as of the Cut-Off Date.
There is no assurance that prepayments will occur, or, if they do occur,
that they will occur at any constant percentage of CPR or in accordance with any
of the aforementioned scenarios.
Payment Delay Feature of Class A-1 and Class B Certificates
The effective yield to the Owners of the Class A-1 and Class B Certificates
will be lower than the yield otherwise produced by the respective Pass-Through
Rate and the purchase price of such Certificates because principal and interest
distributions will not be payable to such Certificateholders until at least the
twenty-fifth day of the month following the month of accrual (without any
additional distributions of interest or earnings thereon in respect of such
delay).
Yield Sensitivity of the Class S-A Certificates
Because amounts distributable to Class S-A Certificateholders consist
entirely of interest, the yield to maturity of the Class S-A Certificates will
be extremely sensitive to the repurchase, prepayment and default experience of
the Mortgage Loans, and prospective investors should fully consider the
associated risks, including the risk that such investors may not fully recover
their initial investment. In particular, investors in the Class S-A Certificates
should be aware that Depositor may cause a termination of the Trust when the
aggregate outstanding principal balance of the Mortgage Loans has declined to
___% or less of the aggregate principal balance of the Mortgage Loans as of the
Cut-Off Date.
The following table indicates certain relationships between the assumed
purchase price and the yield to maturity on the Class S-A Certificates, stated
on a corporate bond equivalent basis. Such table also indicates such
relationships on the assumption that (a) the Trust is not terminated by the
Depositor pursuant to its __% a "clean-up call", and (b) the Trust is so
terminated.
Sensitivity of the Class S-A Certificates to Prepayments
PRE-TAX YIELD TO MATURITY
PREPAYMENt 0% 22 47 50 55
SCENARIO CPR CPR CPR CPR CPR
- ---------- --- --- --- --- ---
I
II
III
IV
V
On the basis of approximately __% CPR, and a purchase price of ____%, no
termination of the Trust by the Depositor pursuant to its __% "clean-up call"
and the other assumptions described above, the pre-tax yield to maturity of the
Class S-A Certificates would be approximately __%. If the actual prepayment rate
were to exceed approximately __% CPR based on such assumptions, an investor in
the Class S-A Certificates as to which such percentage of CPR was exceeded would
not fully recover the initial purchase price thereof.
On the basis of approximately ___% CPR, a purchase price of _______%,
termination of the Trust by the Depositor pursuant to its ___% "clean-up call"
and the other assumptions described above, the pre-tax yield to maturity of the
Class S-A Certificates would be approximately ___%. If the actual prepayment
rate were to exceed approximately ___% CPR, on such assumptions, an investor in
the Class S-A Certificates as to which such percentage of CPR was exceeded would
not fully recover the initial purchase price thereof.
It is highly unlikely that the Mortgage Loans will prepay at a constant
rate until maturity or that all of the Mortgage Loans will prepay at the same
rate. In fact, Mortgage Loans are expected to prepay at different rates.
The yields set forth in the preceding tables were calculated by determining
the monthly discount rates which, when applied to the assumed stream of cash
flow to be paid on the Class S-A Certificates, would cause the discounted
present value of such assumed cash flows to equal the assumed purchase price of
such Class S-A Certificates and by converting such monthly rates to corporate
bond equivalent rates. Such calculations do not take into account variations
that may occur in the interest rates at which investors may be able to reinvest
funds received by them as distributions on the Class S-A Certificates and
consequently do not purport to reflect the return on any investment in the Class
S-A Certificates when such reinvestment rates are considered.
The Mortgage Loans will not necessarily have the characteristics assumed
above, and there can be no assurance the (i) the Mortgage Loans will prepay at
any of the rates shown in the table or at any other particular rate or will
prepay proportionately, (ii) the pre-tax yield on the Class S-A Certificates
will correspond to any of the pre- tax yields shown above or (iii) the aggregate
purchase price of the Class S-A Certificates will be equal to the purchase price
assumed.
Scheduled Final Distribution Date. The Scheduled Final Distribution Date
for the Class S-A Certificates is ___________ __, 200_.
DESCRIPTION OF THE POOLING AND SERVICING AGREEMENT
The Certificates will issued pursuant to the Pooling and Servicing
Agreement to be dated as of the Closing Date (the "Agreement"). The following
summaries describe certain provisions of the Agreement which are not otherwise
described elsewhere in this Prospectus Supplement. The summaries do not purport
to be complete and are subject to and qualified in their entirety by reference
to, the provisions of the Agreement. Wherever particular defined terms used in
the Agreement are referred to in this Prospectus Supplement, such defined terms
are hereby incorporated herein by reference.
The Mortgage Trust will consist of, to the extent provided in the
Agreement, (i) the Mortgage Loans that from time to time are subject to the
Agreement, and the Additional Collateral (as defined below), (ii) such assets as
shall from time to time be identified as deposited in the Certificate Account or
Prepayment Premium Account, in accordance with the Agreement, (iii) property
which secured a Mortgage Loan and which has been acquired by foreclosure or
deed-in-lieu of foreclosure.
Assignment of the Mortgage Loans
At the time of the initial issuance of the Certificates, the Depositor will
assign all its right, title and interest in and to the Mortgage Trust (including
the Mortgage Loans, [letters of credit with respect to certain Mortgage Loans]
and a collateral deposit account with respect to a certain Mortgage Loan (such
letters of credit and collateral deposit account are referred to hereafter as
the "Additional Collateral") to the Trustee, including all principal and
interest received by the Depositor on or with respect to the Mortgage Loans
after the Cut-Off Date (other than payments of interest and principal due on the
Mortgage Loans on or before the Cut-Off Date), together with all its right,
title and interest in and to the proceeds of any related insurance policies. The
Trustee, concurrently with such assignment, will declare that it holds and will
hold such rights and interest for the exclusive use and benefit of the present
and future Owners of the Certificates, other than the Class RL Certificates.
Each Mortgage Loan will be identified in the Mortgage Loan Schedule to the
Agreement. The Mortgage Loan Schedule includes information as to the Cut-Off
Date principal balance of each Mortgage Loan, the Loan Rate, the stated maturity
date of the Mortgage Loan and the name of the Mortgagor and address of the
Mortgaged Property.
The Depositor is obligated to deliver and assign to the Trustee at the
Closing Date, the Mortgage Notes, the Mortgages and certain other documents in
respect of the Mortgage Loans (collectively, the "Mortgage Files") and the
Additional Collateral. By the Closing Date, the Trustee will review the Mortgage
Files (or copies thereof) in accordance with the Agreement and if any document
required to be included in any Mortgage File is found to be defective in any
material respect and such defect is not corrected or cured by the Closing Date,
the affected Mortgage Loan will not be included in the Mortgage Trust.
If (i) a document constituting a part of any Mortgage File is defective,
(ii) an Assignment of Mortgage is not recorded as required or (iii) any
representation, warranty or covenant to a Mortgage Loan as made by the Company
to the Depositor in connection with the sale of the Mortgage Loans to the
Depositor is breached, thereby materially and adversely affecting the interests
of the Owners of the Certificates in such Mortgage Loan (any such Mortgage Loan
being a "Defective Mortgage Loan"), the Company will be required to repurchase
the related Mortgage Loan (including any property acquired in respect thereof
and any insurance policy or insurance proceeds with respect thereto) from the
Trustee at a price equal to the Unpaid Principal Balance of the Mortgage Loan as
of the Distribution Date upon which the proceeds of the repurchase would be
distributed to Certificateholders, together with accrued and unpaid interest at
the Mortgage Loan's Loan Rate (less the Servicing Fee Rate) for the calendar
month preceding the date of repurchase (the "Purchase Price"). Upon receipt by
the Trustee of written notification of any such repurchase, the Trustee will
execute and deliver an instrument of transfer or assignment necessary to vest in
the legal and beneficial ownership of such Mortgage Loan (including any property
acquired in respect thereof or proceeds of any insurance policy with respect
thereto). The obligation of the Company to repurchase any such Mortgage Loan
shall be the sole remedy available to the Owners of the Certificates or the
Trustee, on behalf of the Owners, against the Company under the Agreement.
Notwithstanding the foregoing, in the case of any repurchase of a Mortgage
Loan that would result in the realization of a gain by the Mortgage Trust or
Trust Fund, the Company will not be required to repurchase such Mortgage Loan
unless the Trustee has received an opinion of counsel to the effect that such
repurchase will not be subject to tax as a result of being deemed a "prohibited
transaction" under Section 860F(a)(2) of the Code and a certificate from the
Company to the effect that such repurchase will not give rise to net income
taxable under Section 860F(a)(1) of the Code. The Company will use its
reasonable best efforts to obtain such opinion and deliver such certificate. In
the absence of such opinion or certificate, the Company will not be required to
so repurchase any Mortgage Loan unless there is an actual or imminent default
with respect thereto or unless such breach adversely affects the enforceability
of such Mortgage Loan.
Collection and Other Servicing Procedures
The Servicer is required to service the Mortgage Loans, subject to the
terms of the Mortgage Loans themselves, pursuant to the Agreement and the
requirements of applicable law, in the same manner in which it services mortgage
loans for its own portfolio that are comparable to the Mortgage Loans, giving
due consideration to customary and usual standards of practice of prudent
institutional multifamily mortgage lenders and loan services utilized with
respect to comparable mortgage loans (the "Servicing Standard"). The Servicer
will make reasonable efforts to collect all payments called for under the
Mortgage Loans and will, consistent with the Agreement, follow such collection
procedures as are customary to the servicing of mortgage loans in its servicing
portfolio which are comparable to the Mortgage Loans. Consistent with the above,
the Servicer may, in its discretion, waive any late payment charge in respect of
a late Mortgage Loan payment or any other administrative fee.
The Servicer may extend the Maturity Date of any Mortgage Loan without the
consent of the Trustee or the Owners of the Certificates, subject to the
following conditions: (i) a determination must be made that a Balloon Payment
default is imminent and that the extension of the Maturity date is reasonably
likely to produce a greater recovery than liquidation of the related Mortgage
Loan; (ii) any such extension will be for a period of not greater than [36]
months; and (iii) prior to granting such extension, the Servicer must determine:
(a) that no deferred maintenance exists; (b) the ratio of the net income from
the operation of the Mortgaged Property to debt service on the Mortgage Loan is
not less than to; (c) no Mortgage Loan payment due during the preceding 12
months had been more than 30 days delinquent; and (d) the related mortgagor has
made a reasonable effort to obtain new financing in an amount sufficient to
enable payment of the Balloon Payment.
The Servicer will not permit the placement of a subsequent senior mortgage
on any Mortgaged Property.
In any case in which a Mortgaged Property has been or is about to be
conveyed by the Mortgagor, the Servicer may not permit an assumption of the
related Mortgage Loan. If the Servicer, however, is prevented from enforcing any
such clause or any such clause, by its terms, is not operable, the Servicer is
authorized to take or enter into an assumption and modification agreement with
the person to whom such Mortgaged Property has been or is about to be conveyed,
pursuant to which such person becomes liable under the Mortgage Note and the
Mortgagor remains liable thereon or, if the Servicer finds it appropriate, is
released from liability thereon. In respect of transfers or proposed transfers
not covered by the above guideline, the Servicer will exercise its right to
accelerate the maturity of the related Mortgage Loan and require that the
principal balance thereof be paid in full. Any fee collected by the Servicer for
entering into any such agreement will be retained by the Servicer as additional
servicing compensation.
In addition, if Mortgage Loans contain due-on-encumbrance clauses or
require the consent of the holder of the Mortgage Loan to the creation of any
subordinate lien or encumbrance on the Mortgaged Property, the Servicer, on
behalf of the Trustee, will exercise any right it may have to accelerate the
payment of such Mortgage Loans upon, or to withhold its consent to, the creation
of such liens or encumbrances.
[The Servicer is not required to establish any escrow account into which it
will deposit escrow payments from Mortgagors under the Mortgages for the payment
of taxes, insurance premiums, assessments or similar items.]
Payments on Mortgage Loans; Deposits to Certificate Account and Prepayment
Premium Account
The Trustee will establish and maintain in the name of the Trustee a
separate account (the "Certificate Account") for the benefit of the Owners of
the Certificates. The Certificate Account will be required to be an Eligible
Account (described below). The Servicer shall be required to remit to the
Trustee for deposit into the Certificate Account, daily, within one Business Day
of receipt thereof:
(i) all payments of interest on the Mortgage Loans
(net of the related Monthly Servicing Fee with respect to each
such Mortgage Loan which was an Outstanding Mortgage Loan as of
the preceding Distribution Date);
(ii) all payments of principal received in respect of
the Mortgage Loans;
(iii) the aggregate of all purchase prices paid by
the Company for the purchase of any Defective Mortgage Loan:
(iv) all cash ("Liquidation Proceeds") received in
connection with the liquidation of a Liquidated Mortgage Loan net
of expenses ("Liquidation Expenses") of the Servicer in
connection with such liquidation (such net liquidation proceeds
being referred to herein as "Net Liquidation Proceeds");
(v) the aggregate of any insurance proceeds received
in respect of a Mortgaged Property (net of amounts covering the
related reasonable expenses of the Servicer) that are not
Liquidation Proceeds and are applied to principal or interest on
the related Mortgage Loan;
(vi) any amounts required to be deposited pursuant to
the Agreement in connection with any property ("REO Property")
acquired by the Mortgage Trust through foreclosure or deed in
lieu of foreclosure;
(vii) any amounts required to be deposited pursuant
to the Agreement in connection with the application of
co-insurance clauses, flood damage to REO Properties and blanket
policy deductibles; and
(viii) all advances made by the Servicer with respect
to payments of principal (other than Balloon Payments) and
interest on the Mortgage Loans that were due on the related Due
Date and not received as of the close of business on the
Determination Date preceding the related Distribution Date, less
the aggregate amount of any such delinquent payments that would
constitute a Monthly Advance.
Payments and collections that do not constitute Available Funds (e.g.,
assumption fees, late fees or other administrative charges) will not be
deposited in the Certificate Account and will be retained by [the Servicer as
additional servicing compensation]. The Servicer may, from time to time, direct
the Trustee to make withdrawals from the Certificate Account referred to above,
to make reimbursement of certain expenses to the Servicer.
Trustee will establish and maintain, on behalf of the Certificateholders, a
trust account (the "Prepayment Premium Account") in which shall be deposited any
premium or yield maintenance payment by a Mortgagor with respect to a related
Mortgage Loan in connection with a Principal Prepayment (a "Prepayment
Premium"). The Servicer shall remit to the Trustee for deposit into the
Prepayment Premium Account, daily, within one Business Day of receipt thereof
from subservicers, all Prepayment Premiums received by it.
Any funds on deposit in the Certificate Account and Prepayment Premium
Account may be invested in Permitted Investments. Permitted Investments are
specified in the Agreement as including certain federal government obligations
and other highly rated obligations. Any net investment income from such
Permitted Investments will be for the benefit of [the Servicer as part of its
servicing compensation].
Hazard Insurance
The Servicer is required to cause to be maintained for each Mortgaged
Property a fire insurance policy with extended perils coverage which contains a
standard mortgagee's clause in an amount at least equal to the lesser of (a) the
replacement cost of the improvements on such Mortgaged Property or (b) the
current principal balance of such Mortgage Loan. As set forth above, all amounts
collected by the Servicer under any hazard policy (except for amounts to be
applied to the restoration or repair of the Mortgaged Property or released to
the borrower in accordance with the Servicer's normal servicing procedures or
the terms of the Mortgage Loan), to the extent they constitute Net Liquidation
Proceeds or insurance proceeds, will ultimately be deposited in the Certificate
Account. The ability of the Servicer to assure that hazard insurance proceeds
are appropriately applied may be dependent on its being named as an additional
insured under any hazard insurance policy, or upon the extend to which
information in this regard is furnished to the Servicer by a borrower. The
Agreement provides that the Servicer may satisfy its obligation to cause hazard
policies to be maintained by maintaining a blanket policy issued by an insurer
acceptable to the Rating Agency and fire insurance with extended perils coverage
on the Mortgage Loans. If such blanket policy contains a deductible clause, the
Servicer is obligated to deposit in the Certificate Account the sums which would
have been deposited therein but for such clause.
If the properties securing the Mortgage Loans have appreciated in value and
if the amount of hazard insurance maintained on the improvements securing the
Mortgage Loans were to decline as the principal balances owing thereon
decreased, hazard insurance proceeds could be insufficient to restore fully the
damaged property in the event of a partial loss. See "Description of the Offered
Certificates -- Subordination of the Subordinate Certificates" above for a
description of the protection afforded to holders of the Class A Certificates
and, to a lesser extent, the Class B Certificates against losses occasioned by
hazards which are otherwise uninsured against (including losses caused by the
application of the co-insurance clause described in the preceding paragraph).
If the protection afforded the Owners of the Class B Certificates by the
subordination of the Class C Certificates is exhausted, and if a borrower
defaults on his obligations to make payments on a Mortgage Loan, the Owners of
the Class B Certificates will bear all risk of loss resulting from hazard losses
not covered by hazard insurance. Once the Class Principal Balance is reduced to
zero, all such remaining losses will be by the Owners of the Class A
Certificates.
Realization Upon Defaulted Mortgage Loans
The Servicer will foreclose upon or otherwise comparably convert the
ownership of Mortgaged Properties securing such of the Mortgage Loans as come
into default when, in accordance with applicable servicing procedures under the
Agreement, no satisfactory arrangements can be made for the collection of
delinquent payments and the Servicer determines that such action is in the best
economic interest of the Certificateholders. 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 the Servicer's multifamily
mortgage loan servicing activities and with the Servicing Standard, provided the
Servicer will not expend its own funds in connection foreclosure or other
conversion, correction of a default on a senior mortgage or restoration of any
property unless such foreclosure, correction or restoration is determined to be
in the best economic interest of the Trust. Any Mortgaged Property so acquired
by the Mortgage Trust is required to be disposed of in accordance with
applicable federal income tax law and regulations and consistent with the status
of the Trust Fund and the Mortgage Trust as REMICs, which regulations currently
require that such disposition occur within two years of the acquisition. The
Agreement will provide that the Servicer, acting on behalf of the Trust, may not
acquire title to a Mortgaged Property or take over its operation unless the
Servicer has previously determined, based on a report prepared by an independent
person who regularly conducts environmental audits, that the Mortgaged Property
is in compliance with applicable environmental laws or that it would be in the
best economic interest of the Trusts to take the actions necessary to comply
with such laws. [Special Servicer requirements.]
Servicing and Other Compensation and Payment of Expenses
The principal servicing compensation (the "Servicing Fee") to be paid to
the Servicer in respect of its servicing activities relating to the Certificates
will be paid to it with respect to each Distribution Date by withholding from
funds to be deposited into the Certificate Account out of collections on the
Mortgage Loans in an amount equal to, as to each Mortgage Loan, one-twelfth of
the product of (i) the rate set forth in the Mortgage Loan Schedule (the
"Servicing Fee Rate") and (ii) the Unpaid Principal Balance of such Mortgage
Loan as of such Distribution Date. All assumption fees, late payment charges and
extension and other administrative charges, to the extent collected from
borrowers, will be [retained by the Servicer]. The amounts of late charges are
limited by state law and range from __% to __% of the late monthly payment.
[Assumption fees range from __% to __% of the outstanding amount of the Mortgage
Loan.]
The Servicer will pay certain ongoing expenses associated with the Trust
and incurred by it in connection with its responsibilities under the Agreement,
including, without limitation, payment of the fees and disbursements of the
Trustee, any custodian appointed by the Trustee and any paying agent. In
addition, as indicated in the preceding section, the Servicer will be entitled
to reimbursement for certain expenses incurred by it in connection with
defaulted Mortgage Loans and in connection with the restoration of Mortgaged
Properties, such right of reimbursement being prior to the rights of
Certificateholders to receive any related insurance proceeds or Liquidation
Proceeds.
Evidence as to Compliance
On or before __________ in each year, beginning with __________, 199__, the
Servicer at its expense is required to cause a firm of independent public
accountants to furnish a statement to the Trustee to the effect that such firm
has examined, for the preceding calendar year, certain documents and records
related to the servicing of mortgage loans under pooling and servicing
agreements (including the Agreement) substantially similar to the Agreement and
such examination, which as been conducted substantially in compliance with the
Uniform Single Audit Program for Mortgage Bankers, has disclosed no items of
noncompliance with the provisions of the Agreement which, in the opinion of the
firm, are material, except for such items as will be referred to in the report.
The Agreement will also provide for delivery (on or before __________ in
each year, commencing with __________, 199__) to the Trustee of an annual
statement signed by an officer of the Servicer to the effect that the Servicer
has fulfilled its material obligations under the Agreement throughout the
preceding year.
Certain Matters Regarding the Servicer
The Agreement will provide that the Servicer may not resign from its
obligations and duties thereunder unless (i) its duties thereunder are no longer
permissible under applicable law or (ii) the Servicer no longer wishes to be
Servicer and has proposed a successor Servicer that (a) is reasonably acceptable
to the Trustee (b) whose appointment will not result in a reduction of the
rating assigned to the Offered Certificates or the Class C Certificates and (c)
is approved in writing by Owners of Percentages Interest aggregating not less
than 50% of each Class of Certificate then Outstanding.
The Agreement will also provide that neither the Servicer, nor any
director, officer, employee or agent of the Servicer will be under any liability
to the Trust Fund or the Owners of the Certificates for any action taken or for
refraining from the taking of any action in good faith pursuant to the
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 misfeasance, bad faith or negligence in the
performance of duties or by reason of reckless disregard of obligations and
duties thereunder. The Agreement will further provide that the Servicer and any
director, officer, employee or agent of the Servicer is entitled to
indemnification by the Trust Fund and will be held harmless against any loss,
liability or expense incurred in connection with any legal action relating to
the Agreement or the Owners of the Certificates, other than any loss, liability
or expense related to any specific Mortgage Loan or Mortgage Loans (except any
such loss, liability or expense otherwise reimbursable pursuant to the
Agreement) and any loss, liability or expense incurred by reason of reckless
disregard of obligations and duties thereunder. In addition, the 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 under
the Agreement and which in its opinion may involve it in any expense or
liability. The Servicer may, however, in its discretion undertake any such
action which it may deem necessary or desirable with respect to the Agreement
and the rights and duties of the parties thereto and the interests of the Owners
of the Certificates thereunder. In such event, the legal expenses and costs of
such action and any liability resulting therefrom will be expenses, costs and
liabilities of the Trust Fund and the Servicer will be entitled to be reimbursed
therefor from time to time on one or more Distribution Dates, only out of the
Available Funds for such Distribution Date that remain after the distributions
to the Certificateholders for such Distribution Date have been made. The
Servicer's right to such indemnity or reimbursement will survive any resignation
or termination of the Servicer (and will survive any termination of the
Agreement if the Servicer is still serving as the servicer at such termination)
with respect to any losses, expenses, costs or liabilities arising prior to such
resignation or termination (or arising from events that occurred prior to such
resignation or termination). Any such claims by or on behalf of the
Certificateholders or the Trust Fund will be S-35made only against the Servicer,
who will be liable with respect to its own acts and omissions as well as the
acts and omissions of its directors, officers, employees and agents.
Any corporation into which the Servicer may be merged or consolidated, or
any corporation resulting from any merger, conversion or consolidation to which
the Servicer will be a party, or any corporation succeeding to the business of
the Servicer, which executes an agreement of assumption to perform every
obligation of the Servicer under the Agreement, will be the successor of the
Servicer thereunder, without the execution or filing of any other paper or any
further act on the part of any of the parties thereto, anything therein to the
contrary notwithstanding.
Events of Default
Events of Default under the Agreement will consist of (i) a failure by the
Servicer to deposit in the Certificate Account any deposit required to be made
under the Agreement, which failure continues unremedied for five business days
after the giving of written notice of such failure to the Servicer by the
Trustee, or to the Servicer and the Trustee by holders of the Certificates of
any class evidencing, as to such Class, Percentage Interests aggregating not
less than 25%; (ii) any failure by the Servicer duly to observe or perform in
any material respect any of its other covenants or agreements in the Agreement
which materially affects the Certificateholders and continues, unremedied for 60
days after the giving of written notice of such failure to the Servicer by the
Trustee, or to the Servicer and the Trustee by holders of the Certificates of
any class evidencing, as to such Class, Percentage Interests aggregating not
less than 25%; and (iii) certain events of insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings regarding the
Servicer and certain actions by the Servicer indicating its insolvency or
inability to pay its obligations.
Rights Upon Event of Default
So long as an Event of Default remains unremedied by the Servicer, the
Depositor or the Trustee may, or at the written direction of the Owners of
Certificates evidencing not less than 51% of the Ownership Interests in the
Trust Fund (for the purposes of this percentage, the Class B, Class R and Class
RL Certificateholders shall be deemed to hold 0% of the Ownership Interests in
the Trust Fund) shall, terminate all the rights and obligations of the Servicer
under the Agreement in and to the Mortgage Loans, whereupon the Trustee will
succeed to all the responsibilities, duties and liabilities of the Servicer
under the Agreement and will be entitled to similar compensation arrangements;
provided, however, that the Trustee may waive any default by the Servicer in the
performance of its obligations under the Agreement and its consequences, except
that a default in the making of any required distribution on any of the
Certificates may only be waived with the consent of the Owners of Certificates
of each Class affected thereby, voting as a Class, evidencing, as to each such
Class, Percentage Interests aggregating not less than 66%]. Upon any such waiver
of a past default, such default shall cease to exist, and any Event of Default
arising therefrom shall be deemed to have been remedied for every purpose of the
Agreement. No such waiver shall extend to any subsequent or other default or
impair any right contingent thereon except to the extent expressly so waived.
In the event that the Trustee would be obligated to succeed the Servicer
but is unwilling or unable so to act, it may appoint, or petition a court of
competent jurisdiction for the appointment of, any established housing and home
finance institution that is then servicing a multi-family mortgage loan
portfolio and with a net worth of at least $__________ to act as successor to
the Servicer under the Agreement. Pending such appointment, the Trustee is
obligated to act in such capacity, unless the Trustee is prohibited by law from
so acting. The Trustee and such successor may agree upon the servicing
compensation to be paid, which in no event may be greater than the compensation
to the initial Servicer under the Agreement.
No Certificateholder will have any right under the Agreement to institute
any proceeding with respect to the Agreement unless such holder previously has
given to the Trustee written notice of default and unless holders of
Certificates of any Class evidencing, as to such Class, Percentage Interests
aggregating not less than 25% have made written request upon the Trustee to
institute such proceeding in its own name as Trustee thereunder and have offered
to the Trustee reasonable indemnity and the Trustee for 60 days after the
receipt of such request and after the indemnity has neglected or refused to
institute any such proceeding. The Trustee will be under no obligation to
exercise any of the trusts or powers vested in it by the Agreement or to make
any investigation of matters arising thereunder or to institute, conduct or
defend any litigation thereunder or in relation thereto at the request, order or
direction of any of the Owners of the Certificates covered by the Agreement,
unless such Owners of the Certificates have offered to the Trustee reasonable
security or indemnity against the costs, expenses and liabilities which may be
incurred therein or thereby.
Amendment
The Agreement may be amended from time to time by the Servicer, the
Depositor, the Company and the Trustee without the consent of any of the Owners
of the Certificates (a) to cure any error or any ambiguity or to correct or
supplement any provisions therein which may be inconsistent with any other
provisions therein, (b) to add to the duties or obligations of the Servicer
thereunder, (c) to maintain or improve the rating of the Class A Certificates or
the Class B Certificates then given by a Rating Agency (it being understood that
after obtaining the initial ratings of the Class A and Class B Certificates,
none of the Depositor, the Servicer or the Trustee is obligated to maintain or
improve such ratings), or (d) to add any other provisions with respect to
matters or questions arising under the Agreement; provided, however, that such
action will not, as evidenced by an Opinion of Counsel, adversely affect in any
material respect the interests of any Owner of a Certificate. The Agreement may
also be amended from time to time by the Servicer, the Depositor, and the
Trustee, with the consent of the Owners of Certificates of each Class affected
thereby evidencing, as to such Class, Percentage Interests aggregating not less
than 51% for the purpose of adding any provisions to or changing in any manner
or eliminating any of the provisions of the Agreement or of modifying in any
manner the rights of Owners of the Certificates; provided, however, that no such
amendment will (a) reduce in any manner the amount of, or delay the timing of,
collections of payments on Mortgage Loans or distributions which are required to
be made on any Certificate without the consent of the Owner of such Certificate
or (b) reduce the aforesaid percentage required to consent to any such
amendment, without the consent of the Owners of all Certificates then
outstanding. The Agreement may also be amended from time to time, without the
consent of the Owners of the Certificates, with regard to certain REMIC matters.
Termination; Retirement of the Certificates
The obligations created by the Agreement will terminate upon the payment to
Owners of the Certificates of all amounts held in the Certificate Account or by
the Servicer and required to be paid to them pursuant to the Agreement following
the earlier of (i) the final payment or other liquidation of the last Mortgage
Loan subject thereto or the disposition of all property acquired upon
foreclosure of any such Mortgage Loan and (ii) the repurchase by the Servicer
from the Mortgage Trust of all remaining Mortgage Loans and all property
acquired in respect of such Mortgage Loans, as described below. In no event,
however, will the trust created by the Agreement continue beyond the expiration
of 21 years from the death of the last to survive of certain persons described
in the Agreement. Written notice of termination of the Agreement will be given
to each Certificateholder, and the final distribution will be made only upon
surrender and cancellation of the Certificates at an office or agency appointed
by the Trustee which will be specified in the notice of termination.
At its option, the Depositor may repurchase from the Mortgage Trust all
remaining Mortgage Loans held by the Mortgage Trust at a price equal to the
greater of (a) the sum of (x) 100% of the Unpaid Principal Balance of each
Mortgage Loan (other than any Foreclosed Mortgage Loan represented by REO
Property whose fair market value is included pursuant to clause (y) below) as of
the Distribution Date upon which the proceeds of any repurchase are to be
distributed and (y) the fair market value of all Foreclosed Mortgage Loans
represented by REO Property. The right of the Depositor to make any such
purchase is conditioned upon the Pool Principal Balance being less than 10% of
the Cut-Off Date Pool Principal Balance. The termination of the Trusts is
required to be effected in a manner consistent with applicable federal income
tax regulations and their status as REMIC's.
The Trustee
____________________, a __________ banking association organized under the
laws of the United States, is the Trustee. Its Corporate Trust Office is located
at _________________________. The Depositor may also remove the Trustee under
certain circumstances, including, among others, failure of the Trustee to
continue to satisfy the eligibility requirements described in the Agreement or
adjudication of the Trustee as bankrupt or insolvent. Upon becoming aware of
such circumstances, the Depositor will be obligated to appoint a successor
Trustee. The Trustee may resign from its duties as Trustee under the Agreement.
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.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following opinion of Stroock & Stroock & Lavan LLP, special
counsel to the Depositor as to certain of the material anticipated federal
income tax consequences of the purchase, ownership and disposition of the
Offered Certificates is to be considered only in connection with "Certain
Federal Income Tax Consequences" in the Prospectus. The discussion herein and in
the Prospectus is based upon laws, regulations, rulings and decisions now in
effect, all of which are subject to change. The discussion below and in the
Prospectus does not purport to deal with all federal tax consequences applicable
to all categories of investors, some of which may be subject to special rules.
Investors should consult their own tax advisors in determining the federal,
state, local and any other tax consequences to them of the purchase, ownership
and disposition of the Offered Certificates.
REMIC Elections
The Trustee will cause an election to be made to treat the Mortgage Trust
and the Trust Fund as "real estate mortgage investment conduits" ("REMICS") for
federal income tax purposes. Stroock & Stroock & Lavan LLP, special tax counsel,
is of the opinion that, for federal income tax purposes, assuming (i) the REMIC
elections are made and (ii) compliance with the Agreement, the Mortgage Trust
and the Trust Fund will be treated as REMICs, each Class of Offered Certificates
will be treated as "regular interests" in a REMIC and the Class R Certificates
will be treated as the sole class of "residual interests" in such REMIC. For
federal income tax purposes, regular interests in such REMIC generally are
treated as debt instruments issued by the REMIC on the date on which those
interests are created, and not as ownership interests in the REMIC or its
assets. Owners of Offered Certificates that otherwise report income under a cash
method of accounting will be required to report income with respect to such
Offered Certificates under an accrual method. The Offered Certificates may be
issued with "original issue discount" for federal income tax purposes. The
prepayment assumption to be used in determining whether any Class of Offered
Certificates is issued with original issue discount and the rate of accrual of
original issue discount is ___% of CPR. No representation is made that any of
the Mortgage Loans will prepay at this rate or any other rate. See "Certain
Federal Income Tax Consequences--REMICS--Taxation of Holders of REMIC Regular
Securities--Original Issue Discount" in the Prospectus.
Although not free from doubt, it is anticipated that the Class S-A
Certificates will be treated as issued with original issue discount in an amount
equal to the excess of all payments thereon over their issue price (including
accrued interest), and the Trustee intends to report income in respect of such
Class of Certificates in this manner. Under this method, any "negative" amounts
of original issue discount attributable to rapid prepayments would not be
deductible currently, but would be offset against future positive accruals of
original issue discount, if any. A Class S-A Certificateholder may be entitled
to a loss deduction, which may be a capital loss, to the extent it becomes
certain that such holder will not recover a portion of its remaining basis in
the Class S-A Certificate, assuming no further prepayments.
ERISA CONSIDERATIONS
Any Plan fiduciary which proposes to cause a Plan to acquire any of the
Offered Certificates should consult with its counsel with respect to the
potential consequences under the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), and the Code, of the Plan's acquisition and
ownership of such Certificates.
General
ERISA imposes certain restrictions on employee benefit plans subject to
ERISA ("Plans") and on persons who are parties in interest or disqualified
persons ("parties in interest") with respect to such Plans. Certain employee
benefit plans, such as governmental plans and church plans (if no election has
been made under section 410(d) of the Code), are not subject to the restrictions
of ERISA, and assets of such plans may be invested in the Class A-1 and Class B
Certificates without regard to the ERISA considerations described below, subject
to other applicable federal and state law. However, any such governmental or
church plan which is qualified under Section 401(a) of the Code and exempt from
taxation under Section 501(a) of the Code is subject to the prohibited
transaction rules set forth in Section 503 of the Code.
Investments by Plans are subject to ERISA's general fiduciary requirements,
including the requirement of investment prudence and diversification and the
requirement that a Plan's investments be made in accordance with the documents
governing the Plan.
Prohibited Transactions
General. Section 406 of ERISA prohibits parties in interest with respect to
a Plan from engaging in certain transactions involving a Plan and its assets
unless a statutory or administrative exemption applies to the transaction.
Section 4975 of the Code (or, in some cases, Section 502(i) of ERISA) imposes
certain excise taxes on parties in interest which engage in non-exempt
prohibited transactions.
The United States Department of Labor ("DOL") has issued a final regulation
(29 C.F.R. Section 2510.3- 101) containing rules for determining what
constitutes the assets of a Plan. This regulation provides that, as a general
rule, the underlying assets and properties of corporations, partnerships, trusts
and certain other entities in which a Plan makes an "equity investment" will be
deemed for purposes of ERISA to be assets of the Plan unless certain exceptions
apply. One such exception provides that if less than 25% of the value of the
Certificates outstanding is held by Plans, the assets of the Trusts would not be
deemed to include assets of Plans that are Certificateholders. However, there
can be no assurance that the 25% exception described in the regulations would be
satisfied with respect to the Trusts.
Under the terms of the regulation, the Trusts may be deemed to hold plan
assets by reason of a Plan's investment in a Certificate; such plan assets would
include an undivided interest in the Mortgage Loans and any other assets held by
the Trusts. In such an event, the Depositor, the Servicer, the Trustee and other
persons, in providing services with respect to the Mortgage Loans, may be
parties in interest, subject to the fiduciary responsibility provisions of Title
I of ERISA, including the prohibited transaction provisions of Section 406 of
ERISA (and of Section 4975 of the Code), with respect to transactions involving
the Mortgage Loans unless such transactions are subject to a statutory or
administrative exemption.
[Availability of Administrative Exemption for Class A-1 and Class S-A
Certificates. The U.S. Department of Labor has granted to _____________________
an administrative exemption (Prohibited Transaction Exemption _______,
________________________________________ from certain of the prohibited
transaction rules of ERISA with respect to the initial purchase, the holding and
the subsequent resale by Plans of certificates representing interests in
asset-backed pass-through trusts that consist of certain receivables, loans and
other obligations that meet the conditions and requirements of PTE ______. The
receivables covered by the exemption include mortgage loans such as the Mortgage
Loans. The exemption will apply to the acquisition, holding and resale of the
Class A-1 and Class S-A Certificates by a Plan, provided that certain conditions
(certain of which are described below) are met.
Among the conditions which must be satisfied for PTE ______ to apply to he
Class A-1 and Class S-A Certificates are the following:
(1) The acquisition of the Class A-1 and Class S-A Certificates by a Plan
is on terms (including the price for the Class A-1 and Class S-A 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 Class A-1 and Class S-A
Certificates acquired by the Plan are not subordinated to the rights and
interests evidenced by other certificates of the Trust Fund;
(3) The Class A-1 and Class S-A Certificates acquired by the Plan have
received a rating at the time of such acquisition that is in one of the three
highest generic rating categories from any of S&P, Moody's, Duff & Phelps Credit
Rating Co. or Fitch Investors Service, Inc.;
(4) The Trustee is not an affiliate of any member of the Restricted Group
(as defined below);
(5) The sum of all payments made in connection with the resale of the Class
A-1 and Class S-A Certificates represents not more than reasonable compensation
for reselling the Class A-1 and Class S-A Certificates. The sum of all payments
made to and retained by the Depositor pursuant to the sale of the Mortgage Loans
to the Mortgage 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
represents not more than reasonable compensation for the Servicer's services
under the Agreement and reimbursement of the Servicer's reasonable expenses in
connection therewith; and
(6) The Plan investing in the Class A-1 and Class S-A Certificates is an
"accredited investor" as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission under the 1933 Act.
Moreover, PTE _______ would provide relief from certain
self-dealing/conflict of interest prohibited transactions only if, among other
requirements, (i) in the case of the acquisition of Class A-1 and Class S-A
Certificates in connection with the initial issuance, at least fifty percent
(50%) of the Class A-1 and Class S-A Certificates are acquired by persons
independent of the Restricted Group (as defined below), (ii) the Plan's
investment in Class A-1 or Class S-A Certificates does not exceed twenty-five
percent (25%) of all of the Class A-1 and Class S-A Certificates outstanding at
the time of the acquisition and (iii) immediately after acquisition, no more
than twenty-five percent (25%) of the assets of the Plan are invested in
certificates representing an interest in one or more trusts containing assets
sold or serviced by the same entity. PTE ____ does not apply to Plans sponsored
by the Servicer, the Depositor, the Trustee, any obligor with respect to
Mortgage Loans included in the Mortgage Trust constituting more than five
percent of the aggregate unamortized principal balance of the assets in the
Mortgage Trust, or any affiliate of such parties (the "Restricted Group")
____ believes that the exemption will apply to the acquisition and holding
of the Class A-1 and Class S-A Certificates by Plans and that all conditions of
the exemption other than those within the control of the investors have been
met. [In addition, as of the date hereof, there is no single obligor with
respect to Mortgage Loans included in the Mortgage Trust that constitutes more
than five percent of the aggregate unamortized principal balance of the assets
of the Mortgage Trust.]
Under current law the purchase and holding of the Class B Certificates by
or on behalf of any Plan subject to the fiduciary responsibility provisions of
ERISA may result in "prohibited transactions" within the meaning of ERISA and
the Code. [No transfer of a Class B Certificate or any interest therein may be
made to any Plan or other retirement arrangement, including individual
retirement accounts and annuities, Keogh plans and collective investment and
separate accounts in which such plans, accounts or arrangements are invested
that is subject to ERISA or the Code unless the prospective transferee of the
Class B Certificate provides the Trustee with a representation letter and an
opinion of counsel, each in the form required under the Agreement. See "ERISA
Considerations" herein and in the Prospectus.]
Review By Plan Fiduciaries. Due to the complexity of these rules and the
penalties imposed upon persons involved in prohibited transactions, it is
especially important that any Plan fiduciary who proposes to cause a Plan to
purchase Class A-1 or Class S-A Certificates should consult with its own counsel
with respect to the potential consequences under ERISA and the Code of the
Plan's acquisition and ownership of Class A-1 or Class S-A Certificates. Assets
of a Plan or individual retirement account should not be invested in the Class
A-1 and Class S- A Certificates unless it is clear that the assets of the Trusts
will not be plan assets or unless it is clear that the PTE ______ or a
prohibited transaction class exemption will apply and exempt all potential
prohibited transactions.
LEGAL INVESTMENT CONSIDERATIONS
[As long as the Class A Certificates are rated in one of the two highest
rating categories by at least one nationally recognized statistical rating
organization, the Class A Certificates will constitute "mortgage related
securities" within the meaning of SMMEA and as such will be legal investments
for persons, trusts, corporations, partnerships, associations, business trusts
and business entities (including depository institutions, life insurance
companies and pension funds) created pursuant to or existing under the laws of
the United States or of any State whose authorized investments are subject to
state regulation to the same extent that, under applicable law, obligations
issued by or guaranteed as to principal and interest by the United States or any
agency or instrumentality thereof constitute legal investments for such
entities. Under SMMEA, however, if a State enacted legislation on or prior to
October 3, 1991 specifically limiting the legal investment authority of any such
entities with respect to "mortgage related securities," such securities will
constitute legal investments for entities subject to such legislation only to
the extent provided therein. Certain States have enacted legislation which
overrides the preemption provisions of SMMEA.
SMMEA has amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal with "mortgage
related securities" without limitation as to the percentage of their assets
represented thereby, federal credit unions may invest in such securities, and
national banks may purchase such securities for their own account without regard
to the limitations generally applicable to investment securities set forth in 12
U.S.C. 24 (seventh), subject in each case to such regulations as the applicable
federal regulatory authority may prescribe.]
The [Class B] Certificates will not be "mortgage securities" for purposes
of SMMEA. As a result, the appropriate characterization of the [Class B]
Certificates under various legal investment restrictions, and thus the ability
of investors subject to these restrictions to purchase the [Class B]
Certificates, is subject to significant interpretive uncertainties.
The Depositor makes no representation as to the ability of particular
investors to purchase the Offered Certificates under applicable legal investment
or restrictions. All institutions whose investment activities are subject to
legal investments and regulations, regulatory requirements or review by
regulatory authorities should consult with their own advisors in determining
whether and to what extent the Offered Certificates constitute legal investments
for or are subject to investment, capital or other restrictions.
RATINGS
It is a condition to the issuance of the Offered Certificates that the
Class A-1 and Class S-A Certificates each be rated no lower than "AAA" by S&P
and "Aaa" by Moody's and that the Class B Certificates be rated no lower than
"____" by _____. 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. Each security rating should be evaluated independently
of any other security rating.
The ratings assigned by the Rating Agencies to mortgage pass-through
certificates address the likelihood of the receipt by certificateholders of all
distributions to which such certificateholders are entitled. The ratings
assigned to mortgage pass-through certificates do not constitute a statement
regarding the frequency or extent of principal prepayments. The ratings do not
address the possibility that certificateholders might receive a lower than
anticipated yield on their investment.
UNDERWRITING
Under the terms and subject to the conditions set forth in the Underwriting
Agreement for the sale of the Offered Certificates, the Depositor has agreed to
cause the Trust to sell and ___________________ (the "Underwriters") have agreed
to purchase the Offered Certificates.
In the Underwriting Agreement, the Underwriters have agreed, subject to
the terms and conditions set forth therein, to purchase, the entire principal
amount of each Class of Offered Certificates.
The Underwriters have advised the Depositor that they propose to offer the
Offered Certificates for sale from time to time in one or more registered
transactions or otherwise, at market prices prevailing at the time of sale, at
prices related to such market prices or at negotiated prices. The Underwriters
may effect such transactions by selling such Certificates to or through dealers,
and such dealers may receive compensation in the form of underwriting discounts,
concessions or commissions from the Underwriters or purchasers of the Offered
Certificates for whom they may act as agent. Any dealers that participate with
the Underwriters in the distribution of the Offered Certificates purchased by
the Underwriters may be deemed to be underwriters, and any discounts or
commissions received by them or the Underwriters and any profit on the resale of
Offered Certificates by them or the Underwriters may be deemed to be
underwriting discounts or commissions under the Securities Act.
The Company has agreed to indemnify the Underwriters against certain
liabilities including liabilities under the Securities Act of 1933.
The Depositor has been advised by the Underwriters that the Underwriters
presently intends to make a market in each Class of Offered Certificates, as
permitted by applicable laws and regulations. The Underwriters are not
obligated, however, to make a market in either Class of Offered Certificates and
such market-making may be discontinued at any time at the sole discretion of the
Underwriters. Accordingly, no assurance can be given as to the liquidity of, or
trading markets for, the Offered Certificates.
LEGAL MATTERS
Certain legal matters relating to the validity of the issuance of the
Certificates will be passed upon for the Depositor by Stroock & Stroock & Lavan
LLP, New York, New York and by Alan L. Langus, chief counsel to the Company.
Certain legal matters relating to insolvency issues and certain federal income
tax matters concerning the Certificates will be passed upon for the Depositor by
Stroock & Stroock & Lavan LLP. Certain legal matters relating to the validity of
the Certificates will be passed upon for the Underwriter by ______________.
<PAGE>
EXHIBIT A
MORTGAGE LOAN SCHEDULE
<PAGE>
APPENDIX A
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS
AAA..........................................................................12
accredited investor..........................................................45
Additional Collateral........................................................36
Agreement.....................................................................3
Appraised Values.............................................................21
balloon.......................................................................3
Balloon Payments.............................................................17
Book Entry Termination.......................................................27
CERCLA.......................................................................15
Certain Federal Income Tax Consequences......................................12
Certificate Account..........................................................38
Certificate Registrar........................................................26
Certificates...............................................................1, 6
Class A-1 Certificates........................................................1
Class A-1 Principal Distribution Amount.......................................9
Class B Certificates..........................................................1
Class B Principal Distribution Amount.........................................9
Class C Certificates..........................................................1
Class Principal Balance......................................................28
Class R Certificates..........................................................1
Class RL Certificates.........................................................6
Class S-A Certificates........................................................1
Clean-up call................................................................35
Clearing Agency..............................................................26
Clearing Agency Participants.................................................27
Code.........................................................................13
Company.......................................................................3
Constant prepayment rate.....................................................33
CPR..........................................................................33
Default Rate.................................................................24
Defective Mortgage Loan......................................................37
Depositor.....................................................................3
Description of the Offered Certificates-- Amounts of Distribution............10
Distribution Date.............................................................3
DOL..........................................................................45
Due-on-sale..................................................................33
Equity investment............................................................45
Events of Default............................................................24
Final Scheduled Distribution Date............................................11
Liquidated Mortgage Loan.....................................................29
Liquidation Expenses.........................................................38
Liquidation Proceeds.........................................................38
Lower Tier REMIC..........................................................4, 13
MAI..........................................................................23
Monthly Interest.............................................................28
Monthly Advance...........................................................10, 29
Monthly Report...............................................................30
Moody's......................................................................12
Mortgage Files...............................................................36
Mortgage Loan Schedule.......................................................19
Mortgage Loans.............................................................3, 7
Mortgage related securities..........................................13, 14, 46
Mortgage securities..........................................................47
Mortgage Trust................................................................3
Mortgaged Properties.......................................................3, 7
Net Liquidation Proceeds.....................................................38
Net Losses...................................................................20
Notional Principal Balance....................................................1
Offered Certificates..........................................................1
Operator.....................................................................15
Original issue discount..................................................12, 44
Originator....................................................................7
Outstanding Mortgage Loan....................................................28
Owner........................................................................15
Owners.......................................................................26
Parties in interest..........................................................44
Payment Date.................................................................26
Percentage Interest..........................................................26
Plan of Distribution..........................................................2
Policies.....................................................................25
Prepayment...................................................................33
Prepayment Premium...........................................................39
Prepayment Premium Account...................................................39
Prepayments..................................................................12
Prohibited transaction.......................................................37
Prohibited transactions..................................................13, 46
Purchase Price...............................................................37
Rating Agencies..............................................................12
Ratings......................................................................12
Real estate mortgage investment conduit......................................44
Real estate mortgage investment conduits..................................4, 13
Real estate owned............................................................20
Realized Losses..............................................................11
Record Date...............................................................8, 26
Regular interest..............................................................4
Regular interests.....................................................3, 13, 44
REMICs........................................................................4
REO Property.................................................................38
Residual Certificates.........................................................6
Residual interests.......................................................13, 44
Restricted Group.............................................................46
Risk Factors..............................................................1, 15
S&P..........................................................................12
Senior Certificates........................................................1, 6
Servicer......................................................................3
Servicing Fee................................................................40
Servicing Fee Rate.......................................................11, 40
Servicing Standard...........................................................37
SREA.........................................................................23
SRPA.........................................................................23
Subordinate Certificates......................................................1
Superlien....................................................................15
The Mortgage Loans--General..................................................17
The Mortgage Trust--Mortgage Loan Characteristics.............................7
The Mortgage Trust-Underwriting Standards.....................................7
Trust Fund.................................................................3, 6
Trustee.......................................................................3
Trusts.....................................................................3, 7
Underwriters.................................................................47
Underwriting Standards.......................................................19
Unpaid Delinquent Maturity Amount............................................29
Unpaid Principal Balance.....................................................28
Unpaid Principal Shortfall...................................................29
Unpaid Principal Balance.....................................................29
Upper Tier REMIC..............................................................4
Weighted average life........................................................33
Yield, Prepayment and Maturity Considerations.................................3
<PAGE>
PROSPECTUS
ASSET BACKED CERTIFICATES
(Issuable in Series)
CONTISECURITIES ASSET FUNDING CORP.
(DEPOSITOR)
This Prospectus relates to Asset Backed Certificates to be issued from time
to time in one or more series (and one or more classes within a series), certain
classes of which may be offered on terms determined at the time of sale and
described in this Prospectus and the related Prospectus Supplement. Each series
of Certificates will be issued by a separate trust (each, a "Trust") and will
evidence either a beneficial ownership interest in, such Trust. The assets of a
Trust will include one or more of the following: (i) one-to-four family and/or
multifamily residential mortgage loans, including mortgage loans secured by
junior liens on the related mortgaged properties and Title I loans and other
types of home improvement retail installment contracts, (ii) conditional sales
contracts and installment sales or loan agreements or participation interests
therein secured by manufactured housing, (iii) mortgage-backed securities, (iv)
other mortgage-related assets and securities and (v) reinvestment income,
reserve funds, cash accounts, insurance policies, guaranties, letters of credit
or other assets as described in the related Prospectus Supplement.
One or more classes of Certificates of a series may be (i) entitled to
receive distributions allocable to principal, principal prepayments, interest or
any combination thereof prior to one or more other classes of Certificates of
such series or after the occurrence of certain events or (ii) subordinated in
the right to receive such distributions to one or more senior classes of
Certificates of such series, in each case as specified in the related Prospectus
Supplement. Interest on each class of Certificates entitled to distributions
allocable to interest may accrue at a fixed rate or at a rate that is subject to
change from time to time as specified in the related Prospectus Supplement. The
Depositor or its affiliates may retain or hold for sale from time to time one or
more classes of a series of Certificates.
Distributions on the Certificates will be made at the intervals and on the
dates specified in the related Prospectus Supplement from the assets of the
related Trust and any other assets pledged for the benefit of the Certificates.
An affiliate of the Depositor may make or obtain for the benefit of the
Certificates limited representations and warranties with respect to mortgage
assets assigned to the related Trust. Neither the Depositor nor any affiliates
will have any other obligation with respect to the Certificates.
The yield on Certificates will be affected by the rate of payment of
principal (including prepayments) of mortgage assets in the related Trust. Each
series of Certificates will be subject to early termination under the
circumstances described herein and in the related Prospectus Supplement.
If specified in a Prospectus Supplement, one or more separate elections may
be made to treat the Trust for the related series or specified portions thereof
as a "real estate mortgage investment conduit" ("REMIC") for federal income tax
purposes. See "Certain Federal Income Tax Consequences" herein and in the
related Prospectus Supplement.
It is a condition to the issuance of the Certificates that the Certificates
be rated in not less than the fourth highest rating category by a nationally
recognized rating organization.
SEE "RISK FACTORS" BEGINNING ON PAGE 6 HEREIN AND IN THE RELATED PROSPECTUS
SUPPLEMENT FOR A DISCUSSION OF SIGNIFICANT MATTERS AFFECTING INVESTMENTS IN THE
CERTIFICATES.
See "ERISA Considerations" herein and in the related Prospectus Supplement
for a discussion of restrictions on the acquisition of Certificates by "plan
fiduciaries."
THE ASSETS OF A TRUST ARE THE SOLE SOURCE OF PAYMENTS ON THE RELATED
CERTIFICATES. THE CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF
THE DEPOSITOR, ANY SERVICER, ANY MASTER SERVICER, ANY ORIGINATOR, ANY TRUSTEE OR
ANY OF THEIR AFFILIATES, EXCEPT AS SET FORTH HEREIN AND IN THE RELATED
PROSPECTUS SUPPLEMENT. NEITHER THE CERTIFICATES NOR THE UNDERLYING MORTGAGE
ASSETS WILL BE GUARANTEED OR INSURED BY ANY GOVERNMENTAL AGENCY OR
INSTRUMENTALITY OR BY THE DEPOSITOR, ANY SERVICER, ANY MASTER SERVICER, ANY
ORIGINATOR, ANY TRUSTEE OR ANY OF THEIR AFFILIATES, 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
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS OR ANY RELATED PROSPECTUS
SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Offers of the Certificates may be made through one or more different
methods, including offerings through underwriters, as more fully described
herein and in the related Prospectus Supplement. See "Plan of Distribution"
herein and in the related Prospectus Supplement.
Prior to their issuance there will have been no market FOR the Certificates
nor can there by any assurance that one will develop or if it does develop, that
it will provide the Owners of the Certificates with liquidity or will continue
for the life of the Certificates.
RETAIN THIS PROSPECTUS FOR FUTURE REFERENCE. THIS PROSPECTUS MAY NOT BE
USED TO CONSUMMATE SALES OF CERTIFICATES UNLESS ACCOMPANIED BY A PROSPECTUS
SUPPLEMENT.
The date of this Prospectus is September 18, 1997
<PAGE>
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and any Prospectus
Supplement with respect hereto and, if given or made, such information or
representations must not be relied upon. This Prospectus and any Prospectus
Supplement with respect hereto do not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the Certificates
offered hereby and thereby or an offer of such Certificates 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; however, if any material change occurs
while this Prospectus is required by law to be delivered, this Prospectus will
be amended or supplemented accordingly
TABLE OF CONTENTS
PAGE
SUMMARY OF PROSPECTUS........................................1
RISK FACTORS.................................................7
DESCRIPTION OF THE CERTIFICATES.............................10
General................................................11
Classes of Certificates................................11
Distributions of Principal and Interest................13
Book Entry Registration................................14
List of Owners of Certificates.........................15
THE TRUSTS..................................................15
Mortgage Loans.........................................15
Contracts..............................................18
Mortgage-Backed Securities.............................19
Other Mortgage Securities..............................20
CREDIT ENHANCEMENT..........................................20
SERVICING OF MORTGAGE LOANS AND CONTRACTS...................25
Payments on Mortgage Loans.............................26
Advances...............................................26
Collection and Other Servicing Procedures..............27
Primary Mortgage Insurance.............................29
Standard Hazard Insurance..............................29
Title Insurance Policies...............................30
Claims Under Primary Mortgage Insurance Policies
and Standard Hazard Insurance Policies; Other
Realization Upon Defaulted Loan.....................30
Realization Upon or Sale of Defaulted
Multifamily Loans.................................. 31
Servicing Compensation and Payment of Expenses.........32
Master Servicer........................................32
ADMINISTRATION..............................................32
Assignment of Mortgage Assets..........................32
Evidence as to Compliance..............................35
The Trustee............................................35
Administration of the Certificate Account..............36
Reports................................................36
Forward Commitments; Pre-Funding.......................37
Servicer Events of Default.............................37
Rights Upon Servicer Event of Default..................38
Amendment..............................................38
Termination............................................38
USE OF PROCEEDS.............................................39
THE DEPOSITOR...............................................39
CERTAIN LEGAL ASPECTS OF THE MORTGAGE ASSETS................39
General................................................39
Foreclosure............................................40
Soldiers' and Sailors' Civil Relief Act................45
The Contracts..........................................46
The Title I Program....................................48
LEGAL INVESTMENT MATTERS....................................53
ERISA CONSIDERATIONS........................................54
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.....................55
Federal Income Tax Consequences For REMIC Certificates.55
Taxation of Regular Certificates.......................57
Taxation of Residual Certificates......................62
Treatment of Certain Items of REMIC Income and Expense 64
Tax-Related Restrictions on Transfer of Residual
Certificates.........................................66
Sale or Exchange of a Residual Certificate.............68
Taxes That May Be Imposed on the REMIC Pool............68
Liquidation of the REMIC Pool..........................69
Administrative Matters.................................69
Limitations on Deduction of Certain Expenses...........70
Taxation of Certain Foreign Investors..................70
Backup Withholding.....................................71
Reporting Requirements.................................71
Federal Income Tax Consequences for Certificates as
to Which No REMIC Election Is Made...................72
Standard Certificates..................................72
Premium and Discount...................................73
Stripped Certificates..................................75
Reporting Requirements and Backup Withholding..........78
Taxation of Certain Foreign Investors..................78
Taxation of Securities Classified as
Partnership Interests................................78
PLAN OF DISTRIBUTION........................................78
LEGAL MATTERS...............................................79
FINANCIAL INFORMATION.......................................79
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS................80
UNTIL 90 DAYS AFTER THE DATE OF EACH PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE RELATED CERTIFICATES, WHETHER OR NOT PARTICIPATING
IN THE DISTRIBUTION THEREOF, MAY BE REQUIRED TO DELIVER THIS PROSPECTUS AND THE
RELATED PROSPECTUS SUPPLEMENT. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
AVAILABLE INFORMATION
The Depositor is subject to the informational requirements of the
Securities Exchange Act of 1934 (the "Exchange Act") and in accordance therewith
files reports and other information with the Securities and Exchange Commission
(the "Commission"). Such reports and other information filed by the Depositor
can be inspected and copied at the public reference facilities maintained by the
Commission at its Public Reference Section, 450 Fifth Street, N.W., Washington,
D.C. 20549, and its Regional Offices located as follows: Chicago Regional
Office, 500 West Madison, 14th Floor, Chicago, Illinois 60661; New York Regional
Office, Seven World Trade Center, New York, New York 10048. Copies of such
material can also be obtained at prescribed rates from the Public Reference
Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and
electronically through the Commission's Electronic Data Gathering, Analysis and
Retrieval System at the Commission's web site (http:\\www.sec.gov). The
Depositor does not intend to send any financial reports to Owners.
This Prospectus does not contain all of the information set forth in the
Registration Statement (of which this Prospectus forms a part) and exhibits
thereto which the Depositor has filed with the Commission under the Securities
act of 1933 (the "Securities Act") and to which reference is hereby made.
REPORTS TO OWNERS
The Trustee or other designated person will be required to provide periodic
unaudited reports concerning the Certificates and the Trust to all registered
holders of Certificates of the related series. See "Administration-Reports."
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed with respect to each respective Trust pursuant to
Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act subsequent to the date
of this Prospectus and prior to the termination of the offering of the
securities of such Trust offered hereby shall be deemed to be incorporated by
reference into this Prospectus when delivered with respect to such Trust. Any
statement contained in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
Any person receiving a copy of this Prospectus may obtain, without charge,
upon written or oral request, a copy of any of the documents incorporated by
reference herein, except for the exhibits to such documents (other than the
documents expressly incorporated therein by reference). Requests should be
directed to ContiSecurities Asset Funding Corp., 277 Park Avenue, 38th Floor,
New York, New York 10172 (telephone number (212) 207-2840).
<PAGE>
SUMMARY OF PROSPECTUS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the Prospectus Supplement relating to a particular series of Certificates and to
the related Agreement which will be prepared in connection with each series of
Certificates. Unless otherwise specified, capitalized terms used and not defined
in this Summary of Prospectus have the meanings given to them in this
Prospectus. An index indicating where certain capitalized terms used herein are
defined appears in Appendix A hereto.
SECURITIES............................ Asset Backed Certificates, issuable
from time to time in series, in fully
registered form or book entry only
form, in authorized denominations, as
described in the Prospectus Supplement
(the "Certificates"). Each Certificate
will represent a beneficial ownership
interest in a trust (a "Trust")
created from time to time pursuant to
a pooling and servicing agreement or
trust agreement (each, an
"Agreement").
THE DEPOSITOR......................... ContiSecurities Asset Funding Corp.
(the "Depositor") is a Delaware
corporation. The Depositor's principal
executive offices are located at 277
Park Avenue, 38th Floor, New York, New
York, 10172; telephone number (212)
207-2840. See "The Depositor" herein.
The Depositor or its affiliates may
retain or hold for sale from time to
time one or more classes of a series
of Certificates.
THE SERVICER.......................... The entity or entities named as the
Servicer in the Prospectus Supplement
(the "Servicer"), will act as
servicer, with respect to the Mortgage
Loans and Contracts included in the
related Trust. The Servicer may be an
affiliate of the Depositor and may be
a seller of Mortgage Assets to the
Depositor (each, a "Seller").
THE MASTER SERVICER................... A "Master Servicer" may be specified
in the related Prospectus Supplement
for the related series of
Certificates.
THE TRUSTEE........................... The trustee (the "Trustee") for each
series of Certificates will be
specified in the related Prospectus
Supplement.
TRUST ASSETS.......................... The assets of a Trust will be
mortgage-related assets (the "Mortgage
Assets") consisting of one or more of
the following types of assets:
A. The Mortgage Loans................ "Mortgage Loans" may include: (i)
conventional (I.E., not insured or
guaranteed by any governmental agency)
Mortgage Loans secured by one-to-four
family residential properties; (ii)
conventional multifamily mortgage
loans ("Conventional Multifamily
Loans") or mortgages insured by the
Federal Housing Administration (the
"FHA") ("FHA-Insured Multifamily
Loans" and together with the
Conventional Multifamily Loans, the
"Multifamily Loans"); (iii) Mortgage
Loans secured by security interests in
shares issued by private, non-profit,
cooperative housing corporations
("Cooperatives") and in the related
proprietary leases or occupancy
agreements granting exclusive rights
to occupy specific dwelling units in
such Cooperatives' buildings; and,
(iv) Mortgage Loans secured by junior
liens on the related mortgaged
properties, including Title I Loans
and other types of home improvement
retail installment contracts. The
Mortgage Loans may be located in any
one of the 50 states, the District of
Columbia or the Commonwealth of Puerto
Rico. See "The Trusts - Mortgage
Loans" herein.
B. Contracts........................ Contracts may include conditional
sales contracts and installment sales
or loan agreements or participation
interests therein secured by new or
used Manufactured Homes (as defined
herein). Contracts may be conventional
(I.E., not insured or guaranteed by
any government agency) or insured by
the FHA, including Title I Contracts,
or partially guaranteed by the
Veterans Administration ("VA"), as
specified in the related Prospectus
Supplement. See "The Trusts -
Contracts" herein.
C. Mortgage-
Backed Securities............... "Mortgage-Backed Securities" (or "MBS")
may include (i) private (that is, not
guaranteed or insured by the United
States or any agency or
instrumentality thereof) mortgage
participations, mortgage pass-through
certificates or other mortgage-backed
securities or (ii) certificates
insured or guaranteed by Federal Home
Loan Mortgage Corporation ("FHLMC") or
Federal National Mortgage Association
("FNMA") or Government National
Mortgage Association ("GNMA"). See
"The Trusts - Mortgage- Backed
Securities" herein.
D. Other Mortgage Securities......... Other Mortgage Securities may
include other securities that directly
or indirectly represent an ownership
interest in, or are secured by and
payable from, mortgage loans on real
property or mortgage-backed
securities, such as residual interests
in issuances of collateralized
mortgage obligations or mortgage
pass-through certificates. See "The
Trusts - Other Mortgage Securities"
herein.
Trust assets may also include
reinvestment income, reserve funds,
cash accounts, insurance policies,
guaranties, letters of credit or other
assets as described in the related
Prospectus Supplement.
The related Prospectus Supplement for
a series of Certificates will describe
the Mortgage Assets to be included in
the Trust for such series.
THE CERTIFICATES...................... The Certificates of any series may be
issued in one or more classes, as
specified in the Prospectus
Supplement. One or more classes of
Certificates of each series (i) may be
entitled to receive distributions
allocable only to principal, only to
interest or to any combination
thereof; (ii) may be entitled to
receive distributions only of
prepayments of principal throughout
the lives of the Certificates or
during specified periods; (iii) may 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; (iv) may be
entitled to receive such distributions
only after the occurrence of events
specified in the Prospectus
Supplement; (v) may be entitled 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, may be entitled to receive
interest at a fixed rate or a rate
that is subject to change from time to
time; (vii) may accrue interest, with
such accrued interest added to the
principal or notional amount of the
Certificates, and no payments being
made thereon until certain other
classes of the series have been paid
in full; and (viii) as to Certificates
entitled to distributions allocable to
interest, may be entitled to
distributions allocable to interest
only after the occurrence of events
specified in the Prospectus Supplement
and may accrue interest until such
events occur, in each case as
specified in the related Prospectus
Supplement. The timing and amounts of
such distributions may vary among
classes, over time, or otherwise as
specified in the related Prospectus
Supplement.
DISTRIBUTIONS ON
THE CERTIFICATES.................... The related Prospectus Supplement will
specify (i) whether distributions on
the Certificates entitled thereto will
be made monthly, quarterly,
semi-annually or at other intervals
and dates out of the payments received
in respect of the Mortgage Assets
included in the related Trust and
other assets, if any, pledged for the
benefit of the related Owners of
Certificates; (ii) the amount
allocable to payments of principal and
interest on any Distribution Date; and
(iii) whether all distributions will
be made PRO RATA to Owners of
Certificates of the class entitled
thereto.
The aggregate original principal
balance of the Certificates will equal
the aggregate distributions allocable
to principal that such Certificates
will be entitled to receive; the
Certificates will have an aggregate
original principal balance equal to or
less than the aggregate unpaid
principal balance of the related
Mortgage Assets (plus amounts held in
a Pre- Funding Account, if any) as of
the first day of the month of creation
of the Trust; and the Certificates
will bear interest in the aggregate at
a rate (the "Pass-Through Rate") equal
to the interest rate borne by the
related Mortgage Assets net of
servicing fees and any other specified
amounts.
PRE-FUNDING ACCOUNT................... A Trust may enter into an agreement
(each, a "Pre-Funding Agreement") with
the Depositor whereby the Depositor
will agree to transfer additional
Mortgage Assets to such Trust
following the date on which such Trust
is established and the related
Certificates are issued. Any
Pre-Funding Agreement will require
that any Mortgage Loans so transferred
conform to the requirements specified
in such Pre-Funding Agreement. If a
Pre- Funding Agreement is to be
utilized, the related Trustee will be
required to deposit in a segregated
account (each, a "Pre-Funding
Account") all or a portion of the
proceeds received by the Trustee in
connection with the sale of one or
more classes of Certificates of the
related series; subsequently, the
additional Mortgage Assets will be
transferred to the related Trust in
exchange for money released to the
Depositor from the related Pre-
Funding Account. Each Pre-Funding
Agreement will set a specified period
during which any such transfers must
occur. If all moneys originally
deposited to such Pre-Funding Account
are not used by the end of such
specified period, then any remaining
moneys will be applied as a mandatory
prepayment of a class or classes of
Certificates as specified in the
related Prospectus Supplement. The
specified period for the acquisition
by a Trust of additional Mortgage
Loans will generally not exceed three
months from the date such Trust is
established.
OPTIONAL TERMINATION.................. The Servicer, the Seller, the
Depositor, or, if specified in the
related Prospectus Supplement, the
Owners of a related class of
Certificates or a credit enhancer may
at their respective options effect
early retirement of a series of
Certificates through the purchase of
the Mortgage Assets in the related
Trust. See "Administration -
Termination" herein.
MANDATORY TERMINATION................. The Trustee, the Servicer or certain
other entities specified in the related
Prospectus Supplement may be required
to effect early retirement of a series
of Certificates by soliciting
competitive bids for the purchase of
the assets of the related Trust or
otherwise. See "Administration -
Termination" herein.
ADVANCES.............................. The Servicer of the Mortgage Loans and
Contracts will be obligated (but only
to the extent set forth in the related
Prospectus Supplement) to advance
delinquent installments of principal
and/or interest (less applicable
servicing fees) on the Mortgage Loans
and Contracts in a Trust. Any such
obligation to make advances may be
limited to amounts due to the Owners of
Certificates of the related series, to
amounts deemed to be recoverable from
late payments or liquidation proceeds,
to specified periods or to any
combination thereof, in each case as
specified in the related Prospectus
Supplement. Any such advance will be
recoverable as specified in the related
Prospectus Supplement. See "Servicing
of Mortgage Loans and Contracts"
herein.
CREDIT ENHANCEMENT.................... If specified in the related Prospectus
Supplement, a series of Certificates,
or certain classes within such series,
may have the benefit of one or more
types of credit enhancement ("Credit
Enhancement") including but not
limited to overcollateralization,
cross support, mortgage pool
insurance, special hazard insurance, a
bankruptcy bond, reserve funds, other
insurance, guaranties and similar
instruments and arrangements. Credit
Enhancement also may be provided in
the form of subordination of one or
more classes of Certificates in a
series under which losses are first
allocated to any Subordinated
Certificates up to a specified limit.
The protection against losses afforded
by any such Credit Enhancement will be
limited as described in the related
Prospectus Supplement. See "Credit
Enhancement" herein.
BOOK ENTRY REGISTRATION............... Certificates of one or more classes of
a series may be issued in book entry
form ("Book Entry Certificates") in
the name of a clearing agency (a
"Clearing Agency") registered with the
Securities and Exchange Commission, or
its nominee. Transfers and pledges of
Book Entry Certificates may be made
only through entries on the books of
the Clearing Agency in the name of
brokers, dealers, banks and other
organizations eligible to maintain
accounts with the Clearing Agency
("Clearing Agency Participants") or
their nominees. Transfers and pledges
by purchasers and other beneficial
owners of Book Entry Certificates
("Beneficial Owners") other than
Clearing Agency Participants may be
effected only through Clearing Agency
Participants. All references to the
Owners of Certificates shall mean
Beneficial Owners to the extent
Beneficial Owners may exercise their
rights through a Clearing Agency.
Except as otherwise specified in this
Prospectus or a related Prospectus
Supplement, the term "Owners" shall be
deemed to include Beneficial Owners.
See "Risk Factors - Book Entry
Registration" and "Description of the
Certificates - Book Entry
Registration" herein.
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES...................... Federal income tax consequences will
depend on, among other factors,
whether one or more elections are made
to treat a Trust or specified portions
thereof as a "real estate mortgage
investment conduit" ("REMIC") under
the Internal Revenue Code of 1986, as
amended (the "Code"), or, if no REMIC
election is made, whether the
Certificates are considered to be
Standard Certificates, Stripped
Certificates or Partnership Interests.
The related Prospectus Supplement for
each series of Certificates will
specify whether one or more REMIC
elections will be made. See "Certain
Federal Income Tax Consequences"
herein and in the related Prospectus
Supplement.
ERISA CONSIDERATIONS.................. A fiduciary of any employee benefit
plan subject to the Employee
Retirement Income Security Act of
1974, as amended ("ERISA"), or the
Code should carefully review with its
own legal advisors whether the
purchase or holding of Certificates
could give rise to a transaction
prohibited or otherwise impermissible
under ERISA or the Code. Certain
classes of Certificates may not be
transferred unless the Trustee and the
Depositor are furnished with a letter
of representation or an opinion of
counsel to the effect that such
transfer will not result in a
violation of the prohibited
transaction provisions of ERISA and
the Code and will not subject the
Trustee, the Depositor or the Servicer
to additional obligations. See
"Description of the Certificates -
General" herein and "ERISA
Considerations" herein and in the
related Prospectus Supplement.
LEGAL INVESTMENT MATTERS.............. Certificates that constitute
"mortgage related securities" under
the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA") will
be so described in the related
Prospectus Supplement. Certificates
that are not so qualified may not be
legal investments for certain types of
institutional investors, subject, in
any case, to any other regulations
which may govern investments by such
institutional investors. See "Legal
Investment Matters" herein and in the
related Prospectus Supplement.
USE OF PROCEEDS....................... Substantially all the net proceeds
from the sale of a series of
Certificates will be applied to the
simultaneous purchase of the Mortgage
Assets included in the related Trust
(or to reimburse the amounts
previously used to effect such
purchase), the costs of carrying the
Mortgage Assets until sale of the
Certificates and to pay other
expenses. See "Use of Proceeds"
herein.
RATING................................ Each class of Certificates offered by
a Prospectus Supplement will be rated
in one of the four highest rating
categories of a nationally recognized
statistical rating agency; PROVIDED,
HOWEVER, that one or more classes of
Subordinated Certificates and Residual
Certificates, which will not be so
offered, need not be so rated.
RISK FACTORS.......................... Investment in the Certificates will be
subject to one or more risk factors,
including declines in the value of
Mortgaged Properties, prepayment of
Mortgage Loans, higher risks of
defaults on particular types of
Mortgage Loans, limitations on
security for the Mortgage Loans,
limitations on credit enhancement and
various other factors. See "Risk
Factors" herein and in the related
Prospectus Supplement.
<PAGE>
RISK FACTORS
Prospective investors should consider, among other things, the following
risk factors in connection with the purchase of the Certificates:
GENERAL. If the residential real estate market in general or a regional or
local area where Mortgage Assets for a Trust are concentrated should experience
an overall decline in property values, or a significant downturn in economic
conditions, rates of delinquencies, foreclosures and losses could be higher than
those now generally experienced in the mortgage lending industry. See "The
Trusts - Mortgage Loans" herein.
LIMITED OBLIGATIONS. The Certificates will not represent an interest in or
obligation of the Depositor. The Certificates of each series will not be insured
or guaranteed by any government agency or instrumentality, the Depositor, any
Servicer or the Seller.
PREPAYMENT CONSIDERATIONS. The prepayment experience on Mortgage Loans or
Contracts constituting or underlying the Mortgage Assets will affect the average
life of each class of Certificates relating to a Trust. Prepayments may be
influenced by a variety of economic, geographic, social and other factors,
including changes in interest rate levels. In general, if mortgage interest
rates fall, the rate of prepayment would be expected to increase. Conversely, if
mortgage interest rates rise, the rate of prepayment would be expected to
decrease. Other factors affecting prepayment of mortgage loans include changes
in housing needs, job transfers, unemployment and servicing decisions. See
"Prepayment and Yield Considerations" in the related Prospectus Supplement.
RISK OF HIGHER DEFAULT RATES FOR MORTGAGE LOANS WITH BALLOON PAYMENTS. A
portion of the aggregate principal balance of the Mortgage Loans at any time may
be "balloon loans" that provide for the payment of the unamortized principal
balance of such Mortgage Loan in a single payment at maturity ("Balloon Loans").
Such Balloon Loans provide for equal monthly payments, consisting of principal
and interest, generally based on a 30- year amortization schedule, and a single
payment of the remaining balance of the Balloon Loan generally 5, 7, 10, or 15
years after origination. Amortization of a Balloon Loan based on a scheduled
period that is longer than the term of the loan results in a remaining principal
balance at maturity that is substantially larger than the regular scheduled
payments. The Depositor does not have any information regarding the default
history or prepayment history of payments on Balloon Loans. Because borrowers of
Balloon Loans are required to make substantial single payments upon maturity, it
is possible that the default risk associated with the Balloon Loans is greater
than that associated with fully-amortizing Mortgage Loans.
SECURITY INTERESTS AND OTHER ASPECTS OF THE CONTRACTS. Contracts may be
secured by a security interest in a Manufactured Home. Perfection of security
interests in the Manufactured Homes and enforcement of rights to realize upon
the value of the Manufactured Homes as collateral for the Contracts are subject
to a number of Federal and state laws, including the Uniform Commercial Code as
adopted in each state and each state's certificate of title statutes. The steps
necessary to perfect the security interest in a Manufactured Home will vary from
state to state. Because of the expense and administrative inconvenience
involved, no party will be required to amend any certificates of title to change
the lienholder specified therein to the Trustee and no party will be required to
deliver any certificate of title to the Trustee or note thereon the Trustee's
interest. Consequently, in some states, in the absence of such an amendment, the
assignment to the Trustee of the security interest in the Manufactured Home may
not be effective or such security interest may not be perfected and, in the
absence of such notation or delivery to the Trustee, the assignment of the
security interest in the Manufactured Home may not be effective against
creditors of the previous owner of the related Contract or a trustee in
bankruptcy of such previous owner. In addition, numerous Federal and state
consumer protection laws impose requirements on lending under conditional sales
contracts and installment loan agreements such as the Contracts, and the failure
by the lender or seller of goods to comply with such requirements could give
rise to liabilities of assignees for amounts due under such agreements and
claims by such assignees may be subject to set-off as a result of such lender's
or seller's noncompliance. These laws would apply to the Trustee as assignee of
the Contracts. Each Seller of Contracts will warrant that each Contract sold by
it complies with all requirements of law and will make certain warranties
relating to the validity, subsistence, perfection and priority of the security
interest in each Manufactured Home securing a Contract. A breach of any such
warranty that materially adversely affects any Contract would create an
obligation of the Seller to repurchase such Contract unless such breach is
cured. If any related Credit Enhancement is exhausted and recovery of amounts
due on the Contracts is dependent on repossession and resale of Manufactured
Homes securing Contracts that are in default, certain other factors may limit
the ability of the Trust to realize upon the Manufactured Homes or may limit the
amount realized to less than the amount due. See "Certain Legal Aspects of the
Mortgage Assets - The Contracts" herein.
LIMITED LIQUIDITY. There will be no market for the Certificates of any
series prior to the issuance thereof, and there can be no assurance that a
secondary market will develop or, if it does develop, that it will provide
liquidity of investment or will continue for the life of the Certificates of
such series. The market value of the Certificates will fluctuate with changes in
prevailing rates of interest. Consequently, the sale of Certificates in any
market that may develop may be at a discount from the Certificates' par value or
purchase price. Owners of Certificates generally have no right to request
redemption of Certificates, and the Certificates are subject to redemption only
under the limited circumstances described in the related Prospectus Supplement.
In addition, the Certificates will not be listed on any securities exchange.
LIMITED ASSETS. Owners of Certificates of each series must rely upon
distributions on the related Mortgage Assets, together with the other specific
assets pledged for the benefit of such series (which assets may be subject to
release from such pledge prior to payment in full of the Certificates), for the
payment of principal of, and interest on, that series of Certificates. If the
assets comprising the Trust are insufficient to make payments on such
Certificates, no other assets of the Depositor will be available for payment of
the deficiency. Because payments of principal will be applied to classes of
outstanding Certificates of a series in the priority specified in the related
Prospectus Supplement, a deficiency may have a disproportionately greater effect
on the Certificates of classes having lower priority in payment. In addition,
due to the priority of payments and the allocation of losses, defaults
experienced on the assets comprising a Trust may have a disproportionate effect
on a specified class or classes within such series.
Certain of the Mortgage Loans included in a Trust, particularly those
secured by Multifamily Properties, may not be fully amortizing (or may not
amortize at all) over their terms to maturity and, thus, will require
substantial payments of principal and interest (that is, balloon payments) at
their stated maturity. Mortgage Loans of this type involve a greater degree of
risk than self-amortizing loans because the ability of a Mortgagor to make a
balloon payment typically will depend upon its ability either to fully refinance
the loan or to sell the related Mortgaged Property at a price sufficient to
permit the Mortgagor to make the balloon payment. The ability of a Mortgagor to
accomplish either of these goals will be affected by a number of factors,
including the value of the related Mortgaged Property, the level of available
mortgage rates at the time of sale or refinancing, the Mortgagor's equity in the
related Mortgaged Property, prevailing general economic conditions, the
availability of credit for loans secured by comparable real properties and, in
the case of Multifamily Properties, the financial condition and operating
history of the Mortgagor and the related Mortgaged Property, tax laws and rent
control laws.
It is anticipated that some or all of the Mortgage Loans included in any
Trust, particularly Mortgage Loans secured by Multifamily Properties, will be
nonrecourse loans or loans for which recourse may be restricted or
unenforceable. As to those Mortgage Loans, recourse in the event of Mortgagor
default will be limited to the specific real property and other assets, if any,
that were pledged to secure the Mortgage Loan. However, even with respect to
those Mortgage Loans that provide for recourse against the Mortgagor and its
assets generally, there can be no assurance that enforcement of such recourse
provisions will be practicable, or that the other assets of the Mortgagor will
be sufficient to permit a recovery in respect of a defaulted Mortgage Loan in
excess of the liquidation value of the related Mortgaged Property.
LIMITATIONS, REDUCTION AND SUBSTITUTION OF CREDIT ENHANCEMENT. Credit
Enhancement may be provided in one or more of the forms described in the related
Prospectus Supplement, including, but not limited to, prioritization as to
payments of one or more classes of such series, a Mortgage Pool Insurance
Policy, a Special Hazard Insurance Policy, a bankruptcy bond, one or more
Reserve Funds, other insurance, guaranties and similar instruments and
agreements, or any combination thereof. See "Credit Enhancement" herein.
Regardless of the Credit Enhancement provided, the amount of coverage may be
limited in amount and in most cases will be subject to periodic reduction in
accordance with a schedule or formula. Furthermore, such Credit Enhancement may
provide only very limited coverage as to certain types of losses and may provide
no coverage as to certain other types of losses. The Trustee may be permitted to
reduce, terminate or substitute all or a portion of the Credit Enhancement for
any series of Certificates, if the applicable rating agencies indicate that the
then-current rating thereof will not be adversely affected.
ORIGINAL ISSUE DISCOUNT. All the Compound Interest Certificates and
Stripped Certificates that are entitled only to interest distributions will be,
and certain of the other Certificates may be, issued with original issue
discount for federal income tax purposes. An Owner of a Certificate issued with
original issue discount will be required to include original issue discount in
ordinary gross income for federal income tax purposes as it accrues, in advance
of receipt of the cash attributable to such income. Accrued but unpaid interest
on such Certificates generally will be treated as original issue discount for
this purpose. See "Certain Federal Income Tax Consequences - Federal Income Tax
Consequences for REMIC Certificates," "- Taxation of Regular Certificates -
Variable Rate Regular Certificates," "Certain Federal Income Tax Consequences -
Federal Income Tax Consequences for Certificates as to Which No REMIC Election
Is Made - Standard Certificates," and "Certain Federal Income Tax Consequences -
Premium and Discount" and "- Stripped Certificates" herein.
BOOK ENTRY REGISTRATION. Because transfers and pledges of Book Entry
Certificates may be effected only through book entries at a Clearing Agency
through Clearing Agency Participants, the liquidity of the secondary market for
Book Entry Certificates may be reduced to the extent that some investors are
unwilling to hold Certificates in book entry form in the name of Clearing Agency
Participants and the ability to pledge Book Entry Certificates may be limited
due to lack of a physical certificate. Beneficial Owners of Book Entry
Certificates may, in certain cases, experience delay in the receipt of payments
of principal and interest because such payments will be forwarded by the Trustee
to the Clearing Agency who will then forward payment to the Clearing Agency
Participants who will thereafter forward payment to Beneficial Owners. In the
event of the insolvency of the Clearing Agency or of a Clearing Agency
Participant in whose name Certificates are recorded, the ability of Beneficial
Owners to obtain timely payment and (if the limits of applicable insurance
coverage by the Securities Investor Protection Corporation are exceeded, or if
such coverage is otherwise unavailable) ultimate payment of principal and
interest on Book Entry Certificates may be impaired.
CERTAIN MATTERS RELATING TO INSOLVENCY. The Sellers of the Mortgage Assets
to the Depositor and the Depositor intend that the transfers of such Mortgage
Assets to the Depositor, and in turn to the applicable Trust, constitute sales
rather than pledges to secure indebtedness for insolvency purposes. If, however,
a seller of Mortgage Assets were to become a debtor under the federal bankruptcy
code, it is possible that a creditor, trustee-in-bankruptcy or receiver of such
seller may argue that the sale thereof by such Seller is a pledge rather than a
sale. This position, if argued or accepted by a court, could result in a delay
in or reduction of distributions on the related Certificates.
JUNIOR LIEN MORTGAGE LOANS. Because Mortgage Loans secured by junior (I.E.,
second, third, etc.) liens are subordinate to the rights of the beneficiaries
under the related senior deeds of trust or senior mortgages, a decline in the
residential real estate market would adversely affect the position of the
related Trust as a junior beneficiary or junior mortgagee before having such an
effect on the position of the related senior beneficiaries or senior mortgagees.
A rise in interest rates over a period of time, the general condition of a
Mortgaged Property and other factors may also have the effect of reducing the
value of the Mortgaged Property from the value at the time the junior lien
Mortgage Loan was originated and, as a result, may reduce the likelihood that,
in the event of a default by the borrower, liquidation or other proceeds will be
sufficient to satisfy the junior lien Mortgage Loan after satisfaction of any
senior liens and the payment of any liquidation expenses.
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 a Servicer took the same steps in
realizing upon defaulted Mortgage Loans having small remaining principal
balances as in the case of defaulted Mortgage Loans having larger principal
balances, the amount realized after expenses of liquidation would be smaller as
a percentage of the outstanding principal balance of the smaller Mortgage Loans.
To the extent the average outstanding principal balances of the Mortgage Loans
in a Trust are relatively small, realizations net of liquidation expenses may
also be relatively small as a percentage of the principal amount of the Mortgage
Loans.
LIMITATIONS ON INTEREST PAYMENTS AND FORECLOSURES. Generally, under the
terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as amended (the
"Relief Act"), or similar state legislation, a Mortgagor who enters military
service after the origination of the related Mortgage Loan (including a
Mortgagor who is a member of the National Guard or is in reserve status at the
time of the origination of the Mortgage Loan and is later called to active duty)
may not be charged interest (including fees and charges) above an annual rate of
6% during the period of such Mortgagor's active duty status, unless a court
orders otherwise upon application of the lender. It is possible that such action
could have an effect, for an indeterminate period of time, on the ability of the
related Servicer to collect full amounts of interest on certain of the Mortgage
Loans. In addition, the Relief Act imposes limitations that would impair the
ability of the related 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 RATINGS. The rating of Certificates credit enhanced through
external credit enhancement such as a letter of credit, financial guaranty
insurance policy or mortgage pool insurance will depend primarily on the
creditworthiness of the issuer of such external credit enhancement device (a
"Credit Enhancer"). Any reduction in the rating assigned to the claims-paying
ability of the related Credit Enhancer below the rating initially given to the
related Certificates would likely result in a reduction in the rating of the
Certificates. See "Ratings" in the Prospectus Supplement.
OTHER LEGAL CONSIDERATIONS. Applicable federal and state laws generally
regulate interest rates and other charges, require certain disclosures, prohibit
unfair and deceptive practices, regulate debt collection, and require licensing
of the originators of the mortgage loans and contracts. Depending on the
provisions of the applicable law and the specified facts and circumstances
involved, violations of those laws, policies and principles may limit the
ability to collect all or part of the principal of or interest on the Mortgage
Loans and Contracts and may entitle the borrower to a refund of amounts
previously paid. See "Certain Legal Aspects of the Mortgage Assets" herein.
DESCRIPTION OF THE CERTIFICATES
Each Trust will be created pursuant to an Agreement entered into among the
Depositor, the Trustee, the Master Servicer, if any, and the Servicer. The
provisions of each Agreement will vary depending upon the nature of the
Certificates to be issued thereunder and the nature of the related Trust.
Certificates which represent beneficial interests in the Trust will be issued
pursuant to the Agreement similar to the form filed as an Exhibit to the
Registration Statement of which this Prospectus is a part. The following
summaries and the summaries set forth under "Administration" describe certain
provisions relating to each series of Certificates. THE PROSPECTUS SUPPLEMENT
FOR A SERIES OF CERTIFICATES WILL DESCRIBE THE SPECIFIC PROVISIONS RELATING TO
SUCH SERIES. The Depositor will provide Owners of Certificates, without charge,
on written request a copy of the Agreement for the related series. Requests
should be addressed to ContiSecurities Asset Funding Corp., 277 Park Avenue,
38th Floor, New York, New York 10172. The Agreement relating to a series of
Certificates will be filed with the Securities and Exchange Commission within 15
days after the date of issuance of such series of Certificates (the "Delivery
Date").
The Certificates of a series will be entitled to payment only from the
assets of the Trust and any other assets pledged for the benefit of the
Certificates and will not be entitled to payments in respect of the assets
included in any other trust fund established by the Depositor. The Certificates
will not represent obligations of the Depositor, the Trustee, the Master
Servicer, if any, any Servicer or any affiliate thereof and will not be
guaranteed by any governmental agency. See "The Trusts" herein.
The Mortgage Assets relating to a series of Certificates, other than Title
I Loans and GNMA MBS, will not be insured or guaranteed by any governmental
entity and, to the extent that delinquent payments on or losses in respect of
defaulted Mortgage Assets, are not advanced or paid from any applicable Credit
Enhancement, such delinquencies may result in delays in the distribution of
payments on, or losses allocated to one or more classes of Certificates of such
series.
GENERAL
The Certificates of each series will be issued either in book entry form or
in fully registered form. The minimum original denomination of each class of
Certificates will be specified in the related Prospectus Supplement. The
original "Certificate Principal Balance" of each Certificate will equal the
aggregate distributions or payments allocable to principal to which such
Certificate is entitled and distributions allocable to interest on each
Certificate 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.
Except as described below under "Book Entry Registration" with respect to
Book Entry Certificates, the Certificates of each series will be transferable
and exchangeable on a "Certificate Register" to be maintained at the corporate
trust office or such other office or agency maintained for such purposes by the
Trustee. The Trustee will be appointed initially as the "Certificate Registrar"
and no service charge will be made for any registration of transfer or exchange
of Certificates, but payment of a sum sufficient to cover any tax or other
governmental charge may be required.
Under current law the purchase and holding of certain classes of
Certificates may result in "prohibited transactions" within the meaning of ERISA
and the Code. See "ERISA Considerations" herein and in the related Prospectus
Supplement. Transfer of Certificates of such a class will not be registered
unless the transferee (i) executes a representation letter stating that it is
not, and is not purchasing on behalf of, any such plan, account or arrangement
or (ii) provides an opinion of counsel satisfactory to the Trustee and the
Depositor that the purchase of Certificates of such a class by or on behalf of
such plan, account or arrangement is permissible under applicable law and will
not subject the Trustee, the Servicer or the Depositor to any obligation or
liability in addition to those undertaken in the Agreement.
As to each series, one or more elections may be made to treat the related
Trust or designated portions thereof as a REMIC for federal income tax purposes.
The related Prospectus Supplement will specify whether a REMIC election is to be
made. Alternatively, the Agreement for a series may provide that a REMIC
election may be made at the discretion of the Depositor or the Servicer and may
only be made if certain conditions are satisfied. See "Certain Federal Income
Tax Considerations" herein. As to any such series, the terms and provisions
applicable to the making of a REMIC election, as well as any material federal
income tax consequences to Owners of Certificates not otherwise described
herein, will be set forth in the related Prospectus Supplement. If such an
election is made with respect to a series, one of the classes will be designated
as evidencing the "residual interests" in the related REMIC, as defined in the
Code. All other classes of Certificates in such a series will constitute
"regular interests" in the related REMIC, as defined in the Code. As to each
series with respect to which a REMIC election is to be made, the Servicer, the
Trustee, an Owner of Residual Certificates or another person as specified in the
related Prospectus Supplement will be obligated to take all actions required in
order to comply with applicable laws and regulations and will be obligated to
pay any prohibited transaction taxes. The person so specified will be entitled
to reimbursement for any such payment.
CLASSES OF CERTIFICATES
Each series of Certificates will be issued in one or more classes which
will evidence the beneficial ownership in the assets of the Trust that are
allocable to (i) principal of such class of Certificates and (ii) interest on
such Certificates. If specified in the Prospectus Supplement, one or more
classes of a series of Certificates may evidence beneficial ownership interests
in separate groups of assets included in the related Trust.
The Certificates will have an aggregate original Certificate Principal
Balance equal to the aggregate unpaid principal balance of the Mortgage Assets
(plus, amounts held in a Pre-Funding Account, if any) as of the time and day
prior to creation of the Trust specified in the related Prospectus Supplement
(the "Cut-Off Date") after deducting payments of principal due before the
Cut-Off Date and will bear interest at rates which, on a weighted basis, will be
equal to the Pass-Through Rate. The Pass-Through Rate will equal the weighted
average rate of interest borne by the related Mortgage Assets, net of the
aggregate servicing fees, amounts allocated to the residual interests and any
other amounts as are specified in the Prospectus Supplement. The original
Certificate Principal Balance (or Notional Principal Balance) of the
Certificates of a series and the interest rate on the classes of such
Certificates will be determined in the manner specified in the Prospectus
Supplement.
Each class of Certificates that is entitled to distributions allocable to
interest will bear interest at a fixed rate or a rate that is subject to change
from time to time (a) in accordance with a schedule, (b) by reference to an
index, or (c) otherwise (each, a "Certificate Interest Rate"). One or more
classes of Certificates may provide for interest that accrues but is not
currently payable ("Compound Interest Certificates"). With respect to any class
of Compound Interest Certificates, any interest that has accrued but is not paid
on a given Distribution Date will be added to the aggregate Certificate
Principal Balance of such class of Certificates on that Distribution Date.
A series of Certificates may include one or more classes entitled only to
distributions or payments (i) allocable to interest, (ii) allocable to principal
(and allocable as between scheduled payments of principal and Principal
Prepayments, as defined below), or (iii) allocable to both principal (and
allocable as between scheduled payments of principal and Principal Prepayments)
and interest. A series of Certificates may consist of one or more classes as to
which distributions or payments will be allocated (i) on the basis of
collections from designated portions of the assets of the Trust, (ii) in
accordance with a schedule or formula, (iii) in relation to the occurrence of
events, or (iv) otherwise. The timing and amounts of such distributions or
payments may vary among classes, over time or otherwise.
A series of Certificates may include one or more Classes of Scheduled
Amortization Certificates and Companion Certificates. "Scheduled Amortization
Certificates" are Certificates with respect to which payments of principal are
to be made in specified amounts on specified Distribution Dates, to the extent
of funds available on such Distribution Date. "Companion Certificates" are
Certificates which receive payments of all or a portion of any funds available
on a given Distribution Date which are in excess of amounts required to be
applied to payments on Scheduled Amortization Certificates on such Distribution
Date. Because of the manner of application of payments of principal to Companion
Certificates, the weighted average lives of Companion Certificates of a series
may be expected to be more sensitive to the actual rate of prepayments on the
Mortgage Assets in the related Trust than will the Scheduled Amortization
Certificates of such series.
One or more series of Certificates may constitute series of "Special
Allocation Certificates", which may include Senior Certificates, Subordinated
Certificates, Priority Certificates and Non-Priority Certificates. As specified
in the related Prospectus Supplement for a series of Special Allocation
Certificates, the timing and/or priority of payments of principal and/or
interest may favor one or more classes of Certificates over one or more other
classes of Certificates. Such timing and/or priority may be modified or
reordered upon the occurrence of one or more specified events. Losses on Trust
assets for such series may be disproportionately borne by one or more classes of
such series, and the proceeds and distributions from such assets may be applied
to the payment in full of one or more classes within such series before the
balance, if any, of such proceeds are applied to one or more other classes
within such series. For example, Special Allocation Certificates in a series may
be comprised of one or more classes of Senior Certificates having a priority in
right to distributions of principal and interest over one or more classes of
Subordinated Certificates, as a form of Credit Enhancement. See "Credit
Enhancement - Subordination" herein. Typically, the Subordinated Certificates
will carry a rating by the rating agencies lower than that of the Senior
Certificates. In addition, one or more classes of Certificates ("Priority
Certificates") may be entitled to a priority of distributions of principal or
interest from assets in the Trust over another class of Certificates
("Non-Priority Certificates"), but only after the exhaustion of other Credit
Enhancement applicable to such series. The Priority Certificates and
Non-Priority Certificates nonetheless may be within the same rating category.
DISTRIBUTIONS OF PRINCIPAL AND INTEREST
GENERAL. Distributions of principal and interest will be made to the extent
of funds available therefor, on the dates specified in the Prospectus Supplement
(each, a "Distribution Date") to the persons in whose names the Certificates are
registered (the "Owners") at the close of business on the dates specified in the
Prospectus Supplement (each, a "Record Date"). With respect to Certificates
other than Book Entry Certificates, distributions will be made by check or money
order mailed to the person entitled thereto at the address appearing in the
Certificate Register or, if specified in the Prospectus Supplement, in the case
of Certificates that are of a certain minimum denomination as specified in the
Prospectus Supplement, upon written request by the Owner of a Certificate, by
wire transfer or by such other means as are agreed upon with the person entitled
thereto; PROVIDED, HOWEVER, that the final distribution in retirement of the
Certificates (other than Book Entry Certificates) will be made only upon
presentation and surrender of the Certificates at the office or agency of the
Trustee specified in the notice of such final distribution. With respect to Book
Entry Certificates, such payments will be made as described below under "Book
Entry Registration".
Distributions will be made out of, and only to the extent of, funds in a
separate account established and maintained for the benefit of the Certificates
of the related series (the "Certificate Account" with respect to such series),
including any funds transferred from any related Reserve Fund. Amounts may be
invested in the Eligible Investments specified herein and in the Prospectus
Supplement, and all income or other gain from such investments will be deposited
in the related Certificate Account and may be available to make payments on the
Certificates of the applicable series on the next succeeding Distribution Date
or pay after amounts owed by the Trust.
DISTRIBUTIONS OF INTEREST. Interest will accrue on the aggregate
Certificate Principal Balance (or, in the case of Certificates entitled only to
distributions allocable to interest, the aggregate Notional Principal Balance
(as defined below)) of each class of Certificates entitled to interest from the
date, at the applicable Certificate Interest Rate and for the periods (each, an
"Interest Accrual Period") specified in the Prospectus Supplement. The aggregate
Certificate Principal Balance of any class of Certificates entitled to
distributions of principal will be the aggregate original Certificate Principal
Balance of such class of Certificates, reduced by all distributions allocable to
principal, and, in the case of Compound Interest Certificates, increased by all
interest accrued but not then distributable on such Compound Interest
Certificates. With respect to a class of Certificates entitled only to
distributions allocable to interest, such interest will accrue on a notional
principal balance (the "Notional Principal Balance") of such class, computed
solely for purposes of determining the amount of interest accrued and payable on
such class of Certificates.
To the extent funds are available therefor, interest accrued during each
Interest Accrual Period on each class of Certificates entitled to interest
(other than a class of Compound Interest Certificates) will be distributable on
the Distribution Dates specified in the Prospectus Supplement until the
aggregate Certificate Principal Balance of the Certificates of such class has
been distributed in full or, in the case 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. Distributions of interest on each class
of Compound Interest Certificates will commence only after the occurrence of the
events specified in the Prospectus Supplement and, prior to such time, the
aggregate Certificate Principal Balance (or Notional Principal Balance) of such
class of Compound Interest Certificates, will increase on each Distribution Date
by the amount of interest that accrued on such class of Compound Interest
Certificates 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 Compound Interest Certificates will thereafter accrue interest on its
outstanding Certificate Principal Balance (or Notional Principal Balance) as so
adjusted.
DISTRIBUTIONS OF PRINCIPAL. The Prospectus Supplement will specify the
method by which the amount of principal to be distributed on the Certificates on
each Distribution Date will be calculated and the manner in which such amount
will be allocated among the classes of Certificates entitled to distributions of
principal.
One or more classes of Certificates may be entitled to receive all or a
disproportionate percentage of the payments of principal which are received on
the related Mortgage Assets 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"). Any such allocation may have the effect
of accelerating the amortization of such Certificates relative to the interests
evidenced by the other Certificates.
UNSCHEDULED DISTRIBUTIONS. The Certificates of a series may be subject to
receipt of distributions before the next scheduled Distribution Date under the
circumstances and in the manner described below and in the related Prospectus
Supplement. If applicable, such unscheduled distributions will be made on the
Certificates of a series on the date and in the amount specified in the related
Prospectus Supplement if, due to substantial payments of principal (including
Principal Prepayments) on the related Mortgage Assets, low rates then available
for reinvestment of such payments or both, it is determined, based on specified
assumptions, that the amount anticipated to be on deposit in the Certificate
Account for such series on the next related Distribution Date, together with, if
applicable, any amounts available to be withdrawn from any related Reserve Fund
or from any other Credit Enhancement provided for such series, may be
insufficient to make required distributions on the Certificates on such
Distribution Date. The amount of any such unscheduled distribution that is
allocable to principal will not exceed the amount that would otherwise have been
required to be distributed as principal on the Certificates on the next
Distribution Date and will include interest at the applicable Certificate
Interest Rate (if any) on the amount of the unscheduled distribution allocable
to principal for the period and to the date specified in the Prospectus
Supplement.
All distributions allocable to principal in any unscheduled distribution
will be made in the same priority and manner as distributions of principal on
the Certificates would have been made on the next Distribution Date except as
otherwise stated in the related Prospectus Supplement, and, with respect to
Certificates of the same class, unscheduled distributions of principal will be
made on a PRO RATA basis. Notice of any unscheduled distribution will be given
by the Trustee prior to the date of such distribution.
BOOK ENTRY REGISTRATION
Certificates may be issued as Book Entry Certificates and held in the name
of a Clearing Agency registered with the Securities and Exchange Commission or
its nominee. Transfers and pledges of Book Entry Certificates may be made only
through entries on the books of the Clearing Agency in the name of Clearing
Agency Participants or their nominees. Clearing Agency Participants may also be
Beneficial Owners of Book Entry Certificates.
Purchasers and other Beneficial Owners may not hold Book Entry Certificates
directly but may hold, transfer or pledge their ownership interest in the
Certificates only through Clearing Agency Participants. Furthermore, Beneficial
Owners will receive all payments of principal and interest with respect to the
Certificates and, if applicable, may request redemption of Certificates, only
through the Clearing Agency and the Clearing Agency Participants. Beneficial
Owners will not be registered Owners of Certificates or be entitled to receive
definitive certificates representing their ownership interest in the
Certificates except under the limited circumstances, if any, described in the
related Prospectus Supplement. See "Risk Factors - Book Entry Registration"
herein.
If Certificates of a series are issued as Book Entry Certificates, the
Clearing Agency will be required to make book entry transfers among Clearing
Agency Participants, to receive and transmit payments of principal and interest
with respect to the Certificates of such series, and to receive and transmit
requests for redemption with respect to such Certificates. Clearing Agency
Participants with whom Beneficial Owners have accounts with respect to such Book
Entry Certificates will be similarly required to make book entry transfers and
receive and transmit payments and redemption requests on behalf of their
respective Beneficial Owners. Accordingly, although Beneficial Owners will not
be registered Owners of Certificates and will not possess physical certificates,
a method will be provided whereby Beneficial Owners may receive payments,
transfer their interests, and submit redemption requests.
LIST OF OWNERS OF CERTIFICATES
Upon written request of a specified number or percentage interests of
Owners of Certificates of record of a series of Certificates for purposes of
communicating with other Owners of Certificates with respect to their rights as
Owners of Certificates, the Trustee will afford such Owners access during
business hours to the most recent list of Owners of Certificates of that series
held by the Trustee. With respect to Book Entry Certificates, the only named
Owner on the Certificate Register will be the Clearing Agency.
The Agreement will not provide for the holding of any annual or other
meetings of Owners of Certificates.
THE TRUSTS
The Trust for a series of Certificates will consist of: (i) the Mortgage
Assets (subject, if specified in the Prospectus Supplement, to certain
exclusions) received on and after the related Cut-Off Date; (ii) all payments
(subject, if specified in the Prospectus Supplement, to certain exclusions) in
respect of such Mortgage Assets, which may be adjusted, to the extent specified
in the related Prospectus Supplement, in the case of interest payments on
Mortgage Assets, to the Pass-Through Rate; (iii) if specified in the Prospectus
Supplement, reinvestment income on such payments; (iv) with respect to a Trust
that includes Mortgage Loans, or Contracts, all property acquired by foreclosure
or deed in lieu of foreclosure with respect to any such Mortgage Loan or
Contract; (v) certain rights of the Trustee, the Depositor and the Servicer
under any policies required to be maintained in respect of the related Mortgage
Assets; (vi) certain rights of the Depositor or one of its affiliates under any
Mortgage Loan purchase agreement, including in respect of any representations
and warranties therein; and (vii) if so specified in the Prospectus Supplement,
one or more forms of Credit Enhancement.
The Certificates of each series will be entitled to payment only from the
assets of the related Trust and any other assets pledged therefor and will not
be entitled to payments in respect of the assets of any other trust established
by the Depositor.
Mortgage Assets may be acquired by the Depositor from affiliated or
unaffiliated originators. The following is a brief description of the Mortgage
Assets expected to be included in the Trusts. If specific information respecting
the Mortgage Assets is not known at the time the related series of Certificates
initially are offered, more general information of the nature described below
will be provided in the related Prospectus Supplement, and specific information
will be set forth in a report on Form 8-K to be filed with the Securities and
Exchange Commission within fifteen days after the initial issuance of such
Certificates. A copy of the Agreement with respect to each series of
Certificates will be attached to the Form 8-K and will be available for
inspection at the corporate trust office of the Trustee specified in the related
Prospectus Supplement. A schedule of the Mortgage Assets relating to each series
of Certificates, will be attached to the related Agreement delivered to the
Trustee upon delivery of such Certificates.
MORTGAGE LOANS
The Mortgage Loans will be evidenced by promissory notes (the "Mortgage
Notes") secured by mortgages or deeds of trust (the "Mortgages") creating liens
on residential properties (the "Mortgaged Properties"). Such Mortgage Loans will
be within the broad classifications of single family mortgage loans, defined
generally as loans on residences containing one-to-four dwelling units or
multifamily loans. If specified in the Prospectus Supplement, the Mortgage Loans
may include cooperative apartment loans ("Cooperative Loans") secured by
security interests in shares issued by Cooperatives and in the related
proprietary leases or occupancy agreements granting exclusive rights to occupy
specific dwelling units in such Cooperatives' buildings, or the Mortgage Loans
may be secured by junior liens on the related mortgaged properties, including
Title I Loans and other types of home improvement retail installment contracts.
The Mortgaged Properties securing the Mortgage Loans may include investment
properties and vacation and second homes. The Mortgaged Property for such loans
may also consist of residential properties consisting of five or more rental or
cooperatively-owned dwelling units in high-rise, mid-rise or garden apartment
buildings or projects ("Multifamily Properties"). Each Mortgage Loan will be
selected by the Depositor for inclusion in the Trust from among those acquired
by the Depositor or originated or acquired by one or more affiliated or
unaffiliated originators, including newly originated loans. Mortgaged Properties
may be located in any one of the 50 states, the District of Columbia or the
Commonwealth of Puerto Rico.
The Mortgage Loans will be "conventional" mortgage loans, that is they will
not be insured or guaranteed by any governmental agency, the principal and
interest on the Mortgage Loans included in the Trust for a series of
Certificates will be payable either on the first day of each month or on
different scheduled days throughout each month, and the interest will be
calculated either on a simple-interest or accrual method as described in the
related Prospectus Supplement. When a full principal amount is paid on a
Mortgage Loan during a month, the mortgagor is generally charged interest only
on the days of the month actually elapsed up to the date of such prepayment, at
a daily interest rate that is applied to the principal amount of the Mortgage
Loan so prepaid.
The payment terms of the Mortgage Loans to be included in a Trust for a
series will be described in the related Prospectus Supplement and may include
any of the following features or combinations thereof or other features
described in the related Prospectus Supplement:
(a) Interest may be payable at a fixed rate, a rate adjustable
from time to time in relation to an index, a rate that is fixed for a
period of time or under certain circumstances and followed by an
adjustable rate, a rate that otherwise varies from time to time, or a
rate that is convertible from an adjustable rate to a fixed rate.
Changes to an adjustable rate may be subject to periodic limitations,
maximum rates, minimum rates or a combination of such limitations.
Accrued interest may be deferred and added to the principal of a
Mortgage Loan for such periods and under such circumstances as may be
specified in the related Prospectus Supplement. Mortgage Loans may
provide for the payment of interest at a rate lower than the specified
mortgage rate for a period of time or for the life of the Mortgage Loan
with the amount of any difference contributed from funds supplied by
the seller of the Mortgaged Property or another source.
(b) Principal may be payable on a level debt service basis to
fully amortize the Mortgage Loan over its term, may be calculated on
the basis of an amortization schedule that is longer than the original
term to maturity or on an interest rate that is different from the
interest rate on the Mortgage Loan or may not be amortized during all
or a portion of the original term. Payment of all or a substantial
portion of the principal may be due on maturity. Principal may include
interest that has been deferred and added to the principal balance of
the Mortgage Loan.
(c) Monthly payments of principal and interest may be fixed for
the life of the Mortgage Loan, may increase over a specified period of
time or may change from period to period. Mortgage Loans may include
limits on periodic increases or decreases in the amount of monthly
payments and may include maximum or minimum amounts of monthly
payments.
(d) Prepayments of principal may be subject to a prepayment fee,
which may be fixed for the life of the Mortgage Loan or may decline
over time, and may be prohibited for the life of the Mortgage Loan or
for certain periods ("lockout periods"). Certain Mortgage Loans may
permit prepayments after expiration of the applicable lockout period
and may require the payment of a prepayment fee in connection 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 Servicer, or
as may be required by any applicable government program.
(e) Another type of mortgage loan described in the Prospectus
Supplement.
With respect to a series for which the related Trust includes Mortgage
Loans, the related Prospectus Supplement may specify, among other things,
information regarding the interest rates (the "Mortgage Rates"), the average
Principal Balance and the aggregate Principal Balance, the years of origination
and original principal balances and the original loan-to-value ratios. The
"Principal Balance" of any Mortgage Loan will be the unpaid principal balance of
such Mortgage Loan as of the Cut-Off Date, after deducting any principal
payments due before the Cut-Off Date, reduced by all principal payments,
including principal payments advanced pursuant to the related Agreement,
previously distributed with respect to such Mortgage Loan and reported as
allocable to principal.
The "Loan-to-Value Ratio" of any Mortgage Loan will be determined by
dividing the amount of the Mortgage Loan by the Original Value (defined below)
of the related Mortgaged Property. The "principal amount" of the Mortgage Loan,
for purposes of computation of the Loan-to-Value Ratio of any Mortgage Loan,
will include any part of an origination fee that has been financed. In some
instances, it may also include amounts which the seller or some other party to
the transaction has paid to the mortgagee, such as minor reductions in the
purchase price made at the closing. The "Original Value" of a Mortgage Loan is
(a) in the case of any purchase money Mortgage Loan, the lesser of (i) the value
of the mortgaged property, based on an appraisal thereof and (ii) the selling
price, and (b) otherwise the value of the mortgaged property, based on an
appraisal thereof.
There can be no assurance that the Original Value will reflect actual real
estate values during the term of a Mortgage Loan. 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 the Mortgaged Properties, the actual rates of delinquencies,
foreclosures and losses could be significantly higher than those now generally
experienced in the mortgage lending industry. In addition, adverse economic
conditions (which may or may not affect real estate values) may affect the
timely and ultimate payment by mortgagors of scheduled payments of principal and
interest on the Mortgage Loans and, accordingly, the actual rates of
delinquencies, foreclosures and losses with respect to the Mortgage Loans.
Multifamily Loans will consist of Multifamily Loans consisting of either
Conventional Multifamily Loans or FHA-Insured Multifamily Loans secured by
mortgages or deeds of trust or other similar security instruments creating a
lien on rental apartment buildings or projects containing five or more units,
including, but not limited to, high-rise, mid-rise and garden apartments or
secured by apartment buildings owned by cooperative housing corporations. The
Multifamily Properties may include mixed commercial and residential structures.
Unless otherwise specified in the related Prospectus Supplement, each Mortgage
Loan will create a first priority mortgage lien on a Mortgaged Property. A
Multifamily Loan may create a lien on a borrower's leasehold estate in a
property; however, unless otherwise specified in the related Prospectus
Supplement, the term of any such leasehold will exceed the term of the Mortgage
Loan by at least two years. The Depositor expects that Mortgage Loans will have
been originated by mortgagees in the ordinary course of their real estate
lending activities. Each Multifamily Loan will bear interest at an annual fixed
rate or adjustable rate of interest specified in the Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, all of the
Multifamily Loans will have had original terms to maturity of not more than 40
years and will provide for scheduled payments of principal, interest or both, to
be made on specified dates ("Due Dates") that occur monthly, quarterly or
semi-annually. A Multifamily Loan (i) may provide for accrual of interest
thereon at an interest rate (a "Mortgage Loan Rate") that is fixed over its term
of that adjusts from time to time, or that may be converted at the borrower's
election from an adjustable to a fixed Mortgage Loan Rate, or from a fixed to an
adjustable Mortgage Loan Rate, (ii) may provide for level payments to maturity
or for payments that adjust from time to time to accommodate changes in the
Mortgage Loan Rate or to reflect the occurrence of certain events, and may
permit negative amortization, (iii) may be fully amortizing over its term to
maturity, or may provide for little or no amortization over its term and thus
require a balloon payment on its stated maturity date, and (iv) may contain a
prohibition on prepayment (the period of such prohibition, a "Lock-out Period"
and its date of expiration, a "Lock-out Expiration Date") or require payment of
a premium or a yield maintenance penalty (a "Prepayment Premium") in connection
with a prepayment, in each case as described in the related Prospectus
Supplement. A Multifamily Loan may also contain a provision that entitles the
lender to a share of profits realized from the operation or disposition of the
Mortgaged Property (an "Equity Participation"), as described in the related
Prospectus Supplement. If holders of any class or classes of Certificates of a
series will be entitled to all or a portion of an Equity Participation, the
related Prospectus Supplement will describe the Equity Participation and the
method or methods by which distributions in respect thereof will be made to such
holders.
Lenders typically look to the Debt Service Coverage Ratio of a loan secured
by income-producing property as an important measure of the risk of default on
such loan. Unless otherwise defined in the related Prospectus Supplement, the
"Debt Service Coverage Ratio" of a Multifamily Loan at any given time is the
ratio of (i) the Net Operating Income of the related Mortgaged Property for a
twelve-month period to (ii) the annualized scheduled payments on the Multifamily
Loan and on any other loan that is secured by a lien on the Mortgaged Property
prior to the lien of the related Mortgage. Unless otherwise defined in the
related Prospectus Supplement, "Net Operating Income" means, for any given
period, the total operating revenues derived from a Mortgaged Property during
such period, minus the total operating expenses incurred in respect of such
Mortgaged Property during such period other than (i) non-cash items such as
depreciation and amortization, (ii) capital expenditures and (iii) debt service
on loans (including the related Multifamily Loan) secured by liens on the
Mortgaged Property. The Net Operating Income of a Mortgage Property will
fluctuate over time and may or may not be sufficient to cover debt service on
the related Multifamily Loan at any given time. As the primary source of the
operating revenues of a non-owner occupied income-producing property, rental
income (and maintenance payments from tenant-stockholders of a Cooperative) may
be affected by the condition of the applicable real estate market and/or area
economy.
Increases in operating expenses due to the general economic climate or
economic conditions in a locality or industry segment, such as increases in
interest rates, real estate tax rates, energy costs, labor costs and other
operating expenses and/or to changes in governmental rules, regulations and
fiscal policies, may also affect the risk of default on a Multifamily Loan. As
may be further described in the related Prospectus Supplement, in some cases
leases of Mortgaged Properties may provide that the lessee, rather than the
borrower/landlord, is responsible for payment of operating expenses ("Net
Leases"). However, the existence of such "net of expense" provisions will result
in stable Net Operating Income to the borrower/landlord only to the extent that
the lessee is able to absorb operating expense increases while continuing to
make rent payments.
CONTRACTS
Each pool of Contracts included in the Trust with respect to a series of
Certificates (the "Contract Pool") will consist of manufactured housing
conditional sales contracts and installment loan agreements or participation
interests therein (collectively, "Contracts"). The Contracts may be conventional
manufactured housing contracts or contracts insured by the FHA, including Title
I Contracts, or partially guaranteed by the VA. Each Contract is secured by a
Manufactured Home. The Prospectus Supplement will specify whether the Contracts
will be fully amortizing or have a balloon payment and whether they will bear
interest at a fixed or variable rate.
The Manufactured Homes securing the Contracts consist of manufactured homes
within the meaning of 42 United States Code, Section 5402(6), which defines a
"Manufactured Home" as "a structure, transportable in one or more sections,
which in the traveling mode, is eight body feet or more in width or forty body
feet or more in length, or, when erected on site, is three hundred twenty or
more square feet, and which is built on a permanent chassis and designed to be
used as a dwelling with or without permanent foundation when connected to the
required utilities, and includes the plumbing, heating, air-conditioning, and
electrical systems contained therein; except that such term shall include any
structure which meets all the requirements of this paragraph except the size
requirements and with respect to which the manufacturer voluntarily files a
certification required by the Secretary of Housing and Urban Development and
complies with the standards established under [this] chapter." Moreover, if an
election is made to treat the Trust as a REMIC as described in "Certain Federal
Income Tax Consequences - Federal Income Tax Consequences for REMIC
Certificates" herein, Manufactured Homes will have a minimum of 400 square feet
of living space and a minimum width in excess of 102 inches.
For purposes of calculating the loan-to- value ratio of a Contract relating
to a new Manufactured Home, the "Collateral Value" is no greater than the sum of
a fixed percentage of the list price of the unit actually billed by the
manufacturer to the dealer (exclusive of freight to the dealer site) including
"accessories" identified in the invoice (the "Manufacturer's Invoice Price"),
plus the actual cost of any accessories purchased from the dealer, a delivery
and set-up allowance, depending on the size of the unit and the cost of state
and local taxes, filing fees and up to three years prepaid hazard insurance
premiums. The Collateral Value of a used Manufactured Home is the least of the
sales price, the appraised value, and the National Automobile Dealer's
Association book value plus prepaid taxes and hazard insurance premiums. The
appraised value of a Manufactured Home is based upon the age and condition of
the manufactured housing unit and the quality and condition of the mobile home
park in which it is situated, if applicable.
The related Prospectus Supplement may specify for the Contracts contained
in the related Contract Pool, among other things, the date of origination of the
Contracts; the annual percentage rates on the Contracts; the loan-to-value
ratios; the minimum and maximum outstanding principal balance as of the Cut-Off
Date and the average outstanding principal balance; the outstanding principal
balances of the Contracts included in the Contract Pool; the original maturities
of the Contracts; and the last maturity date of any Contract.
MORTGAGE-BACKED SECURITIES
"Mortgage-Backed Securities" (or "MBS") may include (i) private (that is,
not guaranteed or insured by the United States or any agency or instrumentality
thereof) mortgage participations, mortgage pass-through certificates or other
mortgage-backed securities or (ii) certificates insured or guaranteed by FHLMC
or FNMA or GNMA.
Any MBS will have been issued pursuant to a participation and servicing
agreement, a pooling and servicing agreement, an indenture or similar agreement
(an "MBS Agreement"). A seller (the "MBS Issuer") and/or servicer (the "MBS
Servicer") of the underlying mortgage loans will have entered into the MBS
Agreement with a trustee or a custodian under the MBS Agreement (the "MBS
Trustee"), if any, or with the original purchaser or purchasers of the MBS.
The MBS may have been issued in one or more classes with characteristics
similar to the classes of Certificates described herein. Distributions in
respect of the MBS will be made by the MBS Servicer or the MBS Trustee on the
dates specified in the related Prospectus Supplement. The MBS Issuer or the MBS
Servicer or another person specified in the related Prospectus Supplement may
have the right or obligation to repurchase or substitute assets underlying the
MBS after a certain date or under other circumstances specified in the related
Prospectus Supplement.
Reserve funds, subordination, cross-support or other credit enhancement
similar to that described for the Certificates under "Credit Enhancement" may
have been provided with respect to the MBS. The type, characteristics and amount
of such credit enhancement, if any, will be a function of the characteristics of
the underlying mortgage loans and other factors and generally will have been
established on the basis of the requirements of any rating agency that may have
assigned a rating to the MBS, or by the initial purchasers of the MBS.
The Prospectus Supplement for a series of Certificates that evidence
interests in MBS will specify, to the extent available, (i) the aggregate
approximate initial and outstanding principal amount and type of the MBS to be
included in the Trust, (ii) the original and remaining term to stated maturity
of the MBS, if applicable, (iii) the pass- through or bond rate of the MBS or
the formula for determining such rates, (iv) the payment characteristics of the
MBS, (v) the MBS Issuer, MBS Servicer and MBS Trustee, as applicable, (vi) a
description of the credit support, if any, (vii) the circumstances under which
the stated underlying mortgage loans, or the MBS themselves may be purchased
prior to their maturity, (viii) the terms on which mortgage loans may be
substituted for those originally underlying the MBS, (ix) the servicing fees
payable under the MBS Agreement, (x) to the extent available to the Depositor,
information in respect of the underlying mortgage loans, and (xi) the
characteristics of any cash flow agreements that relate to the MBS.
OTHER MORTGAGE SECURITIES
Other Mortgage Securities include other securities that directly or
indirectly represent an ownership interest in, or are secured by and payable
from, mortgage loans on real property or mortgage-backed securities, including
residual interests in issuances of collateralized mortgage obligations or
mortgage pass-through certificates. Any Other Mortgage Securities that are
privately placed securities will not be included in a Trust until such time as
such privately placed securities would be freely transferable pursuant to Rule
144A of the Securities Act of 1933, as amended. Further (i) such privately
placed securities will have been acquired in the secondary market and not
pursuant to an initial offering thereof and (ii) the underlying issuer of such
securities will not be affiliated with the Depositor and will not have an
interest in the Trust. The Prospectus Supplement for a series of Certificates
will describe any Other Mortgage Securities to be included in the Trust for such
series.
CREDIT ENHANCEMENT
GENERAL. Various forms of Credit Enhancement may be provided with respect
to one or more classes of a series of Certificates or with respect to the assets
in the related Trust. Credit Enhancement may be in the form of the subordination
of one or more classes of the Certificates of such series, the establishment of
one or more Reserve Funds, the use of a cross-support feature, use of a Mortgage
Pool Insurance Policy, Special Hazard Insurance Policy, bankruptcy bond, or
another form of Credit Enhancement described in the related Prospectus
Supplement, or any combination of the foregoing. Credit Enhancement may not
provide protection against all risks of loss and may not guarantee repayment of
the entire principal balance of the Certificates and interest thereon. If losses
occur which exceed the amount covered by Credit Enhancement or which are not
covered by the Credit Enhancement, Owners of Certificates will bear their
allocable share of deficiencies.
FINANCIAL GUARANTY INSURANCE POLICIES. If so specified in the related
Prospectus Supplement, a financial guaranty insurance policy or surety bond
("Financial Guaranty Insurance Policy") may be obtained and maintained for each
class or series of Certificates. The issuer of any Financial Guaranty Insurance
Policy (a "Financial Guaranty Insurer") will be described in the related
Prospectus Supplement. Such description will include financial information on
the Financial Guaranty Insurer. In addition, the audited financial statements of
a Financial Guaranty Insurer and an auditors consent to use such financial
statements will be filed with the Securities and Exchange Commission on Form 8-K
or will be incorporated by reference to financial statements already on file
with the Securities and Exchange Commission.
Unless otherwise specified in the related Prospectus Supplement, a
Financial Guaranty Insurance Policy will unconditionally and irrevocably
guarantee to Certificateholders that an amount equal to each full and completed
insured payment will be received by an agent of the Trustee (an "Insurance
Paying Agent") on behalf of Certificateholders, for distribution by the Trustee
to each Certificateholder. The "insured payment" will be defined in the related
Prospectus Supplement, and will generally equal the full amount of the
distributions of principal and interest to which Certificateholders are entitled
under the related Agreement plus any other amounts specified therein or in the
related Prospectus Supplement (the "Insured Payment").
Financial Guaranty Insurance Policies may apply only to certain specified
classes, or may apply at the Mortgage Asset level and only to specified Mortgage
Assets.
The specific terms of any Financial Guaranty Insurance Policy will be as
set forth in the related Prospectus Supplement. Financial Guaranty Insurance
Policies may have limitations including (but not limited to) limitations on the
insurer's obligation to guarantee the obligations of the Seller or Depositor to
repurchase or substitute for any Mortgage Loans, Financial Guaranty Insurance
Policies will not guarantee any specified rate of prepayments and/or to provide
funds to redeem Certificates on any specified date.
Subject to the terms of the related Agreement, the Financial Guaranty
Insurer may be subrogated to the rights of Certificateholder to receive payments
under the Certificates to the extent of any payment by such Financial Guaranty
Insurer under the related Financial Guaranty Insurance Policy.
SUBORDINATION. Distributions in respect of scheduled principal, interest or
any combination thereof otherwise payable to one or more classes of Certificates
of a series (the "Subordinated Certificates") may be paid to one or more other
classes of such series (the "Senior Certificates") under the circumstances and
to the extent provided in the Prospectus Supplement. If specified in the
Prospectus Supplement, delays in receipt of scheduled payments on the Mortgage
Assets and losses on defaulted Mortgage Assets will be borne first by the
various classes of Subordinated Certificates and thereafter by the various
classes of Senior Certificates, in each case under the circumstances and subject
to the limitations specified in the Prospectus Supplement. The aggregate
distributions in respect of delinquent payments on the Mortgage Assets over the
lives of the Certificates or at any time, the aggregate losses in respect of
defaulted Mortgage Assets which must be borne by the Subordinated Certificates
by virtue of subordination and the amount of the distributions otherwise
distributable to the Subordinated Certificates that will be distributable to
Owners of Senior Certificates on any Distribution Date may be limited as
specified in the Prospectus Supplement. If aggregate distributions in respect of
delinquent payments on the Mortgage Assets or aggregate losses in respect of
such Mortgage Assets were to exceed the total amounts payable and available for
distribution to Owners of Subordinated Certificates or, if applicable, were to
exceed the specified maximum amount, Owners of Senior Certificates could
experience losses on the Certificates.
In addition to or in lieu of the foregoing, all or any portion of
distributions otherwise payable to Subordinated Certificates on any Distribution
Date may instead be deposited into one or more Reserve Funds (as defined below)
established by the Trustee. If so specified in the Prospectus Supplement, such
deposits may be made on each Distribution Date, on each Distribution Date for
specified periods, or on each Distribution Date until the balance in the Reserve
Fund has reached a specified amount and, following payments from the Reserve
Fund to Owners of Senior Certificates or otherwise, thereafter to the extent
necessary to restore the balance in the Reserve Fund to required levels, in each
case as specified in the Prospectus Supplement. If so specified in the
Prospectus Supplement, amounts on deposit in the Reserve Fund may be released to
the Depositor or the Owners of any class of Certificates at the times and under
the circumstances specified in the Prospectus Supplement.
If specified in the Prospectus Supplement, various classes of Subordinate
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 events, or
(iv) otherwise, in each case as specified in the Prospectus Supplement. As
between classes of Subordinated Certificates, payments with respect to Senior
Certificates on account of delinquencies or losses and payments to any Reserve
Fund will be allocated as specified in the Prospectus Supplement.
OVERCOLLATERALIZATION. If specified in the Prospectus Supplement,
subordination provisions of a Trust may be used to accelerate to a limited
extent the amortization of one or more classes of Certificates relative to the
amortization of the related Mortgage Loans. The accelerated amortization is
achieved by the application of certain excess interest to the payment of
principal of one or more classes of Certificates. This acceleration feature
creates, with respect to the Mortgage Loans or groups thereof,
overcollateralization which results from the excess of the aggregate principal
balance of the related Mortgage Loans, or a group thereof, over the principal
balance of the related class of Certificates. Such acceleration may continue for
the life of the related Certificates, or may be limited. In the case of limited
acceleration, once the required level of overcollateralization is reached, and
subject to certain provisions specified in the related Prospectus Supplement,
such limited acceleration feature may cease, unless necessary to maintain the
required level of overcollateralization.
CROSS-SUPPORT. If specified in the related Prospectus Supplement, the
beneficial ownership of separate groups of assets included in the Trust for a
series may be evidenced by separate classes of related series of Certificates.
In such case, Credit Enhancement may be provided by a cross-support feature
which may require that distributions be made with respect to Certificates
evidencing beneficial ownership of one or more asset groups prior to
distributions to Subordinated Certificates evidencing a beneficial ownership
interest in other asset groups within the same Trust. The Prospectus Supplement
for a series which includes a cross-support feature will describe the manner and
conditions for applying such cross-support feature.
If specified in the Prospectus Supplement, the coverage provided by one or
more forms of Credit Enhancement may apply concurrently to two or more separate
Trusts for a separate series of Certificates. If applicable, the Prospectus
Supplement will identify the Trusts to which such credit support relates and the
manner of determining the amount of the coverage provided thereby and of the
application of such coverage to the identified Trusts.
POOL INSURANCE. If specified in the related Prospectus Supplement, one or
more mortgage pool insurance policies (each, a "Mortgage Pool Insurance Policy")
will be obtained.
Any such Mortgage Pool Insurance Policy will, subject to the limitations
described below and in the Prospectus Supplement, cover loss by reason of
default in payments on such Mortgage Loans up to the amounts specified in the
Prospectus Supplement or report on Form 8-K and for the periods specified in the
Prospectus Supplement. The Trustee under the related Agreement will agree to use
its best reasonable efforts to cause to be maintained in effect any such
Mortgage Pool Insurance Policy and to supervise the filing of claims thereunder
to the issuer of such Mortgage Pool Insurance Policy (the "Pool Insurer") for
the period of time specified in the related Prospectus Supplement. A Mortgage
Pool Insurance Policy, however, is not a blanket policy against loss, because
claims thereunder may only be made respecting particular defaulted Mortgage
Loans and only upon satisfaction of certain conditions precedent set forth in
such policy as described in the related Prospectus Supplement. The Mortgage Pool
Insurance Policies, if any, will not cover loss due to a failure to pay or
denial of a claim under a primary mortgage insurance policy, irrespective of the
reason therefor. The related Prospectus Supplement will describe the terms of
any applicable Mortgage Pool Insurance Policy and will set forth certain
information with respect to the related Pool Insurer.
In general, a Mortgage Pool Insurance Policy may 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 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,
a failure of coverage attributable to one of the foregoing events might result
in a breach of a representation of the Seller and in such event might give rise
to an obligation on the part of the Seller to purchase the defaulted Mortgage
Loan if the breach materially and adversely affects the interests of the Owners
of the Certificates and cannot be cured by the Seller.
The original amount of coverage under any Mortgage Pool Insurance Policy
will be reduced over the life of such Certificates by the aggregate dollar
amount of claims paid less the aggregate of the net amounts realized by the Pool
Insurer upon disposition of all foreclosed properties. The amount of claims paid
will generally include certain expenses incurred with respect to the applicable
Mortgage Loans as well as accrued interest on delinquent Mortgage Loans to the
date of payment of the claim. See "Certain Legal Aspects of the Mortgage Assets
- - Foreclosure" herein. Accordingly, if aggregate net claims paid under any
Mortgage Pool Insurance Policy reach the original policy limit, coverage under
that Mortgage Pool Insurance Policy will be exhausted and any further losses
will be borne by one or more classes of Certificates unless otherwise covered by
another form of Credit Enhancement, as specified in the Prospectus Supplement.
Since any Mortgage Pool Insurance Policy may require that the Mortgaged
Property subject to a defaulted Mortgage Loan be restored to its original
condition prior to claiming against the Pool Insurer, such policy may not
provide coverage against hazard losses. As set forth under "Servicing of
Mortgage Loans and Contracts C Standard Hazard Insurance", the hazard policies
concerning the Mortgage Loans typically exclude from coverage physical damage
resulting from a number of causes and even when the damage is covered, may
afford recoveries which are significantly less than the full replacement cost of
such losses. Even if special hazard insurance is applicable as specified in the
Prospectus Supplement, no coverage in respect of special hazard losses will
cover all risks, and the amount of any such coverage will be limited. See
"Special Hazard Insurance" below. As a result, certain hazard risks will not be
insured against and will therefore be borne by Owners of the Certificates,
unless otherwise covered by another form of Credit Enhancement, as specified in
the Prospectus Supplement.
The terms of any Mortgage Pool Insurance Policy relating to a Contract Pool
will be described in the related Prospectus Supplement.
SPECIAL HAZARD INSURANCE. If specified in the related Prospectus
Supplement, one or more special hazard insurance policies (each, a "Special
Hazard Insurance Policy") will be obtained.
Any such Special Hazard Insurance Policy will, subject to limitations
described below and in the Prospectus Supplement, cover (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 covered by
the standard form of hazard insurance policy for the respective states in which
the Mortgaged Properties are located or under flood insurance policies, if any,
covering the Mortgaged Properties, and (ii) loss caused by reason of the
application of the coinsurance clause contained in hazard insurance policies.
See "Servicing of Mortgage Loans and Contracts C Standard Hazard Insurance." Any
Special Hazard Insurance Policy may not cover losses occasioned by war, civil
insurrection, certain governmental actions, 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 are"-,
chemical contamination and certain other risks. Aggregate claims under each
Special Hazard Insurance Policy will be limited as described in the related
Prospectus Supplement. Any Special Hazard Insurance Policy may also provide that
no claim may be paid unless hazard and, if applicable, flood insurance on the
Mortgaged Property has been kept in force and other protection and preservation
expenses have been paid.
Subject to the foregoing limitations, any Special Hazard Insurance Policy
generally will provide that, where there has been damage to property securing a
foreclosed Mortgage Loan (title to which has been acquired by the insured) and
to the extent such damage is not covered by the hazard insurance policy or flood
insurance policy, if any, maintained with respect to such Mortgage Loan, the
issuer of the Special Hazard Insurance Policy (the "Special Hazard Insurer")
will pay the lesser of (i) the cost of repair or replacement of such property or
(ii) upon transfer of the property to the special hazard insurer, the unpaid
principal balance of such Mortgage Loan at the time of acquisition of such
property by foreclosure or deed in lieu of foreclosure, plus accrued interest to
the date of claim settlement and certain expenses incurred with respect to such
property. If the unpaid principal balance plus accrued interest and certain
expenses is paid by the Special Hazard Insurer, the amount of further coverage
under the related Special Hazard Insurance Policy will be reduced by such amount
less any net proceeds from the sale of the property. Any amount paid as the cost
of repair or replacement of the property will also reduce coverage by such
amount. Restoration of the property with the proceeds described under (i) above
will satisfy the condition under any applicable Mortgage Pool Insurance Policy
that the property be restored before a claim under such Mortgage Pool Insurance
Policy may be validly presented with respect to the defaulted Mortgage Loan
secured by such property. The payment described under (ii) above will render
unnecessary presentation of a claim in respect of such Mortgage Loan under any
related Mortgage Pool Insurance Policy. Therefore, so long as a Mortgage Pool
Insurance Policy remains in effect, the payment by the Special Hazard Insurer
under a Special Hazard Insurance Policy of the cost of repair or replacement or
the unpaid principal balance of the Mortgage Loan plus accrued interest and
certain expenses will not affect the total insurance proceeds but will affect
the relative amounts of coverage remaining under any related Special Hazard
Insurance Policy and any related Mortgage Pool Insurance Policy.
The terms of any Special Hazard Insurance Policy relating to a Contract
Pool will be described in the related Prospectus Supplement.
BANKRUPTCY BOND. In the event of a bankruptcy of a borrower, the bankruptcy
court may establish the value of the property securing the related Mortgage Loan
at an amount less than the then outstanding principal balance of such Mortgage
Loan. The amount of the secured debt could be reduced to such value and the
holder of such Mortgage Loan thus would become an unsecured creditor to the
extent the outstanding principal balance of such Mortgage Loan exceeds the value
so assigned to the property by the bankruptcy court. In addition, certain other
modifications of the terms of a Mortgage Loan can result from a bankruptcy
proceeding, including the reduction in monthly payments required to be made by
the borrower. See "Certain Legal Aspects of the Mortgage Assets" herein. If so
provided in the related Prospectus Supplement, the Depositor will obtain a
bankruptcy bond or similar insurance contract (the "bankruptcy bond") for
proceedings with respect to borrowers under the Bankruptcy Code. The bankruptcy
bond will cover certain losses resulting from a reduction by a bankruptcy court
of scheduled payments of principal of 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 bankruptcy bond will provide coverage in the aggregate amount specified
in the related Prospectus Supplement. Such amount will be reduced by payments
made under such bankruptcy bond in respect of the related Mortgage Loans and
will not be restored.
If specified in the related Prospectus Supplement, other forms of Credit
Enhancement may be provided to cover such bankruptcy-related losses. Any
bankruptcy bond or other form of Credit Enhancement provided to cover
bankruptcy-related losses will be described in the related Prospectus
Supplement.
RESERVE FUNDS. If specified in the Prospectus Supplement, cash, U.S.
Treasury securities, instruments evidencing ownership of principal or interest
payments thereon, letters of credit, surety bonds, demand notes, certificates of
deposit or a combination thereof in the aggregate amount specified in the
Prospectus Supplement will be deposited by the Depositor on the Delivery Date in
one or more accounts (each, a "Reserve Fund") established and maintained with
the Trustee. Such cash and the principal and interest payments on such other
investments will be used to enhance the likelihood of timely payment of
principal of, and interest on, or, if so specified in the Prospectus Supplement,
to provide additional protection against losses in respect of, the assets in the
related Trust, to pay the expenses of the Trust or for such other purposes
specified in the Prospectus Supplement. Whether or not the Depositor has any
obligation to make such a deposit, certain amounts to which the Owners of
Subordinated Certificates, if any, would otherwise be entitled may instead be
deposited into the Reserve Fund from time to time and in the amounts as
specified in the Prospectus Supplement. Any cash in any Reserve Fund and the
proceeds of any other instrument upon maturity will be invested in Eligible
Investments. If a letter of credit is deposited with the Trustee, such letter of
credit will be irrevocable. Any instrument deposited therein will name the
Trustee as a beneficiary and will be issued by an entity acceptable to each
rating agency that rates the Certificates. Additional information with respect
to such instruments deposited in the Reserve Funds may be set forth in the
Prospectus Supplement.
Any amounts so deposited and payments on instruments so deposited will be
available for withdrawal from the Reserve Fund for distribution with respect to
the Certificates for the purposes, in the manner and at the times specified in
the Prospectus Supplement.
OTHER INSURANCE, GUARANTIES AND SIMILAR INSTRUMENTS OR AGREEMENTS. If
specified in the Prospectus Supplement, the related Trust may also include
insurance, guaranties, surety bonds, letters of credit, guaranteed investment
contracts or similar arrangements for the purpose of (i) maintaining timely
payments or providing additional protection against losses on the assets
included in such Trust, (ii) paying administrative expenses, (iii) establishing
a minimum reinvestment rate on the payments made in respect of such assets or
principal payment rate on such assets, (iv) guaranteeing timely payment of
principal and interest under the Certificates, or for such other purpose as is
specified in such Prospectus Supplement. Such arrangements may include
agreements under which Owners of Certificates are entitled to receive amounts
deposited in various accounts held by the Trustee upon the terms specified in
the Prospectus Supplement. Such arrangements may be in lieu of any obligation of
the Servicers or the Seller to advance delinquent installments in respect of the
Mortgage Loans. See "Servicing of Mortgage Loans and Contracts - Advances"
herein.
SERVICING OF MORTGAGE LOANS AND CONTRACTS
With respect to each series of Certificates, the related Mortgage Loans and
Contracts will be serviced by a sole servicer or by a master servicer with
various sub-servicers pursuant to, or as provided for in, the Agreement. The
Prospectus Supplement for each series will specify the servicer and the master
servicer, if any, for such series.
The related Prospectus Supplement will specify whether the Servicer is a
FNMA- or FHLMC-approved servicer of conventional mortgage loans. In addition,
the Depositor will require adequate servicing experience, where appropriate, and
financial stability, generally including a net worth requirement (to be
specified in the Agreement) as well as satisfaction of certain other criteria.
Each Servicer will be required to perform the customary functions of a
mortgage loan servicer, including collection of payments from borrowers (the
"Mortgagors") and remittance of such collections to the Trustee, maintenance of
applicable standard hazard insurance or primary mortgage insurance policies,
attempting to cure delinquencies, supervising foreclosures, management of
Mortgaged Properties under certain circumstances, and maintaining accounting
records relating to the Mortgage Loans and Contracts, as applicable, and, if
specified in the related Prospectus Supplement, maintenance of escrow or
impoundment accounts of Mortgagors for payment of taxes, insurance, and other
items required to be paid by the Mortgagor pursuant to the Mortgage Loan or
Contract. Each Servicer will also be obligated to make advances in respect of
delinquent installments on Mortgage Loans and Contracts, as applicable, as
described more fully under "- Payments on Mortgage Loans" and "- Advances" below
and in respect of certain taxes and insurance premiums not paid on a timely
basis by Mortgagors.
Each Servicer will be entitled to a monthly servicing fee as specified in
the related Prospectus Supplement. Each Servicer will also generally be entitled
to collect and retain, as part of its servicing compensation, late payment
charges and assumption underwriting fees. Each Servicer will be reimbursed from
proceeds of one or more of the insurance policies described herein ("Insurance
Proceeds") or from proceeds received in connection with the liquidation of
defaulted Mortgage Loans ("Liquidation Proceeds") for certain expenditures
pursuant to the Agreement. See "- Advances" and "- Servicing Compensation and
Payment of Expenses" below.
Each Servicer will be required to service each Mortgage Loan and Contract,
as applicable, pursuant to the terms of the Agreement for the entire term of
such Mortgage Loan and Contract, as applicable, unless such Agreement is earlier
terminated. Upon termination, a replacement for the Servicer will be appointed.
PAYMENTS ON MORTGAGE LOANS
Each Servicer will establish and maintain a separate account (each, a
"Custodial Account"). Subject to the following paragraph, each Custodial Account
must be an account the deposits in which are fully insured by either the Federal
Deposit Insurance Corporation ("FDIC") or the National Credit Union
Administration ("NCUA") or are, to the extent such deposits are in excess of the
coverage provided by such insurance, continuously secured by certain obligations
issued or guaranteed by the United States of America. If at any time the amount
on deposit in such Custodial Account shall exceed the amount so insured or
secured, the applicable Servicer must remit to the Trustee the amount on deposit
in such Custodial Account which exceeds the amount so insured or secured, less
any amount such Servicer may retain for its own account pursuant to its
Servicing Agreement.
Notwithstanding the foregoing, the deposits in a Servicer's Custodial
Account will not be required to be fully insured or secured as described above,
and such Servicer will not be required to remit amounts on deposit therein in
excess of the amount so insured or secured, so long as such Servicer meets
certain requirements established by the rating agencies requested to rate the
Certificates.
Each Servicer is required to deposit into its Custodial Account on a daily
basis all amounts in respect of each Mortgage Loan received by such Servicer,
with interest adjusted to a rate (the "Remittance Rate") equal to the related
Mortgage Rate less the Servicer's servicing fee rate. On the day of each month
specified in the related Prospectus Supplement (the "Remittance Date"), each
Servicer of the Mortgage Loans will remit to the Trustee all funds held in its
Custodial Account with respect to each Mortgage Loan; PROVIDED, HOWEVER, that
Principal Prepayments may be remitted on the Remittance Date in the month
following the month of such prepayment. Each Servicer will be required pursuant
to the terms of the Agreement and as specified in the related Prospectus
Supplement, to remit with each Principal Prepayment interest thereon at the
Remittance Rate through the last day of the month in which such Principal
Prepayment is made. Each Servicer may also be required to advance its own funds
as described below.
ADVANCES
With respect to a delinquent Mortgage Loan or Contract, the related
Servicer may be obligated (but only to the extent set forth in the related
Prospectus Supplement) to advance its own funds or funds from its Custodial
Account equal to the aggregate amount of payments of principal and interest
(adjusted to the applicable Remittance Rate) which were due on a due date and
which are delinquent as of the close of business on the business day preceding
the Remittance Date ("Monthly Advance"). Generally, such advances will be
required to be made by the Servicer unless the Servicer determines that such
advances ultimately would not be recoverable under any applicable insurance
policy, from the proceeds of liquidation of the related Mortgaged Properties, or
from any other source (any amount not so reimbursable being referred to herein
as a "Nonrecoverable Advance"). Such advance obligation generally will continue
through the month following the month of final liquidation of such Mortgage Loan
or Contract. Any Servicer funds thus advanced will be reimbursable to such
Servicer out of recoveries on the Mortgage Loans or Contracts with respect to
which such amounts were advanced. Each Servicer will also be obligated to make
advances with respect to certain taxes and insurance premiums not paid by
Mortgagors on a timely basis. Funds so advanced are reimbursable to the
Servicers out of recoveries on the related Mortgage Loans or Contracts. Each
Servicer's right of reimbursement for any advance will be prior to the rights of
the Trust to receive any related Insurance Proceeds or Liquidation Proceeds.
Failure by a Servicer to make a required Monthly Advance will be grounds for
termination under the related Agreement.
COLLECTION AND OTHER SERVICING PROCEDURES
Each Servicer will service the Mortgage Loans and Contracts pursuant to
guidelines established in the related Agreement.
MORTGAGE LOANS. The Servicer will be responsible for making reasonable
efforts to collect all payments called for under the Mortgage Loans. The
Servicer will be obligated to follow such normal practices and procedures as it
deems necessary or advisable to realize upon a defaulted Mortgage Loan. In this
regard, the Servicer may (directly or through a local assignee) sell the
property at a foreclosure or trustee's sale, negotiate with the Mortgagor for a
deed in lieu of foreclosure or, in the event a deficiency judgment is available
against the Mortgagor or other person (see "Certain Legal Aspects of the
Mortgage Assets C Foreclosure - Anti-Deficiency Legislation and Other
Limitations on Lenders" for a description of the limited availability of
deficiency judgments), foreclose against such property and proceed for the
deficiency against the appropriate person. The amount of the ultimate net
recovery (including the proceeds of any Mortgage Pool Insurance Policy or other
applicable Credit Enhancement), after reimbursement to the Servicer of its
expenses incurred in connection with the liquidation of any such defaulted
Mortgage Loan and prior unreimbursed advances of principal and interest with
respect thereto will be deposited in the Certificate Account when realized and
will be distributed to Owners of Certificates on the next Distribution Date
following the month of receipt.
With respect to Cooperative Loans, any prospective purchaser will generally
have to obtain the approval of the board of directors of the relevant
Cooperative before purchasing the shares and acquiring rights under the related
proprietary lease or occupancy agreement. See "Certain Legal Aspects of the
Mortgage Assets" herein. This approval is usually based on the purchaser's
income and net worth and numerous other factors. Although the Cooperative's
approval is unlikely to be unreasonably withheld or delayed, the necessity of
acquiring such approval could limit the number of potential purchasers for those
shares and otherwise limit the Trust's ability to sell and realize the value of
those shares.
In general, a "tenant-stockholder" (as defined in Code Section 216(b) (2))
of a corporation that qualifies as a "cooperative housing corporation" within
the meaning of Code Section 216(b)(1) is allowed a deduction for amounts paid or
accrued within his taxable year to the corporation representing his
proportionate share of certain interest expenses and certain real estate taxes
allowable as a deduction under Code Section 216(a) to the corporation under Code
Sections 163 and 164. In order for a corporation to qualify under Code Section
216(b)(1) for its taxable year in which such items are allowable as a deduction
to the corporation, such Section requires, among other things, that at least 80%
of the gross income of the corporation be derived from its tenant-stockholders.
By virtue of this requirement, the status of a corporation for purposes of Code
Section 216(b)(1) must be determined on a year-to-year basis. Consequently,
there can be no assurance that Cooperatives relating to the Cooperative Loans
will qualify under such Section for any particular year. In the event that such
a Cooperative fails to qualify for one or more years, the value of the
collateral securing any related Cooperative Loans could be significantly
impaired because no deduction would be allowable to its tenant-stockholders
under Code Section 216(a) with respect to those years. In view of the
significance of the tax benefits accorded tenant-stockholders of a corporation
that qualifies as a cooperative housing corporation, however, the likelihood
that such a failure would be permitted to continue over a period of years
appears remote.
The Servicer will expend its own funds to restore property securing a
Mortgage Loan which has sustained uninsured damage only if it determines that
such restoration will increase the proceeds to the Trust of liquidation of the
Mortgage Loan after the reimbursement to the Servicer of its expenses.
If a Mortgaged Property has been or is about to be conveyed by the
Mortgagor, the Servicer will be obligated (to the extent it has knowledge of
such conveyance) to accelerate the maturity of the Mortgage Loan, unless it
reasonably believes it is unable to enforce that Mortgage Loan's "due-on-sale"
clause under the applicable law. If it reasonably believes it may be restricted
by law, for any reason, from enforcing such a "due-on-sale" clause, the Servicer
may 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, provided such person satisfies the
criteria required to maintain the coverage provided by applicable insurance
policies (unless otherwise restricted by applicable law). Any fee collected by
the Servicer for entering into an assumption agreement will be retained by the
Servicer as additional servicing compensation. For a description of
circumstances in which the Servicer may be unable to enforce "due-on-sale"
clauses, see "Certain Legal Aspects of the Mortgage Assets - Foreclosure -
Enforceability of Certain Provisions" herein. In connection with any such
assumption, the Mortgage Rate borne by the related Mortgage Note may not be
decreased.
If specified in the related Prospectus Supplement, the Servicer will
maintain with one or more depository institutions one or more accounts into
which it will deposit all payments of taxes, insurance premiums, assessments or
comparable items received for the account of the Mortgagors. Withdrawals from
such account or accounts may be made only to effect payment of taxes, insurance
premiums, assessments or comparable items, to reimburse the Servicer out of
related collections for any cost incurred in paying taxes, insurance premiums
and assessments or otherwise preserving or protecting the value of the
Mortgages, to refund to mortgagors any amounts determined to be overages and to
pay interest to Mortgagors on balances in such account or accounts to the extent
required by law.
So long as it acts as servicer of the Mortgage Loans, the Servicer will be
required to maintain certain insurance covering errors and omissions in the
performance of its obligations as servicer and certain fidelity bond coverage
ensuring against losses through wrongdoing of its officers, employees and
agents.
In the case of Multifamily Loans, a Mortgagor's failure to make required
Mortgage Loan payments may mean that operating income is insufficient to service
the mortgage debt, or may reflect the diversion of that income from the
servicing of the mortgage debt. In addition, a Mortgagor under a Multifamily
Loan that is unable to make Mortgage Loan payments may also be unable to make
timely payment of taxes and otherwise to maintain and insure the related
Mortgaged Property. In general, the Servicer will be required to monitor any
Multifamily Loan that is in default, evaluate whether the causes of the default
can be corrected over a reasonable period without significant impairment of the
value of the related Mortgaged Property, initiate corrective action in
cooperation with the Mortgagor if cure is likely, inspect the related Mortgaged
Property and take such other actions as are consistent with the Agreement. A
significant period of time may elapse before the Servicer is able to assess the
success of any such corrective action or the need for additional in initiatives.
The time within which the Servicer can make the initial determination of
appropriate action, evaluate the success of corrective action, develop
additional initiatives, institute foreclosure proceedings and actually foreclose
(or accept a deed to a Mortgaged Property in lieu of foreclosure) on behalf of
the Owners of the related series may vary considerably depending on the
particular Multifamily Loan, the Mortgaged Property, the Mortgagor, the presence
of an acceptable party to assume the Multifamily Loan and the laws of the
jurisdiction in which the Mortgaged Property is located. If a Mortgagor files a
bankruptcy petition, the Servicer may not be permitted to accelerate the
maturity of the related Multifamily Loan or to foreclose on the Mortgaged
Property for a considerable period of time. See "Certain Legal Aspects of
Mortgage Loans."
CONTRACTS. Pursuant to the Agreement, the Servicer will service and
administer the Contracts assigned to the Trustee as more fully set forth below.
The Servicer, either directly or through sub-servicers subject to general
supervision by the Servicer, will perform diligently all services and duties
required to be performed under the Agreement, in the same manner as performed by
prudent lending institutions of manufactured housing installment sales contracts
of the same type as the Contracts in those jurisdictions where the related
Manufactured Homes are located. The duties to be performed by the Servicer will
include collection and remittance of principal and interest payments, collection
of insurance claims and, if necessary, repossession.
Each Agreement will provide that when any Manufactured Home securing a
Contract is about to be conveyed by the borrower, the Servicer (to the extent it
has knowledge of such prospective conveyance and prior to the time of the
consummation of such conveyance) may exercise its rights to accelerate the
maturity of such Contract under the applicable "due-on-sale" clause, if any,
unless the Servicer reasonably believes it is unable to enforce such
"due-on-sale" clause under applicable law. In such case the Servicer is
authorized to take or enter into an assumption agreement from or with the person
to whom such Manufactured Home has been or is about to be conveyed, pursuant to
which such person becomes liable under the Contract, provided such person
satisfies the criteria required to maintain the coverage provided by applicable
insurance policies (unless otherwise restricted by applicable law). Where
authorized by the Contract, the annual percentage rate may be increased, upon
assumption, to the then-prevailing market rate but will not be decreased.
Under each Agreement the Servicer will repossess or otherwise comparably
convert the ownership of properties securing such of the related Contracts as
come into and continue in default and as to which no satisfactory arrangements
can be made for collection of delinquent payments. In connection with such
repossession or other conversion, the Servicer will follow such practices and
procedures as it deems necessary or advisable and as shall be normal and usual
in its general servicing activities. The Servicer, however, will not be required
to expend its own funds in connection with any repossession or towards the
restoration of any property unless it determines (i) that such restoration or
repossession will increase the proceeds of liquidation of the related Contract
to the Trust after reimbursement to itself for such expenses and (ii) that such
expenses will be recoverable to it either through Liquidation Proceeds or
through Insurance Proceeds.
PRIMARY MORTGAGE INSURANCE
Mortgage Loans that the Depositor acquires will generally not have primary
mortgage insurance. If obtained, the primary mortgage insurance policies will
not insure against certain losses which may be sustained in the event of a
personal bankruptcy of the mortgagor under a Mortgage Loan.
STANDARD HAZARD INSURANCE
MORTGAGE LOANS. The Servicer will be required to cause to be maintained for
each Mortgage Loan a standard hazard insurance policy. The coverage of such
policy is required to be in an amount not less than the maximum insurable value
of the improvements securing such Mortgage Loan from time to time or the
principal balance owing on such Mortgage Loan from time to time, whichever is
less. In all events, such coverage shall be in an amount sufficient to ensure
avoidance of the applicability of the co-insurance provisions under the terms
and conditions of the applicable policy. The ability of each Servicer to assure
that hazard insurance proceeds are appropriately applied may be dependent on its
being named as an additional insured under any standard hazard insurance policy
and under any flood insurance policy referred to below, or upon the extent to
which information in this regard is furnished to such Servicer by Mortgagors.
Each Agreement may provide that the related Servicer may satisfy its obligation
to cause hazard insurance policies to be maintained by maintaining a blanket
policy insuring against hazard losses on the Mortgage Loans serviced by such
Servicer.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements on the property by fire,
lightning, explosion, smoke, wind-storm and hail, riot, strike and civil
commotion, subject to the conditions and exclusions particularized in each
policy. Although the policies relating to the Mortgage Loans will be
underwritten by different insurers and, therefore, will not contain identical
terms and conditions, the basic terms thereof are dictated by state law. Such
policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other water-related
causes, earth movement (including earthquakes, landslides and mud flow), nuclear
reactions, 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. If the
property securing a Mortgage Loan is located in a federally designated flood
area, flood insurance will be required to be maintained in such amounts as would
be required by FNMA in connection with its mortgage loan purchase program. The
Depositor may also purchase special hazard insurance against certain of the
uninsured risks described above. See "Credit Enhancement - Special Hazard
Insurance".
Since the amount of hazard insurance the Servicer is required to cause to
be maintained on the improvements securing the Mortgage Loans declines as the
principal balances owing thereon decrease, if the residential properties
securing the Mortgage Loans appreciate in value over time, the effect of
coinsurance in the event of partial loss may be that hazard insurance proceeds
will be insufficient to restore fully the damaged property.
The Depositor will not require that a standard hazard or flood insurance
policy be maintained on the cooperative dwelling relating to any Cooperative
Loan. Generally, the Cooperative itself is responsible for maintenance of hazard
insurance for the property owned by the Cooperative and the tenant-stockholders
of that Cooperative do not maintain individual hazard insurance policies. To the
extent, however, that a Cooperative and the related borrower on a Cooperative
Loan do not maintain such insurance or do not maintain adequate coverage or any
insurance proceeds are not applied to the restoration of damaged property, any
damage to such borrower's cooperative dwelling or such Cooperative's building
could significantly reduce the value of the collateral securing such Cooperative
Loan to the extent not covered by other credit support.
CONTRACTS. The Servicer will generally be required to cause to be
maintained with respect to each Contract one or more hazard insurance policies
which provide, at a minimum, the same coverage as a standard form fire and
extended coverage insurance policy that is customary for manufactured housing,
issued by a company authorized to issue such policies in the state in which the
Manufactured Home is located and in an amount which is not less than the maximum
insurable value of such Manufactured Home or the principal balance due from the
borrower on the related Contract, whichever is less. When a Manufactured Home's
location was, at the time of origination of the related Contract, within a
federally designated special flood hazard area, the Servicer also shall cause
such flood insurance to be maintained, which coverage shall be at least equal to
the minimum amount specified in the preceding sentence or such lesser amount as
may be available under the federal flood insurance program.
The Servicer may maintain, in lieu of causing individual hazard insurance
policies to be maintained with respect to each Manufactured Home, and shall
maintain, to the extent that the related Contract does not require the borrower
to maintain a hazard insurance policy with respect to the related Manufactured
Home, one or more blanket insurance policies covering losses on the borrowers'
interests in the Contracts resulting from the absence or insufficiency of
individual hazard insurance policies.
The Servicer, to the extent practicable, will cause the borrowers to pay
all taxes and similar governmental charges when and as due. To the extent that
nonpayment of any taxes or charges would result in the creation of a lien upon
any Manufactured Home having a priority equal or senior to the lien of the
related Contract, the Servicer will pay any such delinquent tax or charge.
If the Servicer repossesses a Manufactured Home on behalf of the Trustee,
the Servicer will either (i) maintain at its expense hazard insurance with
respect to such Manufactured Home or (ii) indemnify the Trustee against any
damage to such Manufactured Home prior to resale or other disposition.
TITLE INSURANCE POLICIES
The Agreements will generally require that a title insurance policy be in
effect on each of the Mortgaged Properties and that such title insurance policy
contain no coverage exceptions, except customary exceptions generally accepted
in the mortgage banking industry.
CLAIMS UNDER PRIMARY MORTGAGE INSURANCE POLICIES AND STANDARD HAZARD INSURANCE
POLICIES; OTHER REALIZATION UPON DEFAULTED LOAN
Each Servicer will present claims to any primary insurer under any related
primary mortgage insurance policy and to the hazard insurer under any related
standard hazard insurance policy. All collections under any related primary
mortgage insurance policy or any related standard hazard insurance policy (less
any proceeds to be applied to the restoration or repair of the related Mortgaged
Property or to the reimbursement of Advances by the Servicer) will be remitted
to the Trustee.
If any Mortgaged Property securing a defaulted Mortgage Loan is damaged and
proceeds, if any, from the related standard hazard insurance policy are
insufficient to restore the damaged property to a condition sufficient to permit
recovery under any applicable Mortgage Pool Insurance Policy or any related
primary mortgage insurance policy, each Servicer may be required to expend its
own finds to restore the damaged property to the extent specified in the related
Prospectus Supplement, but only to the extent it determines such expenditures
are recoverable from Insurance Proceeds or Liquidation Proceeds.
If recovery under any applicable Mortgage Pool Insurance Policy or any
related primary mortgage insurance policy is not available, the Servicer will
nevertheless be obligated to attempt to realize upon the defaulted Mortgage
Loan. Foreclosure proceedings will be conducted by the Servicer in accordance
with the Agreement. If the proceeds of any liquidation of the Mortgaged Property
securing the defaulted Mortgage Loan are less than the Principal Balance of the
defaulted Mortgage Loan plus interest accrued thereon, a loss will be realized
on such Mortgage Loan, to the extent the applicable Credit Enhancement is not
sufficient, in the amount of such difference plus the aggregate of expenses
which are incurred by the Servicer in connection with such proceedings and are
reimbursable under the Agreement. In such case there will be a reduction in the
value of the Mortgage Loans and Trust may be unable to recover the full amount
of principal and interest due thereon.
In addition, where a Mortgaged Property securing a defaulted Mortgage Loan
can be resold for an amount exceeding the principal balance of the related
Mortgage Loan together with accrued interest and expenses, it may be expected
that, where retention of any such amount is legally permissible, the Pool
Insurer will exercise its right under the related Mortgage Pool Insurance
Policy, if any, to purchase such Mortgaged Property and realize for itself any
excess proceeds. Any amounts remaining in the Certificate Account after such
foreclosure or liquidation and attributable to such Mortgage Loan will be
distributed to Owners of the Certificates.
REALIZATION UPON OR SALE OF DEFAULTED MULTIFAMILY LOANS
Unless otherwise specified in the related Prospectus Supplement, the
Servicer may not acquire title to any Multifamily Property securing a Mortgage
Loan or take any other action that would cause the related Trustee, for the
benefit of Owners of the related series, or any other specified person to be
considered to hold title to, to be a "mortgagee-in-possession" of, or to be an
"owner" or an "operator" of such Mortgaged Property within the meaning of
certain federal environmental laws, unless the Servicer has previously
determined, based on a report prepared by a person who regularly conducts
environmental audits, that either:
(i) the Mortgaged Property is in compliance with applicable
environmental laws and regulations or, if not, that taking such actions
are necessary to bring the Mortgaged Property into compliance therewith
is reasonably likely to produce a greater recovery on a present value
basis than not taking such actions; and
(ii) there are no circumstances or conditions present at the
Mortgaged Property that have resulted in any contamination for which
investigation, testing, monitoring, containment, clean-up or
remediation could be required under any applicable environmental laws
and regulations or, if such circumstances or conditions are present for
which any such action could be required, taking such actions with
respect to the Mortgaged Property is reasonably likely to produce a
greater recovery on a present value basis than not taking such actions.
See "Certain Legal Aspects of Mortgage Loans)Foreclosure -
Environmental Legislation."
In addition, unless otherwise specified in the related Prospectus
Supplement, the Servicer will not be obligated to foreclose upon or otherwise
convert the ownership of any Mortgaged Property securing a single family
Mortgage Loan if it has received notice or has actual knowledge that such
property may be contaminated with or affected by hazardous wastes or hazardous
substances; however, no environmental testing will generally be required. The
Servicer will not be liable to the Owners of the related series if, based on its
belief that no such contamination or affect exists, the Servicer forecloses on a
Mortgaged Property and takes title to such Mortgaged Property, and thereafter
such Mortgaged Property is determined to be so contaminated or affected.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
As compensation for its servicing duties, each Servicer will be entitled to
a monthly servicing fee in the amount specified in the related Prospectus
Supplement. In addition to the primary compensation, a Servicer may be permitted
to retain all assumption underwriting fees and late payment charges, to the
extent collected from Mortgagors.
As set forth above, each Servicer will be entitled to reimbursement for
certain expenses incurred by it in connection with the liquidation of defaulted
Mortgage Loans and Contracts and in connection with advancing delinquent
payments. No loss will be suffered on the Certificates by reason of such
expenses to the extent claims for such expenses are paid directly under any
applicable Mortgage Pool Insurance Policy, a primary mortgage insurance policy,
the special hazard insurance policy or from other forms of Credit Enhancement.
In the event, however, that the defaulted Mortgage Loans are not covered by a
Mortgage Pool Insurance Policy, primary mortgage insurance policies, the Special
Hazard Insurance Policy or another form of Credit Enhancement, or claims are
either not made or paid under such policies or Credit Enhancement, or if
coverage thereunder has ceased, such a loss will occur to the extent that the
proceeds from the liquidation of a defaulted Mortgage Loan or Contract, after
reimbursement of the Servicer's expenses, are less than the Principal Balance of
such defaulted Mortgage Loan or Contract.
MASTER SERVICER
A Master Servicer may be specified in the related Prospectus Supplement for
the related series of Certificates. Customary servicing functions with respect
to Mortgage Loans constituting the Mortgage Pool will be provided by the
Servicer directly or through one or more Sub-Servicers subject to supervision by
the Master Servicer. If the Master Servicer is not directly servicing the
Mortgage Loans, then the Master Servicer will (i) administer and supervise the
performance by the Servicer of its servicing responsibilities under the
Agreement with the Master Servicer, (ii) maintain a current data base with the
payment histories of each Mortgagor, (iii) review monthly servicing reports and
data relating to the Mortgage Pool for discrepancies and errors, and (iv) act as
back- up Servicer during the term of the transaction unless the Servicer is
terminated or resigns in such case the Master Servicer shall assume the
obligations of the Servicer.
The Master Servicer will be a party to the Agreement for any series for
which Mortgage Loans comprise the assets of a Trust. The Master Servicer will be
required to satisfy the standard established for the qualification of the Master
Servicer in the related Agreement. The Master Servicer will be compensated for
the performance of its services and duties under each Agreement as specified in
the related Prospectus Supplement.
ADMINISTRATION
The following summary describes certain provisions which will be common to
each Agreement. The summary does not purport to be complete and is subject to
the provisions of a particular Agreement.
ASSIGNMENT OF MORTGAGE ASSETS
ASSIGNMENT OF THE MORTGAGE LOANS. At the time of issuance of the
Certificates, the Depositor will assign the Mortgage Loans to the Trustee,
together with all principal and interest adjusted to the Remittance Rate,
subject to exclusions specified in the Prospectus Supplement, due on or with
respect to such Mortgage Loans on or after the Cut-Off Date. The Trustee will,
concurrently with such assignment, execute, countersign and deliver the
Certificates to the Depositor in exchange for the Mortgage Loans. Each Mortgage
Loan will be identified in a schedule appearing as an exhibit to the Agreement.
Such schedule may include information as to the Principal Balance of each
Mortgage Loan as of the Cut-Off Date, as well as information respecting the
Mortgage Rate, the scheduled monthly payment of principal and interest as of the
Cut-Off Date and the maturity date of each Mortgage Note.
In addition, as to each Mortgage Loan, the Depositor will deliver to the
Trustee the Mortgage Note and Mortgage, any assumption and modification
agreement, an assignment of the Mortgage in recordable form (but not necessarily
recorded), evidence of title insurance, if obtained, and, if applicable, the
certificate of private mortgage insurance. In instances where recorded documents
cannot be delivered due to delays in connection with recording, the Depositor
may deliver copies thereof and deliver the original recorded documents promptly
upon receipt.
With respect to any Mortgage Loans which are Cooperative Loans, the
Depositor will cause to be delivered to the Trustee, the related original
Cooperative note endorsed to the order of the Trustee, the original security
agreement, the proprietary lease or occupancy agreement, the recognition
agreement, an executed financing agreement and the relevant stock certificate
and related blank stock powers. The Depositor will file in the appropriate
office an assignment and a financing statement evidencing the Trustee's security
interest in each Cooperative Loan.
Each Seller generally will represent and warrant to the Depositor with
respect to the Mortgage Loans sold by it, among other things, that (i) the
information set forth in the schedule of Mortgage Loans attached thereto is
correct in all material respects: (ii) a lender's title insurance policy or
binder for each Mortgage Loan subject to the Agreement was issued on the date of
origination thereof and each such policy or binder assurance is valid and
remains in full force and effect or a legal opinion concerning title or title
search was obtained or conducted in connection with the origination of the
Mortgage Loans; (iii) at the date of initial issuance of the Certificates, the
Seller has good title to the Mortgage Loans and the Mortgage Loans are free of
offsets, defenses or counterclaims; (iv) at the date of initial issuance of the
Certificates, each Mortgage is a valid first lien on the property securing the
Mortgage Note (subject only to (a) the lien of current real property taxes and
assessments, (b) covenants, conditions, and restrictions, rights of way,
easements and other matters of public record as of the date of the recording of
such Mortgage, such exceptions appearing of record being acceptable to mortgage
lending institutions generally in the area wherein the property subject to the
Mortgage is located or specifically reflected in the appraisal obtained by the
Depositor and (c) other matters to which like properties are commonly subject
which do not materially interfere with the benefits of the security intended to
be provided by such Mortgage) and such property is free of material damage and
is in good repair or, with respect to a junior lien Mortgage Loan, that such
Mortgage is a valid junior lien Mortgage, as the case may be and specifying the
percentage of the Mortgage Loan Pool comprised of junior lien Mortgage Loans;
(v) at the date of initial issuance of the Certificates, no Mortgage Loan is 31
or more days delinquent (with such exceptions as may be specified in the related
Prospectus Supplement) and there are no delinquent tax or assessment liens
against the property covered by the related Mortgage; (vi) at the date of
initial issuance of the Certificates, the portion of each Mortgage Loan, if any,
which in the circumstances set forth below under "Servicing of Mortgage Loans
and Contracts - Primary Mortgage Insurance" should be insured with a private
mortgage insurer is so insured; and (vii) each Mortgage Loan at the time it was
made complied in all material respects with applicable state and federal laws,
including, with out limitation, usury, equal credit opportunity and disclosure
laws. The Depositor's rights against the Seller in the event of a breach of its
representations will be assigned to the Trustee for the benefit of the
Certificates of such series.
ASSIGNMENT OF CONTRACTS. The Depositor will cause the Contracts to be
assigned to the Trustee, together with principal and interest due on or with
respect to the Contracts on and after the Cut-Off Date. Each Contract will be
identified in a loan schedule ("Contract Loan Schedule") appearing as an exhibit
to the related Agreement. Such Contract Loan Schedule may specify, with respect
to each Contract, among other things: the original principal balance and the
outstanding Principal Balance as of the Cut-Off Date; the interest rate; the
current scheduled payment of principal and interest; and the maturity date.
In addition, with respect to each Contract, the Depositor will deliver or
cause to be delivered to the Trustee, the original Contract and copies of
documents and instruments related to each Contract and the security interest in
the Manufactured Home securing each Contract. To give notice of the right, title
and interest of the Trust to the Contracts, the Depositor will cause a UCC-1
financing statement to be filed identifying the Trustee as the secured party and
identifying all Contracts as collateral. The Contracts will not be stamped or
otherwise marked to reflect their assignment from the Depositor to the Trustee.
Therefore, if a subsequent purchaser were able to take physical possession of
the Contracts without notice of such assignment, the interest of the Trust in
the Contracts could be defeated. See "Certain Legal Aspects of the Mortgage
Assets" herein.
The Depositor or the related Seller, as the case may be, may provide
limited representations and warranties to the Trustee concerning the Contracts.
Such representations and warranties may include: (i) that the information
contained in the Contract Loan Schedule provides an accurate listing of the
Contracts and that the information respecting such Contracts set forth in such
Contract Loan Schedule is true and correct in all material respects at the date
or dates respecting which such information is furnished; (ii) that, immediately
prior to the conveyance of the Contracts, the Depositor had good title to and
was sole owner of, each such Contract; and (iii) that there has been no other
sale by it of such Contract and that the Contract is not subject to any lien,
charge, security interest or other encumbrance.
ASSIGNMENT OF MORTGAGE-BACKED SECURITIES AND OTHER MORTGAGE SECURITIES.
With respect to each series, the Depositor will cause any Mortgage-Backed
Securities and Other Mortgage Securities included in the related Trust to be
registered in the name of the Trustee (directly or through a participant in a
depository). The Trustee (or its custodian) will have possession of any
certificated Mortgage-Backed Securities and Other Mortgage Securities. The
Trustee will not be in possession of or be assignee of record of any underlying
assets for a Mortgage-Backed Security or Other Mortgage Security. Each
Mortgage-Backed Security and Other Mortgage Security will be identified in a
schedule appearing as an exhibit to the related Agreement which may specify
certain information with respect to such security, including, as applicable, the
original principal amount, outstanding principal balance as of the Cut-Off Date,
annual pass-through rate or interest rate and maturity date and certain other
pertinent information for each such security. The Depositor will represent and
warrant to the Trustee, among other things, the information contained in such
schedule is true and correct and that immediately prior to the transfer of the
related securities to the Trustee, the Depositor had good title to, and was the
sole owner of, each such security.
REPURCHASE OR SUBSTITUTION OF MORTGAGE LOANS AND Contracts. The Trustee
will review the documents delivered to it with respect to the Mortgage Loans and
Contracts included in the related Trust. If any document is not delivered or is
found to be defective in any material respect and the Depositor or the related
Seller, if so required cannot deliver such document or cure such defect within
the period specified in the related Prospectus Supplement after notice thereof
(which the Trustee will undertake to give within the period specified in the
related Prospectus Supplement), and if any other party obligated to deliver such
document or cure such defect has not done so and has not substituted or
repurchased the affected Mortgage Loan or Contract then the Depositor will cause
the Seller, not later than the first date designated for the deposit of payments
into the Certificate Account (a "Deposit Date") which is more than a specified
number of days after such period, (a) if so provided in the Prospectus
Supplement to remove the affected Mortgage Loan or Contract from the Trust and
substitute one or more other Mortgage Loans or Contracts therefor or (b)
repurchase the Mortgage Loan or Contract from the Trustee for a price equal to
100% of its Principal Balance plus one month's interest thereon at the
applicable Remittance Rate. This repurchase and, if applicable, substitution
obligation will generally constitute the sole remedy available to the Trustee
for a material defect in a document relating to a Mortgage Loan or Contract.
The Depositor is required to cause the Seller to do either of the following
(a) cure any breach of any representation or warranty that materially and
adversely affects the interests of the Owners of the Certificates in a Mortgage
Loan (each, a "Defective Mortgage Loan") or Contract within a specified number
of days of its discovery by the Depositor or its receipt of notice thereof from
the Trustee, (b) repurchase such Defective Mortgage Loan or Contract not later
than the first Deposit Date which is more than a specified number of days after
such period for a price equal to 100% of its Principal Balance plus one month's
interest thereon at the applicable Remittance Rate, or (c) if so specified in
the Prospectus Supplement, remove the affected Mortgage Loan or Contract from
the Trust and substitute one or more other mortgage loans or contracts therefor.
This repurchase and, if applicable, substitution obligation will generally
constitute the sole remedies available to the Trustee for any such breach.
If the related Prospectus Supplement so provides, the Depositor or a
designated affiliate may be obligated to repurchase or substitute Mortgage Loans
or Contracts as described above, whether or not the Depositor obtains such an
agreement from the Seller which sold such Mortgage Loans or Contracts.
If a REMIC election is to be made with respect to all or a portion of a
Trust, there may be federal income tax limitations on the right to substitute
Mortgage Loans or Contracts.
EVIDENCE AS TO COMPLIANCE
The Agreement will provide that on or before a specified date in each year,
beginning the first such date that is at least a specified number of months on
and after the Cut-Off Date, a firm of independent public accountants will
furnish a statement to the Trustee to the effect that, based on an examination
of certain specified documents and records relating to the servicing of the
Depositor's mortgage loan portfolio conducted substantially in compliance with
the audit program for mortgages serviced for FNMA or FHLMC, the United States
Department of Housing and Urban Development Mortgage Audit Standards or the
Uniform Single Audit Program for Mortgage Bankers or in accordance with other
standards specified in the Agreement (the "Applicable Accounting Standards"),
such firm is of the opinion that such servicing has been conducted in compliance
with the Applicable Accounting Standards except for (a) such exceptions as such
firm shall believe to be immaterial and (b) such other exceptions as shall be
set forth in such statement.
THE TRUSTEE
Any commercial bank or trust company serving as Trustee may have normal
banking relationships with the Depositor. In addition, the Depositor and the
Trustee acting jointly will have the power and the responsibility for appointing
co-trustees or separate trustees of all or any part of the Trust relating to a
particular series of Certificates. In the event of such appointment, all rights,
powers, duties and obligations conferred or imposed upon the Trustee by the
Agreement shall be conferred or imposed upon the Trustee and such separate
trustee or co-trustee jointly, or, in any jurisdiction in which the Trustee
shall be incompetent or unqualified to perform certain acts, singly upon such
separate trustee or co-trustee who shall exercise and perform such rights,
powers, duties and obligations solely at the direction of the Trustee.
The Trustee will make no representations as to the validity or sufficiency
of the Agreement, the Certificates or of any Mortgage Asset or related document,
and will not be accountable for the use or application by the Depositor of any
funds paid to the Depositor in respect of the Certificates or the related
assets, or amounts deposited in the Certificate Account or deposited into the
Distribution Account. If no Event of Default has occurred, the Trustee will be
required to perform only those duties specifically required of it under the
Agreement. However, upon receipt of the various certificates, reports or other
instruments required to be furnished to it, the Trustee will be required to
examine them to determine whether they conform to the requirements of the
Agreement.
The Trustee may resign at any time, and the Depositor may remove the
Trustee if the Trustee ceases to be eligible to continue as such under the
Agreement, if the Trustee becomes insolvent or in such other instances, if any,
as are set forth in the Agreement. Following any resignation or removal of the
Trustee, the Depositor 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.
ADMINISTRATION OF THE CERTIFICATE ACCOUNT
The Agreement will require that the Certificate Account be either (i)
maintained with a depository institution the debt obligations of which (or, in
the case of a depository institution which is a part of a holding company
structure, the debt obligations of the holding company of which) have a rating
acceptable to each rating agency that was requested to rate the Certificates, or
(ii) an account or accounts the deposits in which are fully insured by either
the Bank Insurance Fund (the "BIF") of the FDIC or the Savings Association
Insurance Fund (as successor to the Federal Savings and Loan Insurance
Corporation) ("SAIF") of the FDIC. The collateral eligible to secure amounts in
the Certificate Account is limited to United States government securities and
other investments acceptable to the rating agencies rating such series of
Certificates, and may include one or more Certificates of a series ("Eligible
Investments"). If so specified in the related Prospectus Supplement, a
Certificate Account may be maintained as an interest bearing account, or the
funds held therein may be invested pending each succeeding Payment Date in
Eligible Investments. If so specified in the related Prospectus Supplement, the
Servicer or its designee will be entitled to receive any such interest or other
income earned on funds in the Certificate Account as additional compensation.
The Servicer will deposit in the Certificate Account from amounts previously
deposited by it into the Servicer's Custodial Account on the related Remittance
Date the following payments and collections received or made by it on and after
the Cut-Off Date (including scheduled payments of principal and interest due on
and after the Cut-Off Date but received before the Cut-Off Date):
(i) all Mortgagor payments on account of principal, including
Principal Prepayments and, if specified in the related Prospectus
Supplement, prepayment penalties:
(ii) all Mortgagor payments on account of interest, adjusted to
the Remittance Rate;
(iii) all Liquidation Proceeds net of certain amounts reimbursed
to the Servicer or other person entitled thereto, as described above;
(iv) all Insurance Proceeds, other than proceeds to be applied to
the restoration or repair of the related property or released to the
Mortgagor and net of certain amounts reimbursed to the Servicer or other
person entitled thereto, as described above;
(v) all condemnation awards or settlements which are not released
to the Mortgagor in accordance with normal servicing procedures;
(vi) any Advances made as described under "Servicing of Mortgage
Loans and Contracts - Advances" herein and certain other amounts required
under the Agreement to be deposited in the Certificate Account;
(vii) all proceeds of any Mortgage Loan or Contract or property
acquired in respect thereof repurchased by the Depositor, the Seller or
otherwise as described above or under "Termination" below;
(viii) all amounts, if any, required to be deposited in the
Certificate Account from any Credit Enhancement for the related series; and
(ix) all other amounts required to be deposited in the
Certificate Account pursuant to the related Agreement.
REPORTS
Concurrently with each distribution on the Certificates, there will be
mailed to Owners a statement generally setting forth, to the extent applicable
to any series, among other things:
(i) the aggregate amount of such distribution allocable to
principal, separately identifying the amount allocable to each class;
(ii) the amount of such distribution allocable to interest,
separately identifying the amount allocable to each class;
(iii) the aggregate Certificate Principal Balance of each class
of the Certificates after giving effect to distributions on such
Distribution Date;
(iv) the aggregate Certificate Principal Balance of any class of
Compound Interest Certificates after giving effect to any increase in such
Principal Balance that results from the accrual of interest that is not yet
distributable thereon;
(v) if applicable, the amount otherwise distributable to any
class of Certificates that was distributed to other classes of
Certificates;
(vi) if any class of Certificates has priority in the right to
receive Principal Prepayments, the amount of Principal Prepayments in
respect of the related Mortgage Assets;
(vii) the aggregate Principal Balance and number of Mortgage
Loans and Contracts which were delinquent as to a total of two installments
of principal and interest; and
(viii) the aggregate Principal Balances of Mortgage Loans and
Contracts which (a) were delinquent 30-59 days, 60-89 days, and 90 days or
more, and (b) were in foreclosure.
Customary information deemed necessary for Owners to prepare their tax
returns will be furnished annually.
FORWARD COMMITMENTS; PRE-FUNDING
The Trustee of a Trust may enter into a Pre-Funding Agreement for the
transfer of additional Mortgage Loans to such Trust following the date on which
such Trust is established and the related Certificates are issued. The Trustee
of a Trust may enter into Pre-Funding Agreements to permit the acquisition of
additional Mortgage Loans that could not be delivered by the Depositor or have
not formally completed the origination process, in each case prior to the
Delivery Date. Any Pre-Funding Agreement will require that any Mortgage Loans so
transferred to a Trust conform to the requirements specified in such Pre-Funding
Agreement. If a Pre-Funding Agreement is to be utilized, the related Trustee
will be required to deposit in the Purchase Account all or a portion of the
proceeds received by the Trustee in connection with the sale of one or more
classes of Certificates of the related series; the additional Mortgage Loans
will be transferred to the related Trust in exchange for money released from the
related Pre-Funding Account. Each Pre-Funding Agreement will set a specified
period during which any such transfers must occur. The Pre-Funding Agreement or
the related Agreement will require that, if all moneys originally deposited to
such Pre-Funding Account are not so used by the end of such specified period,
then any remaining moneys will be applied as a mandatory prepayment of the
related class or classes of Certificates as specified in the related Prospectus
Supplement. The specified period for the acquisition by a Trust of additional
Mortgage Loans is not expected to exceed three months from the date such Trust
is established.
SERVICER EVENTS OF DEFAULT
"Events of Default" under the Agreement will consist of (i) any failure by
the Servicer to duly observe or perform in any material respect any other of its
covenants or agreements in the Agreement materially affecting the rights of
Owners which continues unremedied for a specified number of days after the
giving of written notice of such failure to the Depositor by the Trustee or to
the Servicer and the Trustee by the Owners of Certificates evidencing interests
aggregating not less than 25% of the affected class of Certificates; and (ii)
certain events of insolvency, readjustment of debt, marshaling of assets and
liabilities or similar proceedings and certain actions by the Servicer
indicating its insolvency, reorganization or inability to pay its obligations.
RIGHTS UPON SERVICER EVENT OF DEFAULT
As long as an Event of Default under the Agreement remains unremedied by
the Servicer, the Trustee, or Owners of Certificates may terminate all the
rights and obligations of the Servicer under the Agreement, whereupon the
Trustee or Master Servicer, if any, or a new Servicer appointed pursuant to the
Agreement, will succeed to all the responsibilities, duties and liabilities of
the Servicer under the Agreement and will be entitled to similar compensation
arrangements. Following such termination, the Depositor shall appoint any
established mortgage loan servicer satisfying the qualification standards
established in the Agreement to act as successor to the Servicer under the
Agreement. If no such successor shall have been appointed within a specified
number of days following such termination, then either the Depositor or the
Trustee may petition a court of competent jurisdiction for the appointment of a
successor Servicer. Pending the appointment of a successor Servicer, the Trustee
or the Master Servicer, if any, shall act as Servicer.
The Owners of Certificates will not have any right under the Agreement to
institute any proceeding with respect to the Agreement, unless they previously
have given to the Trustee written notice of default and unless the Owners of the
percentage of the Certificates specified in the Prospectus Supplement have made
written request to the Trustee to institute such proceeding in its own name as
Trustee thereunder and have offered to the Trustee reasonable indemnity and the
Trustee for a specified number of days has neglected or refused to institute any
such proceedings. However, the Trustee is under no obligation to exercise any of
the trusts or powers vested in it by the Agreement or to make any investigation
of matters arising thereunder or to institute, conduct or defend any litigation
thereunder or in relation thereto at the request, order or direction of any of
the Owners, unless such Owners have offered to the Trustee reasonable security
or indemnity against the costs, expenses and liabilities which may be incurred
therein or thereby.
AMENDMENT
An Agreement generally may be amended by the Depositor, the Servicer and
the Trustee, without the consent of the Owners of the Certificates, to cure any
ambiguity, to correct or supplement any provision therein which may be defective
or inconsistent with any other provision therein, to take any action necessary
to maintain REMIC status of any Trust as to which a REMIC election has been
made, to add any other provisions with respect to matters or questions arising
under the Agreement which are not materially inconsistent with the provisions of
the Agreement or for any other purpose, provided that with respect to amendments
for any other purpose (a) the Depositor shall deliver an opinion of counsel
satisfactory to the Trustee, that such amendment will not adversely affect in
any material respect the interests of any Owners of Certificates of that series
and (B) such amendment will not result in a withdrawal or reduction of the
rating of any rated Certificate. Notwithstanding the foregoing, no such
amendment may (i) reduce in any manner the amount of, or delay the timing of,
collections of payments received on the related Mortgage Assets or distributions
which are required to be made on any Certificate without the consent of the
Owner of such Certificate, (ii) adversely affect in any material respect the
interests of the Owners of any class of Certificates in any manner other than as
described in (i), without the consent of the Owners of Certificates of such
class evidencing not less than a majority of the interests of such class or
(iii) reduce the aforesaid percentage of Certificates of any class required to
consent to any such amendment, without the consent of the Owners of all
Certificates of such class then outstanding. Any other amendment provisions
inconsistent with the foregoing shall be specified in the related Prospectus
Supplement.
TERMINATION
The obligations of the Depositor, the Servicer, and the Trustee created by
the Agreement will terminate upon the payment as required by the Agreement of
all amounts held by the Servicer or in the Certificate Account and required to
be paid to them pursuant to the Agreement after the later of (i) the maturity or
other liquidation of the last Mortgage Asset subject thereto or the disposition
of all property acquired upon foreclosure of any such Mortgage Loan or Contract
or (ii) the repurchase by the Depositor from the Trust of all the outstanding
Certificates or all remaining assets in the Trust. The Agreement will establish
the repurchase price for the assets in the Trust and the allocation of such
purchase price among the classes of Certificates. The exercise of such right
will effect early retirement of the Certificates of that series, but the
Depositor's right so to repurchase will be subject to the conditions described
in the related Prospectus Supplement. If a REMIC election is to be made with
respect to all or a portion of a Trust, there may be additional conditions to
the termination of such Trust which will be described in the related Prospectus
Supplement. In no event, however, will the trust created by the Agreement
continue beyond the expiration of 21 years from the death of the survivor of
certain persons named in the Agreement. The Trustee will give written notice of
termination of the Agreement to each Owner, and the final distribution will be
made only upon surrender and cancellation of the Certificates at an office or
agency of the Trustee specified in such notice of termination.
USE OF PROCEEDS
Substantially all the net proceeds to be received from the sale of each
series of Certificates will be applied to the simultaneous purchase of the
Mortgage Assets related to such series (or to reimburse the amounts previously
used to effect such a purchase), the costs of carrying such Mortgage Assets
until sale of the Certificates and to pay other expenses.
THE DEPOSITOR
The Depositor will have no ongoing servicing obligations or
responsibilities with respect to any Mortgage Pool or Contract Pool. The
Depositor does not have, nor is it expected in the future to have, any
significant net worth.
The Depositor anticipates that it will acquire Mortgage Assets in the open
market or in privately negotiated transactions, which may be through or from an
affiliate.
Neither the Depositor nor any of its affiliates will insure or guarantee
the Certificates of any series.
CERTAIN LEGAL ASPECTS OF THE MORTGAGE ASSETS
The following discussion contains summaries of certain legal aspects of
mortgage loans and manufactured housing contracts which are general in nature.
Because such legal aspects are governed primarily by applicable state law (which
laws may differ substantially), the summaries do not purport to be complete nor
to reflect the laws of any particular state, nor to encompass the laws of all
states in which the security for the Mortgage Loans and Contracts is situated.
The summaries are qualified by reference to the applicable federal and state
laws governing the Mortgage Loans and Contracts.
GENERAL
MORTGAGES. The Mortgage Loans will be secured either by deeds of trust or
mortgages. A mortgage creates a lien upon the real property encumbered by the
mortgage. It is not prior to liens for real estate taxes and assessments.
Priority between mortgages depends on their terms and generally on the order of
filing with a state or county office. There are two parties to a mortgage: the
mortgagor, who is the borrower and homeowner or the land trustee (as described
below), and the mortgagee, who is the lender. Under the mortgage instrument, 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 formally has three
parties, the borrower-homeowner called the trustor (similar to a mortgager), a
lender (similar to a mortgagee) called the beneficiary, and a third-party
grantee called the trustee. Under a deed of trust, the borrower grants the
property, irrevocably until the debt is paid, in trust and generally with a
power of sale, to the trustee to secure payment of the obligation. The trustee's
authority under a deed of trust and the mortgagee's authority under a mortgage
are governed by law, the express provisions of the deed of trust or mortgage
and, in some cases, the directions of the beneficiary.
COOPERATIVES. Certain of the Mortgage Loans may be Cooperative Loans. The
private, non-profit, cooperative apartment corporation owns all the real
property that comprises the project, including the land, separate dwelling units
and all common areas. The cooperative is directly responsible for project
management and, in most cases, payment of real estate taxes and hazard and
liability insurance. If there is a blanket mortgage on the cooperative apartment
building and or underlying land, as is generally the case, the cooperative, as
project mortgagor, is also responsible for meeting these mortgage obligations. A
blanket mortgage is ordinarily incurred by the cooperative in connection with
the construction or purchase of the cooperative's apartment building. The
interest of the occupant under proprietary leases or occupancy agreements to
which that cooperative is a party are generally subordinate to the interest of
the holder of the blanket mortgage in that building. If the cooperative is
unable to meet the payment obligations arising under its blanket mortgage, the
mortgagee holding the blanket mortgage could foreclose on that mortgage and
terminate all subordinate proprietary leases and occupancy agreements. In
addition, the blanket mortgage on a cooperative may provide financing in the
form of a mortgage that does not fully amortize with a significant portion of
principal being due in one lump sum at final maturity. The inability of the
cooperative to refinance this mortgage and its consequent inability to make such
final payment could lead to foreclosure by the mortgagee providing the
financing. A foreclosure in either event by the holder of the blanket mortgage
could eliminate or significantly diminish the value of any collateral held by
the lender who financed the purchase by an individual tenant-stockholder of
cooperative shares or in the case of a Trust including Cooperative Loans, the
collateral securing the Cooperative Loans.
The cooperative is owned by tenant-stockholders who, through ownership of
stock shares or membership certificates in the corporation, receive proprietary
leases or occupancy agreements which confer exclusive rights to occupy specific
units. Generally, a tenant-stockholder of a cooperative must make a monthly
payment to the cooperative representing such tenant-stockholder's PRO RATA share
of the cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a cooperative and accompanying occupancy rights is financed through
a cooperative share loan evidenced by a promissory note and secured by a
security interest in the occupancy agreement or proprietary lease and in the
related cooperative shares. The lender takes possession of the share certificate
and a counterpart of the proprietary lease or occupancy agreement and a
financing statement covering the proprietary lease or occupancy agreement and
the cooperative shares is filed in the appropriate state and local offices to
perfect the lenders interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant-stockholder, the lender may sue for
judgment on the promissory note, dispose of the collateral at a public or
private sale or otherwise proceed against the collateral or tenant-stockholder
as an individual as provided in the security agreement covering the assignment
of the proprietary lease or occupancy agreement and the pledge of cooperative
shares.
FORECLOSURE
MORTGAGES. Foreclosure of a deed of trust is generally accomplished by a
non-judicial trustee's sale under a specific provision in the deed of trust that
authorizes the trustee to sell the property to a third party upon any default by
the borrower under the terms of the note or deed of trust. In some states, the
trustee must record a notice of default and send a copy to the borrower-trustor
or and any person who has recorded a request for a copy of a notice of default
and notice of sale. In addition, the trustee must provide notice in some states
to any other individual having an interest in the real property, including any
junior lienholders. The borrower, or any other person having a junior
encumbrance on the real estate, may, during a reinstatement period, cure the
default by paying the entire amount in arrears plus the costs and expenses
incurred in enforcing the obligation. Generally, state law controls the amount
of foreclosure expenses and costs, including attorney's fees' which may be
recovered by a lender. If the 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.
Foreclosure of a mortgage is generally accomplished by judicial action. 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 defendant.
Judicial foreclosure proceedings are often not protested by any of the parties
defendant. However, when the mortgagee's right to foreclose is contested, the
legal proceedings necessary to resolve the issue can be time consuming. After
the completion of judicial foreclosure, the court generally issues a judgment of
foreclosure and appoints a referee or other court officer to conduct the sale of
the property.
In case of foreclosure under either a mortgage or a deed of trust, the sale
by the referee or other designated officer or by the trustee is a public sale.
However, because of the difficulty a potential buyer at the sale would have in
determining the exact status of title and because the physical condition of the
property may have deteriorated during foreclosure proceedings, it is uncommon
for a third party to purchase the property at the foreclosure sale. Rather it is
common for the lender to purchase the property from the trustee or referee for
an amount equal to the principal amount of the mortgage or deed of trust,
accrued and unpaid interest and expenses of foreclosure. Thereafter, the lender
will assume the burdens of ownership, including paying real estate taxes,
obtaining casualty 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. Any loss may be reduced by the receipt of any
mortgage insurance proceeds.
When the junior mortgagee or beneficiary under a junior deed of trust cures
the default and state law allows it to reinstate or redeem by paying the full
amount of the senior mortgage or deed of trust, then in those states the amount
paid so to cure or redeem generally becomes a part of the indebtedness secured
by the junior mortgage or deed of trust. See "Junior Liens; Rights of Senior
Mortgagors or Beneficiaries" below.
A sale conducted in accordance with the terms of the power of sale
contained in a mortgage or deed of trust is generally presumed to be conducted
regularly and fairly, and a conveyance of the real property by the trustee
confers, in most states, legal title to the real property to the purchaser, free
of all junior mortgages or deeds of trust and free of all other liens and claims
subordinate to the mortgage or deed of trust under which the sale is made (with
the exception of certain governmental liens). The purchaser's title is, however,
subject to all senior liens, encumbrances and mortgages and may be subject to
mechanic's and materialman's liens in some states. Thus, if the mortgage or deed
of trust being foreclosed is a junior mortgage or deed of trust, the sheriff or
trustee will convey title to the purchaser of the real property, subject to any
existing first mortgage or deed of trust and any other prior liens and claims.
The foreclosure of a junior mortgage or deed of trust, generally, will have an
effect on the first mortgage or deed of trust, if the senior mortgage or deed of
trust grants to the senior mortgagee or beneficiary the right to accelerate its
indebtedness under a "due-on-sale" clause or "due on further encumbrance" clause
contained in the senior mortgage or deed of trust. See "Anti-Deficiency
Legislation and Other Limitations on Lenders" below.
The proceeds received by the sheriff or trustee from the sale are applied
pursuant to the terms of the deed of trust, which may require application first
to the costs, fees and expenses of sale and then in satisfaction of the
indebtedness secured by the mortgage or deed of trust under which the sale was
conducted. In some states, any surplus money remaining may be available to
satisfy claims of the holders of junior mortgages or deeds of trust and other
junior liens and claims in order of their priority, whether or not the mortgagor
or trustee is in default, while in some states, any surplus money remaining may
be payable directly to the mortgagor or trustor. Any balance remaining is
generally payable to the mortgagor or trustor. Following the sale, in some
states the mortgagee or beneficiary following a foreclosure of a mortgage or
deed of trust may not obtain a deficiency judgment against the mortgagor or
trustor. A junior lienholder whose rights in the property are terminated by the
foreclosure by a senior lienholder will not share in the proceeds from the
subsequent disposition of the property.
COOPERATIVE LOANS. The cooperative shares owned by the tenant-stockholder
and pledged to the lender are, in almost all cases, subject to restrictions on
transfer as set forth in the cooperative's Certificate of Incorporation and
Bylaws, as well as the proprietary lease or occupancy agreement, and may be
canceled by the cooperative for failure by the tenant-stockholder to pay rent or
other obligations or charges owned by such tenant-stockholder, including
mechanics' liens against the cooperative apartment building incurred by such
tenant-stockholder. The proprietary lease or occupancy agreement generally
permits the cooperative to terminate such lease or agreement in the event an
obligor fails to make payments or defaults in the performance of covenants
required thereunder. Typically, the lender and the cooperative enter into a
recognition agreement which establishes the rights and obligations of both
parties in the event of a default by the tenant-stockholder on its obligations
under the proprietary lease or occupancy agreement. A default by the
tenant-stockholder under the proprietary lease or occupancy agreement will
usually constitute a default under the security agreement between the lender and
the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the cooperative will recognize the
lender's lien against proceeds from a sale of the cooperative apartment,
subject, however, to the cooperative's right to sums due under such proprietary
lease or occupancy agreement. The total amount owed to the cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the cooperative loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that in the event of a foreclosure on a
cooperative loan, the lender must obtain the approval or consent of the
cooperative as required by the proprietary lease before transferring the
cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited in any rights it may have to dispossess the tenant-stockholders.
In some states, foreclosure on the cooperative shares is accomplished by a
sale in accordance with the provisions of Article 9 of the Uniform Commercial
Code (the "UCC") and the security agreement relating to those shares. Article 9
of the UCC requires that a sale be conducted in a "commercially reasonable"
manner. Whether a foreclosure sale has been conducted in a "commercially
reasonable" manner will depend on the facts in each case. In determining
commercial reasonableness, a court will look to the notice given the debtor and
the method, manner, time, place and terms of the foreclosure. Generally, a sale
conducted according to the usual practice of banks selling similar collateral
will be considered reasonably conducted. Article 9 of the UCC provides that the
proceeds of the sale will be applied first to pay the costs and expenses of the
sale and then to satisfy the indebtedness secured by the lender's security
interest. The recognition agreement, however, generally provides that the
lender's right to reimbursement is subject to the right of the cooperative
corporation to receive sums due under the proprietary lease or occupancy
agreement. If there are proceeds remaining, the lender must account to the
tenant-stockholder for the surplus. Conversely, if a portion of the indebtedness
remains unpaid, the tenant-stockholder is generally responsible for the
deficiency. See "Anti-Deficiency Legislation and Other Limitations on Lenders"
below.
JUNIOR LIENS; RIGHTS OF SENIOR MORTGAGEES OR BENEFICIARIES. Certain of the
Mortgage Loans, including Title I Loans, may be secured by mortgages or deeds of
trust providing for junior (i.e., second, third, etc.) liens on the related
Mortgaged Properties which are junior to the other mortgages or deeds of trust
held by other lenders or institutional investors. The rights of the beneficiary
under a junior deed of trust or as mortgagee under a junior mortgage are
subordinate to those of the mortgagee or beneficiary under the senior mortgage
or deed of trust, including the prior rights of the senior mortgagee or
beneficiary to receive hazard insurance and condemnation proceeds and to cause
the property securing the Mortgage Loans to be sold upon default of the
mortgagor or trustor. As discussed more fully below, a junior mortgagee or
beneficiary in some states may satisfy a defaulted senior loan in full and in
some states may cure such default and bring the senior loan current, in either
event adding the amounts expended to the balance due on the junior loan. In most
states, absent a provision in the senior mortgage or deed of trust, no notice of
default is required to be given to a junior mortgagee or beneficiary.
The forms of the mortgage or deed of trust used by most institutional
lenders generally confer on the mortgagee or beneficiary the right both to
receive all proceeds collected under any hazard insurance policy and all awards
made in connection with any condemnation proceedings, and to apply such proceeds
and awards to any indebtedness secured by the mortgage or deed of trust, in such
order as the mortgagee or beneficiary may determine. Thus, in the event
improvements on the property are damaged or destroyed by fire or other casualty,
or in the event the bankruptcy is taken by condemnation, the mortgagee or
beneficiary under the underlying first mortgage or deed of trust may have the
prior right to collect any insurance proceeds payable under a hazard insurance
policy and any award of damages in connection with the condemnation and to apply
the same to the indebtedness secured by the first mortgage or deed of trust. In
those situations, proceeds in excess of the amount of first mortgage
indebtedness generally may be applied to the indebtedness of a junior mortgage
or trust deed.
Other provisions typically found in the form of the mortgagee or deed of
trust generally used by most institutional lenders obligate the mortgagor or
trustor to pay before delinquency all taxes and assessments on the property and,
when due, all encumbrances, charges and liens on the property which appear prior
to the mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee or beneficiary under the
mortgage or deed of trust. Upon a failure of the mortgagor or trustor to perform
any of these obligations, the mortgagee or beneficiary typically is given the
right under the mortgage or deed of trust to perform the obligation itself at
its election, with the mortgagor or trustor agreeing to reimburse the mortgagee
or beneficiary for any sums expended by the mortgagee or beneficiary on behalf
of the trustor. All sums so expended by the mortgagee or beneficiary generally
become part of the indebtedness secured by the mortgage or deed of trust
RIGHT OF REDEMPTION. In some states, after sale pursuant to a deed of trust
or foreclosure of a mortgage, the borrower and foreclosed junior lienors are
given a statutory period in which to redeem the property following foreclosure.
In some states, redemption may occur only upon payment of the entire principal
balance of the loan, accrued interest and expenses of foreclosure. In other
states, redemption may be authorized if the former borrower pays only a portion
of the sums due. The effect of a statutory right of redemption is to diminish
the ability of the lender to sell the foreclosed property. The rights of
redemption would defeat the title of any purchaser 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.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS. Certain
states have imposed statutory prohibitions that limit the remedies of a
beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment would be a personal judgment against the
former borrower equal in most cases to the difference between the net amount
realized upon the public sale of the real property and the amount due to the
lender. Other statutes require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an attempt
to satisfy the full debt before bringing a personal action against the borrower.
Finally, other statutory provisions limit any deficiency judgment against the
former borrower following a judicial sale to the excess of the outstanding debt
over the fair market value of the property at the time of the public sale. The
purpose of these statutes is generally to prevent a beneficiary or a mortgagee
from obtaining a large deficiency judgment against the former borrower as a
result of low or no bids at the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other 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 and/or enforce a deficiency
judgment. For example, with respect to federal bankruptcy law, a court with
federal bankruptcy jurisdiction may permit a debtor through his or her Chapter
11 or Chapter 13 rehabilitative plan to cure a monetary default in respect of a
mortgage loan on a debtor's residence by paying arrearages within a reasonable
time period and reinstating the original mortgage loan payment schedule even
though the lender accelerated the mortgage loan and final judgment of
foreclosure had been entered in state court (provided no sale of the residence
had yet occurred) prior to the filing of the debtor's petition. Some courts with
federal bankruptcy jurisdiction have approved plans, based on the particular
fact 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 have also indicated that the
terms of a mortgage loan secured by property of the debtor may be modified.
These courts have suggested that such modifications may include reducing the
amount of each monthly payment, changing the rate of interest, altering the
repayment schedule 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. Federal bankruptcy law and limited case law indicate that the foregoing
modifications could not be applied to the terms of a loan secured by property
that is the principal residence of the debtor.
The Code provides priority to certain tax liens over the lien of the
mortgage. In addition, substantive requirements are imposed upon mortgage
lenders in connection with the origination and the servicing of mortgage loans
by numerous federal and some state consumer protection laws. These laws include
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. These federal laws impose specific statutory liabilities upon
lenders who originate mortgage loans and who fail to comply with the provisions
of the law. In some cases, this liability may affect assignees of the mortgage
loans.
Generally, Article 9 of the UCC governs foreclosure on cooperative shares
and the related proprietary lease or occupancy agreement. Some courts have
interpreted section 9-504 of the UCC to prohibit a deficiency award unless the
creditor establishes that the sale of the collateral (which, in the case of a
Cooperative Loan, would be the shares of the cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner.
ENFORCEABILITY OF CERTAIN PROVISIONS. Certain of the Mortgage Loans will
contain due-on-sale clauses. These clauses permit the lender to accelerate the
maturity of a loan if the borrower sells, transfers, or conveys the property.
The enforceability of these clauses was the subject of legislation or litigation
in many states, and in some cases the enforceability of these clauses was
limited or denied. However, the Garn-St. Germain Depository Institutions Act of
1982 (the "Garn-St. Germain Act") preempts state constitutional, statutory and
case law prohibiting the enforcement of due-on-sale clauses and permits lenders
to enforce these clauses in accordance with their terms, subject to certain
limited exceptions. The Garn-St. Germain Act does "encourage" lenders to permit
assumption of loans at the original rate of interest or at some other rate less
than the average of the original rate and the market rate.
The Garn-St. Germain Act also sets forth nine specific instances in which a
mortgage lender covered by the Garn-St. Germain Act (including federal savings
and loan associations and federal savings banks) may not exercise a due-on-sale
clause, notwithstanding the fact that a transfer of the property may have
occurred. These include intra-family transfers, certain transfers by operation
of law, leases of fewer than three years and the creation of a junior
encumbrance. Regulations promulgated under the Garn-St. Germain Act by the
Federal Home Loan Bank Board as succeeded by the Office of Thrift Supervision
(the "OTS"), also prohibit the imposition of a prepayment penalty upon the
acceleration of a loan pursuant to a due-on-sale clause. Any inability of the
Depositor to enforce due-on-sale clauses may affect the average life of the
Mortgage Loans and the number of Mortgage Loans that may be outstanding until
maturity.
Upon foreclosure, courts have imposed general equitable principles. These
equitable principles are generally designed to relieve the borrower from the
legal effect of his defaults under the loan documents. Examples of judicial
remedies that have been fashioned include requirements that the lender undertake
affirmative and expensive actions to determine the causes for the borrower's
default and the likelihood that the borrower will be able to reinstate the loan.
In some cases, courts have substituted their judgment for the lender's judgment
and have required that lenders reinstate loans or recast payment schedules in
order to accommodate borrowers who are suffering from temporary financial
disability. In other cases, courts have limited the right of the lender to
foreclose if the default under the mortgage instrument is not monetary, such as
the borrower falling to adequately maintain the property or the borrower
executing a second mortgage or deed of trust affecting the property. Finally,
some courts have been faced with the issue of whether or not federal or state
constitutional provisions reflecting due process concerns for adequate notice
require that borrowers under deeds of trust or mortgages receive notices in
addition to the statutory-prescribed minimum. For the most part, these cases
have upheld the notice provisions as being reasonable or have found that the
sale by a trustee under a deed of trust, or under a mortgage having a power of
sale, does not involve sufficient state action to afford constitutional
protections to the borrower.
The standard forms of note, mortgage and deed of trust generally contain
provisions obligating the borrower to pay a late charge if payments are not
timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations upon late charges which a lender may collect
from a borrower for delinquent payments. Certain states also limit the amounts
that a lender may collect from a borrower as an additional charge if the loan is
prepaid. Under the Agreement, late charges (to the extent permitted by law and
not waived by the Servicer) will be retained by the Servicer as additional
servicing compensation.
ADJUSTABLE RATE LOANS. The laws of certain states may provide that mortgage
notes relating to adjustable rate loans are not negotiable instruments under the
UCC. In such event, the Trustee will not be deemed to be a "holder in due
course," within the meaning of the UCC and may take such a mortgage note subject
to certain restrictions on its ability to foreclose and to certain contractual
defenses available to a mortgagor.
ENVIRONMENTAL LEGISLATION. Certain states impose a statutory lien for
associated costs on property that is the subject of a cleanup action by the
state on account of hazardous wastes or hazardous substances released or
disposed of on the property. Such a lien will generally have priority over all
subsequent liens on the property and, in certain of these states, will have
priority over prior recorded liens including the lien of a mortgage. In
addition, under federal environmental legislation and under state law in a
number of states, a secured party which takes a deed in lieu of foreclosure or
acquires a mortgaged property at a foreclosure sale or assumes active control
over the operation or management of a property so as to be deemed an "owner" or
"operator" of the property may be liable for the costs of cleaning up a
contaminated site. Although such costs could be substantial, it is unclear
whether they would be imposed on a secured lender (such as a Trust) to
homeowners. In the event that title to a Mortgaged Property securing a Mortgage
Loan in a Trust was acquired by the Trust and cleanup costs were incurred in
respect of the Mortgaged Property, the Trust might realize a loss if such costs
were required to be paid by the Trust.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
Generally, under the terms of the Relief Act, a borrower who enters
military service after the origination of a Mortgage Loan or Contract by such
borrower (including a borrower 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 or similar limitations under state law could have an effect, for an
indeterminate period of time, on the ability of the Servicer to collect full
amounts of interest on certain of the Mortgage Loans. In addition, the Relief
Act imposes limitations which would impair the ability of the Servicer to
foreclose on an affected Mortgage Loan during the borrower'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.
Any shortfalls in interest collections resulting from application of the
Relief Act could adversely affect Certificates.
THE CONTRACTS
GENERAL. As a result of the Depositor's assignment of the Contracts to the
Trustee, the Owners of Certificates will succeed collectively to all the rights
(including the right to receive payment on the Contracts) and will assume
certain obligations of the Depositor. Each Contract evidences both (a) the
obligation of the obligor to repay the loan evidenced thereby, and (b) the grant
of a security interest in the Manufactured Home to secure repayment of such
loans. Certain aspects of both features of the Contracts are described more
fully below.
The Contracts generally are "chattel paper" as defined in the UCC in effect
in the states which the Manufactured Homes initially were registered. Pursuant
to the UCC, the sale of chattel paper is treated in a manner similar to
perfection of a security interest in chattel paper. Under the Agreement, the
Depositor will transfer physical possession of the Contracts to the Trustee or
its custodians. In addition, the Depositor will make an appropriate filing of a
UCC-1 financing statement in the appropriate states to give notice of the
Trustee's ownership of the Contracts. The Contracts will not be stamped or
marked otherwise to reflect their assignment from the Depositor to the Trustee.
Therefore, if a subsequent purchaser were able to take physical possession of
the Contracts without notice of such assignment the Trustee's interest in
Contracts could be defeated.
SECURITY INTERESTS IN THE MANUFACTURED HOMES. The Manufactured Homes
securing the Contracts may be located in all 50 states. Security interests in
manufactured homes may be perfected either by notation of the secured party's
lien on the certificate of title or by delivery of the required documents and
payment of a fee to the state motor vehicle authority, depending on state law.
In some nontitle states, perfection pursuant to the provisions of the UCC is
required. The Depositor may effect such notation or delivery of the required
documents and fees, and obtain possession of the certificate of title, as
appropriate under the laws of the state in which any manufactured home securing
a manufactured housing conditional sales contract is registered. In the event
the Depositor fails, due to clerical errors, to effect such notation or
delivery, or files the security interest under the wrong law (for example, under
a motor vehicle title statute rather than under the UCC, in a few states), the
Trustee may not have a first priority security interest in the Manufactured Home
securing a Contract. As manufactured homes have become larger and often have
been attached to their sites without any apparent intention to move them, courts
in many states have held that manufactured homes, under certain circumstances,
may become subject to real estate title and recording laws. As a result, a
security interest in a manufactured home could be rendered subordinate to the
interests of other parties claiming an interest in the home under applicable
state real estate law. In order to perfect a security interest in a manufactured
home under real estate law, the holder of the security interest must file either
a "fixture filing" under the provisions of the UCC or a real estate mortgage
under the real estate laws of the state where the home is located. These filings
must be made in the real state records office of the county where the home is
located. So long as the borrower does not violate this agreement, a security
interest in the Manufactured Home will be governed by the certificate of title
laws or the UCC, and the notation of the security interest on the certificate of
title or the filing of a UCC financing statement will be effective to maintain
the priority of the security interest in the Manufactured Home. If, however, a
Manufactured Home is permanently attached to this site, other parties could
obtain an interest in the Manufactured Home which is prior to the security
interest transferred to the Trustee. With respect to a series of Certificates
and as described in the related Prospectus Supplement, the Depositor may be
required to perfect a security interest in the Manufactured Home under
applicable real estate laws. If such real estate filings are not required and if
any of the foregoing events were to occur, the only recourse would be to pursue
the Trust's rights to require repurchase for breach of warranties.
The Depositor will assign its security interest in the Manufactured Homes
to the Trustee. Neither the Depositor nor the Trustee will amend the
certificates of title to identify the Trust as the new secured party.
Accordingly, the Depositor will continue to be named as the secured party on the
certificates of title relating to the Manufactured Homes. In most states, such
assignment is an effective conveyance of such security interest without
amendment of any lien noted on the related certificate of title and the new
secured party succeeds to the Depositor's rights as the secured party. However,
in some states there exists a risk that, in the absence of an amendment to the
certificate of title, such assignment of the security interest might not be held
effective against creditors of the Depositor.
In the absence of fraud, forgery or permanent affixation of the
Manufactured Home to its site by the Manufactured Home owner, or administrative
error by state recording officials, the notation of the lien of the Depositor on
the certificate of title or delivery of the required documents and fees will be
sufficient to protect the Trust against the rights of subsequent purchasers of a
Manufactured Home or subsequent lenders who take a security interest in the
Manufactured Home. If there are any Manufactured Homes as to which the security
interest is not perfected, such security interest would be subordinate to, among
others, subsequent purchasers for value of Manufactured Homes and holders of
perfected security interests. There also exists a risk in not identifying the
Trust as the new secured party on the certificate of title that, through fraud
or negligence, the security interest of the Trust could be released.
ENFORCEMENT OF SECURITY INTERESTS IN MANUFACTURED HOMES. The Servicer on
behalf of the Trustee, to the extent required by the related Agreement, may take
action to enforce the Trustee's security interest with respect to Contracts in
default by repossession and resale of the Manufactured Homes securing such
Contracts in default. So long as the Manufactured Home has not become subject to
the real estate law, a creditor can repossess a Manufactured Home securing a
Contract by voluntary surrender, by "self-help" repossession that is "peaceful"
(I.E., without breach of the peace) or in the absence of voluntary surrender and
the ability to repossess without breach of the peace, by judicial process. The
holder of a Contract must give the debtor a number of days' notice, which varies
from 10 to 30 days depending on the state, prior to commencement of any
repossession. The UCC and consumer protection laws in most states place
restrictions on repossession sales, including requiring prior notice to the
debtor and commercial reasonableness in effecting such a sale. The law in most
states also requires that the debtor be given notice of any sale prior to resale
of the unit so that the debtor may redeem at or before such resale. In the event
of such repossession and resale of a Manufactured Home, the Trustee would be
entitled to be paid out of the sale proceeds before such proceeds could be
applied to the payment of the claims of unsecured creditors or the holders of
subsequently perfected security interests or, thereafter, to the debtor.
If the owner of a Manufactured Home moves it to a state other than the
state in which such Manufactured Home initially is registered, under the laws of
most states the perfected security interest in the Manufactured Home would
continue for four months after such relocation and thereafter only if and after
the owner registers the Manufactured Home in such state. If the owner were to
relocate a Manufactured Home to another state and not re- register the
Manufactured Home in such state, and if steps are not taken to re-perfect the
Trustee's security interest in such state, the security interest in the
Manufactured Home would cease to be perfected. A majority of states generally
requires surrender of a certificate of title to re-register a Manufactured Home;
accordingly, the Trustee must surrender possession if it holds the certificate
of title to such Manufactured Home or, in the case of Manufactured Homes
registered in states which provide for notation of lien, the Trustee would
receive notice of surrender if the security interest in the Manufactured Home is
noted on the certificate of title. Accordingly, the Trustee would have the
opportunity to re-perfect its security interest in the Manufactured Home in the
state of relocation. In states which do not require a certificate of title for
registration of a manufactured home, re- registration could defeat perfection.
In the ordinary course of servicing the manufactured housing conditional sales
contracts, the Servicer will be required to take steps to effect such
re-perfection upon receipt of notice of re- registration or information from the
obligor as to relocation. Similarly, when an obligor under a manufactured
housing conditional sales contract sells a manufactured home, the Trustee must
surrender possession of the certificate of title or will receive notice as a
result of its lien noted thereon and accordingly will have an opportunity to
require satisfaction of the related manufactured housing conditional sales
contract before release of the lien. Under each Agreement the Servicer is
obligated to take such steps, at the Servicer's expense, as are necessary to
maintain perfection of security interests in the Manufactured Homes.
Under the laws of most states, liens for repairs performed on a
Manufactured Home take priority even over a perfected security interest. The
Depositor will represent in the Agreement that it has no knowledge of any such
liens with respect to any Manufactured Home securing payment on any Contract.
However, such liens could arise at any time during the term of a Contract. No
notice will be given to the Trustee in the event such a lien arises.
Under the laws applicable in most states, a creditor is entitled to obtain
a deficiency judgment from a debtor for any deficiency on repossession and
resale of the manufactured home securing such debtor's loan. However, some
states impose prohibitions or limitations on deficiency judgments.
Certain other statutory provisions, including federal and state bankruptcy
and insolvency laws and general equitable principles, may limit or delay the
ability of a lender to repossess and resell collateral or enforce a deficiency
judgment.
CONSUMER PROTECTION LAWS. The so-called "Holder-in-Due-Course" rule of the
Federal Trade Commission is intended to defeat the ability of the transferor of
a consumer credit contract which is the seller of goods which gave rise to the
transaction (and certain related lenders and assignees) to transfer such
contract free of notice of claims by the debtor thereunder. The effect of this
rule is to subject the assignee of such a contract to all claims and defenses
which the debtor could assert against the seller of goods. Liability under this
rule is limited to amounts paid under a Contract; however, the obligor also may
be able to assert the rule to set off remaining amounts due as a defense against
a claim brought by the Trust against such obligor. Numerous other federal and
state consumer protection laws impose requirements applicable to the origination
of and lending pursuant to the Contracts, including the Truth-in-Lending Act,
the Federal Trade Commission Act, the Fair Credit Billing Act, the Fair Credit
Reporting Act, the Equal Credit Opportunity Act, the Fair Debt Collection
Practices Act and the Uniform Consumer Credit Code. In the case of some of these
laws, the failure to comply with their provisions may affect the enforceability
of the related Contract TRANSFERS OF MANUFACTURED HOMES; ENFORCEABILITY OF
"DUE-ON-SALE" CLAUSES. The Contracts, in general, prohibit the sale or transfer
of the related Manufactured Homes without the consent of the Depositor and
permit the acceleration of the maturity of the Contracts by the Depositor upon
any such sale or transfer for which consent has not been granted. In certain
cases, the transfer may be made by a delinquent obligor in order to avoid a
repossession proceeding with respect to a Manufactured Home.
In the case of a transfer of a Manufactured Home after which the Servicer
desires to accelerate the maturity of the related Contract, the Servicer's
ability to do so will depend on the enforceability under state law of the
"due-on-sale" clause. The Garn-St. Germain Act preempts, subject to certain
exceptions and conditions, state laws prohibiting enforcement of "due-on-sale"
clauses applicable to the Manufactured Homes. Consequently, in some states the
Servicer may be prohibited from enforcing a "due-on-sale" clause in respect of
certain Manufactured Homes.
THE TITLE I PROGRAM
Certain of the Mortgage Loans or Contracts contained in a Trust may be
loans insured under the FHA Title I credit insurance program created pursuant to
Sections 1 and 2(a) of the National Housing Act of 1934 (the "Title I Program").
Under the Title I Program, the FHA is authorized and empowered to insure
qualified lending institutions against losses on eligible loans. The Title I
Program operates as a coinsurance program in which the FHA insures up to 90% of
certain losses incurred on an individual insured loan, including the unpaid
principal balance of the loan, but only to the extent of the insurance coverage
available in the lender's FHA insurance coverage reserve account. The owner of
the loan bears the uninsured loss on each loan.
The types of loans, which are eligible for insurance by the FHA under the
Title I Program, include property improvement loans ("Property Improvement
Loans" or "Title I Loans") and manufactured home loans ("Manufactured Home
Loans" or "Title I Contracts"). A Property Improvement Loan or Title I Loan
means a loan made to finance actions or items that substantially protect or
improve the basic livability or utility of a property and includes: (1) single
family, multifamily and nonresidential property improvement loans; (2)
manufactured home improvement loans, where the home is classified as personalty;
(3) historic preservation loans; and (4) fire safety equipment loans in existing
health care facilities. A Manufactured Home Loan or Title I Contract means a
loan for the purchase or refinancing of a manufactured home and/or the lot on
which to place such home and includes: (1) manufactured home purchase loans; (2)
manufactured home lot loans; and (3) combination loans.
In addition to these types of loans, there are two basic methods of lending
or originating loans which include a "direct loan" or a "dealer loan". With
respect to a direct loan, the borrower makes application directly to a lender
without any assistance from a dealer, which application may be filled out by the
borrower or by a person acting at the direction of the borrower who does not
have a financial interest in the loan transaction, and the lender may disburse
the loan proceeds solely to the borrower or jointly to the borrower and other
parties to the transaction. With respect to a dealer loan, the dealer, who has a
direct or indirect financial interest in the loan transaction, assists the
borrower in preparing the loan application or otherwise assists the borrower in
obtaining the loan from the lender and the lender may disburse proceeds solely
to the dealer or the borrower or jointly to the borrower and the dealer or other
parties. With respect to a dealer Title I Loan, a dealer may include a seller, a
contractor or supplier of goods or services' and with respect to a dealer Title
I Contract, a dealer is a person engaged in the business of manufactured home
retail sales.
Loans insured under the Title I Program are required to have fixed interest
rates and, generally, provide for equal installment payments due weekly,
biweekly, semi-monthly, or monthly, except that a loan may be payable quarterly
or semi-annually in order to correspond with the borrower's irregular flow of
income The first or last payments (or both) may vary in amount but may not
exceed 150% of the regular installment payment, and the first payment may be due
no later than two months from the date of the loan. The note must contain a
provision permitting full or partial prepayment of the loan. The interest rate
may be established by the lender and must be fixed for the term of the loan and
recited in the note. Interest on an insured loan must accrue from the date of
the loan and be calculated according to the actuarial method. The lender must
assure that the note and all other documents evidencing the loan are in
compliance with applicable Federal, state and local laws.
Each insured lender is required to use prudent lending standards in
underwriting individual loans and to satisfy the applicable loan underwriting
requirements under the Title I Program prior to its approval of the loan and
disbursement of loan proceeds. Generally, the lender must exercise prudence and
diligence to determine whether the borrower and any co-maker are solvent and
acceptable credit risks, with a reasonable ability to make payments on the loan
obligation. The lender's credit application and review must determine whether
the borrower's income will be adequate to meet the periodic payments required by
the loan, as well as the borrower's other housing and recurring expenses, which
determination must be made in accordance with the expense-to-income ratios
published by the Secretary of the United States Department of Housing and Urban
Development ("HUD").
Under the Title I Program, the FHA does not review or approve for
qualification for insurance the individual loans insured thereunder at the time
of approval by the lending institution. If, after a loan has been made and
reported for insurance under the Title I Program, the lender discovers any
material misstatement of fact or that the loan proceeds have been misused by the
borrower, dealer or any other party, it shall promptly report this to the FHA.
In such case, provided that the validity of any lien on the property has not
been impaired, the insurance of the loan under the Title I Program will not be
affected unless such material misstatement of fact or misuse of loan proceeds
was caused by (or was knowingly sanctioned by) the lender or its employees.
REQUIREMENTS FOR TITLE I LOANS. The maximum principal amounts for Title I
Loans must not exceed the actual cost of the project plus any applicable fees
and charges allowed under the Title I Program; provided that such maximum amount
does not exceed the following loan amounts: (i) $25,000 for a single family
property improvement loan and nonresidential property improvement loans; (ii)
the lesser of $60,000 or an average of $12,000 per dwelling unit for multifamily
property improvement loans; and (iii) $17,500 for a manufactured home
improvement loan. Generally, the term of a Title I Loan may not be less than six
months nor greater than 20 years and 32 days, except that the maximum term of a
single family property improvement loan on a manufactured home is limited to 15
years and 32 days and the maximum term of a manufactured home improvement loan
is limited to 12 years and 32 days. A borrower may obtain multiple Title I Loans
with respect to multiple properties, and a borrower may obtain more than one
Title I Loan with respect to a single property, in each case as long as the
total outstanding balance of all Title I Loans on the same property does not
exceed the maximum loan amount for the type of Title I Loan thereon having the
highest permissible loan amount
Borrower eligibility for a Title I Loan requires that the borrower have at
least a one-half interest in either fee simple title to the real property, a
lease thereof for a term expiring at least six months after the final maturity
of the Title I Loan or a recorded land installment contract for the purchase of
the real property, and that the borrower have equity in the property being
improved at least equal to the amount of the Title I Loan if such loan amount
exceeds $15,000. Any Title I Loan in excess of $5,000 must be secured by a
recorded lien on the improved property which is evidenced by a mortgage or deed
of trust executed by the borrower and all other owners in fee simple.
The proceeds from a Title I Loan may be used only to finance property
improvements which substantially protect or improve the basic livability or
utility of the property as disclosed in the loan application. The Secretary of
HUD has published a list of items and activities which cannot be financed with
proceeds from any Title I Loan and from time to time the Secretary of HUD may
amend such list of items and activities. With respect to any dealer Title I
Loan, before the lender may disburse funds, the lender must have in its
possession a completion certificate on a HUD-approved form, signed by the
borrower and the dealer. With respect to any direct Title I Loan the lender is
required to obtain, promptly upon completion of the improvements but not later
than 6 months after disbursement of the loan proceeds with one 6 month extension
if necessary, a completion certificate, signed by the borrower. The lender is
required to conduct an on-site inspection on any Title I Loan where the
principal obligation is $7,500 or more, and or any direct Title I Loan where the
borrower fails to submit a completion certificate.
REQUIREMENTS FOR TITLE I CONTRACTS. The maximum principal amount for any
Title I Contract must not exceed the sum of certain itemized amounts, which
include a specified percentage of the purchase price of the manufactured home
depending on whether it is a new or existing home; provided that such maximum
amount does not exceed the following loan amounts: (i) $40,500 for a new or
existing manufactured home purchase loan; (ii) $13,500 for a manufactured home
lot purchase; and (iii) $54,000 for a combination loan (i.e., a loan to purchase
a new or existing manufactured home and the lot for such home). Generally, the
term of a Title I Contract may not be less than six months nor greater than 20
years and 32 days, except that the maximum term of a manufactured home lot loan
is limited to 15 years and 32 days and the maximum term of a multimodule
manufactured home and lot in combination is limited to 25 years and 32 days.
Borrower eligibility for a Title I Contract requires that the borrower
become the owner of the property to be financed with such loan and occupy the
manufactured home as the borrower's principal residence, except for a
manufactured home lot loan which allows six months to occupy the home as the
borrower's principal residence. If a manufactured home is classified as realty,
then ownership of the home must be in fee simple, and also, the ownership of the
manufactured home lot must be in fee simple, except for a lot which consists of
a share in a cooperative association that owns the manufactured home park. The
borrower's minimum cash down payment requirement to obtain financing through a
Title I Contract is as follows: (i) at least 5% of the first $5,000 and 10% of
the balance of the purchase price of a new manufactured home and at least 10% of
the purchase price of an existing manufactured home for a manufactured home
purchase loan, or in lieu of a full or partial cash down payment, the trade-in
of the borrower's equity in an existing manufactured home; (ii) at least 10% of
the purchase price and development costs of a lot for a manufactured home lot
loan; and (iii) at least 5% of the first $5,000 and 10% of the balance of the
purchase price of the manufactured home and lot for a combination loan.
Any manufactured home financed by a Title I Contract must be certified by
the manufacturer to have been constructed in compliance with the National
Manufactured Housing Construction and Safety Standards Act of 1974 (42 U.S.C.
5401-5426), so as to conform to all applicable Federal construction and safety
standards, and with respect to the purchase of a new manufactured home, the
manufacture must furnish the borrower with a one year written warranty on a HUD
approved form which obligates the manufacturer to correct any nonconformity with
all applicable Federal construction and safety standards or any defects in
materials or workmanship for the one year period after the date of delivery. The
proceeds from a Title I Contract may be used as follows: the purchase or
refinancing of a manufactured home, a suitably developed lot for a manufactured
home already owned by the borrower, or a manufactured home and suitably
developed lot for the home in combination; or the refinancing of an existing
manufactured home already owned by the borrower in connection with the purchase
of a manufactured home lot or an existing lot already owned by the borrower in
connection with the purchase of a manufactured home. In addition, the proceeds
for a Title I Contract which is a manufactured home purchase loan or a
combination loan may be used for the purchase, construction or installation of a
garage, carport, patio or other comparable appurtenance to the home. The
proceeds from a Title I Contract cannot be used for the purchase of furniture or
the financing of any items and activities which are set forth on the list
published by the Secretary of HUD as amended from time to time.
Any Title I Contract must be secured by a recorded lien on the manufactured
home, its furnishings, equipment, accessories and appurtenance, which lien must
be a first lien, superior to any other lien on the property. With respect to any
Title I Contract involving a manufactured home purchase loan or combination loan
and the sale of the manufactured home by a dealer, the lender or its agent
(other than the dealer) must conduct a site-of-placement inspection within 60
days after the date of the loan to verify that the terms and conditions of the
purchase contract have been met, the manufactured home and any options and
appurtenances included in the purchase price or financed with the loan have been
delivered and installed, and the placement certificate executed by the borrower
and the dealer is in order.
FHA INSURANCE COVERAGE. Under the Title I Program the FHA establishes an
insurance coverage reserve account for each lender which has been granted a
Title I insurance contract. The amount of insurance coverage in this account is
10% of the amount disbursed, advanced or expended by the lender in originating
or purchasing eligible loans registered with the FHA for Title I insurance, with
certain adjustments. The balance in the insurance coverage reserve account is
the maximum amount of insurance claims the FHA is required to pay. Loans to be
insured under the Title I Program will be registered for insurance by the FHA
and the insurance coverage attributable to such loans will be included in the
insurance coverage reserve account for the originating or purchasing lender
following the receipt and acknowledgment by the FHA of a loan report on the
prescribed form pursuant to the Title I regulations. The FHA charges a fee of
0.50% per annum of the net proceeds (the original balance) of any eligible loan
so reported and acknowledged for insurance by the originating lender. The FHA
bills the lender for the insurance premium on each insured loan annually, on
approximately the anniversary date of the loan's origination. If an insured loan
is prepaid during the year, the FHA will not refund or abate the insurance
premium.
Under the Title I Program the FHA will reduce the insurance coverage
available in the lender's FHA insurance coverage reserve account with respect to
loans insured under the lender's contract of insurance by (i) the amount of the
FHA insurance claims approved for payment relating to such insured loans, (ii)
the amount of the Annual Reductions attributable to such insured loans and (iii)
the amount of insurance coverage attributable to insured loans sold by the
lender, and such insurance coverage may be reduced for any FHA insurance claims
rejected by the FHA. After a lender has held its Title I contract of insurance
for five years, the lender's FHA insurance coverage reserve account is subject
to an annual reduction (the "Annual Reduction") on each October in an amount
equal to 10% of the insurance coverage reserves available on such date with
respect to such contract of insurance; provided that such Annual Reduction shall
not reduce the insurance coverage to an amount less than $50,000. The balance of
the lender's FHA insurance coverage reserve account will be further adjusted as
required under Title I or by the FHA, and the insurance coverage therein may be
earmarked with respect to each or any eligible loans insured thereunder, if a
determination is made by the Secretary of HUD that it is in its interest to do
so. Originations and acquisitions of new eligible loans will continue to
increase a lender's insurance coverage reserve account balance by 10% of the
amount disbursed, advanced or expended in originating or acquiring such eligible
loans registered with the FHA for insurance under the Title I Program. The
Secretary of HUD may transfer insurance coverage between insurance coverage
reserve accounts with earmarking with respect to a particular insured loan or
group of insured loans when a determination is made that it is in the
Secretary's interest to do so.
The lender may transfer (except as collateral in a bona fide loan
transaction) insured loans and loans reported for insurance only to another
qualified lender under a valid Title I contract of insurance. Unless an insured
loan is transferred with recourse or with a guarantee or repurchase agreement,
the FHA, upon receipt of written notification of the transfer of such loan in
accordance with the Title I regulations, will transfer from the transferor's
insurance coverage reserve account to the transferee's insurance coverage
reserve account an amount, if available, equal to 10% of the actual purchase
price or the net unpaid principal balance of such loan (whichever is less).
However, under the Title I Program not more than $5,000 in insurance coverage
shall be transferred to or from a lender's insurance coverage reserve account
during any October 1 to September 30 period without the prior approval of the
Secretary of HUD.
CLAIMS PROCEDURES UNDER TITLE I. Under the Title I Program the lender may
accelerate an insured loan following a default on such loan only after the
lender or its agent has contacted the borrower in a face-to-face meeting or by
telephone to discuss the reasons for the default and to seek its cure. If the
borrower does not cure the default or agree to a modification agreement or
repayment plan, the lender will notify the borrower in writing that, unless
within 30 days the default is cured or the borrower enters into a modification
agreement or repayment plan, the loan will be accelerated and that, if the
default persists, the lender will report the default to an appropriate credit
agency. The lender may rescind the acceleration of maturity after full payment
is due and reinstate the loan only if the borrower brings the loan current,
executes a modification agreement or agrees to an acceptable repayment plan.
Following acceleration of maturity upon a secured Title I Loan, the lender
may either (a) proceed against the Mortgaged Property under any security
instrument or (b) make a claim under the lender's contract of insurance. If the
lender chooses to proceed against the Mortgaged Property under a security
instrument (or if it accepts a voluntary conveyance or surrender of the
Mortgaged Property), the lender may file an insurance claim only with the prior
approval of the Secretary of HUD. After acceleration of maturity on a defaulted
Title I Contract, the lender must proceed against the loan security by
foreclosure or repossession, as appropriate, and acquire good, marketable title
to the property securing the loan. The lender must take all actions necessary
under applicable law to preserve its rights, if any, to obtain a deficiency
judgment against the borrower. Before filing a claim for insurance with the FHA,
the lender must sell for the best price obtainable any property which the lender
acquired by the foreclosure or repossession of such property securing a
defaulted Title I Contract.
When a lender files an insurance claim with the FHA under the Title I
Program, the FHA reviews the claim, the complete loan file and documentation of
the lender's efforts to obtain recourse against any dealer who has agreed
thereto, certification of compliance with applicable state and local laws in
carrying out any foreclosure or repossession, and evidence that the lender has
properly filed proofs of claims, where the borrower is bankrupt or deceased.
Generally, a claim for reimbursement for loss on any eligible loan must be filed
with the FHA no later than (i) for any Title I Loan, 9 months after the date of
default of such loan, or (ii) for any Title I Contract, 3 months after the date
of sale of the property securing such loan, but not to exceed 18 months after
the date of default. Concurrently with filing the insurance claim, the lender
shall assign to the United States of America the lender's entire interest in the
loan note (or a judgment in lieu of the note), in any security held and in any
claim filed in any legal proceedings. If, at the time the note is assigned the
Secretary has reason to believe that the note is not valid or enforceable
against the borrower, the FHA may deny the claim and reassign the note to the
lender. If either such defect is discovered after the FHA has paid a claim, the
FHA may require the lender to repurchase the paid claim and to accept a
reassignment of the loan note. If the lender subsequently obtains a valid and
enforceable judgment against the borrower, the lender may resubmit a new
insurance claim with an assignment of the judgment. The FHA may contest any
insurance claim and make a demand for repurchase of the loan at any time up to
two years from the date the claim was certified for payment and may do so
thereafter in the event of fraud or misrepresentation on the part of the lender.
Under the Title I Program the amount of an FHA insurance claim payment,
when made, is equal to the Claimable Amount, up to the amount of insurance
coverage in the lender's insurance coverage reserve account. The "Claimable
Amount" is equal to 90% of the sum of: (a) the unpaid loan obligation (net
unpaid principal and the uncollected interest earned to the date of default)
with adjustments thereto if the lender has proceeded against property securing
such loan; (b) the interest on the unpaid amount of the loan obligation from the
date of default to the date of the claim's initial submission for payment plus
15 calendar days (but not to exceed 9 months from the date of default),
calculated at the rate of 7% per annum; (c) the uncollected court costs; (d) the
attorneys fees not to exceed $500; (e) the expenses for recording the assignment
of the security to the United States; and (f) if the loan is a Title I Contract,
certain costs incurred in connection with the foreclosure or repossession of the
manufactured home and/or lot.
LEGAL INVESTMENT MATTERS
The Certificates may constitute "mortgage related securities" for purposes
of SMMEA, so long as they are rated in one of the two highest rating categories
by the Rating Agency or Agencies identified in the related Prospectus Supplement
and, as such, would be legal investments for persons, trusts, corporations,
partnerships, associations, business trusts and business entities (including but
not limited to state-chartered savings banks, commercial banks, saving and loan
associations and insurance companies, as well as trustees and state government
employee retirement systems) created pursuant to or existing under the laws of
the United States or any State (including the District of Columbia and Puerto
Rico) whose authorized investments are subject to State regulation to the same
extent that, under applicable law, obligations issued by or guaranteed as to
principal and interest by the United States or any agency or instrumentality
thereof constitute legal investments for such entities. Under SMMEA, in all
States which enacted legislation prior to October 4, 1991 specifically limiting
the legal investment authority of any of such entities with respect to "mortgage
related securities," the Certificates will constitute legal investments for
entities subject to such legislation only to the extent provided in such
legislation SMMEA provides, however, that in no event will the enactment of any
such legislation affect the validity of any contractual commitment to purchase,
bold or invest in any securities or require the sale or over disposition of any
securities, so long as such contractual commitment was made or such securities
were acquired prior to the enactment of such legislation. Alaska, Arkansas,
Colorado, Connecticut, Delaware, Florida, Georgia, Illinois, Kansas, Louisiana,
Maryland, Michigan, Missouri, Nebraska, New Hampshire, New York, North Carolina,
Ohio, South Dakota, Utah, Virginia and West Virginia each enacted legislation
overriding the exemption afforded by SMMEA prior to the October 4, 1991
deadline.
Institutions whose investment activities are subject to legal investment
laws or regulations or review by certain regulatory authorities may be subject
to restrictions on investment in certain classes of the Certificates. Any
financial institution which is subject to the jurisdiction of the Comptroller of
the Currency, the Board of Governors of the Federal Reserve System, the FDIC,
the OTS, the NCUA or other federal or state agencies with similar authority
should review any applicable rules, guidelines and regulations prior to
purchasing the certificates. The Federal Financial Institutions Examination
Council, for example, has issued a Supervisory Policy Statement on Securities
Activities effective February 10, 1992 (the "Policy Statement"). The Policy
Statement has been adopted by the Comptroller of the Currency, the Federal
Reserve Board, the FDIC and the OTS with respect to the depository institutions
that they regulate. The Policy Statement prohibits depository institutions from
investing in certain "high-risk mortgage securities" except under limited
circumstances, and sets forth certain investment practices deemed to be
unsuitable for regulated institutions. The NCUA issued final regulations
effective December 2, 1991 that restrict and in some instances prohibit the
investment by federal credit unions in certain types of mortgage related
securities.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to "prudent investor" provisions, percentage-of-assets limits and provisions
which may restrict or prohibit investment in securities which are not "interest
bearing" or "income paying," or in securities which are issued in book-entry
form.
Investors should consult their own legal advisors in determining whether
and to what extent the Certificates constitute legal investments for such
investors.
ERISA CONSIDERATIONS
ERISA imposes requirements on employee benefit plans (and on certain other
retirement plans and arrangements, including individual retirement accounts and
annuities, Keogh plans and collective investment funds and separate accounts in
which such plans, accounts or arrangements are invested) (collectively, "Plans")
subject to ERISA and on persons who are fiduciaries with respect to such Plans.
Among other things, ERISA requires that the assets of Plans be held in trust and
that the trustee, or other duly authorized fiduciary, have exclusive authority
and discretion to manage and control the assets of such Plans. ERISA also
imposes certain duties on persons who are fiduciaries of Plans. Under ERISA, any
person who exercises any authority or control respecting the management or
disposition of the assets of a Plan is considered to be a fiduciary of such Plan
(subject to certain exceptions not here relevant). In addition to the imposition
of general fiduciary standards of investment prudence and diversification, ERISA
prohibits a broad range of transactions involving Plan assets and persons
("Parties in Interest") having certain specified relationships to a Plan and
imposes additional prohibitions where Parties in Interest are fiduciaries with
respect to such Plan.
The United States Department of Labor (the "DOL") has issued regulations
concerning the definition of what constitutes the assets of a Plan. (DOL Reg
Section 2510.3-101). Under this regulation, the underlying assets and properties
of corporations, partnerships and certain other entities in which a Plan makes
an "equity" investment could be deemed for purposes of ERISA to be assets of the
investing Plan in certain circumstances. In such case, the fiduciary making such
an investment for the Plan could be deemed to have delegated his or her asset
management responsibility, and the underlying assets and properties could be
subject to ERISA reporting and disclosure. Certain exceptions to the regulation
may apply in the case of a Plan's investment in the Certificates, but the
Depositor cannot predict in advance whether such exceptions apply due to the
factual nature of the conditions to be met. Accordingly, because the Mortgage
Loans may be deemed Plan assets of each Plan that purchases Certificates, an
investment in the Certificates by a Plan might give rise to a prohibited
transaction under ERISA Sections 406 and 407 and be subject to an excise tax
under Code Section 4975 unless a statutory or administrative exemption applies.
DOL Prohibited Transaction Exemption 83-1 ("PTE 83-1") exempts from ERISA's
prohibited transaction rules certain transactions relating to the operation of
residential mortgage investment trusts and the purchase, sale and holding of
"mortgage pool pass-through certificates" in the initial issuance of such
certificates. PTE 83-1 permits, subject to certain conditions, transactions
which might otherwise be prohibited between Plans and Parties in Interest with
respect to those Plans involving the origination, maintenance and termination of
mortgage pools consisting of mortgage loans secured by first or second mortgages
or deeds of trust on single-family residential property, and the acquisition and
holding of certain mortgage pool pass-through certificates representing an
interest in such mortgage pools by PTE.
PTE 83-1 sets forth three general conditions which must be satisfied for
any transaction to be eligible for exemption: (i) the maintenance of a system of
insurance or other protection for the pooled mortgage loans and property
securing such loans, and for indemnifying Owners against reductions in
pass-through payments due to property damage or defaults in loan payments in an
amount not less than the greater of one percent of the aggregate principal
balance of all covered pooled mortgage loans or the principal balance of the
largest covered pooled mortgage loan, (ii) the existence of a pool trustee who
is not an affiliate of the sponsor, and (iii) a limitation on the amount of the
payments retained by the pool sponsor, together with other funds inuring to its
benefit, to not more than adequate consideration for selling the mortgage loans
plus reasonable compensation for services provided by the pool sponsor.
Although the Trustee for any series of Certificates will be unaffiliated
with the Depositor, there can be no assurance that the system of insurance or
subordination will meet the general or specific conditions referred to above. In
addition, the nature of a Trust's assets or the characteristics of one or more
classes of the related series of Certificates may not be included within the
scope of PTE 83-1 or any other class exemption under ERISA. The Prospectus
Supplement will provide additional information with respect to the application
of ERISA and the Code to the related Certificates.
Several underwriters of mortgage-backed securities have applied for and
obtained ERISA prohibited transactions exemptions which are in some respects
broader than PTE 83-1. Such exemptions can only apply to mortgage-backed
securities which, among other conditions, are sold in an offering with respect
to which such underwriter serves as the sole or a managing underwriter, or as a
selling or placement agent. Several other underwriters have applied for similar
exemptions. If such an exemption might be applicable to a series of
Certificates, the related Prospectus Supplement will refer to such possibility.
Each Plan fiduciary who is responsible for making the investment decisions
whether to purchase or commit to purchase and to hold Certificates must make its
own determination as to whether the general and the specific conditions of PTE
83-1 have been satisfied or as to the availability of any other prohibited
transaction exemptions Each Plan fiduciary should also determine whether, under
the general fiduciary standards of investment prudence and diversification, an
investment in the Certificates is appropriate for the Plan, taking into account
the overall investment policy of the Plan and the composition of the Plan's
investment portfolio.
Any Plan proposing to invest in Certificates should consult with its
counsel to confirm that such investment will not result in a prohibited
transaction and will satisfy the other requirements of ERISA and the Code.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is based upon the opinion of Stroock & Stroock & Lavan LLP,
special counsel to the Depositor with respect to the material federal income tax
consequences of the purchase, ownership and disposition of Certificates. The
discussion below does not purport to address all federal income tax consequences
that may be applicable to particular categories of investors, some of which may
be subject to special rules. The authorities on which this discussion is based
are subject to change or differing interpretations, and any such change or
interpretation could apply retroactively. This discussion reflects the
applicable provisions of the Code, as well as final regulations concerning
REMICs (the "REMIC Regulations") and final regulations under Sections 1271
through 1273 and 1275 of the Code concerning debt instruments (the "OID
Regulations"). The Depositor intends to rely on the OID Regulations for all
Certificates offered pursuant to this Prospectus; however, investors should be
aware that the OID Regulations do not adequately address certain issues relevant
to prepayable securities, such as the Certificates. Investors should consult
their own tax advisors in determining the federal, state, local and any other
tax consequences to them of the purchase, ownership and disposition of
Certificates. The Prospectus Supplement for each series of Certificates will
discuss any special tax consideration applicable to any class of Certificates of
such series, and the discussion below is qualified by any such discussion in the
related Prospectus Supplement.
For purposes of this opinion, where the applicable Prospectus Supplement
provides for a fixed retained yield with respect to the Mortgage Assets
underlying a series of Certificates, references to the Mortgage Assets will be
deemed to refer to that portion of the Mortgage Assets held by the Trust which
does not include the fixed retained yield.
FEDERAL INCOME TAX CONSEQUENCES FOR REMIC CERTIFICATES
GENERAL. With respect to a particular series of Certificates, an election
may be made to treat the Trust or one or more trusts or segregated pools of
assets therein as one or more REMICs within the meaning of Code Section 860D. A
Trust or a portion or portions thereof as to which one or more REMIC elections
will be made will be referred to as a "REMIC Pool." For purposes of this
discussion, Certificates of a series as to which one or more REMIC elections are
made are referred to as "REMIC Certificates" and will consist of one or more
classes of "Regular Certificates" and one class of "Residual Certificates" in
the case of each REMIC Pool. Qualification as a REMIC requires ongoing
compliance with certain conditions. With respect to each series of REMIC
Certificates, Stroock & Stroock & Lavan LLP, special counsel to the Depositor,
has advised the Depositor that in their opinion, assuming (i) the making of an
appropriate election, (ii) compliance with the Agreement and (iii) compliance
with any changes in the law, including any amendments to the Code or applicable
Treasury regulations thereunder, each REMIC Pool will qualify as a REMIC and
that if a Trust qualifies as a REMIC, the tax consequences to the Owners will be
as described below. In such case, the Regular Certificates will be considered to
be "regular interests" in the REMIC Pool and generally will be treated for
federal income tax purposes as if they were newly originated debt instruments,
and the Residual Certificates will be considered to be "residual interests" in
the REMIC Pool. The Prospectus Supplement for each series of Certificates will
indicate whether one or more REMIC elections with respect to the related Trust
will be made, in which event references to "REMIC" or "REMIC Pool" herein shall
be deemed to refer to each such REMIC Pool.
STATUS OF REMIC CERTIFICATES. REMIC Certificates held by a domestic
building and loan association will constitute "a regular or residual interest in
a REMIC" within the meaning of Code Section 7701(a)(19)(C) (xi) in the same
proportion that the assets of the REMIC Pool would be treated as "loans secured
by an interest in real property" within the meaning of Code Section
7701(a)(19)(C)(v) or as other assets described in Code Section 7701(a)(19)(C).
REMIC Certificates held by a real estate investment trust (a "REIT") will
constitute "real estate assets" within the meaning of Code Section 856(c)(5)(a),
and interest on the REMIC Certificates will be considered "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) in the same proportion
that, for both purposes, the assets of the REMIC Pool would be so treated. If at
all times 95% or more of the assets of the REMIC Pool constitute qualifying
assets for domestic building and loan asociations and REITs, the REMIC
Certificates will be treated entirely as qualifying assets for such entities.
Moreover, the REMIC Regulations provide that, for purposes of Code Sections
856(c), payments of principal and interest on the Mortgage Assets that are
reinvested pending distribution to holders of REMIC Certificates, constitute
qualifying assets for such entities. Where two REMIC Pools are part of a tiered
structure they will be treated as one REMIC for purposes of the tests described
above respecting asset ownership of more or less than 95%. Notwithstanding the
foregoing, however, REMIC income received by a REIT owning a residual interest
in a REMIC Pool could be treated in part as non-qualifying REIT income if the
REMIC Pool holds Mortgage Assets with respect to which income is contingent on
mortgagor profits or property appreciation. In addition, if the assets of the
REMIC include buy-down Mortgage Assets, it is possible that the percentage of
such assets constituting "qualifying real property loans" or "loans secured by
an interest in real property" for purposes of Code Sections 593(d)(1) and
7701(a)(19)(C)(v), respectively, may be required to be reduced by the amount of
the related buy-down funds. REMIC Certificates held by a regulated investment
company will not constitute "government securities" within the meaning of Code
Section 851(b)(4)(a)(i). REMIC Certificates held by certain financial
institutions will constitute an "evidence of indebtedness" within the meaning of
Code Section 582(c)(i). REMIC Certificates representing interests in obligations
secured by manufactured housing treated as single family residences under Code
Section 25(e)(10) will be considered interests in "qualified mortgages" as
defined in Code Section 860E(a)(3).
QUALIFICATION AS A REMIC. In order for the REMIC Pool to qualify as a
REMIC, there must be ongoing compliance on the part of the REMIC Pool with the
requirements set forth in the Code. The REMIC Pool must fulfill an asset test,
which requires that no more than a DE MINIMIS amount of the assets of the REMIC
Pool, as of the close of the third calendar month beginning after the Delivery
Date (which for purposes of this discussion is the date of issuance of the REMIC
Certificates) and at all times thereafter, may consist of assets other than
"qualified mortgages" and "permitted investments." The REMIC Regulations provide
a "safe harbor" pursuant to which the DE MINIMIS requirement will be met if at
all times the aggregate adjusted basis of any nonqualified assets (I.E., assets
other than qualified mortgages and permitted investments) is less than 1% of the
aggregate adjusted basis of all the REMIC Pool's assets.
If a REMIC Pool fails to comply with one or more of the requirements of the
Code for REMIC status during any taxable year, the REMIC Pool will not be
treated as a REMIC for such year and thereafter. In this event, the
classification of the REMIC Pool for federal income tax purposes is uncertain.
The REMIC Pool could be treated as a taxable mortgage pool (a "TMP")in which
case, any residual income of the REMIC Pool (income from the Mortgage Assets
(possibly without a deduction) interest and original issue discount expense
allocable to the Regular Certificates and any administrative expenses of the
REMIC Pool) would be subject to corporate income tax at the REMIC Pool level.
The Code, however, authorizes the Treasury Department to issue regulations that
address situations where failure to meet one or more of the requirements for
REMIC status occurs inadvertently and in good faith, and disqualification of the
REMIC Pool would occur absent regulatory relief. Investors should be aware,
however, that the Conference Committee Report to the Tax Reform Act of 1986 (the
"1986 Act") indicates that the relief may be accompanied by sanctions, such as
the imposition of a corporate tax on all or a portion of the REMIC Pool's income
for the period of time in which the requirements for REMIC status are not
satisfied.
TAXATION OF REGULAR CERTIFICATES
GENERAL. Payments received by holders of Regular Certificates generally
should be accorded the same tax treatment under the Code as payments received on
ordinary taxable corporate debt instruments. In general, interest and original
issue discount on a Regular Certificate will be treated as ordinary income to a
holder of the Regular Certificate (the "Regular Certificateholder") as they
accrue, and principal payments on a Regular Certificate will be treated as a
return of capital to the extent of the Regular Certificateholder's basis in the
Regular Certificate allocable thereto. Regular Certificateholders must use the
accrual method of accounting with regard to Regular Certificates, regardless of
the method of accounting otherwise used by such Regular Certificateholders.
ORIGINAL ISSUE DISCOUNT. Regular Certificates may be issued with "original
issue discount" within the meaning of Code Section 1273(a). Holders of any class
of Regular Certificates having original issue discount generally must include
original issue discount in ordinary income for federal income tax purposes as it
accrues, in accordance with a constant interest method that takes into account
the compounding of interest, in advance of receipt of the cash attributable to
such income. The Depositor anticipates that the amount of original issue
discount required to be included in a Regular Certificateholder's income in any
taxable year will be computed as described below.
Each Regular Certificate (except to the extent described below with respect
to a Regular Certificate on which distributions of principal are made in a
single installment or upon an earlier distribution by lot of a specified
principal amount upon the request of a Regular Certificateholder or by random
lot (a "Retail Class Certificate")) will be treated as a single installment
obligation for purposes of determining the original issue discount includible in
a Regular Certificateholder's income. The total amount of original issue
discount on a Regular Certificate is the excess of the "stated redemption price
at maturity" of the Regular Certificate over its "issue price." The issue price
of a Regular Certificate is the first price at which a substantial amount of
Regular Certificates of that class are first sold to the public. The Depositor
will determine original issue discount by including the amount paid by an
initial Regular Certificateholder for accrued interest that relates to a period
prior to the issue date of the Regular Certificate in the issue price of a
Regular Certificate and will include in the stated redemption price at maturity
any interest paid on the first Distribution Date to the extent such interest is
attributable to a period in excess of the number of days between the issue date
and such first Distribution Date. The stated redemption price at maturity of a
Regular Certificate always includes the original principal amount of the Regular
Certificate, but generally will not include distributions of stated interest if
such interest distributions constitute "qualified stated interest." Qualified
stated interest generally means stated interest that is unconditionally payable
in cash or in property (other than debt instruments of the issuer) at least
annually at (i) a single fixed rate, (ii) one or more qualified floating rates
(as described below), (iii) a fixed rate followed by one or more qualified
floating rates, (iv) a single objective rate (as described below) or (v) a fixed
rate and an objective rate that is a qualified inverse floating rate. The OID
Regulations state that interest payments are unconditionally payable only if
reasonable remedies exist to compel payment or late payment and nonpayment are
remote. Because the debt securities will generally not provide the holders the
ability to compel payment, the interest payments may be included in the debt
security's stated redemption price at maturity and taxed as OID. Any stated
interest in excess of the qualified stated interest is included in the stated
redemption price at maturity. If the amount of original issue discount is "DE
MINIMIS" as described below, the amount of original issue discount is treated as
zero, and all stated interest is treated as qualified stated interest.
Distributions of interest on Regular Certificates with respect to which deferred
interest will accrue may not constitute qualified stated interest, in which case
the stated redemption price at maturity of such Regular Certificates includes
all distributions of interest as well as principal thereon. Moreover, if the
interval between the issue date and the first Distribution Date on a Regular
Certificate is longer than the interval between subsequent Distribution Dates
(and interest paid on the first Distribution Date is less than would have been
earned if the stated interest rate were applied to outstanding principal during
each day in such interval), the stated interest distributions on such Regular
Certificate technically do not constitute qualified stated interest. In such
case a special rule, applying solely for the purpose of determining whether
original issue discount is DE MINIMIS, provides that the interest shortfall for
the long first period (I.E., the interest that would have been earned if
interest had been paid on the first Distribution Date for each day the Regular
Certificate was outstanding) is treated as made at a fixed rate if the value of
the rate on which the payment is based is adjusted in a reasonable manner to
take into account the length of the interval. There is also a special "teaser"
rule which may be available to treat OID arising from a long first accrual
period as deminimis OID. Regular Certificateholders should consult their own tax
advisors to determine the issue price and stated redemption price at maturity of
a Regular Certificate.
Under a DE MINIMIS rule, original issue discount on a Regular Certificate
will be considered to be zero if such original issue discount is less than 0.25%
of the stated redemption price at maturity of the Regular Certificate multiplied
by the weighted average maturity of the Regular Certificate. For this purpose,
the weighted maturity of the Regular 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 Regular Certificate and the denominator of
which is the stated redemption price at maturity of the Regular Certificate.
Although currently unclear, it appears that the schedule of such distributions
should be determined in accordance with the assumed rate of prepayment of the
Mortgage Assets and the anticipated reinvestment rate, if any, relating to the
Regular Certificates (the "Prepayment Assumption"). The Prepayment Assumption
with respect to a series of Regular Certificates will be set forth in the
related Prospectus Supplement. The holder of a debt instrument includes any DE
MINIMIS original issue discount in income PRO RATA as stated principal payments
are received.
Of the total amount of original issue discount on a Regular Certificate,
the Regular Certificateholder generally must include in gross income for any
taxable year the sum of the "daily portions," as defined below, of the original
issue discount on the Regular Certificate accrued during an accrual period for
each day on which he holds the Regular Certificate, including the date of
purchase but excluding the date of disposition. Although not free from doubt,
the Depositor intends to treat the monthly period ending on the day before each
Distribution Date as the accrual period, rather than the monthly period
corresponding to the prior calendar month. With respect to each Regular
Certificate, a calculation will be made of the original issue discount that
accrues during each successive full accrual period (or shorter period from the
date of original issue) that ends on the day before the related Distribution
Date on the Regular Certificate. For a Regular Certificate, original issue
discount is to be calculated initially based on a schedule of maturity dates
that takes into account the level of prepayments and an anticipated reinvestment
rate that are most likely to occur, which is expected to be based on the
Prepayment Assumption. The original issue discount accruing in a full accrual
period would be the excess, if any, of (i) the sum of (a) the present value of
all of the remaining distributions to be made on the Regular Certificate as of
the end of that accrual period that are included in the Regular Certificate's
stated redemption price at maturity and (b) the distributions made on the
Regular Certificate during the accrual period that are included in the Regular
Certificate's stated redemption price at maturity over (ii) the adjusted issue
price of the Regular Certificate at the beginning of the accrual period. The
present value of the remaining distributions referred to in the preceding
sentence is calculated based on (i) the yield to maturity of the Regular
Certificate at the issue date, (ii) events (including actual prepayments) that
have occurred prior to the end of the accrual period and (iii) the Prepayment
Assumption. For these purposes, the adjusted issue price of a Regular
Certificate at the beginning of any accrual period equals the issue price of the
Regular Certificate, increased by the aggregate amount of original issue
discount with respect to the Regular Certificate that accrued in all prior
accrual periods and reduced by the amount of distributions included in the
Regular Certificate's stated redemption price at maturity that were made on the
Regular Certificate in such prior period. The original issue discount accruing
during any accrual period (as determined in this paragraph) will then be divided
by the number of days in the period to determine the daily portion of original
issue discount for each day in the period.
Under the method described above, the daily portions of original issue
discount required to be included in income by a Regular Certificateholder
generally will increase to take into account prepayments on the Regular
Certificates as a result of prepayments on the Mortgage Assets that exceed the
Prepayment Assumption, and generally will decrease (but not below zero for any
period) if the prepayments are slower than the Prepayment Assumption. To the
extent specified in the applicable Prospectus Supplement, an increase in
prepayments on the Mortgage Assets with respect to a series of Regular
Certificates can result in both a change in the priority of principal payments
with respect to certain classes of Regular Certificates and either an increase
or decrease in the daily portions of original issue discount with respect to
such Regular Certificates.
A purchaser of a Regular Certificate at a price greater than the issue
price also will be required to include in gross income the daily portions of the
original issue discount on the Regular Certificate. With respect to such a
purchaser, the daily portion for any day is reduced by the amount that would be
the daily portion for such day (computed in accordance with the rules set forth
above) multiplied by a fraction, the numerator of which is the amount, if any,
by which the price paid by such purchaser for the Regular Certificate exceeds
the sum of the issue price and the aggregate amount of original issue discount
that would have been includible in the gross income of an original holder of the
Regular Certificate who purchased the Regular Certificate at its issue price,
less any prior distributions included in the stated redemption price at
maturity, and the denominator of which is the sum of the daily portions for such
Regular Certificate (computed in accordance with the rules set forth above) for
all days after the date of purchase and ending on the date on which the
remaining principal amount of such Regular Certificate is expected to be reduced
to zero under the Prepayment Assumption.
A Certificateholder may elect to include in gross income all stated
interest, original issue discount, DE MINIMIS original issue discount, market
discount (as described below under "Market Discount"), DE MINIMIS market
discount and unstated interest (as adjusted for any amortizable bond premium or
acquisition premium) currently as it accrues using the constant yield to
maturity method. If this election is made, the holder is treated as satisfying
the requirements for making the elections with respect to amortization of
premium and current inclusion of market discount, each as described under
"Premium" and "Market Discount" below.
VARIABLE RATE REGULAR CERTIFICATES. Regular Certificates may provide for
interest based on a variable rate. The OID Regulations provide special rules for
variable rate instruments that meet three requirements. First, the noncontingent
principal payments may not exceed the instrument's issue price by more than a
specified amount equal to the lesser of (i) .015 multiplied by the product of
the total noncontingent payments and the weighted average maturity or (ii) 15%
of the total noncontingent principal payments. Second, the instrument must
provide for stated interest (compounded or paid at least annually) at (i) one or
more qualified floating rates, (ii) a single fixed rate followed by one or more
qualified floating rates, (iii) a single objective rate or (iv) a single fixed
rate and a single objective rate that is a qualified inverse floating rate.
Third, the instrument must provide that each qualified floating rate or
objective rate in effect during an accrual period 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 Regular Certificate). A
rate is a qualified floating rate if variations in the rate can reasonably be
expected to measure contemporaneous variations in the cost of newly borrowed
funds. Generally, neither (i) a multiple of a qualified floating rate in excess
of a fixed multiple that is greater than 0.65 but not more than 1.35 (and
increased or decreased by a fixed rate) nor (ii) a cap or floor that is likely
to cause the interest rate on a Regular Certificate to be significantly less or
more than the overall expected return on the Regular Certificate is considered a
qualified floating rate. An objective rate generally is a rate based on a single
fixed formulas and on objective financial or economic information. An objective
rate is a qualified inverse floating rate if the rate is equal to a fixed rate
minus a qualified floating rate and variations in such rate can reasonably be
expected to reflect inversely contemporaneous variations in the cost of newly
borrowed funds. A rate will not be an objective rate if it is reasonably
expected that the average rate during the first half of the instrument's term
will be significantly more or less than the average rate in the final term. An
objective rate must be determined according to a single formula that is fixed
throughout the term of the Regular Certificate and is based on objective
financial information or economic information; however, an objective rate does
not include a rate based on information that is in the control of the issuer or
that is unique to the circumstances of a related party. Stated interest on a
variable rate debt instrument is qualified stated interest if the interest is
unconditionally payable in cash or property at least annually.
In general, the determination of original issue discount and qualified
stated interest on a variable rate debt instrument is made by converting the
debt instrument into a fixed rate debt instrument and then applying the general
original issue discount rules described above to the instrument. If a variable
rate debt instrument provides for stated interest at a single qualified floating
rate or objective rate, all stated interest is qualified stated interest and the
amount of original issue discount, if any, is determined by assuming the
variable rate is a fixed rate equal to (a) in the case of a qualified floating
or inverse floating rate, the value, as of the issue date, of the qualified
floating inverse floating rate or (b) in the case of an objective rate (other
than a qualified inverse floating rate), a fixed rate that reflects the yield
that is reasonably expected for the debt instrument. For all other variable rate
debt instruments, the amount of interest and original issue discount accruals
are determined using the following steps. First, a fixed rate substitute for
each variable rate under the debt instrument is determined. In general, the
fixed rate substitute is a fixed rate equal to the rate of the applicable type
of variable rate as of the issue date. Second, an equivalent fixed rate debt
instrument is constructed using the fixed rate substitute(s) in lieu of the
variable rates and keeping all other terms identical. Third, the amount of
qualified stated interest and original issue discount with respect to the
equivalent fixed rate debt instrument are determined under the rules for fixed
rate debt instruments. Finally, appropriate adjustments for actual variable
rates are made during the term by increasing or decreasing the qualified stated
interest to reflect the amount actually paid during the applicable accrual
period as compared to the interest assumed to be accrued or paid under the
equivalent fixed rate debt instrument. If there is no qualified stated interest
under the equivalent fixed rate debt instrument, the adjustment is made to the
original issue discount for the period.
The application of the OID Regulations to variable rate debt instruments is
limited and may not apply to some Regular Certificates having variable rates.
Furthermore, by their terms, the provisions of regulations issued on June 11,
1996, applicable to instruments having contingent payments, do not apply to
those Regular Certificates. Prospective purchasers of variable rate Regular
Certificates are advised to consult their tax advisers concerning the tax
treatment of such Regular Certificates.
MARKET DISCOUNT. A purchaser of a Regular Certificate also may be subject
to the market discount rules of Code Sections 1276 through 1278. Under these
sections and the principles applied by the OID Regulations in the context of
original issue discount, "market discount" is the amount by which a subsequent
purchaser's initial basis in the Regular Certificate (i) is exceeded by the
stated redemption price at maturity of the Regular Certificate or (ii) in the
case of a Regular Certificate having original issue discount, is exceed by the
sum of the issue price of such Regular Certificate plus any original issue
discount that would have previously accrued thereon if held by an original
Regular Certificateholder (who purchased the Regular Certificate at its issue
price), in either case less any prior distributions included in the stated
redemption price at maturity of such Regular Certificate. Such purchaser
generally will be required to recognize accrued market discount as ordinary
income as distributions includible in the stated redemption price at maturity of
such Regular Certificate are received in an amount not exceeding any such
distribution. That recognition rule would apply regardless of whether the
purchaser is a cash-basis or accrual-basis taxpayer. Such market discount would
accrue in a manner to be provided in Treasury regulations and should take into
account the Prepayment Assumption. The Conference Committee Report to the 1986
Act provides that until such regulations are issued, such market discount would
accrue either (i) on the basis of a constant interest rate or (ii) in the ratio
of stated interest allocable to the relevant period to the sum of the interest
for such period plus the remaining interest as of the end of such period, or in
the case of a Regular Certificate issued with original issue discount, in the
ratio of original issue discount accrued for the relevant period to the sum of
the original issue discount accrued for such period plus the remaining original
issue discount as of the end of such period. Such purchaser also generally will
be required to treat a portion of any gain on a sale or exchange of the Regular
Certificate as ordinary income to the extent of the market discount accrued to
the date of disposition under one of the foregoing methods, less any accrued
market discount previously reported as ordinary income as partial distributions
in reduction of the stated redemption price at maturity were received. Such
purchaser will be required to defer deduction of a portion of the excess of the
interest paid or accrued on indebtedness incurred to purchase or carry a Regular
Certificate over the interest distributable thereon. The deferred portion of
such interest expense in any taxable year generally will not exceed the accrued
market discount on the Regular Certificate for such year. Any such deferred
interest expense is, in general, allowed as a deduction not later than the year
in which the related market discount income is recognized or the Regular
Certificate is disposed of. As an alternative to the inclusion of market
discount in income on the foregoing basis, the Regular Certificateholder may
elect to include market discount in income currently as it accrues in all market
discount instruments acquired by such Regular Certificateholder in that taxable
year or thereafter, in which case the interest deferral rule will not apply. In
Revenue Procedure 92-67, the Internal Revenue Service set forth procedures for
taxpayers (1) electing under Code Section 1278(b) to include market discount in
income currently, (2) electing under rules of Code Section 1276(b) to use a
constant interest rate to determine accrued market discount on a bond where the
holder of the bond is required to determine the amount of accrued market
discount at a time prior to the holder's disposition of the bond, and (3)
requesting consent to revoke an election under Code Section 1278(b).
By analogy to the OID Regulations, market discount with respect to a
Regular Certificate will be considered to be zero if such market discount is
less than 0.25% of the remaining stated redemption price at maturity of such
Regular Certificate multiplied by the weighted average maturity of the Regular
Certificate (determined as described above under "Original Issue Discount")
remaining after the date of purchase. Treasury regulations implementing the
market discount rules have not yet been issued, and therefore investors should
consult their own tax advisors regarding the application of these rules as well
as the advisability of making any of the elections with respect thereto.
PREMIUM. A Regular Certificate purchased at a cost greater than its
remaining stated redemption price at maturity generally is considered to be
purchased at a premium. If the Regular Certificateholder holds such Regular
Certificate as a "capital asset" within the meaning of Code Section 1221, the
Regular Certificateholder may elect under Code Section 171 to amortize such
premium as an offset to interest income under a constant yield method that
reflects compounding based on the interval between payments on the Regular
Certificates. This election, once made, applies to all obligations held by the
taxpayer at the beginning of the first taxable year to which such section
applies and to all taxable debt obligations thereafter acquired and is binding
on such taxpayer in all subsequent years. The Conference Committee Report to the
1986 Act indicates a Congressional intent that the same rules that apply to the
accrual of market discount on installment obligations will also apply to
amortizing bond premium under Code Section 171 on installment obligations such
as the Regular Certificates.
SALE OR EXCHANGE OF REGULAR CERTIFICATES. If a Regular Certificateholder
sells or exchanges a Regular Certificate, the Regular Certificateholder will
recognize gain or loss equal to the difference, if any, between the amount
received and his adjusted basis in the Regular Certificate. The adjusted basis
of a Regular Certificate generally will equal the cost of the Regular
Certificate to the seller, increased by any original issue discount or market
discount previously included in the seller's gross income with respect to the
Regular Certificate and reduced by amounts included in the stated redemption
price at maturity of the Regular Certificate that were previously received by
the seller and by any amortized premium.
Except as described above with respect to market discount, and except as
provided in this paragraph, any gain or loss on the sale or exchange of a
Regular Certificate realized by an investor who holds the Regular Certificate as
a capital asset will be capital gain or loss and will be long-term or short-term
depending on whether the Regular Certificate has been held for the long-term
capital gain holding period (currently more than one year). Gain from the
disposition of a Regular Certificate that might otherwise be capital gain will
be treated as ordinary income to the extent that such gain does not exceed the
excess, if any, of (i) the amount that would have been includible in the 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 (ii) the amount of income actually includible in the gross income of such
holder with respect to the Regular Certificate. In addition, gain or loss
recognized from the sale of a Regular Certificate by certain banks or thrift
institutions will be treated as ordinary income or loss pursuant to Code Section
582(c).
TAXATION OF RESIDUAL CERTIFICATES
TAXATION OF REMIC INCOME. Generally, the "daily portions" of REMIC taxable
income or net loss will be includible as ordinary income or loss in determining
the federal taxable income of holders of Residual Certificates ("Residual
Certificateholders") and will not be taxed separately to the REMIC Pool. The
daily portions of REMIC taxable income or net loss of a Residual
Certificateholder are determined by allocating the REMIC Pool's taxable income
or net loss for each calendar quarter ratably to each day in such quarter and by
allocating such daily portion among the Residual Certificateholders in
proportion to their respective holdings of Residual Certificates in the REMIC
Pool on such day. REMIC taxable income is generally determined in the same
manner as the taxable income of an individual using a calendar year and the
accrual method of accounting, except that (i) the limitation on deductibility of
investment interest expense and expenses for the production of income do not
apply, (ii) all bad loans will be deductible as business bad debts and (iii) the
limitation on the deductibility of interest and expenses related to tax-exempt
income will apply. REMIC taxable income generally means the REMIC Pool's gross
income, including interest, original issue discount income and market discount
income, if any, on the Mortgage Assets, plus income on reinvestment of cashflows
and reserve assets, minus deductions, including interest and original issue
discount expense on the Regular Certificates, servicing fees on the Mortgage
Assets and other administrative expenses of the REMIC Pool, amortization of
premium, if any, with respect to the Mortgage Assets, and any tax imposed on the
REMIC's income from foreclosure property. The requirement that Residual
Certificateholders report their PRO RATA share of taxable income or net loss of
the REMIC Pool will continue until there are no Certificates of any class of the
related series outstanding.
The taxable income recognized by a Residual Certificateholder in any
taxable year will be affected by, among other factors, the relationship between
the timing of recognition of interest and original issue discount or market
discount income or amortization of premium with respect to the Mortgage Assets,
on the one hand, and the timing of deductions for interest (including original
issue discount) on the Regular Certificates, on the other hand. Because of the
way REMIC taxable income is calculated, a Residual Certificateholder may
recognize "phantom" income (I.E., income recognized for tax purposes in excess
of income as determined under financial accounting or economic principles) which
will be matched in later years by a corresponding tax loss or reduction in
taxable income, but which could lower the yield to Residual Certificateholders
due to the lower present value of such future loss or reduction. For example, if
an interest in the Mortgage Assets is acquired by the REMIC Pool at a discount,
and one or more of such Mortgage Assets is prepaid, the Residual
Certificateholder may recognize taxable income without being entitled to receive
a corresponding amount of cash because (i) the prepayment may be used in whole
or in part to make distributions in reduction of principal on the Regular
Certificates and (ii) the discount income on the Mortgage Loan which is
includible in the REMIC's taxable income may exceed the discount deduction
allowed to the REMIC upon such distributions on the Regular Certificates. When
there is more than one class of Regular Certificates that distribute principal
sequentially, this mismatching of income and deductions is particularly likely
to occur in the early years following issuance of the Regular Certificates when
distributions in reduction of principal are being made in respect of earlier
maturing classes of Certificates. If taxable income attributable to such a
mismatching is realized in general, losses would be allowed in later years as
distributions on the later classes of Regular Certificates are made. Taxable
income may also be greater in earlier years than in later years as a result of
the fact that interest expense deductions, expressed as a percentage of the
outstanding principal amount of such a series of Regular Certificates, may
increase over time as distributions in reduction of principal are made on the
lower yielding classes of Regular Certificates, where interest income with
respect to any given Mortgage Loan will remain constant over time as a
percentage of the outstanding principal amount of that loan. Consequently,
Residual Certificateholders must have sufficient other sources of cash to pay
any federal, state or local income taxes due as a result of such mismatching or
unrelated deductions against which to offset such income. Prospective investors
should be aware, however, that a portion of such income may be ineligible for
offset by such investor's unrelated deductions. See the discussion of "excess
inclusions" below under "Limitations on Offset or Exemption of REMIC Income;
Excess Inclusions." The timing of such mismatching of income and deductions
described in this paragraph, if present with respect to a series of
Certificates, may have a significant adverse effect upon the Residual
Certificateholder's after-tax rate of return. In addition, a Residual
Certificateholder's taxable income during certain periods may exceed the income
reflected by such Certificateholder for such periods in accordance with
generally accepted accounting principles.
BASIS AND LOSSES. The amount of any net loss of the REMIC Pool that may be
taken into account by the Residual Certificateholder is limited to the adjusted
basis of the Residual Certificate as of the close of the quarter (or time of
disposition of the Residual Certificate if earlier), determined without taking
into account the net loss for the quarter. The initial adjusted basis of a
purchaser of a Residual Certificate is the amount paid for such Residual
Certificate. Such adjusted basis will be increased by the amount of taxable
income of the REMIC Pool reportable by the Residual Certificateholder and
decreased by the amount of loss of the REMIC Pool reportable by the Residual
Certificateholder. A cash distribution from the REMIC Pool also will reduce such
adjusted basis (but not below zero). Any loss that is disallowed on account of
this limitation may be carried over indefinitely with respect to the Residual
Certificateholder as to whom such loss was disallowed and may be used by such
Residual Certificateholder only to offset any income generated by the residual
from such REMIC Pool. Residual Certificateholders should consult their tax
advisors about other limitations on the deductibility of net losses that may
apply to them.
A Residual Certificateholder will not be permitted to amortize directly the
cost of its Residual Certificate as an offset to its share of the taxable income
of the related REMIC Pool. However, such taxable income will not include cash
received by the REMIC Pool that represents a recovery of the REMIC Pool's basis
in its assets. Such recovery of basis by the REMIC Pool will have the effect of
amortization of the issue price of the Residual Certificates over their life.
However, in view of the possible acceleration of the income of Residual
Certificateholders described above under "Taxation of REMIC Income," the period
of time over which such issue price is effectively amortized may be longer than
the economic life of the Residual Certificates.
If a Residual Certificate has a negative value, it is not clear whether its
issue price would be considered to be zero or such negative amount for purposes
of determining the REMIC Pool's basis in its assets. The REMIC Regulations do
not address whether residual interests could have a negative basis and a
negative issue price. The Depositor does not intend to treat a class of Residual
Certificates as having a value of less than zero for purposes of determining the
bases of the related REMIC Pool in its assets.
Further, to the extent that the initial adjusted basis of a Residual
Certificateholder (other than an original holder) in the Residual Certificate is
greater than the corresponding portion of the REMIC Pool's basis in the Mortgage
Assets, the Residual Certificateholder will not recover a portion of such basis
until termination of the REMIC Pool unless Treasury regulations yet to be issued
provide for periodic adjustments to the REMIC income otherwise reportable by
such holder. The REMIC Regulations do not so provide. See "Treatment of Certain
Items of REMIC Income and Expense - Market Discount" below regarding the basis
of Mortgage Assets to the REMIC Pool and "Sale or Exchange of Residual
Certificates" below regarding possible treatment of a loss upon termination of
the REMIC Pool as a capital loss.
MARK TO MARKET RULES
Prospective purchasers of a Residual Certificate should be aware that on
December 24, 1996, the Internal Revenue Service issued final regulations (the
"Mark to Market Regulations") relating to the requirement that a securities
dealer mark to market securities held for sale to customers. This mark-to-market
requirement applies to all securities of a dealer, except to the extent that the
dealer has specifically identified a security as held for investment. The Mark
to Market Regulations provide that for purposes of this mark-to-market
requirement, a Residual Certificate acquired after January 4, 1995, is not
treated as a security and thus may not be marked to market.
TREATMENT OF CERTAIN ITEMS OF REMIC INCOME AND EXPENSE
ORIGINAL ISSUE DISCOUNT. Generally, the REMIC Pool's deductions for
original issue discount will be determined in the same manner as original issue
discount income on Regular Certificates as described above under "Taxation of
Regular Certificates - Original Issue Discount" and "Variable Rate Regular
Certificates," without regard to the DE MINIMIS rule described therein.
MARKET DISCOUNT. The REMIC Pool will have market discount income in respect
of Mortgage Assets if, in general, the basis of the REMIC Pool in such Mortgage
Assets is exceeded by their unpaid principal balances. The REMIC Pool's basis in
such Mortgage Assets is generally the fair market value of the Mortgage Assets
immediately after the transfer thereof to the REMIC Pool. The REMIC Regulations
provide that such basis is equal in the aggregate to the issue prices of all
regular and residual interests in the REMIC Pool. In respect of Mortgage Assets
that have market discount to which Code Section 1276 applies, the accrued
portion of such market discount would be recognized currently by the REMIC as an
item of ordinary income. Market discount income generally should accrue in the
manner described above under "Taxation of Regular Certificates Market Discount."
PREMIUM. Generally, if the basis of the REMIC Pool in the Mortgage Assets
exceeds the unpaid principal balances thereof, the REMIC Pool will be considered
to have acquired such Mortgage Assets at a premium equal to the amount of such
excess. As stated above, the REMIC Pool's basis in the Mortgage Assets is the
fair market value of the Mortgage Assets, based on the aggregate of the issue
prices of the regular and residual interests in the REMIC Pool immediately after
the transfer thereof to the REMIC Pool. In a manner analogous to the discussion
above under "Taxation of Regular Certificates - Premium," a person that holds a
Mortgage Loan as a capital asset under Code Section 1221 may elect under Code
Section 171 to amortize premium on Mortgage Assets originated after September
27, 1985 under a constant yield method. Amortizable bond premium will be treated
as an offset to interest income on the Mortgage Assets, rather than as a
separate deduction item. Premium on Mortgage Assets may be deductible in
accordance with a reasonable method regularly employed by the holder thereof.
The allocation of such premium PRO RATA among principal payments should be
considered a reasonable method; however, the Internal Revenue Service may argue
that such premium should be allocated in a different manner, such as allocating
such premium entirely to the final payment of principal.
LIMITATIONS ON OFFSET OR EXEMPTION OF REMIC INCOME; EXCESS INCLUSIONS. A
portion of the income allocable to a Residual Certificate (referred to in the
Code as an "excess inclusion") for any calendar quarter, will be subject to
federal income tax in all events. Thus, for example, an excess inclusion (i)
cannot, except as described below, be offset by any unrelated losses or loss
carryovers of a Residual Certificateholder, (ii) will be treated as "unrelated
business taxable income" within the meaning of Code Section 512 if the Residual
Certificateholder is a pension fund or any other organization that is subject to
tax only on its unrelated business taxable income and (iii) is not eligible for
any reduction in the rate of withholding tax in the case of a Residual
Certificateholder that is a foreign investor, as further discussed in "Taxation
of Certain Foreign Investors - Residual Certificates" below. Members of an
affiliated group are treated as one corporation for purposes of applying the
limitation on offset of excess inclusion income. The Small Business Protection
Act of 1996 (the "1996 Act") eliminated a special rule that permitted thrift
institutions to use net operating losses and other allowable deductions to
offset their excess inclusion income from Residual Certificates with significant
value for taxable years beginning after December 31, 1995 (subject to exceptions
for certain certificates held continuously since November 1, 1995). The 1996 Act
also provides new rules affecting the determination of alternative maximum
taxable income ("AMTI") of a Residual Certificateholder. First, AMTI is
calculated without regard to the special rule that taxable income cannot be less
than excess inclusion income for the year. Second, AMTI cannot be less than
excess inclusion income for the year. Finally, any AMTI net operating loss
deduction is computed without regard to excess inclusion income. These new rules
are effective for tax years beginning after December 31, 1986, unless a Residual
Certificateholder elects to have the rules apply only to tax years ending after
August 20, 1996.
Except as discussed in the following paragraph, with respect to excess
inclusions from Residual Certificates without "significant value," for any
Residual Certificateholder, the excess inclusion for any calendar quarter is the
excess, if any, of (i) the income of such Residual Certificateholder for that
calendar quarter from its Residual Certificate over (ii) the sum of the "daily
accruals" (as defined below) for all days during the calendar quarter on which
the Residual Certificateholder holds such Residual Certificate. For this
purpose, the daily accruals with respect to a Residual Certificate are
determined by allocating to each day in the calendar quarter its ratable portion
of the product of the "adjusted issue price" (as defined below) of the Residual
Certificate at the beginning of the calendar quarter and 120 percent of the
"Federal long-term rate" in effect at the time the Residual Certificate is
issued. For this purpose the "adjusted issue price" of a Residual Certificate
at the beginning of any calendar quarter equals the issue price of the Residual
Certificate (adjusted for contributions), increased by the amount of daily
accruals for all prior quarters, and decreased (but not below zero) by the
aggregate amount of payments made on the Residual Certificate before the
beginning of such quarter. The Federal long-term rate is an average of current
yields on Treasury securities with a remaining term of greater than nine years,
computed and published monthly by the IRS.
The Code provides that to the extent provided in regulations, as an
exception to the general rule described above, the entire amount of income
accruing on a Residual Certificate will be treated as an excess inclusion if the
Residual Certificates in the aggregate are considered not to have "significant
value." The Treasury Department has not yet provided regulations in this respect
and the REMIC Regulations did not adopt this rule.
Under Treasury regulations to be promulgated, a portion of the dividends
paid by a REIT which owns a Residual Certificate are to be designated as excess
inclusions in an amount corresponding to the Residual Certificate's allocable
share of the excess inclusions. Similar rules apply in the case of regulated
investment companies, common trust funds and cooperatives. Thus, investors in
such entities which own a Residual Certificate will be subject to the
limitations on excess inclusions described above. The REMIC Regulations do not
provide guidance on this issue.
TAX-RELATED RESTRICTIONS ON TRANSFER OF RESIDUAL CERTIFICATES
DISQUALIFIED ORGANIZATIONS. If legal title or beneficial interest in a
Residual Certificate is transferred to a Disqualified Organization (as defined
below), a tax would be imposed in an amount equal to the product of (i) the
present value of the total anticipated excess inclusions with respect to such
Residual Certificate for periods after the transfer and (ii) the highest
marginal federal corporate income tax rate. The REMIC Regulations provide that
the anticipated excess inclusion are based on actual prepayment experience to
the date of the transfer and projected payments based on the Prepayment
Assumption. The present value discount rate equals the applicable Federal rate
under Code Section 1274(d) that would apply to a debt instrument that was issued
on the date the Disqualified Organization acquired the Residual Certificate and
whose term ended on the close of the last quarter in which excess inclusion was
expected to accrue with respect to the Residual Certificate. Such a tax
generally would be imposed on the transferor of the Residual Certificate, except
that where such transfer is through an agent (including a broker, nominee, or
other middleman) for a Disqualified Organization, the tax would instead be
imposed on such agent. However, a transferor of a Residual Certificate would in
no event be liable for such tax with respect to a transfer if the transferee
furnishes to the transferor an affidavit that the transferee is not a
Disqualified Organization and, as of the time of the transfer, the transferor
does not have actual knowledge that such affidavit is false. The tax also may be
waived by the Treasury Department if the Disqualified Organization promptly
disposes of the Residual Certificate and the transferor pays income tax at the
highest corporate rate on the excess inclusion for the period the Residual
Certificate is actually held by the Disqualified Organization.
In addition, if a "Pass-Through Entity" (as defined below) has excess
inclusion income with respect to a Residual Certificate during a taxable year
and a Disqualified Organization is the record holder of an equity interest in
such entity, then a tax is imposed on such entity equal to the product of (i)
the amount of excess inclusions that are allocable to the interest in the
Pass-Through Entity during the period such interest is held by such Disqualified
Organization and (ii) the highest marginal federal corporate income tax rate.
Such tax would be deductible from the ordinary gross income of the Pass-Through
Entity for the taxable year. The Pass-Through Entity would not be liable for
such tax if it has received an affidavit from such record holder that (i) states
under penalty of perjury that it is not a Disqualified Organization or (ii)
furnishes a social security number and states under penalties of perjury that
the social security number is that of the transferee, provided that during the
period such person is the record holder of the Residual Certificate, the
Pass-Through Entity does not have actual knowledge that such affidavit is false.
Excess inclusion income of a Residual Certificate held by an electing large
partnership (as defined in Code section 775) is subject to tax in the hands of
the partnership.
For these purposes, (i) "Disqualified Organization" means the United
States, any state or political subdivision thereof, any foreign government, any
international organization, any agency or instrumentality of any of the
foregoing (provided, that such term does not include an instrumentality if all
its activities are subject to tax and a majority of its board of directors is
not selected by any such governmental entity), any cooperative organization
furnishing electric energy or providing telephone service to persons in rural
areas as described in Code Section 1381(a)(2)(C), and any organization (other
than a farmers' cooperative described in Code Section 521) that is exempt from
taxation under the Code unless such organization is subject to the tax on
unrelated business income imposed by Code Section 511 and (ii) "Pass-Through
Entity" means any regulated investment company, real estate investment trust,
common trust fund, partnership, trust or estate and certain corporations
operating on a cooperative basis. Except as may be provided in Treasury
regulations yet to be issued, any person holding an interest in a Pass- Through
Entity as a nominee for another will, with respect to such interest, be treated
as a Pass-Through Entity.
The Agreement with respect to a series of Certificates will provide that
neither legal title nor beneficial interest in a Residual Certificate may be
transferred or registered unless (i) the proposed transferee provides to the
Depositor and the Trustee an affidavit to the effect that such transferee is not
a Disqualified Organization, is not purchasing such Residual Certificates on
behalf of a Disqualified Organization (I.E., as a broker, nominee or middleman
thereof) and is not an entity that holds REMIC residual securities as nominee to
facilitate the clearance and settlement of such securities through electronic
book-entry changes in accounts of participating organizations and (ii) the
transferor provides a statement in writing to the Depositor and the Trustee that
it has no actual knowledge that such affidavit is false. Moreover, the Agreement
will provide that any attempted or purported transfer in violation of these
transfer restrictions will be null and void and will vest no rights in any
purported transferee. Each Residual Certificate with respect to a series will
have a legend referring to such restrictions on transfer, and each Residual
Certificateholder will be deemed to have agreed, as a condition of ownership
thereof, to any amendments to the related Agreement required under the Code or
applicable Treasury regulations to effectuate the foregoing restrictions.
Information necessary to compute an applicable excise tax must be furnished to
the Internal Revenue Service and to the requesting party within 60 days of the
request, and the Depositor or the Trustee may charge a fee for computing and
providing such information.
NONECONOMIC RESIDUAL INTERESTS. Under the REMIC Regulations certain
transfers of Residual Certificates are disregarded, in which case the transferor
continues to be treated as the owner of the Residual Certificates and thus
continues to be subject to tax on its allocable portion of the net income of the
REMIC Pool. Under the Final REMIC Regulations, a transfer of a Noneconomic
Residual Interest (defined below) to a Residual Certificateholder (other than a
Residual Certificateholder who is not a U.S. Person, as defined below under
"Foreign Investors") is disregarded for all federal income tax purposes unless
no significant purpose of the transfer is to impede the assessment or collection
of tax. A residual interest in a REMIC (including a residual interest with a
positive value at issuance) is 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 the present value of the
anticipated excess inclusions and the highest federal corporate income tax rate
in effect for the year in which the transfer occurs, and (ii) the transferor
reasonably expects that the transferee will receive distributions from the REMIC
at or after the time at which taxes accrue on the anticipated excess inclusions
in an amount sufficient to satisfy the accrued taxes. The anticipated excess
inclusions and the present value rate are determined in the same manner as set
forth above under "Disqualified Organizations." 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
transferor would be unwilling or unable to pay taxes due on its share of the
taxable income of the REMIC. Under the REMIC Regulations, a transferor is
presumed not to have improper knowledge if (i) the transferor conducted, 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 found that
the transferee had historically paid its debts as they came due and found no
significant evidence to indicate that the transferor will not continue to pay
its debts as they come due in the future; and (ii) the transferee represents to
the transferor that it understands that, as the holder of the Noneconomic
Residual Interest, the transferee may incur tax liabilities in excess of any
cash flows generated by the residual interest and that the transferee intends to
pay taxes associated with holding residual interest as they become due. The
Agreement will require the transferee of a Residual Certificate to state as part
of the affidavit described above under the heading "Disqualified Organizations"
that such transferee (i) has historically paid its debts as they come due, (ii)
intends to continue to pay its debts as they come due in the future, (iii)
understands that, as the holder of a Noneconomic Residual Interest, it may incur
tax liabilities in excess of any cash flows generated by the Residual
Certificate, and (iv) intends to pay any and all taxes associated with holding
the Residual Certificate as they become due. The transferor must have no reason
to believe that such statement is untrue.
FOREIGN INVESTORS. The REMIC Regulations provide that the transfer of a
Residual Certificate that has "tax avoidance potential" to a "foreign person"
will be disregarded for all federal tax purposes. A Residual Certificate is
deemed to have tax avoidance potential unless, at the time of the transfer, the
transferor reasonably expects that, for each excess inclusion, (i) the REMIC
Pool will distribute to the transferee residual interest holder an amount that
will equal at least 30% of the excess inclusions and (ii) that each such amount
will be distributed at or after the time at which the excess inclusion accrues
and not later than the close of the calendar year following the calendar year of
accrual. If the non-U.S. Person transfers the Residual Certificate back to a
U.S. Person, the transfer will be disregarded and the foreign transferor will
continue to be treated as the owner unless arrangements are made so that the
transfer does not have the effect of allowing the transferor to avoid tax on
accrued excess inclusions.
The Prospectus Supplement relating to a series of Certificates may provide
that a Residual Certificate may not be purchased by or transferred to any person
that is not a U.S. Person or may describe the circumstances and restrictions
pursuant to which such a transfer may be made. The term "U.S. Person" means a
citizen or resident of the United States, a corporation, partnership or other
entity created or organized in or under the laws of the United States or any
political subdivision thereof or an estate or trust that is subject to U.S.
federal income tax regardless of the source of its income.
SALE OR EXCHANGE OF A RESIDUAL CERTIFICATE
Upon the sale or exchange of a Residual Certificate, the Residual
Certificateholder will recognize gain or loss equal to the excess, if any, of
the amount realized over the adjusted basis (as described above under "Taxation
of Residual Certificates - Basis and Losses") of such Residual Certificateholder
in such Residual Certificate at the time of the sale or exchange. In addition to
reporting the taxable income of the REMIC Pool, a Residual Certificateholder
will have taxable income to the extent that any cash distribution to him from
the REMIC Pool exceeds such adjusted basis on that Distribution Date. Such
income will be treated as gain from the sale or exchange of the Residual
Certificate. It is possible that the termination of the REMIC Pool may be
treated as a sale or exchange of a Residual Certificateholder's Residual
Certificate, in which case, if the Residual Certificateholder has an adjusted
basis in his Residual Certificate remaining when his interest in the REMIC Pool
terminates, and if he holds such Residual Certificate as a capital asset under
Code Section 1221, then he will recognize a capital loss at that time in the
amount of such remaining adjusted basis.
Losses on dispositions of Residual Certificates will be disallowed where
the seller of the Residual Certificate, during the period beginning six months
before the sale or disposition of the Residual Certificate and ending six months
after such sale or disposition, acquires (or enters into any other transaction
that results in the application of Code Section 1091) any residual interest in
any REMIC or any interest in a "taxable mortgage pool" (such as a non-REMIC
owner trust) that is economically comparable to a Residual Certificate.
TAXES THAT MAY BE IMPOSED ON THE REMIC POOL
PROHIBITED TRANSACTIONS. Net income from certain transactions by the REMIC
Pool, called prohibited transactions, will not be part of the calculation of
income or loss includible in the federal income tax returns of Residual
Certificateholders, but rather will be taxed directly to the REMIC Pool at a
100% rate. Prohibited transactions generally include (i) the disposition of a
qualified mortgage other than for (a) substitution within two years of the
Startup Day for a defective (including a defaulted) obligation (or repurchase in
lieu of substitution of a defective (including a defaulted) obligation at any
time) or for any qualified mortgage within three months of the Startup Day, (b)
foreclosure, default or imminent default of a qualified mortgage, (c) bankruptcy
or insolvency of the REMIC Pool or (d) a qualified (complete) liquidation, (ii)
the receipt of income from assets that are not the type of mortgages or
investments that the REMIC Pool is permitted to hold, (iii) the receipt of
compensation for services or (iv) the receipt of gain from disposition of cash
flow investments other than pursuant to a qualified liquidation. Notwithstanding
(i) and (iv), it is not a prohibited transaction to sell REMIC Pool property to
prevent a default on Regular Certificates as a result of a default on qualified
mortgages or to facilitate a clean-up call (generally, an optional termination
to save administrative costs when no more than a small percentage of the
Certificates is outstanding). The REMIC Regulations indicate that the
modification of a Mortgage Loan generally will not be treated as a disposition
if it is occasioned by a default or reasonably foreseeable default, an
assumption of the Mortgage Loan, the waiver of a due-on-sale or encumbrance
clause or the conversion of an interest rate by a mortgagor pursuant to the
terms of a convertible adjustable rate Mortgage Loan. The REMIC Regulations also
provide that the modification of mortgage loans underlying Mortgage-Backed
Securities will not be treated as a modification of the Mortgage-Backed
Securities, provided that the trust issuing the Mortgage Backed Securities was
not created to avoid prohibited transaction rules.
CONTRIBUTIONS TO THE REMIC POOL AFTER THE STARTUP DAY. In general, the
REMIC Pool will be subject to a tax at a 100% rate on the value of any property
contributed to the REMIC Pool after the Startup Day. Exceptions are provided for
cash contributions to the REMIC Pool (i) during the three months following the
Startup Day, (ii) made to a qualified reserve fund by a Residual
Certificateholder, (iii) in the nature of a guarantee, (iv) made to facilitate a
qualified liquidation or clean-up call and (v) as otherwise permitted in
Treasury regulations yet to be issued.
NET INCOME FROM FORECLOSURE PROPERTY. The REMIC Pool will be 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. Generally, property acquired by the REMIC Pool through
foreclosure or deed in lieu of foreclosure would be treated as "foreclosure
property" for a period of three years, with a possible extensions. Net income
from foreclosure property generally means (i) gain from the sale of a
foreclosure property that is inventory property and (ii) gross income from
foreclosure property other than qualifying rents and other qualifying income for
a real estate investment trust.
LIQUIDATION OF THE REMIC POOL
If a REMIC Pool and the Trustee adopt a plan of complete liquidation,
within the meaning of Code Section 860F(a)(4)(A)(i) and sell all of the REMIC
Pool's assets (other than cash) within a 90-day period beginning on the date of
the adoption of the plan of liquidation, the REMIC Pool will recognize no gain
or loss on the sale of its assets, provided that the REMIC Pool credits or
distributes in liquidation all of the sale proceeds plus its cash (other than
amounts retained to meet claims against the REMIC Pool) to holders of Regular
Certificates and Residual Certificateholders within the 90-day period.
ADMINISTRATIVE MATTERS
The REMIC Pool will be required to maintain its books on a calendar year
basis and to file federal income tax returns for federal income tax purposes in
a manner similar to a partnership. The form for such income tax return is Form
1066, U.S. Real Estate Mortgage Investment Conduit Income Tax Return. The
Trustee will be required to sign the REMIC Pool's returns. Treasury regulations
provide that, except where there is a single Residual Certificateholder for an
entire taxable year, the REMIC Pool generally will be subject to the procedural
and administrative rules of the Code applicable to partnerships, including the
determination by the Internal Revenue Service of any adjustments to, among other
things, items of REMIC income, gain, loss, deduction or credit in a unified
administrative proceeding. The Depositor or a designated Residual
Certificateholders will be obligated to act as "tax matters person," as defined
in applicable Treasury regulations, with respect to the REMIC Pool. If the Code
or applicable Treasury regulations do not permit the Depositor to act as tax
matters person in its capacity as agent of the Residual Certificateholders, the
Residual Certificateholder chosen by the Residual Certificateholders or such
other person specified pursuant to Treasury regulations will be required to act
as tax matters person.
Treasury regulations provide that a holder of a Residual Certificate is not
required to treat items on its return consistently with their treatment on the
REMIC Pool's return if a holder owns 100% of the Residual Certificates for the
entire calendar year. Otherwise, each holder of a Residual Certificate is
required to treat items on its return consistently with their treatment on the
REMIC Pool's return, unless the holder of a Residual Certificate either files a
statement identifying the inconsistency or establishes that the inconsistency
resulted from incorrect information received from the REMIC Pool. The Service
may assess a deficiency resulting from a failure to comply with the consistency
requirement without instituting an administrative proceeding at the REMIC Pool
level.
LIMITATIONS ON DEDUCTION OF CERTAIN EXPENSES
An investor who is an individual, estate or trust will be subject to
limitation with respect to certain itemized deductions described in Code Section
67, to the extent that such itemized deductions, in the aggregate, do not exceed
2% of the investor's adjusted gross income. In addition, Code Section 68
provides that itemized deductions otherwise allowable for a taxable year of an
individual taxpayer will be reduced by the lesser of (i) 3% of the excess, if
any, of adjusted gross income over $100,000, adjusted yearly for inflation
($50,000, adjusted yearly for inflation, in the case of a married individual
filing a separate return), or (ii) 80% of the amount of itemized deductions
otherwise allowable for such year. In the case of a REMIC Pool, such deductions
may include deductions under Code Section 212 for servicing fees and all
administrative and other expenses relating to the REMIC Pool or any similar
expenses allocated to the REMIC Pool with respect to a regular interest it holds
in another REMIC. Such investors who hold REMIC Certificates either directly or
indirectly through certain pass-through entities may have their PRO RATA share
of such expenses allocated to them as additional gross income, but may be
subject to such limitation on deductions. In addition, such expenses are not
deductible at all for purposes of computing the alternative minimum tax, and may
cause such investors to be subject to significant additional tax liability.
Treasury regulations provide that the additional gross income and corresponding
amount of expenses generally are to be allocated entirely to the holders of
Residual Certificates in the case of a REMIC Pool that would not qualify as a
fixed investment trust in the absence of a REMIC election. However, such
additional gross income and limitation on deductions will apply to the allocable
portion of such expenses to holders of Regular Certificates, as well as holders
of Residual Certificates, where such Regular Certificates are issued in a manner
that is similar to pass-through certificates in a fixed investment trust. In
general, such allocable portion will be determined based on the ratio that a
REMIC Certificateholder's income, determined on a daily basis, bears to the
income of all holders of Regular Certificates and Residual Certificates with
respect to a REMIC Pool. As a result, individuals, estates or trusts holding
REMIC Certificates (either directly or indirectly through a grantor trust,
partnership, S corporation, REMIC, or certain other pass-through entities
described in the foregoing Treasury regulations) may have taxable income in
excess of the interest income at the pass-through rate on Regular Certificates
that are issued in a single class or otherwise consistently with fixed
investment trust status or in excess of cash distributions for the related
period on Residual Certificates.
TAXATION OF CERTAIN FOREIGN INVESTORS
REGULAR CERTIFICATES. Interest, including original issue discount,
distributable to Regular Certificateholders who are nonresident aliens, foreign
corporations, or other Non-U.S. Persons (as defined below), will be considered
"portfolio interest" and therefore, generally will not be subject to 30% United
States withholding tax, provided that such Non-U.S. Person (i) is not a
"10-percent shareholder" within the meaning of Code Section 871(h)(3)(B) or a
controlled foreign corporation described in Code Section 881(c)(3)(C) and (ii)
provides the Trustee, or the person who would otherwise be required to withhold
tax from such distributions under Code Sections 1441 or 1442, with an
appropriate statement, signed under penalties of perjury, identifying the
beneficial owner and stating, among other things, that the beneficial owner of
the Regular Certificate is a Non-U.S. Person. If such statement, or any other
required statement, is not provided, 30% withholding will apply unless reduced
or eliminated pursuant to an applicable tax treaty or unless the interest on the
Regular Certificate is effectively connected with the conduct of a trade or
business within the United States by such Non-U.S. Person. In the latter case,
such Non-U.S. Person will be subject to United States federal income tax at
regular rates. Investors who are Non-U.S. Persons should consult their own tax
advisors regarding the specific tax consequences to them of owning a Regular
Certificate. The term "Non-U.S. Person" means any person who is not a U.S.
Person.
RESIDUAL CERTIFICATES. The Conference Committee Report to the 1986 Act
indicates that amounts paid to Residual Certificateholders who are Non-U.S.
Persons are treated as interest for purposes of the 30% (or lower treaty rate)
United States withholding tax. Treasury regulations provide that amounts
distributed to Residual Certificateholders qualify as "portfolio interest,"
subject to the conditions described in "Regular Certificates" above, but only to
the extent that (i) the Mortgage Assets were issued after July 18, 1984 and (ii)
the Trust fund or segregated pool of assets therein (as to which a separate
REMIC election will be made), to which the Residual Certificate relates,
consists of obligations issued in "registered form" within the meaning of Code
Section 163(f)(1). Generally, Mortgage Assets will not be, but regular interests
in another REMIC Pool will be, considered obligations issued in registered form.
Furthermore, a Residual Certificateholder will not be entitled to any exemption
(or to any lower treaty rate) from the 30% withholding tax to the extent of that
portion of REMIC taxable income that constitutes an "excess inclusion." See
"Taxation of Residual Certificates - Limitations on Offset or Exemption of REMIC
Income; Excess Inclusions." If the amounts paid to Residual Certificateholders
who are Non-U.S. Persons are effectively connected with the conduct of a trade
or business within the United States by such Non-U.S. Persons, 30% (or lower
treaty rate) withholding will not apply. Instead, the amounts paid to such
Non-U.S. Persons will be subject to United States federal income tax at regular
rates. If 30% (or lower treaty rate) withholding is applicable, such amounts
generally will be taken into account for purposes of withholding only when paid
or otherwise distributed (or when the Residual Certificate is disposed of) under
rules similar to withholding upon disposition of debt instruments that have
original issue discount. See "Tax-Related Restrictions on Transfer of Residual
Certificates - Foreign Investors" above concerning the disregard of certain
transfers having "tax avoidance potential."
Recently issued Treasury regulations (the "Final Withholding Regulations"),
which are generally effective with respect to payments made after December 31,
1998, consolidate and modify the current certification requirements and means by
which a holder may claim exemption from United States federal income tax
withholding and provide certain presumptions regarding the status of holders
when payments to the holders cannot be reliably associated with appropriate
documentation provided to the payor. All holders of Offered Certificates should
consult their tax advisers regarding the application of the Final Withholding
Regulations.
BACKUP WITHHOLDING
Distributions made on the Regular Certificates, and proceeds from the sale
of the Regular Certificates to or through certain brokers, may be subject to a
"backup" withholding tax under Code Section 3406 of 31% on "reportable payments"
(including interest distributions, original issue discount, and, under certain
circumstances, principal distributions) unless the Regular Certificateholder
complies with certain reporting and/or certification procedures, including the
provision of its taxpayer identification number to the Trustee, its agent or the
broker who effected the sale of the Regular Certificate, or such
Certificateholder is otherwise an exempt recipient under applicable provisions
of the Code. Any amounts to be withheld from distribution on the Regular
Certificates would be refunded by the Internal Revenue Service or allowed as a
credit against the Regular Certificateholder's federal income tax liability.
REPORTING REQUIREMENTS
Reports of accrued interest and original issue discount will be made
annually to the Internal Revenue Service and to individuals, estates, non-exempt
and non-charitable trusts, and partnerships who are either holders of record of
Regular Certificates or beneficial owners who own Regular Certificates through a
broker or middleman as nominee. All brokers, nominees and all other non-exempt
holders of record of Regular Certificates (including corporations, non-calendar
year taxpayers, securities or commodities dealers, real estate investment
trusts, investment companies, common trust funds, thrift institutions and
charitable trusts) may request such information for any calendar quarter by
telephone or in writing by contacting the person designated in Internal Revenue
Service Publication 938 with respect to a particular series of Regular
Certificates. Holders through nominees must request such information from the
nominee. Treasury regulations provide that information necessary to compute the
accrual of any market discount on the Regular Certificates must be furnished.
The Internal Revenue Service's Form 1066 has an accompanying Schedule Q,
Quarterly Notice to Residual Interest Holders of REMIC Taxable Income or Net
Loss Allocation. Treasury regulations require that Schedule Q be furnished by
the REMIC Pool to each Residual Certificateholder with respect to any calendar
quarter.
Treasury regulations require that, in addition to the foregoing
requirements, information must be furnished quarterly to Residual
Certificateholders, furnished annually, if applicable, to holders of Regular
Certificates, and filed annually with the Internal Revenue Service concerning
Code Section 67 expenses (see "Limitations on Deduction of Certain Expenses"
above) allocable to such holders. Furthermore, under such regulations,
information must be furnished quarterly to Residual Certificateholders,
furnished annually to holders of Regular Certificates, and filed annually with
the Internal Revenue Service concerning the percentage of the REMIC Pool's
assets meeting the qualified asset tests described above under "Federal Income
Tax Consequences for REMIC Certificates" above.
FEDERAL INCOME TAX CONSEQUENCES FOR CERTIFICATES AS TO WHICH NO REMIC ELECTION
IS MADE
Stroock & Stroock & Lavan LLP, special counsel to the Depositor, is of the
opinion that if a Trust does not elect REMIC status and is not treated as a
partnership, the tax consequences to the Owners will be as described below.
STANDARD CERTIFICATES
GENERAL. If no election is made to treat a Trust (or a segregated pool of
assets therein) with respect to a series of Certificates as a REMIC, the Trust
may be classified as a grantor trust under subparagraph E, Part 1 of subchapter
J of the Code and not as a partnership or an association taxable as a
corporation. Where there is no fixed retained yield with respect to the Mortgage
Assets underlying the Certificates of a series, and where such Certificates are
not designated as Stripped Certificates, as described below under "Stripped
Certificates" or as Partnership Interests described under "Taxation of
Securities Classified as Partnership Interests," the holder of each such
"Standard Certificate" in such series will be treated as the owner of a PRO RATA
undivided interest in the ordinary income and corpus portions of the Trust
represented by his Certificate and will be considered the beneficial owner of a
PRO RATA undivided interest in each of the Mortgage Assets, subject to the
discussion below under "Recharacterization of Servicing Fees." Accordingly, the
holder of a Certificate (a "Certificateholder") of a particular series will be
required to report on its federal income tax return its PRO RATA share of the
entire income from the Mortgage Assets, original issue discount (if any),
prepayment fees, assumption fees, and late payment charges received by or on
behalf of the Trust, in accordance with such Certificateholder's method of
accounting. A Certificateholder generally will be able to deduct its share of
servicing fees and all administrative and other expenses of the Trust in
accordance with his method of accounting, provided that such amounts are
reasonable compensation for services rendered to that Trust. However, investors
who are individuals, estates or trusts who own Certificates, either directly or
indirectly through certain pass-through entities, will not be allowed to deduct
certain itemized deductions described in Code Section 67, including deductions
under Code Section 212 for servicing fees and all such administrative and other
expenses of the Trust, to the extent that such deductions, in the aggregate, do
not exceed two percent of the investor's adjusted gross income. In addition,
Code Section 68 provides that itemized deductions otherwise allowable for a
taxable year of an individual taxpayer will be reduced by the lesser of (i) 3%
of the excess, if any, of adjusted gross income over $100,000, adjusted yearly
for inflation ($50,000, adjusted yearly for inflation, in the case of a married
individual filing a separate return), or (ii) 80% of the amount of itemized
deductions otherwise allowable for such year. As a result such investors holding
Certificates, directly or indirectly through a pass-through entity, may have
aggregate taxable income in excess of the aggregate amount of cash received on
such Certificates with respect to interest at the pass-through rate on such
Certificates or discount thereon. In addition, such expenses are not deductible
at all for purposes of computing the alternative minimum tax and may cause such
investors to be subject to significant additional tax liability. Moreover, where
there is fixed retained yield with respect to the Mortgage Assets underlying a
series of Certificates or where the servicing fees are in excess of reasonable
servicing compensation, the transaction will be subject to the application of
the "stripped bond" and "stripped coupon" rules of the Code, as described below
under "Stripped Certificates" and "Premium and Discount - Recharacterization of
Servicing Fees," respectively.
TAX STATUS. Subject to the discussion below, Stroock & Stroock & Lavan LLP,
special counsel to the Depositor, is of the opinion that:
(1) A Standard Certificate owned by a "domestic building and loan
association" within the meaning of Code Section 7701(a)(19) will be
considered to represent "loans . . . secured by an interest in real
property" within the meaning of Code Section 7701(a)(19)(C)(v),
provided that the real property securing the Mortgage Assets
represented by that Certificate is of the type described in such
section.
(2) A Standard Certificate owned by a real estate investment trust
will be considered to represent "real estate assets" within the
meaning of Code Section 856(c)(4) to the extent that the assets
of the related Trust consist of qualified assets, and interest income
on such assets will he considered "interest on obligations secured by
mortgages on real property" within the meaning of Code Section
856(c).
(3) A Standard Certificate owned by a REMIC will be considered to
represent an "obligation (including any participation or certificate
of beneficial ownership therein) which is principally secured by an
interest in real property" within the meaning of Code Section
860G(a)(3)(A) to the extent that the assets of the related Trust
consist of "qualified mortgages" within the meaning of Code Section
860G(a)(3).
An issue arises as to whether buy-down Mortgage Assets may be characterized
in their entirety under the Code provisions cited in the immediately preceding
paragraph. There is indirect authority supporting treatment of an investment in
a buy-down Mortgage Loan as entirely secured by real property if the fair market
value of the real property securing the loan exceeds the principal amount of the
loan at the time of issuance or acquisition, as the case may be. There is no
assurance that the treatment described above is proper. Accordingly,
Certificateholders are urged to consult their own tax advisors concerning the
effects of such arrangements on the characterization of such Certificateholder's
investment for federal income tax purposes.
PREMIUM AND DISCOUNT
Certificateholders are advised to consult with their tax advisors as to the
federal income tax treatment of premium and discount arising either upon initial
acquisition of Certificates or thereafter.
PREMIUM. The treatment of premium incurred upon the purchase of a
Certificate will be determined generally as described above under "- Taxation of
Regular Certificates - Premium."
ORIGINAL ISSUE DISCOUNT. The Internal Revenue Service has stated in
published rulings that, in circumstances similar to those described herein, the
original issue discount rules will be applicable to a Certificateholder's
interest in those Mortgage Assets as to which the conditions for the application
of those sections are met. Rules regarding periodic inclusion of original issue
discount income are applicable to mortgages of corporations originated after May
27, 1969, mortgages of noncorporate mortgagors (other than individuals)
originated after July l, 1982, and mortgages of individuals originated after
March 2, 1984. Such original issue discount could arise by the charging of
points by the originator of the mortgages in an amount greater than a statutory
DE MINIMIS exception, to the extent that the points are not currently deductible
under applicable Code provisions or are not for services provided by the lender.
It is generally not anticipated that adjustable rate Mortgage Assets will be
treated as issued with original issue discount. However, the application of the
OID Regulations to adjustable rate mortgage loans with incentive interest rates
or annual or lifetime interest rate caps may result in original issue discount.
Original issue discount must generally be reported as ordinary gross income
as it accrues under a constant yield method that takes into account the
compounding of interest, in advance of the cash attributable to such income.
However, Code Section 1272 provide for a reduction in the amount of original
issue discount includible in the income of a holder of an obligation that
acquires the obligation after its initial issuance at a price greater than the
sum of the original issue price and the previously accrued original issue
discount, less prior payments of principal. Accordingly, if such Mortgage Assets
acquired by a Certificateholder are purchased at a price equal to the then
unpaid principal amount of such Mortgage Assets, no original issue discount
attributable to the difference between the issue price and the original
principal amount of such Mortgage Assets (I.E., points) will be includible by
such holder. Section 1272(a)(6) provides for the use of a prepayment
assumption in determining original issue discount for any pool of debt
instruments the yield on which may be affected by reason of prepayments.
MARKET DISCOUNT. Certificateholders also will be subject to the market
discount rules to the extent that the conditions for application of those
sections are met. Market discount on the Mortgage Assets will be determined and
will be reported as ordinary income generally in the manner described above
under "- Taxation of Regular Certificates - Market Discount."
RECHARACTERIZATION OF SERVICING FEES. If the servicing fees paid to
Servicers were deemed to exceed reasonable servicing compensation, the amount of
such excess would be nondeductible under Code Section 162 or 212. In this
regard, there are no authoritative guidelines for federal income tax purposes as
to either the maximum amount of servicing compensation that may be considered
reasonable in the context of this or similar transactions or whether, in the
case of the Certificates, the reasonableness of servicing compensation should be
determined on a weighted average or loan-by-loan basis. If a loan-by-loan basis
is appropriate, the likelihood that such amount would exceed reasonable
servicing compensation as to some of the Mortgage Assets would be increased.
Recently issued Internal Revenue Service guidance indicates that a servicing fee
in excess of reasonable compensation ("excess servicing") will cause the
Mortgage Assets to be treated under the "stripped bond" rules. Such guidance
provides safe harbors for servicing deemed to be reasonable and requires
taxpayers to demonstrate that the value of servicing fees in excess of such
amounts is not greater than the value of the services provided.
Accordingly, if the Internal Revenue Service's approach is upheld, a
servicer that receives excess servicing fees would be viewed as retaining an
ownership interest in a portion of the interest payments on the Mortgage Assets.
Under the rules of Code Section 1286, the separation of the right to receive
some or all of the interest payments on an obligation from the right to receive
some or all of the principal payments on the obligation would result in
treatment of such Mortgage Assets as "stripped coupons" and "stripped bonds."
While Certificateholders would still be treated as owners of beneficial
interests in a grantor trust for federal income tax purposes, the corpus of such
trust could be viewed as excluding the portion of the Mortgage Assets the
ownership of which is attributed to a servicer, or as including such portion as
a second class of equitable interest. Applicable Treasury regulations treat such
an arrangement as a fixed investment trust, since the multiple classes of trust
interests should be treated as merely facilitating direct investments in the
trust assets and the existence of multiple classes of ownership interests is
incidental to that purpose. In general, such a recharacterization should not
have any significant effect upon the timing or amount of income reported by a
Certificateholder. See "Stripped Certificates" below for a further
description of the federal income tax treatment of stripped bonds and stripped
coupons.
In the alternative, the amount, if any, by which the servicing fees paid to
the servicers are deemed to exceed reasonable compensation for servicing could
be treated as deferred payments of purchase price by the Certificateholders to
purchase an undivided interest in the Mortgage Assets. In such event, the
present value of such additional payments might be included in the
Certificateholder's basis in such undivided interests for purposes of
determining whether the Certificate was acquired at a discount, at par, or at a
premium. Under this alternative, Certificateholders may also be entitled to a
deduction for unstated interest with respect to each deferred payment. The
Internal Revenue Service may take the position that the specific statutory
provisions of Code Section 1286 described above override the alternative
described in this paragraph. Certificateholders are advised to consult their tax
advisors as to the proper treatment of the amounts paid to the servicers as set
forth herein as servicing compensation or under either of the alternatives set
forth above.
SALE OR EXCHANGE OF CERTIFICATES. Upon sale or exchange of a Certificate, a
Certificateholder will recognize gain or loss equal to the difference between
the amount realized on the sale and its aggregate adjusted basis in the Mortgage
Assets and other assets represented by the Certificate. In general, the
aggregate adjusted basis will equal the Certificateholder's cost for the
Certificate, increased by the amount of any income previously reported with
respect to the Certificate and decreased by the amount of any losses previously
reported with respect to the Certificate and the amount of any distributions
received thereon. Except as provided above with respect to market discount on
any Mortgage Assets, and except for certain financial institutions subject to
the provisions of Code Section 582(c), any such gain or loss would be capital
gain or loss if the Certificate was held as a capital asset.
STRIPPED CERTIFICATES
GENERAL. Pursuant to Code Section 1286, the separation of ownership of the
right to receive some or all of the principal payments on an obligation from
ownership of the right to receive some or all of the interest payments results
in the creation of "stripped bonds" with respect to principal payments and
"stripped coupons" with respect to interest payments. For purposes of this
discussion, Certificates that are subject to those rules will be referred to as
"Stripped Certificates." The Certificates will be subject to those rules if (i)
the Depositor or any of its affiliates retains (for its own account or for
purposes of resale), in the form of fixed retained yield or otherwise, an
ownership interest in a portion of the payments on the Mortgage Assets, (ii) the
Depositor, any of its affiliates or a servicer is treated as having an ownership
interest in the Mortgage Assets to the extent it is paid (or retains) servicing
compensation in an amount greater than reasonable consideration for servicing
the Mortgage Assets (see "Standard Certificates - Recharacterization of the
Servicing Fees" above) and (iii) Certificates are issued in two or more classes
or subclasses representing the right to non PRO rata percentages of the interest
and principal payments on the Mortgage Assets.
In general, a holder of a Stripped Certificate (a "Stripped
Certificateholder") will be considered to own "stripped bonds" with respect to
its PRO RATA share of all or a portion of the principal payments on each
Mortgage Loan and/or "stripped coupons" with respect to its PRO RATA share of
all or a portion of the interest payments on each Mortgage Loan, including the
Stripped Certificate's allocable share of the servicing fees paid, to the extent
that such fees represent reasonable compensation for services rendered. See
discussion above under "Standard Certificates - Recharacterization of Servicing
Fees." For this purpose the Trust intends to allocate the servicing fees to the
Stripped Certificates in proportion to the respective offering price of each
class (or subclass) of Stripped Certificates. The holder of a Stripped
Certificate generally will be entitled to a deduction each year in respect of
the servicing fees, as described above under "- Federal Income Tax Consequences
for Certificates as to Which No REMIC Election is Made - Standard Certificates -
General," subject to the limitations described therein.
Code Section 1286 treats a stripped bond or a stripped coupon generally as
a new obligation issued (i) on the date that the stripped interest is purchased
and (ii) at a price equal to its purchase price or, if more than one stripped
interest is purchased, the share of the purchase price allocable to such
stripped interest. Each stripped interest generally will have original issue
discount equal to the excess of its stated redemption price at maturity (or, in
the case of a stripped coupon, the amount payable on the due date of such
coupon) over its issue price. Although the treatment of Stripped Certificates
for federal income tax purposes is not clear in certain respects at this time,
particularly where such Stripped Certificates are issued with respect to a Trust
containing variable-rate Mortgage Assets, the Depositor has been advised by
counsel that (i) the Trust will be treated as a grantor trust under subpart E,
Part 1 of subchapter J of the Code and not as an association taxable as a
corporation, and (ii) each Stripped Certificate should be treated as a single
installment obligation for purposes of calculating original issue discount and
gain or loss on disposition. This treatment is based on the interrelationship of
Code Section 1286 and the regulations thereunder, Code Sections 1272 through
1275, and the OID Regulations. While under Code Section 1286 computations with
respect to Stripped Certificates arguably should be made in one of the ways
described below, the OID Regulations state, in general, that all debt
instruments issued in connection with the same transaction must be treated as a
single debt instrument. The Trustee will make and report all computations
described below using this aggregate approach, unless substantial legal
authority requires otherwise.
Furthermore, the regulations under Code Section 1286 support the treatment
of a Stripped Certificate as a single debt instrument issued on the date it is
originated for purposes of calculating any original issue discount. The preamble
to such regulations state that such regulations are premised on the assumption
that an aggregation approach is appropriate in determining whether original
issue discount on a stripped bond or stripped coupon is DE MINIMIS. In addition,
under these regulations, a Stripped Certificate that represents a right to
payments of both interest and principal may be viewed either as issued with
original issue discount or market discount (as described below), at a DE MINIMIS
original issue discount, or presumably, at a premium. The preamble to such
regulations also provide that such regulations are premised on the assumption
that generally the interest component of such a Stripped Certificate would be
treated as stated interest under the original issue discount rules. Further, the
regulations provide that the purchaser of such a Stripped Certificate may be
required to account for any discount as market discount rather than original
issue discount if either (i) the initial discount with respect to the Strip
Certificate was treated as zero under the DE MINIMIS rule or (ii) no more than
100 basis points in excess of reasonable servicing is stripped off the related
Mortgage Assets. Any such market discount would be reportable as described above
under "Federal Income Tax Consequences for REMIC Certificates - Taxation of
Regular Certificates - Market Discount," without regard to the DE MINIMIS rule
therein.
STATUS OF STRIPPED CERTIFICATES. No specific legal authority exists as to
whether the character of the Stripped Certificates, for federal income tax
purposes, will be the same as that of the Mortgage Assets. Although the issue is
not free from doubt, counsel has advised the Depositor that Stripped
Certificates owned by applicable holders should be considered to represent "real
estate assets" within the meaning of Code Section 856(c), "obligations(s) . . .
principally secured by an interest in real property" within the meaning of Code
Section 860G(a)(3)(A), and "loans . . . secured by an interest in real property"
within the meaning of Code Section 7701(a)(19)(C)(v), and interest (including
original issue discount) income attributable to Stripped Certificates should be
considered to represent "interest on obligations secured by mortgages on real
property" within the meaning or Code Section 856(c), provided that in each
case the Mortgage Assets and interest on such Mortgage Assets qualify for such
treatment. The application of such Code provisions to buy-down Mortgage Assets
is uncertain. See "-Federal Income Tax Consequences for Certificates as to Which
No REMIC Election is Made" and "- Standard Certificates - Tax Status" above.
ORIGINAL ISSUE DISCOUNT. Except as described above under "- General," each
Stripped Certificate will be considered to have been issued (i) on the date that
the stripped interest is purchased and (ii) at a price equal to its purchase
price or, if more than one stripped interest is purchased, the share of the
purchase price allocable to such stripped interest. Each stripped interest
generally will have original issue discount equal to the excess of its stated
redemption price at maturity (or, in the case of a stripped coupon, the amount
payable on the due date of such coupon) over its issue price. Original issue
discount with respect to a Stripped Certificate must be included in ordinary
income as it accrues, in accordance with a constant yield method that takes into
account the compounding of interest, which may be prior to the receipt of the
cash attributable to such income. Counsel has advised the Depositor that the
amount of original issue discount required to be included in the income of a
Stripped Certificateholder in any taxable year likely will be computed generally
as described above under "Federal Income Tax Consequences for REMIC Certificates
- - Taxation of Regular Certificates - Original Issue Discount" and "- Variable
Rate Regular Certificates." However, with the apparent exception of a Stripped
Certificate issued with DE MINIMIS original issue discount, as described above
under "- General," the issue price of a Stripped Certificate will be the
purchase price paid by each holder thereof, and the stated redemption price at
maturity will include the aggregate amount of the payments to be made on the
Stripped Certificate to such Stripped Certificateholder, presumably under the
Prepayment Assumption, other than amounts treated as qualified stated interest.
If the Mortgage Assets prepay at a rate either faster or slower than that
under the Prepayment Assumption, a Stripped Certificateholder's recognition of
original issue discount will be either accelerated or decelerated and the amount
of such original issue discount will be either increased or decreased depending
on the relative interests in principal and interest on each Mortgage Loan
represented by such Stripped Certificateholder's Stripped Certificate. While the
matter is not free from doubt, the holder of a Stripped Certificate should be
entitled in the year that it becomes certain (assuming no further prepayments)
that the holder will not recover a portion of its adjusted basis in such
Stripped Certificate to recognize an ordinary loss equal to such portion of
unrecoverable basis.
SALE OR EXCHANGE OF STRIPPED CERTIFICATES. Sale or exchange of a Stripped
Certificate prior to its maturity will result in gain or loss equal to the
difference, if any, between the amount received and the Stripped
Certificateholder's adjusted basis in such Stripped Certificate, as described
above under "Federal Income Tax Consequences for REMIC Certificates - Taxation
of Regular Certificates - Sale or Exchange of Regular Certificates." To the
extent that a subsequent purchaser's purchase price is exceeded by the remaining
payments on the Stripped Certificates, such subsequent purchaser will be
required for federal income tax purposes to accrue and report such excess as if
it were original issue discount (or market discount) in the manner described
above. It is not clear for this purpose whether the assumed prepayment rate that
is to be used in the case of a Stripped Certificateholder other than by the
original Stripped Certificateholder should be based on the Prepayment Assumption
or a new rate based on the circumstances at the date of subsequent purchase.
PURCHASE OF MORE THAN ONE CLASS OF STRIPPED CERTIFICATES. Where an investor
purchases more than one class of Stripped Certificates, it is currently unclear
whether for federal income tax purposes such classes of Stripped Certificates
should be treated separately or aggregated for purposes of the rules described
above.
Because of these possible varying characterizations of Stripped
Certificates and the resultant differing treatment of income recognition,
Stripped Certificateholders are urged to consult their own tax advisors
regarding the proper treatment of Stripped Certificates for federal income tax
purposes.
REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
The Trustee will furnish, within a reasonable time after the end of each
calendar year, to each Certificateholder or Stripped Certificateholder at any
time during such year, such information (prepared on the basis described above)
as the Trustee deems to be necessary or desirable to enable such
Certificateholders to prepare their federal income tax returns. Such information
will include the amount of original issue discount accrued on Certificates held
by persons other than Certificateholders exempted from the reporting
requirements. The amounts required to be reported by the Trustee may not be
equal to the proper amount of original issue discount required to be reported as
taxable income by a Certificateholder, other than an original Certificateholder.
The Trustee will also file such original issue discount information with the
Internal Revenue Service. If a Certificateholder fails to supply an accurate
taxpayer identification number or if the Secretary of the Treasury determines
that a Certificateholder has not reported all interest and dividend income
required to be shown on his federal income tax return, 31% backup withholding
may be required in respect of any reportable payments, as described above under
"- Backup Withholding."
TAXATION OF CERTAIN FOREIGN INVESTORS
To the extent that a Certificate evidences ownership in Mortgage Assets
that are issued on or before July 18, 1984, interest or original issue discount
paid by the person required to withhold tax under Code Section 1441 or 1442,
which apply to nonresident aliens, foreign corporations, or other Non-U.S.
Persons generally will be subject to 30% United States withholding tax, or such
lower rate as may be provided for interest by an applicable tax treaty. Accrued
original issue discount or market discount recognized by the Certificateholder
on the sale or exchange of such a Certificate also will be subject to federal
income tax at the same rate.
Treasury regulations provide that interest or original issue discount paid
by the Trustee or other withholding agent to a Non-U.S. Person evidencing
ownership interest in Mortgage Assets issued after July 18, 1984 will be
"portfolio interest" and will be treated in the manner, and such persons will be
subject to the same certification requirements described above under "- Taxation
of Certain Foreign Investors - Regular Certificates."
Recently issued Treasury regulations (the "Final Withholding Regulations"),
which are generally effective with respect to payments made after December 31,
1998, consolidate and modify the current certification requirements and means
by which a holder may claim exemption from United States federal income tax
withholding and provide certain presumptions regarding the status of holders
when payments to the holders cannot be reliably associated with appropriate
documentation provided to the payor. All holders of Offered Certificates should
consult their tax advisers regarding the application of the Final Withholding
Regulations.
TAXATION OF SECURITIES CLASSIFIED AS PARTNERSHIP INTERESTS
Certain Trusts may be treated as partnerships for Federal income tax
purposes. In such event, the Trusts may issue Certificates characterized as
"Partnership Interests" as discussed in the related Prospectus Supplement. With
respect to such series of Partnership Interests, Stroock & Stroock & Lavan LLP,
special counsel to the Depositor, is of the opinion that (unless otherwise
limited in the related Prospectus Supplement, which will also cover any material
federal income tax consequences application to the Owners) the Trust will be
characterized as a partnership and not an association taxable as a corporation
for federal income tax purposes.
PLAN OF DISTRIBUTION
Certificates are being offered hereby in series through one or more
underwriters or groups of underwriters (the "Underwriters"). The Prospectus
Supplement will set forth the terms of offering of the series of Certificates,
including the public offering or purchase price of each class of Certificates of
such series being offered thereby or the method by which such price will be
determined and the net proceeds to the Depositor from the sale of each such
class. Such Certificates will be acquired by the Underwriters for their own
account or may be offered by the Underwriters on a best efforts basis. The
Underwriters may resell such Certificates from time to time in one or more
transactions including negotiated transactions, at fixed public offering prices
or at varying prices to be determined at the time of sale or at the time of
commitment therefor. The managing Underwriter or Underwriters with respect to
the offer and sale of a particular series of Certificates will be set forth on
the cover of the Prospectus Supplement relating to such series and the members
of the underwriting syndicate, if any, will be named in such Prospectus
Supplement
In connection with the sale of the Certificates, Underwriters may receive
compensation from the Depositor or from purchasers of the Certificates in the
form of discounts, concessions or commissions. Underwriters and dealers
participating in the distribution of the Certificates may be deemed to be
underwriters in connection with such Certificates, and any discounts or
commissions received by them from the Depositor and any profit on the resale of
Certificates by them may be deemed to be underwriting discounts and commissions
under the Securities Act of 1933, as amended. The Prospectus Supplement will
describe any such compensation paid by the Depositor.
It is anticipated that the underwriting agreement pertaining to the sale of
any series of Certificates will provide that the obligations of the Underwriters
will be subject to certain conditions precedent, that the Underwriters will be
obligated to purchase all such Certificates if any are purchased and that the
Depositor will indemnify the Underwriters against certain civil liabilities,
including liabilities under the Securities Act of 1933, as amended.
LEGAL MATTERS
Certain legal matters relating to the validity of the issuance of the
Certificates will be passed upon for the Depositor by Stroock & Stroock & Lavan
LLP, New York, NY and by Alan L. Langus, Chief Counsel for the Depositor.
Certain legal matters relating to insolvency issues and certain federal income
tax matters concerning the Certificates will be passed upon for the Depositor by
Stroock & Stroock & Lavan LLP.
FINANCIAL INFORMATION
A Trust will be formed with respect to each series of Certificates. No
Trust will have any assets or obligations prior to the issuance of the related
series of Certificates. No Trust will engage in any activities other than those
described herein or in the Prospectus Supplement. Accordingly, no financial
statement with respect to any Trust is included in this Prospectus or will be
included in the Prospectus Supplement.
The Depositor has determined that its financial statements are not material
to the offering made hereby.
A Prospectus Supplement and the related Form 8-K (which will be
incorporated by reference to the Registration Statement) may contain financial
statements of the related Credit Enhancer, if any.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
APPENDIX
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS
PAGE
1986 Act....................................................55
1996 Act....................................................63
Agreement....................................................1
AMTI........................................................63
Annual Reduction............................................49
Applicable Accounting Standards.............................33
Balloon Loans................................................6
Beneficial Owners............................................4
BIF.........................................................34
Book Entry Certificates......................................4
Certificate Account.........................................12
Certificate Interest Rate...................................11
Certificate Principal Balance...............................10
Certificate Register........................................10
Certificate Registrar.......................................10
Certificateholder...........................................70
Certificates.................................................1
Clearing Agency..............................................4
Clearing Agency Participants.................................4
Code.........................................................5
Companion Certificates......................................11
Compound Interest Certificates..............................11
Contract Loan Schedule......................................31
Contract Pool...............................................17
Contracts...................................................17
Conventional Multifamily Loans...............................1
Cooperative Loans...........................................14
Cooperatives.................................................1
Credit Enhancement...........................................4
Credit Enhancer..............................................9
Custodial Account...........................................24
Cut-Off Date................................................10
Debt Service Coverage Ratio.................................16
Defective Mortgage Loan.....................................32
Delivery Date................................................9
Deposit Date................................................32
Depositor....................................................1
Disqualified Organization...................................64
Distribution Date...........................................11
DOL.........................................................52
Due Dates...................................................16
Eligible Investments........................................34
Equity Participation........................................16
ERISA........................................................5
Events of Default...........................................35
FDIC........................................................24
FHA..........................................................1
FHA-Insured Multifamily Loans................................1
FHLMC........................................................2
Financial Guaranty Insurance Policy.........................19
Financial Guaranty Insurer..................................19
FNMA.........................................................2
Garn-St. Germain Act........................................42
GNMA.........................................................2
HUD.........................................................47
Insurance Paying Agent......................................19
Insurance Proceeds..........................................24
Insured Payment.............................................19
Interest Accrual Period.....................................12
Liquidation Proceeds........................................24
Loan-to-Value Ratio.........................................15
Lock-out Expiration Date....................................16
Lock-out Period.............................................16
Manufactured Home...........................................17
Manufactured Home Loans.....................................47
Manufacturer's Invoice Price................................17
Mark to Market Regulations..................................61
Master Servicer..............................................1
MBS..........................................................2
MBS Agreement...............................................18
MBS Issuer..................................................18
MBS Servicer................................................18
MBS Trustee.................................................18
Monthly Advance.............................................24
Mortgage Assets..............................................1
Mortgage Loan Rate..........................................16
Mortgage Loans...............................................1
Mortgage Notes..............................................14
Mortgage Pool Insurance Policy..............................20
Mortgage Rates..............................................15
Mortgage-Backed Securities...................................2
Mortgaged Properties........................................14
Mortgages...................................................14
Mortgagors..................................................23
Multifamily Loans............................................1
Multifamily Properties......................................14
NCUA........................................................24
Net Leases..................................................17
Net Operating Income........................................16
Noneconomic Residual Interest...............................65
Non-Priority Certificates...................................11
Nonrecoverable Advance......................................24
Non-U.S. Person.............................................68
Notional Principal Balance..................................12
OID Regulations.............................................53
Original Value..............................................16
OTS.........................................................43
Owners......................................................11
Partnership Interests.......................................76
Pass-Through Entity.........................................64
Pass-Through Rate............................................3
Plans.......................................................52
Policy Statement............................................51
Pool Insurer................................................21
Pre-Funding Account..........................................3
Pre-Funding Agreement........................................3
Prepayment Assumption.......................................56
Prepayment Premium..........................................16
Principal Balance...........................................15
Principal Prepayments.......................................12
Priority Certificates.......................................11
Property Improvement Loans..................................47
Proposed Premium Regulations................................59
PTE 83-1....................................................52
Record Date.................................................11
Regular Certificateholder...................................55
Regular Certificates........................................53
REIT........................................................54
Relief Act...................................................9
REMIC........................................................5
REMIC Certificates..........................................53
REMIC Pool..................................................53
REMIC Regulations...........................................53
Remittance Date.............................................24
Remittance Rate.............................................24
Reserve Fund................................................23
Residual Certificateholders.................................60
Residual Certificates.......................................53
Retail Class Certificate....................................55
SAIF........................................................34
Scheduled Amortization Certificates.........................11
Seller.......................................................1
Senior Certificates.........................................19
Servicer.....................................................1
SMMEA........................................................5
Special Allocation Certificates.............................11
Special Hazard Insurance Policy.............................21
Special Hazard Insurer......................................22
Standard Certificate........................................70
Stripped Certificateholder..................................73
Stripped Certificates.......................................73
Subordinated Certificates...................................19
Thrift Institution..........................................54
Title I Contracts...........................................47
Title I Loans...............................................47
Title I Program.............................................46
TMP.........................................................54
Trust........................................................1
Trustee......................................................1
U.S. Person.................................................66
UCC.........................................................40
Underwriters................................................76
VA ..........................................................2
72173.1d
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses expected to be incurred in connection with the issuance and
distribution of the securities being registered, other than underwriting
compensation, are as set forth below. All such expenses except for the
registration fees are estimated.
SEC Registration Fee $303.03
Legal Fees and Expenses* **
Accounting Fees and Expenses* **
Trustee's Fees and Expenses* **
(including counsel fees)
Printing and Engraving Fees* **
Blue Sky Fees and Expenses* **
Rating Agency Fees* **
Miscellaneous* **
Total $303.03
- ----------------
* Estimated in accordance with Item 511 of Regulation S-K.
** To be filed by amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The form of Underwriting Agreement filed as Exhibit 1.1 to this
Registration Statement on Form S-3 provides for indemnification by each
Underwriter of any officer, director or controlling person of the Registrant who
becomes subject to liability arising out of an untrue or alleged untrue
statement of a material fact contained in this Registration Statement, the
Prospectus filed herewith or any Preliminary Prospectus, related Prospectus
Supplement or related Preliminary Prospectus Supplement, or omission or alleged
omission, that was made in reliance on written information provided to the
Registrant by such Underwriter.
The Certificate of Incorporation and Bylaws for the Registrant filed as
Exhibits 3.1 and 3.2 to this Registration Statement on Form S-3 provide for
indemnification of directors and officers to the full extent permitted by
Delaware law. Section 145 of the Delaware General Corporation Law provides, in
substance, that Delaware corporations shall have the power, under specified
circumstances, to indemnify their directors, officers, employees and agents in
connection with actions, suits or proceeding brought against them by a third
party or in the right of the corporation, by reason of the fact that they were
or are such directors, officers, employees or agents, against expenses incurred
in any such action, suit or proceeding.
The Bylaws also provide that the Registrant may, to the full extent
permitted by law, purchase and maintain insurance on behalf of any corporate
agent against any liability which may be asserted against him.
<PAGE>
ITEM 16. EXHIBITS.
(a) FINANCIAL STATEMENTS:
NONE.
(b) EXHIBITS:
**1.1 --Form of Underwriting Agreement.
**3.1 --Certificate of Incorporation of ContiSecurities Asset
Funding Corp.
**3.2 --By-Laws of ContiSecurities Asset Funding Corp.
**4.1 --Form of Pooling and Servicing Agreement.
*5.1 --Opinion of Stroock & Stroock & Lavan
LLP with respect to the securities being
registered.
*8.1 --Opinion of Stroock & Stroock & Lavan LLP
with respect to tax matters (included as
part of Exhibit 5.1).
*23.1 --Consent of Stroock & Stroock & Lavan LLP (included as
part of Exhibit 5.1).
***23.2 --Consent of Independent Auditor of Certificate Insurer.
*24.1 --Powers of Attorney (included on signature page).
- ---------------------
* Filed herewith.
** Incorporated by reference to the respective exhibits of the same
numbers of the Company's Registration Statement on Form S-3,
Registration No. 333-19427.
*** To be filed by amendment.
ITEM 17. UNDERTAKINGS.
A. UNDERTAKING IN RESPECT OF INDEMNIFICATION. Insofar as indemnifications
for liabilities arising under the Securities Act of 1933 may be permitted to
directors, officers and controlling persons of the Registrant pursuant to the
foregoing provisions, or otherwise, the Registrant has 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 Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant 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, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question 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.
B. UNDERTAKING PURSUANT TO RULE 415.
(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;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of this Registration Statement (or the more recent
post-effective amendment thereof) which, individually or in the aggregate,
represents 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 volume of
securities offered would not exceed that which is 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% 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) do not apply if the
Registration Statement is on Form S-3 or Form S-8, and the information
required to be included in a post-effective amendment by those paragraphs
is contained in periodic reports filed with or furnished to the Commission
by the Registrant pursuant to Section 13 or Section 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 Securities
Act of 1933, 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 post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
C. UNDERTAKING PURSUANT TO RULE 430A.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus 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.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, State of New York on the 3rd day of
November 1997.
CONTISECURITIES ASSET FUNDING CORP.
By:/s/ James E. Moore
Name: James E. Moore
Title: President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints Susan E. O'Donovan, Alan L. Langus or
James E. Moore, or any of them, his true and lawful attorney-in-fact and agent
with full power of substitution and resubstitution, for him or her and in his
name, place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement, and to
file the same with all exhibits thereto, and all documents in connection
therewith, with the Securities and Exchange Commission, granting said
attorney-in-fact and agent and each of them, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he might or could do
in person, hereby ratifying and confirming all that said attorney-in-fact and
agent or any of them, or their or his substitute or substitutes, may lawfully do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
/s/ James E. Moore President (Principal Executive November 3, 1997
James E. Moore Officer) and Director
/s/ Susan E. O'Donovan Vice President (Principal Financial November 3, 1997
Susan E. O'Donovan and Accounting Officer)
/s/ James J. Bigham Director November 3, 1997
James J. Bigham
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION PAGE
NO. NO.
**1.1 Form of Underwriting Agreement..............................
**3.1 Certificate of Incorporation of ContiSecurities Asset
Funding Corp................................................
**3.2 By-Laws of ContiSecurities Asset Funding Corp...............
**4.1 Form of Pooling and Servicing Agreement.....................
*5.1 Opinion of Stroock & Stroock & Lavan LLP with respect
to the securities being registered..........................
*8.1 Opinion of Stroock & Stroock & Lavan LLP
with respect to tax matters (included
as part of Exhibit 5.1).....................................
*23.1 Consent of Stroock & Stroock & Lavan LLP
(included as part of Exhibit 5.1)............................
***23.2 Consent of Independent Auditor of Certificate insurer
*24.1 Powers of Attorney (included on signature page)..............
- ------
* Filed herewith.
** Incorporated by reference to the respective exhibits of the same numbers
of the Company's Registration Statement on Form S-3, Registration No.
333-19427.
*** To be filed by amendment.
<PAGE>
As filed with the Securities and Exchange Commission on November 3, 1997
Registration Statement No. 333-______
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------------
EXHIBITS TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------------------
CONTISECURITIES ASSET FUNDING CORP.
(Exact name of registrant as specified in governing instruments)
Delaware 13-2937238
(State or other jurisdiction (IRS Employee
of incorporation or organization) Identification Number)
277 Park Avenue
New York, New York 10172
(212) 207-2840
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
--------------------------------------
James E. Moore
President
ContiSecurities Asset Funding Corp.
277 Park Avenue
New York, New York 10172
(212) 207-2842
Fax: (212) 207-5251
(Name and Address of agent for service)
--------------------------------------
Please send copies of communication to:
Jerry R. Marlatt, Esq. Alan L. Langus, Esq.
STROOCK & STROOCK & LAVAN LLP Chief Counsel
180 Maiden Lane Contitrade Service, L.L.C.
New York, New York 10038 277 Park Avenue, 38th Floor
(212) 806-5400 New York, New York 10172
(212) 207-2822
Fax: (212) 207-2937
Exhibit 5.1
STROOCK & STROOCK & LAVAN LLP
180 Maiden Lane
New York, New York 10038
November 4, 1997
ContiSecurities Asset Funding Corp.
277 Park Avenue
New York, New York 10172
Re: ContiSecurities Asset Funding Corp. Statement on Form S-3
(NO. 333-19427)
Ladies and Gentlemen:
We have acted as counsel for ContiSecurities Asset Funding Corp., a
Delaware corporation (the "Company"), in connection with the authorization and
issuance from time to time in one or more series of Asset Backed Certificates
(collectively, the "Certificates"). The registration statement on Form S-3
relating to the Securities referred to below (the "Registration Statement") is
being filed with the Securities and Exchange Commission under the Securities Act
of 1933, as amended. As set forth in the Registration Statement, separate Trusts
(each, a "Trust") will be established pursuant to the conditions of a separate
pooling and servicing agreement (each, a "Pooling and Servicing Agreement") and
each Trust will issue Certificates pursuant to the respective Pooling and
Servicing Agreement.
We have examined original or reproduced or certified copies of the
Certificate of Incorporation and By-laws of the Company, each as amended to
date, records of actions taken by the Company's Board of Directors, a form of
Pooling and Servicing Agreement, forms of Certificates, the prospectus and form
of prospectus supplement relating to Asset-Backed Securities. We also have
examined such other documents, papers, statutes and authorities as we deem
necessary as a basis for the opinions hereinafter set forth. In our examination
of such material, we have assumed the genuineness of all signatures and the
conformity to original documents of all copies submitted to us as certified or
reproduced copies. As to various matters material to such opinions, we have
relied upon the representations and warranties in the form of Pooling and
Servicing Agreement and statements and certificates of officers and
representatives of the Company and others.
Based upon the foregoing, we are of the opinion that:
1. When a Pooling and Servicing Agreement has been duly and validly
authorized, executed and delivered by the Company, the Originators and the
independent trustee or trustees that are party thereto, it will constitute a
legal, valid and binding agreement of the Company, enforceable against the
Company in accordance with its terms.
2. When a series Certificates, has been duly and validly authorized by
all necessary action on the part of the Company (subject to the terms thereof
being otherwise in compliance with applicable law at such time) and when
executed as specified in, and delivered pursuant to, a Pooling and Servicing
Agreement and when sold as described in the Registration Statement, they will be
validly issued and outstanding and entitled to the benefits of the Pooling and
Servicing Agreement and will evidence the entire beneficial ownership of the
applicable Trust.
3. The information in the Prospectus under the caption "Federal Income
Tax Consequences," and in the form of prospectus supplement forming a part of
the Prospectus under the caption "Federal Income Tax Consequences," to the
extent that it constitutes matters of law or legal conclusions, sets forth our
opinion with respect to the material Federal income tax consequences of an
investment in the Securities.
In rendering the foregoing opinions, we express no opinion as to laws of
any jurisdiction other than the State of New York and the Federal law of the
United States of America. Our opinions expressed in paragraphs 1 and 2 are
subject to the effect of bankruptcy, insolvency, moratorium, fraudulent
conveyance and similar laws relating to or affecting creditors' rights generally
and court decisions with respect thereto, and we express no opinion with respect
to the application of equitable principles in any proceeding, whether at law or
in equity.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement, to the references to us in each Prospectus and to the
filing of this opinion as an exhibit to any application made by or on behalf of
the Company or any dealer in connection with the registration of the Securities
under the securities or blue sky laws of any state or jurisdiction. In giving
such permission, we do not admit hereby that we come within the category of
persons whose consent is required under Section 7 of the Securities Act of 1933
or the General Rules and Regulations of the Securities and Exchange Commission
thereunder.
Very truly yours,
STROOCK & STROOCK & LAVAN LLP
