PROSPECTUS SUPPLEMENT
(To Prospectus Dated April 17, 1996)
$400,000,000
ContiMortgage Home Equity Loan Trust 1997-1
ContiMortgage Corporation
Seller and Servicer
ContiWest Corporation
Seller
ContiSecurities Asset Funding Corp.
Depositor
The ContiMortgage Home Equity Loan Pass-Through Certificates, Series
1997-1 will consist of (i) the Class A-1 Certificates, the Class A-2
Certificates, the Class A-3 Certificates, the Class A-4 Certificates, the Class
A-5 Certificates, the Class A-6 Certificates, the Class A-7 Certificates, the
Class A-8 Certificates, the Class A-9 Certificates and the Class A-10IO
Certificates* (collectively, the "Class A Certificates"), (ii) the Class M-1
Certificates and the Class M-2 Certificates (collectively, the "Mezzanine
Certificates"), (iii) the Class B Certificates (collectively with the Mezzanine
Certificates, the "Subordinate Certificates"), (iv) the Class C Certificates and
(v) the residual class with respect to each REMIC held by the Trust (the "Class
R Certificates"). Only the Class A Certificates, the Mezzanine Certificates and
the Class B Certificates (collectively, the "Offered Certificates") are offered
hereby.
For a discussion of significant matters affecting investment in the
Certificates, see "Risk Factors" beginning on Page S-16 herein, "Prepayment and
Yield Considerations" beginning on page S-29 herein and "Risk Factors" beginning
on page 6 in the Prospectus.
The Certificates represent undivided ownership interests in a pool of
fixed rate home equity loans (the "Home Equity Loans") held by ContiMortgage
Home Equity Loan Trust 1997-1 (the "Trust"). The Certificates will represent
undivided ownership interests in the Home Equity Loans, which are secured by
first and second lien mortgages or deeds of trust.
The Certificates also will represent undivided ownership interests in
all monies due under the Home Equity Loans after January 17, 1997 (the "Cut-Off
Date"), security interests in the properties which secure the Home Equity Loans,
funds on deposit in certain trust accounts and certain other property. The Home
Equity Loans were originated or purchased by the Sellers. The Trust will be
created pursuant to a Pooling and Servicing Agreement (the "Pooling and
Servicing Agreement") to be dated as of February 1, 1997, among the Depositor,
ContiMortgage Corporation, as a Seller and the Servicer, ContiWest Corporation,
as a Seller and Manufacturers and Traders Trust Company, as the Trustee (the
"Trustee").
(Cover continued on next page)
--------------------
THE OFFERED CERTIFICATES REPRESENT BENEFICIAL INTERESTS IN THE TRUST ONLY AND DO
NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF THE DEPOSITOR, THE SELLERS, THE
SERVICER OR ANY OF THEIR AFFILIATES. NEITHER THE OFFERED CERTIFICATES NOR THE
HOME EQUITY 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 SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
--------------------
<TABLE>
<CAPTION>
==================================================================================================================================
Initial Certificate Pass-Through Price to Public Underwriting Proceeds to
Class Principal Balance Rate (1) Discount Depositor (1)(2)
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
Per Class A-1 Certificate..... $50,750,000 6.25% 100.00128% 0.125% 99.87628%
- ----------------------------------------------------------------------------------------------------------------------------------
Per Class A-2 Certificate..... $57,500,000 6.31% 99.98426% 0.140% 99.84426%
- ----------------------------------------------------------------------------------------------------------------------------------
Per Class A-3 Certificate..... $84,500,000 6.48% 99.98350% 0.175% 99.80850%
- ----------------------------------------------------------------------------------------------------------------------------------
Per Class A-4 Certificate..... $37,250,000 6.68% 99.98869% 0.225% 99.76369%
- ----------------------------------------------------------------------------------------------------------------------------------
Per Class A-5 Certificate..... $28,250,000 6.91% 99.97027% 0.275% 99.69527%
- ----------------------------------------------------------------------------------------------------------------------------------
Per Class A-6 Certificate..... $20,000,000 7.06% 99.95057% 0.325% 99.62557%
- ----------------------------------------------------------------------------------------------------------------------------------
Per Class A-7 Certificate..... $24,250,000 7.32% 99.99211% 0.375% 99.61711%
- ----------------------------------------------------------------------------------------------------------------------------------
Per Class A-8 Certificate..... $21,500,000 7.62% 99.94389% 0.400% 99.54389%
- ----------------------------------------------------------------------------------------------------------------------------------
Per Class A-9 Certificate..... $30,000,000 7.05% 99.94801% 0.375% 99.57301%
- ----------------------------------------------------------------------------------------------------------------------------------
Per Class M-1 Certificate..... $18,000,000 7.42% 99.96508% 0.400% 99.56508%
- ----------------------------------------------------------------------------------------------------------------------------------
Per Class M-2 Certificate..... $23,000,000 7.67% 99.98396% 0.425% 99.55896%
- ----------------------------------------------------------------------------------------------------------------------------------
Per Class B Certificate....... $5,000,000 7.92% 99.98185% 0.450% 99.53185%
- ----------------------------------------------------------------------------------------------------------------------------------
Total......................... $400,000,000 $399,914,700 $1,000,000 $398,914,700
==================================================================================================================================
</TABLE>
(1) Plus accrued interest, if any, from January 18, 1997.
(2) Before deducting expenses, estimated to be $475,000.
* Interest will be calculated on the Class A-10IO Certificates on the basis of
a Notional Principal Amount equal to the aggregate outstanding Loan Balance
of the Home Equity Loans.
The Offered Certificates (other than the Class A-10IO Certificates) are
offered by the Underwriters and the Class A-10IO Certificates are offered by
Greenwich Capital Markets, Inc., when, as and if issued, delivered to and
accepted by the Underwriters and subject to certain other conditions. It is
expected that delivery of the Offered Certificates will be made against payment
therefor in book-entry form through the book-entry facilities of The Depository
Trust Company, Cedel Bank, S.A. and the Euroclear System on or about February 6,
1997.
--------------------
Underwriters of the Offered Certificates
(other than the Class A-10IO Certificates)
Greenwich Capital Markets, Inc.
ContiFinancial Services Corporation
Morgan Stanley & Co.
Incorporated
--------------------
Underwriter of the Class A-10IO Certificates
Greenwich Capital Markets, Inc.
--------------------
The date of this Prospectus Supplement is January 30, 1997
<PAGE>
(Cover continued from previous page)
The Class M-1 Certificates are subordinate in right of distribution to
the Class A Certificates to the extent described herein. The Class M-2
Certificates are subordinate in right of distribution to the Class A
Certificates and the Class M-1 Certificates to the extent described herein. The
Class B Certificates are subordinate in right of distribution to the Class A
Certificates and the Mezzanine Certificates to the extent described herein. The
initial aggregate Certificate Principal Balance of the Subordinate Certificates
will equal approximately 11.50% of the initial aggregate Certificate Principal
Balance of all of the Certificates.
Distributions of interest will be made to the Owners of the
Certificates on the 15th day of each month (or, if such day is not a business
day, the next business day) beginning March 17, 1997. To the extent available,
interest will be passed through on each Payment Date to the Owners of the
Offered Certificates based on the related Certificate Principal Balance (as
defined herein) or Notional Principal Amount (as defined herein), and at the
rate applicable to each Class of the Offered Certificates (each, a "Pass-Through
Rate"). The Pass-Through Rate for the Class A-10IO Certificates is described
under "Summary of Terms-Certificates Offered" herein. Distributions of principal
in reduction of the Certificate Principal Balances will be made on each Payment
Date in the manner and the amounts described herein.
As described further herein, the Mezzanine Certificates and Class B
Certificates may not be acquired by Plans (as defined herein). See "ERISA
Considerations" herein.
The Class A-10IO Certificates are interest-only Certificates. The yield
to investors on the Class A-10IO Certificates will, and the yield to investors
on the Offered Certificates (other than the Class A-10IO 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 related Home Equity Loans, which may vary over time. A
rapid rate of such principal payments on the related Home Equity Loans could
result in the failure of investors in the related Class of Class A-10IO
Certificates to recover their initial investments. See "Summary of Terms --
Nature of Class A-10IO Certificates," "Prepayment and Yield Considerations"
herein and "Risk Factors" in the Prospectus.
The Trust Estate will make one or more elections to treat certain
assets thereof as a "real estate mortgage investment conduit" (a "REMIC") for
federal income tax purposes. As described more fully herein, all Classes of the
Offered Certificates will constitute "regular interests" in a REMIC. See
"Certain Federal Income Tax Consequences" 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 Certificates. The Underwriters
intend, but are not obligated, to make a market in the Offered Certificates
(other than the Class A-10IO Certificates) and Greenwich Capital Markets, Inc.
intends, but is not obligated, to make a market in the Class A-10IO
Certificates.
----------
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE OFFERED CERTIFICATES, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND THE
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 April 17, 1996, 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
(the "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 and electronically
through the Commission's Electronic Data Gathering, Analysis and Retrieval
system at the Commission's web site (http:\\www.sec.gov).
REPORTS TO OWNERS
Monthly and annual reports concerning the Certificates and the Trust
will be sent by the Trustee to the Owners of Offered Certificates. So long as
any Offered Certificate is in book-entry form, such reports will be sent to Cede
& Co., as the nominee of DTC and as Owner of such Offered Certificates pursuant
to the Pooling and Servicing Agreement. DTC will supply such reports to Owners
of any such Offered Certificates in accordance with its procedures. The
Depositor will file or cause to be filed with the Commission such periodic
reports with respect to the Trust as are required under the Securities Exchange
Act of 1934 and the rules and regulations of the Commission thereunder. It is
the Depositor's intent to suspend the filing of such reports as soon as such
reports are no longer statutorily required.
<PAGE>
TABLE OF CONTENTS
Prospectus Supplement
Page
SUMMARY OF TERMS.............................................................S-1
RISK FACTORS................................................................S-16
THE SELLERS AND THE SERVICER................................................S-18
General ..............................................................S-18
Credit and Underwriting Guidelines.....................................S-19
Indemnification by the Depositor.......................................S-21
Delinquency, Loan Loss and Foreclosure Information.....................S-21
USE OF PROCEEDS.............................................................S-23
THE DEPOSITOR...............................................................S-23
THE HOME EQUITY LOAN POOL...................................................S-23
General ..............................................................S-23
Home Equity Loans......................................................S-24
Interest Payments on the Home Equity Loans.............................S-29
PREPAYMENT AND YIELD CONSIDERATIONS.........................................S-29
General ..............................................................S-29
Projected Prepayment and Yield for Offered Certificates................S-30
Payment Lag Feature of Offered Certificates............................S-36
Yield Sensitivity of the Class A-10IO Certificates.....................S-36
FORMATION OF THE TRUST AND TRUST PROPERTY...................................S-37
ADDITIONAL INFORMATION......................................................S-38
DESCRIPTION OF THE OFFERED CERTIFICATES.....................................S-38
General ..............................................................S-38
Payment Dates..........................................................S-38
Distributions..........................................................S-38
Book Entry Registration of the Offered Certificates....................S-40
Assignment of Rights...................................................S-43
CREDIT ENHANCEMENT..........................................................S-43
Subordination of Subordinate Certificates..............................S-43
Application of Realized Losses.........................................S-44
Application of Monthly Excess Cashflow Amounts.........................S-45
THE POOLING AND SERVICING AGREEMENT.........................................S-47
Covenant of the Sellers to Take Certain Actions with
Respect to the Home Equity Loans in
Certain Situations............................................S-47
Assignment of Home Equity Loans........................................S-48
Servicing and Sub-Servicing............................................S-49
Removal and Resignation of Servicer....................................S-52
The Trustee............................................................S-52
Reporting Requirements.................................................S-52
Removal of Trustee for Cause...........................................S-53
Governing Law..........................................................S-54
Amendments.............................................................S-54
Termination of the Trust...............................................S-54
Optional Termination...................................................S-54
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.....................................S-55
REMIC Elections........................................................S-55
ERISA CONSIDERATIONS........................................................S-56
RATINGS.....................................................................S-58
LEGAL INVESTMENT CONSIDERATIONS.............................................S-59
UNDERWRITING................................................................S-59
CERTAIN LEGAL MATTERS.......................................................S-61
Prospectus
Page
SUMMARY OF PROSPECTUS........................................................ 1
RISK FACTORS................................................................. 6
DESCRIPTION OF THE CERTIFICATES.............................................. 9
General................................................................. 9
Classes of Certificates................................................. 10
Distributions of Principal and Interest................................. 11
Book Entry Registration................................................. 13
List Owners of Certificates............................................. 13
THE TRUSTS................................................................... 13
Mortgage Loans.......................................................... 14
Contracts............................................................... 15
Mortgage-Backed Securities.............................................. 16
Other Mortgage Securities............................................... 17
CREDIT ENHANCEMENT........................................................... 17
SERVICING OF MORTGAGE LOANS AND CONTRACTS.................................... 22
Payments on Mortgage Loans.............................................. 22
Advances................................................................ 23
Collection and Other Servicing Procedures............................... 23
Primary Mortgage Insurance.............................................. 25
Standard Hazard Insurance............................................... 25
Title Insurance Policies................................................ 26
Claims Under Primary Mortgage Insurance Policies and Standard
Hazard Insurance Policies; Other Realization Upon
Defaulted Loan...................................................... 26
Servicing Compensation and Payment of Expenses.......................... 27
Master Servicer......................................................... 27
ADMINISTRATION............................................................... 28
Assignment of Mortgage Assets........................................... 28
Evidence as to Compliance............................................... 30
The Trustee............................................................. 30
Administration of the Certificate Account............................... 31
Reports................................................................. 32
Forward Commitments; Pre-Funding........................................ 32
Servicer Events of Default.............................................. 32
Rights Upon Servicer Event of Default................................... 33
Amendment............................................................... 33
Termination............................................................. 33
USE OF PROCEEDS.............................................................. 34
THE DEPOSITOR.................................................................34
CERTAIN LEGAL ASPECTS OF THE MORTGAGE ASSETS................................. 34
General................................................................. 34
Foreclosure............................................................. 35
Soldiers' and Sailors' Civil Relief Act................................. 40
The Contracts........................................................... 40
The Title I Program..................................................... 43
LEGAL INVESTMENT MATTERS..................................................... 47
ERISA CONSIDERATIONS......................................................... 48
CERTAIN FEDERAL INCOME TAX CONSEQUENCES...................................... 50
Federal Income Tax Consequences For REMIC Certificates.................. 50
Taxation of Regular Certificates........................................ 51
Taxation of Residual Certificates....................................... 57
Treatment of Certain Items of REMIC Income and Expense.................. 59
Tax-Related Restrictions on Transfer of Residual Certificates........... 61
Sale or Exchange of a Residual Certificate.............................. 63
Taxes That May Be Imposed on the REMIC Pool............................. 63
Liquidation of the REMIC Pool........................................... 64
Administrative Matters.................................................. 64
Limitations on Deduction of Certain Expenses............................ 64
Taxation of Certain Foreign Investors................................... 65
Backup Withholding...................................................... 66
Reporting Requirements.................................................. 66
Federal Income Tax Consequences for Certificates as to Which
No REMIC Election Is Made........................................... 67
Standard Certificates .................................................. 67
Premium and Discount.................................................... 68
Stripped Certificates................................................... 70
Reporting Requirements and Backup Withholding........................... 72
Taxation of Certain Foreign Investors................................... 72
Taxation of Securities Classified as Partnership Interests.............. 73
PLAN OF DISTRIBUTION......................................................... 73
LEGAL MATTERS................................................................ 73
FINANCIAL INFORMATION........................................................ 73
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS.................................A-1
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<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: ContiMortgage Home Equity Loan Trust 1997-1 (the
"Trust").
Certificates Offered: $400,000,000 Home Equity Loan Pass-Through Certificates,
Series 1997-1, to be issued in the following Classes
(each, a "Class") and original Certificate Principal
Balances (each, a "Certificate Principal Balance"), set
forth below:
<TABLE>
<CAPTION>
Initial Certificate Pass-Through
Principal Balance Rate Class
----------------- ---- -----
<S> <C> <C> <C>
$50,750,000 6.25% Class A-1 Certificates
$57,500,000 6.31% Class A-2 Certificates
$84,500,000 6.48% Class A-3 Certificates
$37,250,000 6.68% Class A-4 Certificates
$28,250,000 6.91% Class A-5 Certificates
$20,000,000 7.06% Class A-6 Certificates
$24,250,000 7.32% Class A-7 Certificates
$21,500,000 7.62% (1) Class A-8 Certificates
$30,000,000 7.05% (1) Class A-9 Certificates
$0 (2) 1.10% Class A-10IO Certificates
$18,000,000 7.42% (3) Class M-1 Certificates
$23,000,000 7.67% (3) Class M-2 Certificates
$5,000,000 7.92% (3) Class B Certificates
</TABLE>
(1) The Pass-Through Rate with respect to the Class A-8
and Class A-9 Certificates will on any Payment Date
equal the lesser of (x) the Pass-Through Rate for such
Class set out above and (y) the weighted average Coupon
Rate of the Home Equity Loans less approximately 1.61%
per annum. Approximately 6.45% of the Home Equity Loans
by Loan Balance as of the Cut-Off Date bear interest at
Coupon Rates which, after the deduction of 1.61%, would
be lower than the Class A-8 and Class A-9 Pass-Through
Rates. As a result, it is unlikely that the weighted
average of the Coupon Rates of the Home Equity Loans
after the deduction of 1.61% will be less than such
Pass-Through Rates.
(2) Interest will be calculated on the Class A-10IO
Certificates on each Payment Date on the basis of a
"Notional Principal Amount" equal to the aggregate
outstanding Loan Balance of the Home Equity Loans as of
the first day of the related Remittance Period.
Reference to the Notional Principal Amount of the Class
A-10IO Certificates is solely for convenience on certain
calculations and does not represent the right to receive
any distribution allocable to principal.
(3) The Pass-Through Rate with respect to the
lowest-ranking Class of the Subordinate Certificates
then remaining will on any Payment Date equal the lesser
of (x) the Pass-Through Rate for such Class set out
above and (y) the weighted average Coupon Rate of the
Home Equity Loans less approximately 1.61% per annum.
The Certificates will consist of (i) the "Class A-1
Certificates," the "Class A-2 Certificates," the "Class
A-3 Certificates," the "Class A-4 Certificates," the
"Class A-5 Certificates," the "Class A-6 Certificates,"
the "Class A-7 Certificates," the "Class A-8
Certificates," the "Class A-9 Certificates" and the
"Class A-10IO Certificates" (collectively, the "Class A
Certificates"), (ii) the "Class M-1 Certificates" and
the "Class M-2 Certificates" (collectively, the
"Mezzanine Certificates") and (iii) the "Class B
Certificates" (and together with the Mezzanine
Certificates, the "Subordinate Certificates"). Only the
Class A Certificates, the Mezzanine Certificates and the
Class B Certificates (collectively, the "Offered
Certificates") are offered hereby.
<PAGE>
The initial aggregate Certificate Principal Balance of
the Subordinate Certificates will equal 11.50% of the
initial aggregate Certificate Principal Balance of all
Certificates.
S-1
<PAGE>
The Subordinate Certificates are subordinate in right of
distribution to the Class A Certificates to the extent
described herein. The Class M-1 Certificates are
subordinate to the Class A Certificates to the extent
described herein. The Class M-2 Certificates are
subordinate to the Class A Certificates and Class M-1
Certificates to the extent described herein. The Class B
Certificates are subordinate to the Class A Certificates
and the Mezzanine Certificates to the extent described
herein.
On any date after the Closing Date, the "Aggregate
Certificate Principal Balance" is the sum of the
Certificate Principal Balance of all Classes of the
Offered Certificates.
Depositor: ContiSecurities Asset Funding Corp. (the "Depositor"),
a Delaware corporation.
Servicer: ContiMortgage Corporation (the "Servicer"), a Delaware
corporation.
Sellers: ContiMortgage Corporation, a Delaware corporation and
ContiWest Corporation, a Nevada corporation (each a
"Seller" and collectively, the "Sellers").
Originator: ContiMortgage Corporation (the "Originator"), a Delaware
corporation.
Trustee: Manufacturers and Traders Trust Company (the "Trustee"),
a New York banking corporation.
Cut-Off Date: As of the close of business on January 17, 1997.
Closing Date: On or about February 6, 1997.
Description of
the Certificates: The Home Equity Loan Pass-Through Certificates (the
"Certificates") will consist of the Offered
Certificates, the Class C Certificates and a residual
class for each REMIC held by the Trust (the "Class R
Certificates"; and collectively with the Class C
Certificates, the "Retained Certificates"). The
Certificates will be issued pursuant to a Pooling and
Servicing Agreement (the "Pooling and Servicing
Agreement") to be dated as of February 1, 1997, among
the Depositor, the Sellers, the Servicer and the
Trustee. Only the Offered Certificates will be offered
hereby.
Denominations: The Offered Certificates (other than the Class A-10IO
Certificates) are issuable in book entry form in minimum
original principal amounts of $1,000 and integral
multiples thereof. The Class A-10IO Certificates are
issuable in book entry form in minimum original notional
principal amounts of $1,000 and integral multiples
thereof.
The Home Equity Loans: Unless otherwise noted, all statistical percentages in
this Prospectus Supplement are approximate and measured
by the aggregate principal balance (the "Loan Balance")
of the home equity loans in the Trust (the "Home Equity
Loans"), as of the Cut-Off Date (the "Original Aggregate
Loan Balance"). See "Additional Information" in this
Prospectus Supplement. The Home Equity Loans will
consist of fixed rate conventional home equity loans
evidenced by promissory notes (the "Notes") secured by
first and second lien deeds of trust, security deeds or
mortgages (the "Mortgages"). The properties securing the
Home Equity Loans (the "Properties") are located in 46
states and the District of Columbia and 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
S-2
<PAGE>
and manufactured housing. The Properties may be
owner-occupied or nonowner occupied investment
properties. No Combined Loan-to-Value Ratio (based upon
appraisals made at the time of origination) exceeded 96%
as of the Cut-Off Date. The Home Equity Loans are not
insured by either primary or pool mortgage insurance
policies. The Home Equity Loans are not guaranteed by
the Sellers 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.
As of the Cut-Off Date, the average Loan Balance of the
Home Equity Loans was $61,171; the interest rates (the
"Coupon Rates") of the Home Equity Loans ranged from
7.90% to 20.95%; the weighted average Loan-to-Value
Ratio of the Home Equity Loans was 72.42%; the weighted
average Combined Loan-to-Value Ratio of the Home Equity
Loans was 75.48%; the weighted average Coupon Rate of
the Home Equity Loans was 11.56%; and the weighted
average remaining term to maturity of the Home Equity
Loans was 214 months. The remaining terms to maturity as
of the Cut-Off Date of the Home Equity Loans ranged from
56 months to 360 months. The maximum Loan Balance of the
Home Equity Loans as of the Cut-Off Date was $450,000.
Home Equity Loans containing "balloon" payments
represented not more than 55.62% of the Original
Aggregate Loan Balance. No Home Equity Loan will mature
later than February 1, 2027. 5,759 of the Home Equity
Loans are secured by first mortgages representing in the
aggregate 93.22% of the Original Aggregate Loan Balance
and 780 of the Home Equity Loans are secured by second
lien mortgages representing in the aggregate 6.78% of
the Original Aggregate Loan Balance. As a percentage of
the Original Aggregate Loan Balance, 84.63% were secured
by mortgages on single-family detached dwellings, 3.74%
by mortgages on single-family attached dwellings, 8.16%
by mortgages on two-to-four family dwellings, 0.57% by
condominiums, 1.46% by manufactured housing and 1.44% by
other types of dwellings. See "The Home Equity Loan
Pool" herein.
Final Scheduled
Payment Dates: The Final Scheduled Payment Dates for each of the
respective Classes of Offered Certificates are as
follows, although it is anticipated that the actual
final Payment Date for each Class will occur earlier
than the Final Scheduled Payment Date. See "Prepayment
and Yield Considerations" herein.
Final Scheduled
Class Payment Date
----- ------------
Class A-1 Certificates: May 15, 2006
Class A-2 Certificates: December 15, 2011
Class A-3 Certificates: January 15, 2012
Class A-4 Certificates: January 15, 2012
Class A-5 Certificates: January 15, 2012
Class A-6 Certificates: January 15, 2015
Class A-7 Certificates: September 15, 2021
Class A-8 Certificates: March 15, 2028
Class A-9 Certificates: March 15, 2028
Class A-10IO Certificates: March 15, 2028
Class M-1 Certificates: March 15, 2028
Class M-2 Certificates: March 15, 2028
Class B Certificates: March 15, 2028
Distributions--General: On the 15th day of each month, or, if such day is not a
Business Day, then the next succeeding Business Day,
commencing March 17, 1997 (each such day
S-3
<PAGE>
being a "Payment Date"), the Trustee will be required,
subject to the availability of amounts therefor,
pursuant to the cashflow priorities hereinafter
described, to distribute to the Owners of the
Certificates of record as of the last day of the
calendar month immediately preceding the calendar month
in which such Payment Date occurs (the "Record Date")
the "Class Distribution Amount" which shall be the sum
of (x) the related Current Interest for such Class, (y)
the related Interest Carry Forward Amount and (z) the
related Principal Distribution Amount for such Class
(each as defined below).
For each Payment Date, interest due with respect to the
Certificates will be interest which has accrued on the
related Certificate Principal Balance or Notional
Principal Amount, as the case may be, during the
calendar month immediately preceding the month in which
such Payment Date occurs; provided that in the case of
the initial Payment Date the Accrual Period shall be the
period from January 18, 1997 through and including
February 28, 1997. Such period relating to the accrual
of interest is the "Accrual Period" for the related
Class of Class A Certificates. All calculations of
interest on the Certificates will be made on the basis
of a 360-day year assumed to consist of twelve 30-day
months.
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.
Interest: On each Payment Date the Interest Remittance Amount will
be distributed in the following order of priority:
First, to the Trustee, the Trustee Fee;
Second, to the Owners of the Class A Certificates
(including the Class A-10IO Certificates), the related
Class A Current Interest plus the Interest Carry Forward
Amount with respect to each such Class of Class A
Certificates without any priority among such Class A
Certificates; provided, that if the Interest Remittance
Amount less the amount paid to the Trustee as the
Trustee Fee (such amount, the "Interest Amount
Available") is not sufficient to make a full
distribution of interest with respect to all Classes of
the Class A Certificates, the Interest Amount Available
will be distributed among the outstanding Classes of
Class A Certificates pro rata based on the aggregate
amount of interest due on each such Class, and the
amount of the shortfall will be carried forward with
accrued interest;
Third, to the extent of the Interest Amount Available
then remaining, to the Owners of the Class M-1
Certificates, the Class M-1 Current Interest;
Fourth, to the extent of the Interest Amount Available
then remaining, to the Owners of the Class M-2
Certificates, the Class M-2 Current Interest;
Fifth, to the extent of the Interest Amount Available
then remaining, to the Owners of the Class B
Certificates, the Class B Current Interest; and
Sixth, the sum of (x) the amount, if any, of the
Interest Amount Available remaining in the Certificate
Account after application with respect to the priorities
set forth above plus (y) the amount of any
Overcollateralization Release Amount for such Payment
Date (such amounts, together, the "Monthly Excess
Cashflow Amount" for a Payment Date) shall be applied as
described
S-4
<PAGE>
below under "Credit Enhancement-Application of Monthly
Excess Cashflow Amounts" in this Summary of Terms.
"Current Interest" with respect to each Class of Offered
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 of Certificates (other than
the Class A-10IO Certificates) or, in the case of the
Class A-10IO Certificates, on the Notional Principal
Amount of the Class A-10IO Certificates plus (ii) the
Preference Amount as it relates to interest previously
paid on such Class of the Offered Certificates prior to
such Payment Date.
"Interest Remittance Amount" means as of any Monthly
Remittance Date, the sum, without duplication, of (i)
all interest due during the related Remittance Period on
the Home Equity Loans (less the Servicing Fee), (ii) all
Compensating Interest paid by the Servicer on such
Monthly Remittance Date and (iii) the portion of any
Substitution Amount relating to interest.
The "Interest Carry Forward Amount" with respect to any
Class of the Offered Certificates for any Payment Date
is the sum of (x) the amount, if any, by which (i) the
Current Interest for such Class as of the immediately
preceding Payment Date exceeded (ii) the amount of the
actual distribution with respect to interest made to the
Owners of such Class of Offered 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 Offered Certificates.
Principal: On each Payment Date (a) before the Stepdown Date or (b)
with respect to which a Trigger Event has occurred,
Owners of the Class A Certificates (other than the Class
A-10IO Certificates) will be entitled to receive payment
of 100% of the Principal Distribution Amount for such
Payment Date as follows: first, to the Owners of the
Class A-9 Certificates, the Class A-9 Lockout
Distribution Amount and then to the Owners of the Class
A Certificates (other than the Class A-10IO
Certificates), in sequential order until the Certificate
Principal Balance of each Class of Class A Certificates
has been reduced to zero.
On each Payment Date (a) on or after the Stepdown Date
and (b) as long as a Trigger Event has not occurred and
is not continuing, the Owners of all Classes of the
Offered Certificates (other than the Class A-10IO
Certificates) will be entitled to receive payments of
principal, in the order of priority, in the amounts set
forth below and to the extent of the Principal
Distribution Amount as follows:
First, the lesser of (x) the Principal Distribution
Amount and (y) the Class A Principal Distribution Amount
shall be distributed to the Owners of the Class A-9
Certificates, in an amount equal to the Class A-9
Lockout Distribution Amount, with the remainder paid to
the Owners of the Class A Certificates (other than the
Class A-10IO Certificates), in sequential order until
the Certificate Principal Balance of each Class of Class
A Certificates has been reduced to zero;
Second, the lesser of (x) the excess of (i) the
Principal Distribution Amount over (ii) the amount
distributed to the Owners of the Class A Certificates in
clause First above and (y) the Class M-1 Principal
Distribution Amount shall be distributed to the Owners
of the Class M-1 Certificates, until the Class M-1
Certificate Principal Balance has been reduced to zero;
S-5
<PAGE>
Third, the lesser of (x) the excess of (i) the Principal
Distribution Amount over (ii) the sum of the amount
distributed to the Owners of the Class A Certificates in
clause First above and the amount distributed to the
Owners of the Class M-1 Certificates in clause Second
above and (y) the Class M-2 Principal Distribution
Amount shall be distributed to the Owners of the Class
M-2 Certificates, until the Class M-2 Certificate
Principal Balance has been reduced to zero;
Fourth, the lesser of (x) the excess of (i) the
Principal Distribution Amount over (ii) the sum of the
amount distributed to the Owners of the Class A
Certificates pursuant to clause First above, the amount
distributed to the Owners of the Class M-1 Certificates
pursuant to clause Second above and the amount
distributed to the Owners of the Class M-2 Certificates
pursuant to clause Third above and (y) the Class B
Principal Distribution Amount shall be distributed to
the Owners of the Class B Certificates, until the Class
B Certificate Principal Balance has been reduced to
zero; and,
Fifth, any amount of the Principal Distribution Amount
remaining after making all of the distributions in
clauses First, Second, Third and Fourth above shall be
distributed as part of the Monthly Excess Cashflow
Amount and shall be applied as described below under
"Credit Enhancement-Application of Monthly Excess
Cashflow Amounts" in this Summary of Terms.
The Class A Certificates (other than the Class A-9 and
Class A-10IO Certificates) are "sequential pay" classes
such that the Owners of the Class A-8 Certificates will
receive no payments of principal until the Class A-7
Certificate Principal Balance is reduced to zero, the
Owners of the Class A-7 Certificates will receive no
payments of principal until the Class A-6 Certificate
Principal Balance is reduced to zero, the Owners of the
Class A-6 Certificates will receive no payments of
principal until the Class A-5 Certificate Principal
Balance is reduced to zero, 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; provided, however, that on any Payment
Date on which the sum of the Certificate Principal
Balance of the Subordinate Certificates and the
Overcollateralization Amount is zero, any amounts of
principal payable to the Owners of the Class A
Certificates on such Payment Date shall be distributed
pro rata and not sequentially.
The Owners of the Class A-9 Certificates are entitled to
receive payments of the Class A-9 Lockout Distribution
Amount specified herein; provided, that if on any
Payment Date the Class A-8 Certificate Principal Balance
is zero, the Owners of the Class A-9 Certificates will
be entitled to receive the entire Class A Principal
Distribution Amount for such Payment Date.
In addition to the following definitions, the above
discussion makes use of a number of defined terms which
are defined under "Description of the Offered
Certificates -- Distributions" herein.
"Principal Distribution Amount" means, as of any Payment
Date, the sum of (i) the Principal Remittance Amount
minus, for Payment Dates occurring on and after the
Stepdown Date, the Overcollateralization Release Amount,
if any, and (ii) the Extra Principal Distribution
Amount, if any.
S-6
<PAGE>
The "Class A-9 Lockout Distribution Amount" for any
Payment Date will be the product of (i) the applicable
Class A-9 Lockout Percentage for such Payment Date and
(ii) the Class A-9 Lockout Pro Rata Distribution Amount
for such Payment Date.
The "Class A-9 Lockout Percentage" for each Payment Date
shall be as follows:
Payment Dates Lockout Percentage
------------- ------------------
March 1997 - February 2000 0%
March 2000 - February 2002 45%
March 2002 - February 2003 80%
March 2003 - February 2004 100%
March 2004 and thereafter 300%
The "Class A-9 Lockout Pro Rata Distribution Amount" for
any Payment Date will be an amount equal to the product
of (x) a fraction, the numerator of which is the
Certificate Principal Balance of the Class A-9
Certificates immediately prior to such Payment Date and
the denominator of which is the aggregate Certificate
Principal Balance of all Classes of the Class A
Certificates immediately prior to such Payment Date and
(y) the Class A Principal Distribution Amount for such
Payment Date.
The Class A-10IO Certificates are interest-only
Certificates and are not entitled to receive
distributions of principal.
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; provided that the initial
Remittance Period shall be the period from January 18,
1997 through and including February 28, 1997. 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 10th 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).
"Principal Remittance Amount" means as of any Monthly
Remittance Date, the sum, without duplication, of (i)
the principal actually collected by the Servicer on the
Home Equity Loans during the related Remittance Period,
(ii) the Loan Balance of each Home Equity Loan that was
repurchased from the Trust during the related Remittance
Period, (iii) any Substitution Amount relating to
principal delivered by the Seller in connection with a
substitution of a Home Equity Loan during the related
Remittance Period, and (iv) all Net Liquidation Proceeds
actually collected by the Servicer during the related
Remittance Period (to the extent such Net Liquidation
Proceeds related to principal).
A "Trigger Event" has occurred with respect to a Payment
Date if the percentage obtained by dividing (x) the
principal amount of 60+ Day Delinquent Loans by (y) the
aggregate outstanding Loan Balance of the Home Equity
Loans as of the last day of the immediately preceding
Remittance Period equals or exceeds one-half of the
Senior Enhancement Percentage.
S-7
<PAGE>
"Stepdown Date" means the later to occur of (x) the
Payment Date in March 2000 and (y) the first Payment
Date on which the Senior Enhancement Percentage (after
taking into account distributions of principal on such
Payment Date) is greater than or equal to the Senior
Specified Enhancement Percentage.
"Class A Principal Distribution Amount" means as of any
Payment Date (a) prior to the Stepdown Date or with
respect to which a Trigger Event has occurred, 100% of
the Principal Distribution Amount and (b) on or after
the Stepdown Date and as long as a Trigger Event has not
occurred the excess of (x) the aggregate Class A
Certificate Principal Balance immediately prior to such
Payment Date over (y) the product of (i) 75% and (ii)
the outstanding Loan Balance of the Home Equity Loans as
of the last day of the related Remittance Period.
"Class M-1 Principal Distribution Amount" means as of
any Payment Date on or after the Stepdown Date and as
long as a Trigger Event has not occurred, the excess of
(x) the sum of (i) the aggregate Class A Certificate
Principal Balance (after taking into account the payment
of the Class A Principal Distribution Amount on such
Payment Date) and (ii) the Class M-1 Certificate
Principal Balance immediately prior to such Payment Date
over (y) the product of (i) 84% and (ii) the outstanding
Loan Balance of the Home Equity Loans as of the last day
of the related Remittance Period.
"Class M-2 Principal Distribution Amount" means as of
any Payment Date on or after the Stepdown Date and as
long as a Trigger Event has not occurred, the excess of
(x) the sum of (i) the aggregate Class A Certificate
Principal Balance (after taking into account the payment
of the Class A Principal Distribution Amount on such
Payment Date), (ii) the Class M-1 Certificate Principal
Balance (after taking into account the payment of the
Class M-1 Principal Distribution Amount on such Payment
Date) and (iii) the Class M-2 Certificate Principal
Balance immediately prior to such Payment Date over (y)
the product of (i) 95.5% and (ii) the outstanding
aggregate Loan Balance of the Home Equity Loans as of
the last day of the related Remittance Period.
"Class B Principal Distribution Amount" means as of any
Payment Date on or after the Stepdown Date and as long
as a Trigger Event has not occurred, the excess of (x)
the sum of (i) the aggregate Class A Certificate
Principal Balance (after taking into account the payment
of the Class A Principal Distribution Amount on such
Payment Date), (ii) the aggregate Class M-1 Certificate
Principal Balance (after taking into account the payment
of the Class M-1 Principal Distribution Amount on such
Payment Date), (iii) the aggregate Class M-2 Certificate
Principal Balance (after taking into account the payment
of the Class M-2 Principal Distribution Amount on such
date) and (iv) the Class B Certificate Principal Balance
immediately prior to such Payment Date over (y) the
product of (i) 98% and (ii) the outstanding aggregate
Loan Balance of the Home Equity Loans as of the last day
of the related Remittance Period
"Overcollateralization Amount" means as of any Payment
Date the difference between (x) the Loan Balance of the
Home Equity Loans as of the last day of the immediately
preceding Remittance Period and (y) the Aggregate
Certificate Principal Balance (after taking into account
all distributions of principal on such Payment Date).
"Senior Enhancement Percentage" for any Payment Date is
the percentage obtained by dividing (x) the sum of (i)
the aggregate Certificate Principal Balance of the
Subordinate Certificates and (ii) the
Overcollateralization Amount, in each case after taking
into account the distribution of the Principal
S-8
<PAGE>
Distribution Amount on such Payment Date by (y) the
aggregate Loan Balance of the Home Equity Loans as of
the last day of the related Remittance Period.
"Senior Specified Enhancement Percentage" on any date of
determination thereof means 25.0%.
"Extra Principal Distribution Amount" means, as of any
Payment Date, the lesser of (x) the Monthly Excess
Interest Amount for such Payment Date and (y) the
Overcollateralization Deficiency for such Payment Date.
"Overcollateralization Deficiency" means, as of any
Payment Date, the excess, if any, of (x) the Targeted
Overcollateralization Amount for such Payment Date over
(y) the Overcollateralization Amount for such Payment
Date, calculated for this purpose after taking into
account the reduction on such Payment Date of the
Aggregate Certificate Principal Balance resulting from
the distribution of the Principal Remittance Amount (but
not the Extra Principal Distribution Amount) on such
Payment Date, but prior to taking into account any
Applied Realized Loss Amount on such Payment Date.
"Overcollateralization Release Amount" means, as of any
Payment Date, the lesser of (x) the Principal Remittance
Amount for such Payment Date and (y) the excess of (i)
the Overcollateralization Amount for such Payment Date,
assuming that 100% of the Principal Remittance Amount is
applied on such Payment Date to the payment of principal
on the Offered Certificates and (ii) the Targeted
Overcollateralization Amount for such Payment Date.
"Targeted Overcollateralization Amount" means, as of any
Payment Date, (x) prior to the Stepdown Date, $4,000,000
and (y) on and after the Stepdown Date, the greater of
(i) 2% of the aggregate outstanding Loan Balance of the
Home Equity Loans as of the last day of the related
Remittance Period and (ii) $2,000,000.
"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 (11 U.S.C.) as amended from time
to time, in accordance with a final nonappealable order
of a court having competent jurisdiction.
Monthly Servicing Fee: The Servicer is entitled to a fee (the "Servicing Fee")
equal to 0.50% per annum (subject to certain limitations
described 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.
Credit Enhancement: The Credit Enhancement provided for the benefit of the
Owners of the Class A Certificates consists of the
subordination of the Subordinate Certificates, the
priority of application of Realized Losses and the
application of Monthly Excess Cashflow Amounts.
Subordination of Subordinate Certificates. The rights of
the Owners of the Subordinate Certificates and the
Retained Certificates to receive distributions with
respect to the Home Equity Loans will be subordinated,
to the extent described herein, to such rights of the
Owners of the Class A Certificates. This subordination
is intended to enhance the likelihood of regular receipt
by the Owners of the Class A Certificates of the full
amount of their scheduled monthly payment of interest
and principal and to afford such Owners protection
against Realized Losses.
S-9
<PAGE>
The protection afforded to the Owners of the Class A
Certificates by means of the subordination of the
Subordinate Certificates and the Retained Certificates
will be accomplished by the preferential right of the
Owners of the Class A Certificates to receive, prior to
any distribution being made on a Payment Date in respect
of the Subordinate Certificates and the Retained
Certificates, the amounts of interest due them and
principal available for distribution on such Payment
Date, and, if necessary, by the right of the Owners of
the Class A Certificates to receive future distributions
of amounts that would otherwise be payable to the Owners
of the Subordinate Certificates and the Retained
Certificates.
In addition, the rights of the Owners of the Class M-2,
Class B and Retained Certificates to receive
distributions will be subordinated, to the extent
described herein, to such rights of the Owners of the
Class A and Class M-1 Certificates. This subordination
is intended to enhance the likelihood of regular receipt
by the Owners of the Class A and Class M-1 Certificates
of the amount of interest due them and principal
available for distribution and to afford such Owners
with protection against Realized Losses.
The rights of the Owners of the Class B and Retained
Certificates to receive distributions will be
subordinated in the same manner to such rights of the
Owners of the Class A, Class M-1 and Class M-2
Certificates and the rights of Owners of the Retained
Certificates to receive distributions will be
subordinated in the same manner to such rights of the
Owners of the Offered Certificates.
Application of Realized Losses. The Pooling and
Servicing Agreement provides that if a Home Equity Loan
becomes a Liquidated Loan during a Remittance Period,
the Net Liquidation Proceeds relating thereto and
allocated to principal may be less than the Loan Balance
of such Home Equity Loan. The amount of such
insufficiency is a "Realized Loss". Realized Losses
will, in effect, be absorbed first, by the Retained
Certificates (both through the application of the
Monthly Excess Interest Amount to fund such deficiency
and through a reduction in the Overcollateralization
Amount), second, by the Owners of the Class B
Certificates, third, by the Owners of the Class M-2
Certificates, and, fourth, by the Owners of the Class
M-1 Certificates.
To the extent that the pool of Home Equity Loans
experiences Realized Losses, such Realized Losses will
reduce the aggregate outstanding Loan Balance of the
Home Equity Loans (i.e, a reduction in the collateral
balance will occur). Since the Overcollateralization
Amount is the excess, if any, of the collateral balance
over the Aggregate Certificate Principal Balance,
Realized Losses, to the extent experienced, will in the
first instance reduce the Overcollateralization Amount.
The Pooling and Servicing Agreement requires that the
Overcollateralization Amount be initially increased to,
and thereafter maintained at, the Targeted
Overcollateralization Amount. This increase and
subsequent maintenance is intended to be accomplished by
the application of Monthly Excess Interest Amounts to
the funding of the Extra Principal Distribution Amount.
Such Extra Principal Distribution Amounts, since they
are funded from interest collections on the collateral
but are distributed as principal on the Offered
Certificates, will increase the Overcollateralization
Amount.
If, on any Payment Date after taking into account all
Realized Losses experienced during the prior Remittance
Period and after taking into account the distribution of
principal (including the Extra Principal Distribution
Amount) with respect to the Offered Certificates on such
Payment Date, the Aggregate Certificate Principal
Balance exceeds the aggregate Loan Balance of the Home
S-10
<PAGE>
Equity Loans as of the end of the related Remittance
Period (i.e., if the level of overcollateralization is
negative), then the Certificate Principal Balance of the
Subordinate Certificates will be reduced (in effect,
"written down") such that the level of
overcollateralization is zero, rather than negative.
Such a negative level of overcollateralization is an
"Applied Realized Loss Amount", which is applied as a
reduction in the Certificate Principal Balance of the
Subordinate Certificates in reverse order of seniority
(i.e., first against the Class B Certificate Principal
Balance until it is reduced to zero, then against the
Class M-2 Certificate Balance until it is reduced to
zero and then against the Class M-1 Certificate
Principal Balance until it is reduced to zero). The
Pooling and Servicing Agreement does not permit the
"write down" of the Certificate Principal Balance of any
Class A Certificate.
Once the Certificate Principal Balance of a Class of
Subordinate Certificates has been "written down," the
amount of such write down will no longer bear interest,
nor will such amount thereafter be "reinstated" or
"written up," although the amount of such write down
may, on future Payment Dates be paid to Owners of the
Subordinate Certificates which experienced the write
down, in direct order of seniority (i.e., first, the
Class M-1 Certificates, second, the Class M-2
Certificates and, third, the Class B Certificates). The
source of funding of such payments will be the amount,
if any, of the Monthly Excess Cashflow Amount remaining
on such future Payment Dates after the funding of the
Extra Principal Distribution Amount and after the
payment of Interest Carry Forward Amounts with respect
to the Subordinate Certificates on such Payment Date.
Application of Monthly Excess Cashflow Amounts. The
weighted average net Coupon Rate for the Home Equity
Loans is generally expected to be higher than the
weighted average of the Pass-Through Rates on the
Offered Certificates, thus generating certain excess
interest collections which, in the absence of losses
will not be necessary to fund interest distributions on
the Offered Certificates. The Pooling and Servicing
Agreement provides that this excess interest be applied
to the extent available, to make accelerated payments of
principal (i.e., the Extra Principal Distribution
Amount) to the Class or Classes then entitled to receive
distributions of principal; such application will cause
the Aggregate Certificate Principal Balance to amortize
more rapidly than the pool of Home Equity Loans,
resulting in overcollateralization. This excess interest
for a Remittance Period, together with interest on the
Overcollateralization Amount itself, on the related
Payment Date is the "Monthly Excess Interest Amount" for
such Payment Date.
The required level of overcollateralization for any
Payment Date is the Targeted Overcollateralization
Amount for such Payment Date. The Targeted
Overcollateralization Amount is initially (i.e., prior
to the Stepdown Date) $4,000,000. Since the actual level
of the Overcollateralization Amount is $0 as of the
Closing Date, in the early months of the transaction,
subject to the availability of Monthly Excess Interest
Amounts, Extra Principal Distribution Amounts will be
paid, with the result that the Overcollateralization
Amount will increase to the level of the Targeted
Overcollateralization Amount.
If, once the Targeted Overcollateralization Amount has
been reached, Realized Losses occur, such Realized
Losses will result in an Overcollateralization
Deficiency (since such Realized Losses reduce the Loan
Balance of the Home Equity Loans without giving rise to
a corresponding reduction of the Aggregate Certificate
Principal Balance). The cashflow priorities of the Trust
require that, in this situation, an Extra Principal
Distribution Amount be paid (subject to the availability
of any Monthly Excess Interest Amount) for the purpose
of re-establishing the Overcollateralization Amount at
the then-required Targeted Overcollateralization Amount.
S-11
<PAGE>
On and after the Stepdown Date, the Targeted
Overcollateralization Amount is permitted to decrease or
"step-down" below the $4,000,000 level to a level equal
to 2% of the then current aggregate outstanding Loan
Balance (subject to a floor of $2,000,000). If the
Targeted Overcollateralization Amount is permitted to
"step-down" on a Payment Date, the Pooling and Servicing
Agreement permits a portion of the Principal Remittance
Amount for such Payment Date not to be passed through as
a distribution of principal on such Payment Date. This
has the effect of decelerating the amortization of the
Offered Certificates relative to the aggregate
outstanding Loan Balance of the Home Equity Loans,
thereby reducing the actual level of the
Overcollateralization Amount to the new, lower Targeted
Overcollateralization Amount. This portion of the
Principal Remittance Amount not distributed as principal
on the Certificates therefore releases
overcollateralization from the Trust. The amount of such
releases are the Overcollateralization Release Amounts.
On any Payment Date, the sum of the Monthly Excess
Interest Amount and the Overcollateralization Release
Amount is the Monthly Excess Cashflow Amount, which is
required to be applied in the following order of
priority on such Payment Date:
(1) to fund the Extra Principal Distribution Amount
for such Payment Date;
(2) to fund the Class M-1 Interest Carry Forward
Amount, if any;
(3) to fund the Class M-1 Realized Loss Amortization
Amount for such Payment Date;
(4) to fund the Class M-2 Interest Carry Forward
Amount, if any;
(5) to fund the Class M-2 Realized Loss Amortization
Amount for such Payment Date;
(6) to fund the Class B Interest Carry Forward
Amount, if any;
(7) to fund the Class B Realized Loss Amortization
Amount for such Payment Date;
(8) to the Servicer to the extent of any
unreimbursed Delinquency Advances or Servicing
Advances; and
(9) to fund a distribution to Owners of the Class C
Certificates.
Nature of Class A-10IO
Certificates: General Character as an Interest-Only Security. As the
owners of interest-only strip securities, the Owners of
the Class A-10IO Certificates will be entitled to
receive monthly distributions only of interest, as
described herein. Because they will not receive any
distributions of principal, the Owners of the Class
A-10IO Certificates will be affected by prepayments,
liquidations and other dispositions (including optional
redemptions described herein) of the Home Equity Loans
to a greater degree than will the Owners of the other
Classes of Offered Certificates. As an extreme
illustration, in the event that the entire pool of Home
Equity Loans prepay in full during the first month, then
on the initial Payment Date the Owners of the Offered
Certificates (other than the Class A-10IO Certificates)
will receive the full par value of their Certificates
while the Owners of the Class A-10IO Certificates will
suffer nearly a complete loss
S-12
<PAGE>
(except for one month's interest) on their investment.
Because, however, the pool contains 6,539 Home Equity
Loans, the prepayment experience of any one Home Equity
Loan will not be material to an investor's overall
return.
In general, losses due to liquidations, repurchases by
the Servicer and other dispositions of Home Equity Loans
from the Trust will have the same effect on the Owners
of the Class A-10IO Certificates as do prepayments of
principal and are collectively referred to as
"Prepayments."
Because the yield to the Owners of the Class A-10IO
Certificates is highly sensitive to rates of prepayment,
it is advisable for potential investors in the Class
A-10IO 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 Home
Equity 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 (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 such investor's yield. See "Prepayment and
Yield Considerations -- Yield Sensitivity of the Class
A-10IO Certificates" herein for other factors which may
also influence prepayment rates.
Applicability of Credit Enhancement to the Class A-10IO
Certificates. As described above under "Credit
Enhancement," the Trust includes provisions which
subordinate the distributions on the Subordinate
Certificates and the Retained Certificates for each
Payment Date for the purpose, inter alia, of funding the
full amounts due on each Class of the Class A
Certificates, including the Class A-10IO Certificates,
on each Payment Date.
In general, the protection afforded by such
subordination and overcollateralization features is for
credit risk and not for prepayment risk. These features
do not guarantee or insure that any particular rate of
prepayment is experienced by the Trust. If the entire
pool of Home Equity Loans were to prepay in the initial
month, with the result that the Owners of the Class
A-10IO 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 feature to mitigate such loss.
Accrual of "Original Issue Discount." The Class A-10IO
Certificates will 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 A-10IO
Certificates to accrue original issue discount at a rate
in excess of the rate at which distributions are
received by such Owners. See "Certain Federal Income Tax
Consequences" herein and in the Prospectus.
Optional Termination: The Owners of Class R Certificates 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 10% of the
Original Aggregate Loan Balances of the Home Equity
Loans as of the Closing Date (the "Clean-Up Call Date").
See "The Pooling and Servicing Agreement--Optional
Termination" herein.
S-13
<PAGE>
Book-Entry Registration
of the Offered
Certificates: The Offered Certificates will initially be issued in
book-entry form. Persons acquiring beneficial ownership
interests in such Offered Certificates ("Beneficial
Owners") may elect to hold their interests through The
Depository Trust Company ("DTC"), in the United States,
or Cedel Bank, 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 Offered 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
The Chase Manhattan Bank ("Chase" and together with
Citibank, the "European Depositaries"), the relevant
depositaries of Cedel and Euroclear, respectively, and
each a participating member of DTC. The Offered
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 Offered 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 Offered Certificates
are held by DTC. See "Description of the Offered
Certificates--Book-Entry Registration of the Offered
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 Moody's Investors Service, Inc.
("Moody's") and "AAA"by Fitch Investors Service, L.P.
("Fitch"). It is a condition of issuance that the Class
M-1, Class M-2 and Class B Certificates receive ratings
of "Aa2," "A3" and "Baa3," respectively, from Moody's
and "AA," "A" and "BBB" from Fitch. Moody's and Fitch
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,
see "Prepayment and Yield Considerations" and "Risk
Factors--Sensitivity to Prepayments" herein.
Other Considerations. 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.
S-14
<PAGE>
Federal Tax
Aspects: For federal income tax purposes, the Trust Estate
created by the Pooling and Servicing Agreement will
consist of two segregated asset pools (the "Upper-Tier
REMIC" and the "Lower-Tier REMIC") with respect to which
elections will be made to treat each as a separate "real
estate mortgage investment conduit" ("REMIC"). The
Offered Certificates will constitute "regular interests"
in a REMIC. See "Certain Federal Income Tax
Consequences" herein.
Owners of the Offered Certificates, including Owners
that generally report income on the cash method of
accounting, will be required to include interest on the
Offered Certificates in income in accordance with the
accrual method of accounting. In addition, the Class
A-10IO Certificates will, and other Offered Certificates
may, be considered to have been issued with original
issue discount. 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 the Prepayment Assumption. See
"Prepayment and Yield Considerations" and "Certain
Federal Income Tax Consequences" herein. In addition,
certain Classes of the Offered Certificates may be
issued at a premium. 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
Prepayment Assumption, or any other rate. In general, as
a result of the qualification of the Offered
Certificates as regular interests in a REMIC, the
Offered 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
Upper-Tier REMIC consist of qualifying assets under such
sections. In addition, interest on the Offered
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
ERISA. The Subordinate Certificates may not be purchased
by employee benefit plans that are subject to ERISA
except as provided herein. See "ERISA Considerations"
herein and in the Prospectus.
Legal Investment
Considerations: The Offered Certificates will not constitute "mortgage
related securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984 ("SMMEA"). The
appropriate characterization of the Certificates under
various legal investment restrictions applicable to the
investment activities of certain institutions, and thus
the ability of investors subject to these restrictions
to purchase the Certificates, may be subject to
significant interpretive uncertainties. All investors
whose investment authority is subject to legal
restrictions should consult their own legal advisors to
determine whether, and to what extent, the Certificates
will constitute legal investments for them.
S-15
<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.
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 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 Offered Certificates and, if purchased at other than
par, the yields realized by Owners of the Offered 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 an
Offered Certificate that is purchased at a premium from the outstanding
principal amount thereof may be adversely affected by a higher than anticipated
level of Prepayments of the Home Equity Loans. Conversely, the yield on an
Offered Certificate that is purchased at a discount from the outstanding
principal amount thereof may be adversely affected by a lower than anticipated
level. The yields realized by Owners of the Class A-10IO Certificates will be
extremely sensitive to the rate of prepayments on the Home Equity Loans. See
"Prepayment and Yield Considerations" herein.
Subordination--Limited Protection Afforded to Class A Certificates. The
rights of the Owners of the Class M-1 Certificates to receive distributions with
respect to the Home Equity Loans will be subordinate to the rights of the
holders of the Class A Certificates to receive such distributions, the rights of
Owners of the Class M-2 Certificates to receive distributions with respect to
the Home Equity Loans will be subordinate to the rights of the Owners of the
Class A and the Class M-1 Certificates to receive such distributions and the
rights of the Owners of the Class B Certificates to receive distributions with
respect to the Home Equity Loans will be subordinate to the rights of the Owners
of the Class A, Class M-1 and Class M-2 Certificates to receive such
distributions. The subordination of the Subordinate Certificates relative to the
Class A Certificates (and of the more lower-ranking Classes of the Subordinate
Certificates to the less higher-ranking Classes thereof) is intended to enhance
the likelihood of regular receipt by the Owners of the Class A Certificates (and
such higher-ranking Classes) of the full amount of the monthly distributions
allocable to them, and to afford such Owners protection against losses.
Subordination--Allocation of Losses to Subordinate Certificates. The
rights of the Owners of each Class of Subordinate Certificates to receive
distributions of principal with respect to the Home Equity Loans will be
subordinate to the rights of the Owners of the Class A Certificates to receive
such distributions and to the rights of the Owners of each higher-ranking Class
of Subordinate Certificates to receive such distributions. See "Credit
Enhancement--Subordination of Subordinate Certificates" herein.
The yields to maturity on the Mezzanine Certificates and Class B
Certificates will be sensitive, in varying degrees, to defaults on the Home
Equity Loans (and the timing thereof). Investors should fully consider the risks
associated with an investment in the Mezzanine Certificates or Class B
Certificates, including the possibility that such investors may not fully
recover their initial investment as a result of Realized Losses on the Home
Equity Loans. See "Credit Enhancement--Application of Realized Losses" and
"Prepayment and Yield Considerations--Projected Payment and Yield for Offered
Certificates" herein.
Nature of Collateral. Because 6.78% of the Original Aggregate Loan
Balance 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
S-16
<PAGE>
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.
Other Legal Considerations. Applicable state laws generally regulate
interest rates and other charges, require certain disclosure, and require
licensing of the Sellers. 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 related 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 Sellers 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 Sellers to collect all or part of the principal of or interest on the Home
Equity Loans and in addition could subject the Sellers to damages and
administrative enforcement. The related 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.
S-17
<PAGE>
Up to 10% of the Original Aggregate Loan Balance may represent Home
Equity Loans that are 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. 55.62% of the Original Aggregate Loan Balance represents Home Equity
Loans which 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"). 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. Each Seller believes that the transfer of
the Home Equity Loans to the Depositor and by the Depositor to the Trust
constitutes a sale by such 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 either Seller in the event of the insolvency of such Seller and will
not be available to the creditors of such Seller. However, in the event of an
insolvency of a Seller, it is possible that a bankruptcy trustee or a creditor
of such Seller may argue that the transaction between such Seller and the
Depositor was a pledge of such Home Equity Loans in connection with a borrowing
by such 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 Sellers will have received an
opinion of Arter & Hadden, counsel to the Sellers, with respect to the true sale
of the Home Equity Loans from each of the Sellers to the Depositor and from the
Depositor to the Trustee, in form and substance satisfactory to the Trustee and
the Rating Agencies.
THE SELLERS AND THE SERVICER
General
ContiMortgage Corporation, a Delaware corporation, will act as the
Servicer and the Originator as well as one of the two Sellers and has been
engaged in the mortgage banking business since 1987. It is engaged in
originating or purchasing and servicing home equity loans secured by first and
second mortgages and deeds of trust in at least 49 states and the District of
Columbia. It is a subsidiary of ContiFinancial Corporation, a subsidiary of
Continental Grain Company and an affiliate of ContiFinancial Services
Corporation, one of the Underwriters and ContiWest Corporation, the other
Seller. ContiFinancial Corporation completed a public offering of certain shares
of its common stock on February 14, 1996.
ContiWest Corporation, a Nevada corporation, will act as the other
Seller and has been engaged in the mortgage banking business since September
1996. It is engaged in the purchase of home equity loans secured by first and
second mortgages and deeds of trust. It is a wholly-owned subsidiary of
ContiFinancial Corporation, a
S-18
<PAGE>
subsidiary of Continental Grain Company and an affiliate of ContiFinancial
Services Corporation, one of the Underwriters and ContiMortgage Corporation.
The Originator has originated or purchased each of the Home Equity
Loans. A portion of the Home Equity Loans were purchased by ContiWest
Corporation from the Originator. ContiWest Corporation and the Originator (in
its capacity as a Seller) are selling the Home Equity Loans to the Depositor.
The Sellers will sell and assign their respective Home Equity Loans to the
Depositor in consideration of the net proceeds from the sale of the Offered
Certificates and the Retained Certificates which are being issued to affiliates
of the Sellers. The Servicer will service each Home Equity Loan.
The Servicer may not assign its obligations under the Pooling and
Servicing Agreement, in whole or in part, unless it shall have first obtained
the written consent of the Trustee, which consent is required not to be
unreasonably withheld; provided, however, that any assignee must meet the
eligibility requirements for a successor servicer set forth in the Pooling and
Servicing Agreement.
The Servicer may enter into sub-servicing agreements (the
"Sub-Servicing Agreements") with qualified sub-servicers (the "Sub-Servicers")
with respect to the servicing of the Home Equity Loans. Under the Pooling and
Servicing Agreement, such sub-servicing arrangements will not discharge the
Servicer from its servicing obligations. See "The Pooling and Servicing
Agreement--Servicing and Sub-Servicing" herein.
The Trustee may remove the Servicer, and the Servicer may resign, only
in accordance with the terms of the Pooling and Servicing Agreement. No removal
or resignation shall become effective until the Trustee or a successor servicer
shall have assumed the Servicer's responsibilities and obligations in accordance
therewith.
Any collections received by the Servicer after removal or resignation
shall be endorsed by it to the Trustee and remitted directly to the Trustee.
Upon removal or resignation of the Servicer, the Trustee may solicit
bids for a successor Servicer and, pending the appointment of a successor
Servicer as a result of soliciting such bids, will be required to serve as
Servicer. If the Trustee is unable to obtain a qualifying bid and is prevented
by law from acting as servicer, the Trustee will be required to appoint, or
petition a court of competent jurisdiction to appoint, an eligible successor.
Any successor is required to be a housing and home finance institution, bank or
mortgage servicing institution which has been designated as an approved
seller-servicer by FNMA or FHLMC for second mortgage loans, having equity of not
less than $5,000,000 as determined in accordance with generally accepted
accounting principles and which shall assume all of the responsibilities, duties
or liabilities of the Servicer.
The Certificates will not represent an interest in or obligation of,
nor are the Home Equity Loans guaranteed by, the Sellers or any of their
affiliates.
Credit and Underwriting Guidelines
The following is a description of the underwriting guidelines
customarily employed by the Originator with respect to home equity loans which
it purchases or originates. Each Home Equity Loan was underwritten according to
these guidelines. The Originator believes its standards are consistent with
those utilized by home equity lenders generally. The underwriting process is
intended to assess both the prospective borrower's ability to repay and the
adequacy of the real property security as collateral for the loan granted. In
certain cases, loans may be made outside of those guidelines with the prior
approval of an underwriting manager of the Originator.
The Originator generally originates or purchases loans which either
fully amortize over a period not to exceed 360 months or provide for
amortization over a 360 month schedule with a "balloon" payment required at the
maturity date, which will not be less than five years after origination. The
loan amounts generally range from a minimum of $10,000 to a maximum of $350,000
unless a higher amount is specifically approved by a senior official of the
Originator. The Originator primarily originates or purchases non-purchase money
first or second mortgage loans although the Originator has programs for
origination of certain purchase money first mortgages.
S-19
<PAGE>
The homes used for collateral to secure the loans may be either primary
residential (which includes second and vacation homes) or investor owned one- to
four- family homes, condominiums or townhouses and may include manufactured
housing. Generally, each home must have a minimum Appraised Value (as defined
below) of $35,000. Mobile housing or agricultural land are not accepted as
collateral. In addition, mixed-use loans secured by owner-occupied properties,
including one-to-four family and small multifamily residences, are made where
the proceeds may be used for business purposes. In some cases, the loan may be
secured by the owner-occupied residence plus additional collateral such as
rental units and small multifamily properties which may have a storefront.
Each property proposed as security for a loan must be appraised not
more than 6 months prior to the date of such loan. The combined loan-to-value
ratio of the first and second mortgages generally may not exceed 85%. If a prior
mortgage exists, the Originator first reviews the first mortgage history. If it
contains open end, advance or negative amortization provisions, the maximum
potential first mortgage balance is used in calculating the combined
loan-to-value ratio which determines the maximum loan amount. The Originator
does not originate or purchase loans where the first mortgage contains a shared
appreciation clause.
For the Originator's full documentation process, each mortgage
applicant must provide, and the Originator must verify, personal financial
information. The applicant's total monthly obligations (which includes principal
and interest on each mortgage, tax assessments, other loans, charge accounts and
all other scheduled indebtedness) generally cannot exceed 50% of the applicant's
gross monthly income. Applicants who are salaried employees must provide current
employment information in addition to two recent years of employment history and
the Originator verifies this information. Verifications are based on written
confirmation from employers or a combination of the two most recent pay stubs,
the two most recent years' W-2 tax forms and telephone confirmation from the
employer. Self-employed applicants must be self-employed in the same field for a
minimum of two years. The self-employed applicant must provide signed copies of
complete federal income tax returns (including schedules) filed for the most
recent two years.
For the Originator's non-income verifier program, proof of two year's
history of self employment plus proof of current self-employed status is
required. The applicant's debt-to-income ratio is calculated based on income as
certified by the borrower on the application and must be reasonable. The maximum
loan-to-value ratio may not exceed 75% for the non-income verifier program.
Non-income verifier loans are also available to borrowers other than
self-employed borrowers on one-to-four family, owner-occupied properties up to a
loan-to-value ratio not to exceed 65%.
The Originator has a "pay for performance" program, permitting the
lower-credit borrower to which the program applies to receive pre-determined
reductions of the Coupon Rate (0.5% per year) at the end of each of the first
three years of the loan, which reductions are dependent upon the borrower's
making monthly payments on the loan on time and in accordance with its terms.
A credit report by an independent credit reporting agency is required
reflecting the applicant's complete credit history. The credit report should
reflect all delinquencies of 30 days or more, repossessions, judgments,
foreclosures, garnishments, bankruptcies, divorce actions and similar adverse
credit practices that can be discovered by a search of public records. If the
report is obtained more than 60 days prior to the loan closing, the lender must
determine that the reported information has not changed. Written verification is
obtained of any first mortgage balance, its status and whether local taxes,
interest, insurance and assessments are included in the applicant's monthly
payment. All taxes and assessments not included in the payment must be verified
as current.
Generally, the applicant should have an acceptable credit history given
the amount of equity available, the strength of the applicant's employment
history and the level of the applicant's income to debt obligations. The
rescission period must have expired prior to funding a loan. The rescission
period may not be waived by the applicant except as permitted by law. Either an
ALTA title insurance policy or an attorney's opinion of title is required for
all loans.
S-20
<PAGE>
The applicant is required to secure property insurance in an amount
sufficient to cover the new loan and any prior mortgage. If the sum of the
outstanding first mortgage, if any, and the home equity loan exceeds replacement
value, insurance equal to replacement value may be accepted. The Originator must
ensure that its name and address is properly added to the "Mortgagee Clause" of
the insurance policy. In the event the Originator's name is added to a "Loss
Payee Clause" and the policy does not provide for written notice of policy
changes or cancellation, an endorsement adding such provision is required.
The Originator's credit underwriting guidelines require that any major
deferred maintenance on any property must be cured from the proceeds of the
loan.
Indemnification by the Depositor
Under the Pooling and Servicing Agreement, the Depositor agrees to
indemnify and hold the Trustee 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 or any Owner
may sustain in any way related to the failure of the Depositor to perform its
duties in compliance with the terms of the Pooling and Servicing Agreement. The
Depositor will immediately notify the Trustee and each Owner if a claim is made
by a third party with respect to the Pooling and Servicing Agreement, and the
Depositor will 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 Sellers, the Trustee and/or the Owner in
respect of such claim. The Trustee may, if necessary, reimburse the Depositor
from amounts otherwise distributable on the Retained Certificates for all
amounts advanced by the Depositor pursuant to the immediately preceding
sentence, except when the claim relates directly to the failure of the Servicer,
if it is an affiliate of the Depositor to perform its duties in compliance with
the terms of the Pooling and Servicing Agreement or the failure of the Depositor
to perform its duties in compliance with the terms of the Pooling and Servicing
Agreement.
Delinquency, Loan Loss and Foreclosure Information
The following tables set forth information relating to the delinquency,
loan loss and foreclosure experience of the Servicer for its servicing portfolio
of home equity loans for the past three years.
The information in the tables below has not been adjusted to eliminate
the effect of the significant growth in the size of the Servicer's home equity
loan portfolio during the periods shown. Accordingly, loss and delinquency as
percentages of aggregate principal balance of Home Equity Loans serviced for
each period would be higher than those shown if a group of Home Equity Loans
were artificially isolated at a point in time and the information showed the
activity only in that isolated group.
S-21
<PAGE>
Delinquency and Foreclosure Experience of the
Servicer's Servicing Portfolio
of Home Equity Loans
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ending December 31,
---------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993
---- ---- ---- ----
Number of Dollar Number Dollar Number of Dollar Number of Dollar
Loans Amount of Loans Amount Loans Amount Loans Amount
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Portfolio At 93,372 $5,699,145 58,459 $3,427,190 33,270 $1,879,920 16,671 $869,779
Delinquency
Percentage (1)
30-59 days 3.31% 3.09% 2.32% 2.02% 0.82% 0.67% 0.91% 0.79%
60-89 days 0.74% 0.72% 0.69% 0.70% 0.19% 0.20% 0.23% 0.25%
90 days and over 0.33% 0.36% 0.95% 1.01% 0.55% 0.57% 0.32% 0.30%
----- ----- ----- ----- ----- ----- ---- ----
Total Delinquency 4.38% 4.17% 3.96% 3.73% 1.56% 1.44% 1.46% 1.34%
Total Delinquency 4,088 $237,642 2,316 $128,063 518 $26,993 243 $11,655
Amount
Default
Percentage (2)
Foreclosure 2.51% 2.61% 1.17% 1.15% 0.33% 0.34% 0.52% 0.53%
Bankruptcy 1.12% 1.12% 0.68% 0.69% 0.34% 0.33% 0.22% 0.21%
Real Estate Owned 0.43% 0.49% 0.07% 0.08% 0.11% 0.11% 0.08% 0.09%
Forbearance 0.14% 0.15% 0.10% 0.12% N/A N/A N/A N/A
----- ----- ----- ----- ----- ----- ----- ------
Total Default 4.20% 4.37% 2.02% 2.04% 0.78% 0.78% 0.82% 0.83%
Total Default 3,926 $249,714 1,182 $69,962 260 $14,717 137 $7,219
Amount
</TABLE>
- ---------------
(1) The delinquency percentage represents the number and dollar value of
payments contractually past due, exclusive of home equity loans in
foreclosure, bankruptcy, real estate owned or forbearance.
(2) The default percentage represents the number and dollar value of
delinquent payments on home equity loans in foreclosure, bankruptcy,
real estate owned or forbearance.
S-22
<PAGE>
Loan Loss Experience on the
Servicer's Servicing Portfolio
of Home Equity Loans
(Dollars in Thousands)
Year Ending December 31,
-------------------------------------------
1996 1995 1994 1993
---- ---- ---- ----
Average Amount Outstanding (1) $4,261,983 $2,641,686 $1,400,163 $606,272
Gross Losses (2) 9,487 2,754 1,203 1,469
Recoveries (3) 77 65 0 0
Net Losses (4) 9,410 2,689 1,203 1,469
Net Losses as a Percentage of
Average Amount Outstanding 0.22% 0.10% 0.08% 0.24%
- -----------------
(1) "Average Amount Outstanding" during the period is the arithmetic
average of the principal balances of the home equity loans outstanding
on the last business day of each month during the period.
(2) "Gross Losses" are actual losses incurred on liquidated properties for
each respective period. Losses include all principal, foreclosure costs
and all accrued interest.
(3) "Recoveries" are recoveries from liquidation proceeds and deficiency
judgments.
(4) "Net Losses" means "Gross Losses" minus "Recoveries."
USE OF PROCEEDS
The Depositor will sell the Home Equity Loans to the Trust concurrently
with delivery of the Certificates. Net proceeds from the sale of the Offered
Certificates will be applied by the Depositor to the purchase of the Home Equity
Loans from the Sellers. Such net proceeds will (together with the Retained
Certificates retained by the Depositor or its affiliates) represent the purchase
price to be paid by the Trust to the Depositor for the 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 and an
affiliate of ContiFinancial Services Corporation, one of the Underwriters. The
Depositor maintains its principal offices at 277 Park Avenue, New York, New York
10172. Neither the Depositor, the Sellers nor the Servicer nor any of their
affiliates will insure or guarantee distributions on the Certificates.
ContiFinancial Corporation completed a public offering of certain shares of its
common stock February 14, 1996.
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 Home Equity
Loans as of the Cut-Off Date. After the Cut-Off Date and prior to the Closing
Date, certain loans included in the pools may prepay in full, or may be
determined not to meet the eligibility requirements. As a result of the
foregoing, the statistical distribution of characteristics as of the Closing
S-23
<PAGE>
Date for the final Home Equity Loan pools will vary from the statistical
distribution of such characteristics as of the Cut-Off Date as presented in this
Prospectus Supplement.
The Home Equity Loan pool consists of fixed-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 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 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.
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 Originator's underwriting guidelines, the Originator 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.
Home Equity Loans
As of the Cut-Off Date, the average Loan Balance of the Home Equity
Loans was $61,171; the Coupon Rates of the Home Equity Loans ranged from 7.90%
to 20.95%; the weighted average Loan-to-Value Ratio of the Home Equity Loans was
72.42%; the weighted average Combined Loan-to-Value Ratio of the Home Equity
Loans was 75.48%; the weighted average Coupon Rate of the Home Equity Loans was
11.56%; the weighted average remaining term to maturity of the Home Equity Loans
was 214 months; and the weighted average original term to maturity of the Home
Equity Loans was 216 months. The remaining terms to maturity as of the Cut-Off
Date of the Home Equity Loans ranged from 56 months to 360 months. The minimum
and maximum Loan Balances of the Home Equity Loans as of the Cut-Off Date were
$198.50 and $450,000, respectively. Home Equity Loans containing "balloon"
payments represented not more than 55.62% of the Original Aggregate Loan Balance
of Home Equity Loans. No Home Equity Loan will mature later than February 1,
2027.
S-24
<PAGE>
Geographic Distribution of Mortgaged Properties
The geographic distribution of Home Equity Loans by state, as of the
Cut-Off Date, was as follows:
Number of Home Aggregate % of Aggregate
State Home Equity Loans Loan Balance Loan Balance
- ----- ----------------- ------------ ------------
Arizona 44 $ 3,011,343.01 0.75%
Arkansas 37 2,078,999.78 0.52
California 118 13,006,377.27 3.25
Colorado 66 4,164,876.69 1.04
Connecticut 78 7,101,585.65 1.78
Delaware 22 1,805,483.60 0.45
District of Columbia 39 3,053,586.74 0.76
Florida 405 22,804,279.63 5.70
Georgia 190 10,806,993.33 2.70
Hawaii 1 84,964.28 0.02
Idaho 19 1,295,448.17 0.32
Illinois 449 28,314,399.05 7.08
Indiana 384 18,302,622.45 4.58
Iowa 18 630,333.49 0.16
Kansas 37 1,909,058.39 0.48
Kentucky 141 7,166,877.52 1.79
Louisiana 4 221,078.22 0.06
Maine 2 102,158.69 0.03
Maryland 267 18,950,785.37 4.74
Massachusetts 150 11,717,967.29 2.93
Michigan 768 33,662,964.58 8.42
Minnesota 73 4,639,449.91 1.16
Mississippi 16 653,537.70 0.16
Missouri 125 5,654,597.45 1.41
Montana 1 74,872.72 0.02
Nebraska 5 243,538.36 0.06
Nevada 9 490,987.79 0.12
New Hampshire 9 432,919.15 0.11
New Jersey 293 24,087,702.00 6.02
New Mexico 44 3,229,216.91 0.81
New York 393 35,654,453.52 8.91
North Carolina 371 20,221,463.24 5.06
Ohio 713 40,235,856.28 10.06
Oklahoma 20 1,399,036.73 0.35
Oregon 31 2,171,028.84 0.54
Pennsylvania 440 24,564,777.91 6.14
Rhode Island 40 3,680,818.54 0.92
South Carolina 174 8,687,690.27 2.17
Tennessee 139 9,363,729.72 2.34
Texas 76 4,227,421.06 1.06
Utah 98 7,309,100.71 1.83
Vermont 1 70,000.00 0.02
Virginia 103 5,149,467.43 1.29
Washington 37 3,150,400.60 0.79
West Virginia 13 390,727.55 0.10
Wisconsin 74 3,947,968.07 0.99
Wyoming 2 76,918.88 0.02
----- --------------- ------
Total 6,539 $399,999,864.54 100.00%
===== =============== =======
S-25
<PAGE>
Original Loan-to-Value Ratios
The original loan-to-value ratios as of the date of origination of the
Home Equity 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 Aggregate % of Aggregate
Original LTV's Home Equity Loans Loan Balance Loan Balance
- -------------- ----------------- ------------ ------------
4.00 to 10.00% 42 $ 692,862.78 0.17%
10.01 to 20.00 328 8,405,514.05 2.10
20.01 to 30.00 357 11,728,837.40 2.93
30.01 to 40.00 284 10,261,196.48 2.57
40.01 to 50.00 412 15,378,483.65 3.84
50.01 to 60.00 477 23,407,728.75 5.85
60.01 to 70.00 1,026 56,409,581.19 14.10
70.01 to 80.00 2,271 157,387,153.82 39.35
80.01 to 90.00 1,342 116,328,506.42 29.08
----- -------------- -----
Total 6,539 $399,999,864.54 100.00%
===== =============== =======
Combined Loan-to-Value Ratios
The original combined loan-to-value ratios as of the dates of
origination of the Home Equity Loans (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 Aggregate % of Aggregate
Original CLTV's Home Equity Loans Loan Balance Loan Balance
- --------------- ----------------- ------------ ------------
10.15 to 20.00% 23 $ 571,902.19 0.14%
20.01 to 30.00 102 2,475,362.57 0.62
30.01 to 40.00 193 5,894,675.56 1.47
40.01 to 50.00 396 14,042,537.39 3.51
50.01 to 60.00 496 23,471,330.21 5.87
60.01 to 70.00 1,109 58,465,479.60 14.62
70.01 to 80.00 2,507 163,437,062.87 40.86
80.01 to 90.00 1,683 129,006,375.62 32.25
90.01 to 95.97 30 2,635,138.53 0.66
------ ---------------- ------
Total 6,539 $399,999,864.54 100.00%
===== =============== =======
S-26
<PAGE>
Cut-Off Date Coupon Rates
The Coupon Rates borne by the Notes relating to the Home Equity Loans
were distributed as follows as of the Cut-Off Date:
Range of Number of Aggregate % of Aggregate
Coupon Rates Home Equity Loans Loan Balance Loan Balance
- ------------ ----------------- ------------ ------------
7.900 to 9.500% 326 $25,790,691.88 6.45%
9.501 to 10.000 538 40,866,454.93 10.22
10.001 to 10.500 533 39,759,849.98 9.94
10.501 to 11.000 949 71,132,044.91 17.78
11.001 to 11.500 680 43,762,329.05 10.94
11.501 to 12.000 892 56,629,844.97 14.16
12.001 to 12.500 567 31,443,913.50 7.86
12.501 to 13.000 647 32,844,694.16 8.21
13.001 to 13.500 332 16,864,627.17 4.22
13.501 to 14.000 358 15,646,498.93 3.91
14.001 to 20.950 717 25,258,915.06 6.31
------ ---------------- -------
Total 6,539 $399,999,864.54 100.00%
===== =============== =======
Cut-Off Date Loan Balances
The distribution of the outstanding principal amounts of the Home
Equity Loans as of the Cut-Off Date was as follows:
Number of Aggregate % of Aggregate
Range of Loan Balances Home Equity Loans Loan Balance Loan Balance
- ---------------------- ----------------- ------------ ------------
$ 0 to $ 25,000 1,001 $ 18,772,192.73 4.69%
25,001 to 50,000 2,286 85,874,686.35 21.47
50,001 to 75,000 1,585 97,324,609.49 24.33
75,001 to 100,000 765 66,080,654.52 16.52
100,001 to 125,000 414 46,289,846.52 11.57
125,001 to 150,000 207 28,138,665.59 7.03
150,001 to 175,000 99 16,045,309.02 4.01
175,001 to 200,000 71 13,302,579.97 3.33
200,001 to 225,000 54 11,576,150.73 2.89
225,001 to 450,000 57 16,595,169.62 4.15
----- ---------------- -------
Total 6,539 $399,999,864.54 100.00%
===== =============== =======
S-27
<PAGE>
Types of Mortgaged Properties
The Properties securing the Home Equity Loans as of the Cut-Off Date
were of the property types as follows:
Number of Aggregate % of Aggregate
Property Types Home Equity Loans Loan Balance Loan Balance
- -------------- ----------------- ------------ ------------
Condominium 44 $ 2,288,828.01 0.57%
Manufactured Housing 127 5,850,681.78 1.46
Mixed Use 24 2,614,416.01 0.65
Planned Unit Development 36 3,140,559.13 0.79
Single Family Attached 288 14,956,454.29 3.74
Single Family Detached 5,569 338,509,003.88 84.63
Two-to-Four Family 451 32,639,921.44 8.16
------ ---------------- -------
Total 6,539 $399,999,864.54 100.00%
===== =============== =======
Distribution of Months of Seasoning
The distribution of the number of months of seasoning of the Home
Equity Loans as of the Cut-Off Date was as follows:
Number of Aggregate % of Aggregate
Months of Seasoning Home Equity Loans Loan Balance Loan Balance
- ------------------- ----------------- ------------ ------------
0 to 1 4,342 $268,738,472.40 67.18%
2 to 12 2,196 131,256,463.80 32.81
13 to 24 1 4,928.34 0.00
------ ---------------- -------
Total 6,539 $399,999,864.54 100.00%
===== =============== =======
Distribution of Remaining Terms to Maturity
The distribution of the number of months remaining to maturity of the
Home Equity Loans as of the CutOff Date was as follows:
Months Remaining Number of Aggregate % of Aggregate
to Maturity Home Equity Loans Loan Balance Loan Balance
- ----------- ----------------- ------------ ------------
0 to 120 246 $ 5,841,505.78 1.46%
121 to 180 4,431 273,968,098.29 68.49
181 to 240 1,023 56,688,957.56 14.17
241 to 360 839 63,501,302.91 15.88
------ ---------------- -----
Total 6,539 $399,999,864.54 100.00%
===== =============== =======
S-28
<PAGE>
Occupancy Status
The occupancy status of the Properties securing the Home Equity Loans
as of the Cut-Off Date was as follows:
Number of Aggregate % of Aggregate
Occupancy Status Home Equity Loans Loan Balance Loan Balance
- ---------------- ----------------- ------------ ------------
Investor Owned 394 $ 18,969,476.94 4.74%
Owner Occupied 6,145 381,030,387.60 95.26
----- -------------- -----
Total 6,539 $399,999,864.54 100.00%
===== =============== =======
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 aggregate Loan
Balance of the Home Equity Loans. 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 Offered Certificates (other than the Class A-10IO
Certificates) and the timing of the reduction of the Notional Principal Amount
on the Class A-10IO 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 Offered Certificates will relate to the rate of payment of
principal of the Home Equity Loans, including for this purpose Prepayments,
liquidations due to defaults, casualties and condemnations, and repurchases by
the Sellers of Home Equity Loans and any accelerated payment of principal. 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
S-29
<PAGE>
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 home equity loans with fixed rates such as the Home Equity Loans is
affected by prevailing market rates for home equity 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 home equity 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.
In addition to the foregoing factors affecting the weighted average
life of each Class of the Offered Certificates, the overcollateralization
provisions of the Trust may result in an additional reduction 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 the Monthly Excess Interest Amount to the payment of the related
Offered Certificate Principal Balance. This creates overcollateralization which
results from the excess of the aggregate Loan Balances of the Home Equity Loans
over the Aggregate Certificate Principal Balance. Once the Targeted
Overcollateralization Amount is reached, the application of the Monthly Excess
Interest Amount to pay down principal will cease, unless necessary to maintain
the Targeted Overcollateralization Amount.
Projected Prepayment and Yield for Offered Certificates
As indicated above, 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 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 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 related Home Equity 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 "Final Scheduled Payment Date" for each Class of the Offered
Certificates is as set forth in the Summary of Terms hereof. Such dates are the
dates on which the "Initial Certificate Principal Balance" set forth in the
Summary of Terms hereof for the related Class as of the Closing Date less all
amounts previously distributed to the Owners on account of principal 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 that no Monthly Excess Interest
Amount will be used to make accelerated payments of principal to the Owners of
the Class A Certificates. The Final Scheduled Payment Date for the Class A-8
Certificates, Class A-9 Certificates, Class A-10IO Certificates and each Class
of the Subordinate Certificates is the thirteenth Payment Date following the
calendar month in which the Loan Balances of all Home Equity Loans have been
reduced to zero assuming that the Home Equity Loans pay in accordance with their
terms. The weighted average life of each Class of the Offered 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 Offered 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 may cause a termination
of the Trust on or after the Clean-Up Call Date.
"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 Offered Certificates will be influenced by, among other things, the
rate at which principal of the Home Equity 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).
S-30
<PAGE>
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 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 the weighted average
lives of the Offered Certificates (other than the Class A-10IO Certificate).
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. A 100% Prepayment
Assumption assumes conditional prepayment rates of 4% per annum of the then
outstanding principal balance of the Home Equity Loans in the first month of the
life of the mortgage loans and an additional 1.455% per annum in each month
thereafter until the twelfth month. Beginning in the twelfth month and in each
month thereafter during the life of the mortgage loans, 100% Prepayment
Assumption assumes a conditional prepayment rate of 20% per annum each month. As
used in the table below, 0% Prepayment Assumption assumes prepayment rates equal
to 0% of the Prepayment Assumption i.e., no prepayments. Correspondingly, 100%
Prepayment Assumption assumes prepayment rates equal to 100% 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 Offered 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 Offered Certificates (other than the Class A-10IO
Certificate) 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
Offered Certificates (other than the Class A-10IO 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 consist of pools of loans with level-pay and balloon amortization
methodologies, Cut-Off Date Loan Balances, mortgage rates net mortgage rates,
original and remaining terms to maturity, and original amortization terms as
applicable, are as set forth in the "Representative Loan Pools" table below,
(ii) the Closing Date for the Certificates occurs on February 6, 1997, (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
March 15, 1997, in accordance with the priorities described herein, (iv) the
difference between the Gross Coupon Rate and the Net Coupon Rate is equal to the
Servicing Fee and the Net Coupon Rate is further reduced by the Trustee Fee, (v)
the Home Equity Loans' prepayment rates are a multiple of the applicable
Prepayment Assumption as stated in the "Prepayment Scenarios" table below; (vi)
prepayments include 30 days' interest thereon, (vii) no optional termination or
mandatory termination is exercised and (viii) the Targeted Overcollateralization
Amount 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.
S-31
<PAGE>
<TABLE>
<CAPTION>
REPRESENTATIVE LOAN POOLS
Original Remaining Original
Term to Term to Amortization
Pool Principal Gross Coupon Net Coupon Maturity Maturity Term Amortization
Number Balance Rate Rate (in months) (in months) (in months) Method
------ ------- ---- ---- ----------- ----------- ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ 349,729.20 11.9693% 11.4693% 60 58 60 Level
2 5,491,776.58 11.8510 11.3510 117 116 117 Level
3 51,498,435.08 11.4052 10.9052 179 178 179 Level
4 56,688,957.56 11.3662 10.8662 240 239 240 Level
5 2,253,975.28 10.7082 10.2082 299 298 299 Level
6 61,247,327.63 11.1874 10.6874 360 359 360 Level
7 222,469,663.21 11.7412 11.2412 180 179 360 Balloon
</TABLE>
PREPAYMENT SCENARIOS (1)
Scenario I Scenario II Scenario III Scenario IV Scenario V Scenario VI
- ---------- ----------- ------------ ----------- ---------- -----------
0% 50% 100% 120% 150% 200%
- ------------------------
(1) As a percentage of the Prepayment Assumption.
S-32
<PAGE>
The following tables set forth the percentages of the initial principal
amount of the Offered Certificates (other than the Class A-10IO Certificates)
that would be outstanding after each of the dates shown, based on prepayment
scenarios described in the table entitled "Prepayment Scenarios." The
percentages have been rounded to the nearest 1%.
<TABLE>
<CAPTION>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
Class A-1 Class A-2
Scenario Scenario
--------------------------------------- ---------------------------------------
Payment Date I II III IV V VI I II III IV V VI
- -- --- -- - -- - -- --- -- - --
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percent 100 100 100 100 100 100 100 100 100 100 100 100
2/15/98 85 32 0 0 0 0 100 100 82 63 35 0
2/15/99 76 0 0 0 0 0 100 58 0 0 0 0
2/15/00 67 0 0 0 0 0 100 0 0 0 0 0
2/15/01 57 0 0 0 0 0 100 0 0 0 0 0
2/15/02 46 0 0 0 0 0 100 0 0 0 0 0
2/15/03 34 0 0 0 0 0 100 0 0 0 0 0
2/15/04 21 0 0 0 0 0 100 0 0 0 0 0
2/15/05 9 0 0 0 0 0 100 0 0 0 0 0
2/15/06 0 0 0 0 0 0 96 0 0 0 0 0
2/15/07 0 0 0 0 0 0 83 0 0 0 0 0
2/15/08 0 0 0 0 0 0 69 0 0 0 0 0
2/15/09 0 0 0 0 0 0 52 0 0 0 0 0
2/15/10 0 0 0 0 0 0 34 0 0 0 0 0
2/15/11 0 0 0 0 0 0 12 0 0 0 0 0
2/15/12 0 0 0 0 0 0 0 0 0 0 0 0
2/15/13 0 0 0 0 0 0 0 0 0 0 0 0
2/15/14 0 0 0 0 0 0 0 0 0 0 0 0
2/15/15 0 0 0 0 0 0 0 0 0 0 0 0
2/15/16 0 0 0 0 0 0 0 0 0 0 0 0
2/15/17 0 0 0 0 0 0 0 0 0 0 0 0
2/15/18 0 0 0 0 0 0 0 0 0 0 0 0
2/15/19 0 0 0 0 0 0 0 0 0 0 0 0
2/15/20 0 0 0 0 0 0 0 0 0 0 0 0
2/15/21 0 0 0 0 0 0 0 0 0 0 0 0
2/15/22 0 0 0 0 0 0 0 0 0 0 0 0
2/15/23 0 0 0 0 0 0 0 0 0 0 0 0
2/15/24 0 0 0 0 0 0 0 0 0 0 0 0
2/15/25 0 0 0 0 0 0 0 0 0 0 0 0
2/15/26 0 0 0 0 0 0 0 0 0 0 0 0
2/15/27 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life to Maturity
Years(1) 4.50 0.82 0.55 0.50 0.44 0.37 12.02 2.20 1.31 1.15 0.99 0.83
Weighted Average
Life to Call
Years(1) 4.50 0.82 0.55 0.50 0.44 0.37 12.02 2.20 1.31 1.15 0.99 0.83
Class A-3 Class A-4
Scenario Scenario
--------------------------------------- ---------------------------------------
Payment Date I II III IV V VI I II III IV V VI
- -- --- -- - -- - -- --- -- - --
Initial Percent 100 100 100 100 100 100 100 100 100 100 100 100
2/15/98 100 100 100 100 100 91 100 100 100 100 100 100
2/15/99 100 100 71 46 9 0 100 100 100 100 100 0
2/15/00 100 96 4 0 0 0 100 100 100 36 0 0
2/15/01 100 60 0 0 0 0 100 100 17 0 0 0
2/15/02 100 27 0 0 0 0 100 100 0 0 0 0
2/15/03 100 0 0 0 0 0 100 98 0 0 0 0
2/15/04 100 0 0 0 0 0 100 55 0 0 0 0
2/15/05 100 0 0 0 0 0 100 29 0 0 0 0
2/15/06 100 0 0 0 0 0 100 2 0 0 0 0
2/15/07 100 0 0 0 0 0 100 0 0 0 0 0
2/15/08 100 0 0 0 0 0 100 0 0 0 0 0
2/15/09 100 0 0 0 0 0 100 0 0 0 0 0
2/15/10 100 0 0 0 0 0 100 0 0 0 0 0
2/15/11 100 0 0 0 0 0 100 0 0 0 0 0
2/15/12 0 0 0 0 0 0 0 0 0 0 0 0
2/15/13 0 0 0 0 0 0 0 0 0 0 0 0
2/15/14 0 0 0 0 0 0 0 0 0 0 0 0
2/15/15 0 0 0 0 0 0 0 0 0 0 0 0
2/15/16 0 0 0 0 0 0 0 0 0 0 0 0
2/15/17 0 0 0 0 0 0 0 0 0 0 0 0
2/15/18 0 0 0 0 0 0 0 0 0 0 0 0
2/15/19 0 0 0 0 0 0 0 0 0 0 0 0
2/15/20 0 0 0 0 0 0 0 0 0 0 0 0
2/15/21 0 0 0 0 0 0 0 0 0 0 0 0
2/15/22 0 0 0 0 0 0 0 0 0 0 0 0
2/15/23 0 0 0 0 0 0 0 0 0 0 0 0
2/15/24 0 0 0 0 0 0 0 0 0 0 0 0
2/15/25 0 0 0 0 0 0 0 0 0 0 0 0
2/15/26 0 0 0 0 0 0 0 0 0 0 0 0
2/15/27 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life to Maturity
Years(1) 14.93 4.40 2.38 2.03 1.68 1.32 14.94 7.40 3.66 3.03 2.42 1.84
Weighted Average
Life to Call
Years(1) 14.93 4.40 2.38 2.03 1.68 1.32 14.94 7.40 3.66 3.03 2.42 1.84
</TABLE>
- -----------------------------
(1) The weighted average life of the Offered Certificates (other than the
Class A-10IO) 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 Offered Certificates.
S-33
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
Class A-5 Class A-6
Scenario Scenario
--------------------------------------- ---------------------------------------
Payment Date I II III IV V VI I II III IV V VI
- -- --- -- - -- - -- --- -- - --
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percent 100 100 100 100 100 100 100 100 100 100 100 100
2/15/98 100 100 100 100 100 100 100 100 100 100 100 100
2/15/99 100 100 100 100 100 89 100 100 100 100 100 100
2/15/00 100 100 100 100 19 0 100 100 100 100 100 0
2/15/01 100 100 100 46 0 0 100 100 100 100 29 0
2/15/02 100 100 36 0 0 0 100 100 100 49 0 0
2/15/03 100 100 0 0 0 0 100 100 65 0 0 0
2/15/04 100 100 0 0 0 0 100 100 2 0 0 0
2/15/05 100 100 0 0 0 0 100 100 0 0 0 0
2/15/06 100 100 0 0 0 0 100 100 0 0 0 0
2/15/07 100 67 0 0 0 0 100 100 0 0 0 0
2/15/08 100 33 0 0 0 0 100 100 0 0 0 0
2/15/09 100 1 0 0 0 0 100 100 0 0 0 0
2/15/10 100 0 0 0 0 0 100 59 0 0 0 0
2/15/11 100 0 0 0 0 0 100 19 0 0 0 0
2/15/12 0 0 0 0 0 0 71 0 0 0 0 0
2/15/13 0 0 0 0 0 0 49 0 0 0 0 0
2/15/14 0 0 0 0 0 0 25 0 0 0 0 0
2/15/15 0 0 0 0 0 0 0 0 0 0 0 0
2/15/16 0 0 0 0 0 0 0 0 0 0 0 0
2/15/17 0 0 0 0 0 0 0 0 0 0 0 0
2/15/18 0 0 0 0 0 0 0 0 0 0 0 0
2/15/19 0 0 0 0 0 0 0 0 0 0 0 0
2/15/20 0 0 0 0 0 0 0 0 0 0 0 0
2/15/21 0 0 0 0 0 0 0 0 0 0 0 0
2/15/22 0 0 0 0 0 0 0 0 0 0 0 0
2/15/23 0 0 0 0 0 0 0 0 0 0 0 0
2/15/24 0 0 0 0 0 0 0 0 0 0 0 0
2/15/25 0 0 0 0 0 0 0 0 0 0 0 0
2/15/27 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life to Maturity
Years(1) 14.94 10.58 4.92 4.04 2.98 2.20 16.13 13.30 6.31 5.08 3.91 2.51
Weighted Average
Life to Call
Years(1) 14.94 10.58 4.92 4.04 2.98 2.20 16.13 13.30 6.31 5.08 3.91 2.51
Class A-7 Class A-8
Scenario Scenario
--------------------------------------- ---------------------------------------
Payment Date I II III IV V VI I II III IV V VI
- -- --- -- - -- - -- --- -- - --
Initial Percent 100 100 100 100 100 100 100 100 100 100 100 100
2/15/98 100 100 100 100 100 100 100 100 100 100 100 100
2/15/99 100 100 100 100 100 100 100 100 100 100 100 100
2/15/00 100 100 100 100 100 0 100 100 100 100 100 99
2/15/01 100 100 100 100 100 0 100 100 100 100 100 78
2/15/02 100 100 100 100 40 0 100 100 100 100 100 20
2/15/03 100 100 100 78 0 0 100 100 100 100 94 5
2/15/04 100 100 100 35 0 0 100 100 100 100 65 3
2/15/05 100 100 80 23 0 0 100 100 100 100 63 3
2/15/06 100 100 52 2 0 0 100 100 100 100 50 3
2/15/07 100 100 25 0 0 0 100 100 100 79 36 2
2/15/08 100 100 2 0 0 0 100 100 100 59 24 0
2/15/09 100 100 0 0 0 0 100 100 80 44 14 0
2/15/10 100 100 0 0 0 0 100 100 61 32 6 0
2/15/11 100 100 0 0 0 0 100 100 47 22 1 0
2/15/12 100 0 0 0 0 0 100 60 5 0 0 0
2/15/13 100 0 0 0 0 0 100 50 1 0 0 0
2/15/14 100 0 0 0 0 0 100 41 0 0 0 0
2/15/15 98 0 0 0 0 0 100 33 0 0 0 0
2/15/16 72 0 0 0 0 0 100 25 0 0 0 0
2/15/17 46 0 0 0 0 0 100 16 0 0 0 0
2/15/18 38 0 0 0 0 0 100 12 0 0 0 0
2/15/19 28 0 0 0 0 0 100 9 0 0 0 0
2/15/20 18 0 0 0 0 0 100 5 0 0 0 0
2/15/21 7 0 0 0 0 0 100 3 0 0 0 0
2/15/22 0 0 0 0 0 0 93 0 0 0 0 0
2/15/23 0 0 0 0 0 0 78 0 0 0 0 0
2/15/24 0 0 0 0 0 0 61 0 0 0 0 0
2/15/25 0 0 0 0 0 0 43 0 0 0 0 0
2/15/26 0 0 0 0 0 0 19 0 0 0 0 0
2/15/27 0 0 0 0 0 0 0 0 0 0 0 0
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Weighted Average
Life to Maturity
Years (1) 20.63 14.92 9.16 7.01 5.00 2.85 27.51 17.24 13.61 11.98 9.10 4.72
Weighted Average
Life to Call
Years (1) 20.02 14.92 9.00 6.94 5.00 2.85 21.36 14.94 9.94 8.36 6.53 4.44
</TABLE>
- -----------------------------
(1) The weighted average life of the Offered Certificates (other than the
Class A-10IO) 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 Offered Certificates.
S-34
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
Class A-9 Class M-1
Scenario Scenario
--------------------------------------- ---------------------------------------
Payment Date I II III IV V VI I II III IV V VI
- -- --- -- - -- - -- --- -- - --
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percent 100 100 100 100 100 100 100 100 100 100 100 100
2/15/98 100 100 100 100 100 100 100 100 100 100 100 100
2/15/99 100 100 100 100 100 100 100 100 100 100 100 100
2/15/00 100 100 100 100 100 100 100 100 100 100 100 100
2/15/01 99 94 89 89 89 94 100 100 85 70 52 30
2/15/02 98 88 80 78 76 75 100 100 67 53 36 18
2/15/03 97 77 66 62 56 49 100 100 52 39 25 10
2/15/04 95 68 52 46 38 29 100 90 41 29 17 6
2/15/05 87 46 24 18 13 15 100 79 32 22 12 0
2/15/06 80 31 11 7 4 5 100 69 25 16 8 0
2/15/07 72 20 5 3 1 0 100 61 19 12 4 0
2/15/08 64 13 2 1 0 0 100 53 15 9 0 0
2/15/09 56 9 1 0 0 0 100 46 12 6 0 0
2/15/10 48 6 0 0 0 0 100 39 9 2 0 0
2/15/11 40 3 0 0 0 0 100 34 7 0 0 0
2/15/12 0 0 0 0 0 0 40 9 0 0 0 0
2/15/13 0 0 0 0 0 0 37 7 0 0 0 0
2/15/14 0 0 0 0 0 0 34 5 0 0 0 0
2/15/15 0 0 0 0 0 0 30 2 0 0 0 0
2/15/16 0 0 0 0 0 0 26 0 0 0 0 0
2/15/17 0 0 0 0 0 0 22 0 0 0 0 0
2/15/18 0 0 0 0 0 0 20 0 0 0 0 0
2/15/19 0 0 0 0 0 0 19 0 0 0 0 0
2/15/20 0 0 0 0 0 0 17 0 0 0 0 0
2/15/21 0 0 0 0 0 0 15 0 0 0 0 0
2/15/22 0 0 0 0 0 0 13 0 0 0 0 0
2/15/23 0 0 0 0 0 0 11 0 0 0 0 0
2/15/24 0 0 0 0 0 0 9 0 0 0 0 0
2/15/25 0 0 0 0 0 0 6 0 0 0 0 0
2/15/26 0 0 0 0 0 0 0 0 0 0 0 0
2/15/27 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life to Maturity
Years(1) 12.06 8.09 6.85 6.58 6.33 6.23 17.79 11.57 7.22 6.09 5.02 4.25
Weighted Average
Life to Call
Years(1) 12.06 8.09 6.77 6.43 5.78 4.74 16.84 11.38 6.67 5.60 4.62 3.97
Class M-2 Class B
Scenario Scenario
--------------------------------------- ---------------------------------------
Payment Date I II III IV V VI I II III IV V VI
- -- --- -- - -- - -- --- -- - --
Initial Percent 100 100 100 100 100 100 100 100 100 100 100 100
2/15/98 100 100 100 100 100 100 100 100 100 100 100 100
2/15/99 100 100 100 100 100 100 100 100 100 100 100 100
2/15/00 100 100 100 100 100 100 100 100 100 100 100 100
2/15/01 100 100 85 70 52 30 100 100 85 70 52 14
2/15/02 100 100 67 53 36 16 100 100 67 53 25 0
2/15/03 100 100 52 39 25 6 100 100 52 31 5 0
2/15/04 100 90 41 29 15 0 100 90 34 13 0 0
2/15/05 100 79 32 22 7 0 100 79 18 0 0 0
2/15/06 100 69 25 14 2 0 100 69 5 0 0 0
2/15/07 100 61 18 8 0 0 100 61 0 0 0 0
2/15/08 100 53 12 3 0 0 100 53 0 0 0 0
2/15/09 100 46 7 0 0 0 100 42 0 0 0 0
2/15/10 100 39 4 0 0 0 100 31 0 0 0 0
2/15/11 100 34 1 0 0 0 100 21 0 0 0 0
2/15/12 40 3 0 0 0 0 32 0 0 0 0 0
2/15/13 37 1 0 0 0 0 27 0 0 0 0 0
2/15/14 34 0 0 0 0 0 21 0 0 0 0 0
2/15/15 30 0 0 0 0 0 14 0 0 0 0 0
2/15/16 26 0 0 0 0 0 7 0 0 0 0 0
2/15/17 22 0 0 0 0 0 0 0 0 0 0 0
2/15/18 20 0 0 0 0 0 0 0 0 0 0 0
2/15/19 18 0 0 0 0 0 0 0 0 0 0 0
2/15/20 15 0 0 0 0 0 0 0 0 0 0 0
2/15/21 13 0 0 0 0 0 0 0 0 0 0 0
2/15/22 10 0 0 0 0 0 0 0 0 0 0 0
2/15/23 7 0 0 0 0 0 0 0 0 0 0 0
2/15/24 4 0 0 0 0 0 0 0 0 0 0 0
2/15/25 0 0 0 0 0 0 0 0 0 0 0 0
2/15/26 0 0 0 0 0 0 0 0 0 0 0 0
2/15/27 0 0 0 0 0 0 0 0 0 0 0 0
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Weighted Average
Life to Maturity
Years (1) 17.54 11.41 7.02 5.90 4.82 3.94 15.83 11.07 6.17 5.18 4.24 3.44
Weighted Average
Life to Call
Years(1) 16.83 11.38 6.67 5.60 4.58 3.78 15.83 11.07 6.17 5.18 4.24 3.44
</TABLE>
- -----------------------------
(1) The weighted average life of the Offered Certificates (other than the
Class A-10IO) 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 Offered Certificates.
S-35
<PAGE>
Payment Lag Feature of Offered 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) 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 March 17, 1997. Thus, the effective
yield to the Owners of the Offered Certificates will be below that otherwise
produced by the related Pass-Through Rate because distributions to Owners of the
Offered Certificates in respect of any given month will not be made until on or
after the 15th day of the following month.
Yield Sensitivity of the Class A-10IO Certificates
Because amounts distributable to the Owners of the Class A-10IO
Certificates consist entirely of interest, the yield to maturity of the Class
A-10IO Certificates will be extremely sensitive to the repurchase, prepayment
and default experience of the Home Equity 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 A-10IO Certificates should be aware that Owners of the
Class R Certificates may cause a termination of the Trust when the aggregate
outstanding Loan Balances of the Home Equity Loans has declined to less than 10%
of the Original Aggregate Loan Balance.
The following table sets forth the pre-tax yield to maturity of the
Class A-10IO Certificates under various Prepayment Scenarios based on the
modeling assumptions set out above.
<TABLE>
<CAPTION>
Pre-Tax Yield to Maturity (1) -- Sensitivity of the
Class A-10IO Certificates to Prepayments
Percentage of the Prepayment Assumption
---------------------------------------
Scenario I Scenario II Scenario III Scenario IV Scenario V Scenario VI
---------- ----------- ------------ ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
No Optional Termination
At a Price of 3.38689%(2) 32.515 22.181 11.299 6.773 -0.225 -12.524
At a Price of 3.44939%(2) 31.838 21.512 10.638 6.114 -0.881 -13.174
At a Price of 3.51189%(2) 31.186 20.867 10.000 5.479 -1.512 -13.800
At a Price of 3.57439%(2) 30.556 20.244 9.384 4.866 -2.122 -14.405
Optional Termination
At a Price of 3.38689%(2) 32.510 22.126 10.263 4.822 -4.123 -20.348
At a Price of 3.44939%(2) 31.833 21.454 9.557 4.090 -4.897 -21.184
At a Price of 3.51189%(2) 31.180 20.805 8.874 3.382 -5.647 -21.994
At a Price of 3.57439%(2) 30.550 20.178 8.213 2.697 -6.374 -22.781
</TABLE>
- --------------------
(1) Represented on a corporate bond equivalent basis.
(2) As a percent of the Notional Principal Amount as of the Cut-Off Date.
Accrued interest will be added to such price after calculating the
yields set forth in the table.
On the basis of 136% Prepayment Assumption, a purchase price of
3.38689%, optional termination of the Trust and the Modeling Assumptions, the
pre-tax yield to maturity of the Class A-10IO Certificates would be
approximately 0%. If the actual prepayment rate were to exceed approximately
136% Prepayment Assumption, based on such assumptions, an investor in the Class
A-10IO Certificates would not fully recover the initial purchase price thereof.
On the basis of 133% Prepayment Assumption, a purchase price of
3.44939%, optional termination of the Trust and the Modeling Assumptions, the
pre-tax yield to maturity of the Class A-10IO Certificates would be
approximately 0%. If the actual prepayment rate were to exceed approximately
133% Prepayment Assumption, based on such assumptions, an investor in the Class
A-10IO Certificates would not fully recover the initial purchase price thereof.
On the basis of 131% Prepayment Assumption, a purchase price of
3.51189%, optional termination of the Trust and the Modeling Assumptions, the
pre-tax yield to maturity of the Class A-10IO Certificates would be
approximately 0%. If the actual prepayment rate were to exceed approximately
131% Prepayment Assumption,
S-36
<PAGE>
based on such assumptions, an investor in the Class A-10IO Certificates would
not fully recover the initial purchase price thereof.
On the basis of 129% Prepayment Assumption, a purchase price of
3.57439%, optional termination of the Trust and the Modeling Assumptions, the
pre-tax yield to maturity of the Class A-10IO Certificates would be
approximately 0%. If the actual prepayment rate were to exceed approximately
129% Prepayment Assumption, based on such assumptions, an investor in the Class
A-10IO Certificates would not fully recover the initial purchase price thereof.
The yields set forth in the preceding table were calculated by
determining the monthly discount rates which, when applied to the assumed stream
of cash flow to be paid on the Class A-10IO Certificates would cause the
discounted present value of such assumed cash flows to equal the assumed
purchase price of the Class A-10IO Certificates plus accrued interest 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 A-10IO Certificates.
The Home Equity Loans will not necessarily have the characteristics
assumed above, and there can be no assurance that (i) the Home Equity 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 A-10IO
Certificates will correspond to any of the pre-tax yields shown above or (iii)
the purchase price of the Class A-10IO Certificates will be equal to any of the
purchase prices assumed.
FORMATION OF THE TRUST AND TRUST PROPERTY
ContiMortgage Home Equity Trust 1997-1 (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 Offered Certificates and the Retained Certificates.
The property of the Trust will include (a) the Home Equity Loans (other
than 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 Upper-Tier
Distribution Account (as defined in the Pooling and Servicing Agreement), 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 and (c) proceeds of all the
foregoing (including, but not by way of limitation, all proceeds of any hazard
insurance and title insurance policies 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 Offered Certificates will not represent an interest in or an
obligation of, nor will the Home Equity Loans be guaranteed by, the Depositor,
the Sellers, 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.
S-37
<PAGE>
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Home Equity Loans
and the Properties is based upon the pool as constituted at the close of
business on the Cut-Off Date. Prior to the issuance of the Offered Certificates,
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 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
Offered 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 Offered Certificates. In the event 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 a current report on Form 8-K.
DESCRIPTION OF THE OFFERED 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.
Payment Dates
On each Payment Date, the Owners of each Class of the Offered
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 (or Notional Principal Amount) of such Class of
Offered Certificates is reduced to zero, and to the extent funds are available
therefor, the related Current Interest, any Interest Carry Forward Amount and
the portion of the Principal Distribution Amount, if any, allocated therefor as
of such Payment Date, allocated among the Classes of the Offered Certificates as
described below. 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
"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 Offered Certificates--Book Entry Registration of the
Offered 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.
Each Owner of record of the related Class of the Offered 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 an Offered
Certificate as of any date of determination will be equal to the percentage
obtained by dividing the principal balance (or notional principal balance) of
such Certificate as of the Cut-Off Date by the Certificate Principal Balance (or
Notional Principal Amount) for the related Class of the Offered 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 and (ii) the proceeds of any liquidation of the Trust Estate.
S-38
<PAGE>
The Pooling and Servicing Agreement establishes a pass-through rate on
each Class of the Offered Certificates (each, a "Pass-Through Rate") as set
forth in the Summary of Terms herein.
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 with respect to interest and principal:
Interest: On each Payment Date the Interest Remittance Amount will be
distributed in the following order of priority:
First, to the Trustee, the Trustee Fee;
Second, to the Owners of the Class A Certificates (including the Class
A-10IO Certificates), the related Class A Current Interest plus the
related Class A Interest Carry Forward Amount with respect to each such
Class of Class A Certificates without any priority among such Class A
Certificates ; provided, that if the Interest Amount Available is not
sufficient to make a full distribution of interest with respect to all
Classes of the Class A Certificates, the Interest Amount Available will
be distributed among the outstanding Classes of Class A Certificates
pro rata based on the aggregate amount of interest due on each such
Class, and the amount of the shortfall will be carried forward with
accrued interest;
Third, to the extent of the Interest Amount Available then remaining,
to the Owners of the Class M-1 Certificates, the Class M-1 Current
Interest;
Fourth, to the extent of the Interest Amount Available then remaining,
to the Owners of the Class M-2 Certificates, the Class M-2 Current
Interest;
Fifth, to the extent of the Interest Amount Available then remaining,
to the Owners of the Class B Certificates, the Class B Current
Interest; and
Sixth, the Monthly Excess Cashflow Amount shall be applied as described
under "Credit Enhancement-Application of Monthly Excess Cashflow
Amount."
Principal: On each Payment Date (a) before the Stepdown Date or (b)
with respect to which a Trigger Event has occurred, Owners of the Class A
Certificates (other than the Class A-10IO Certificates) will be entitled to
receive payment of 100% of the Principal Distribution Amount as follows: first,
to the Owners of the Class A-9 Certificates, the Class A-9 Lockout Distribution
Amount and then to the Owners of the Class A Certificates (other than the Class
A-10IO Certificates), in sequential order until the Certificate Principal
Balance of each Class of Class A Certificates has been reduced to zero.
On each Payment Date (a) on or after the Stepdown Date and (b) as long
as a Trigger Event has not occurred and is not continuing, the Owners of all
Classes of the Offered Certificates (other than the Class A-10IO Certificates)
will be entitled to receive payments of principal, in the order of priority, in
the amounts set forth below and to the extent of the Principal Distribution
Amount as follows:
First, the lesser of (x) the Principal Distribution Amount and (y) the
Class A Principal Distribution Amount shall be distributed to the
Owners of the Class A-9 Certificates, in an amount equal to the Class
A-9 Lockout Distribution Amount, with the remainder paid to the Owners
of the Class A Certificates (other than the Class A-10IO Certificates),
in sequential order until the Certificate Principal Balance of each
Class of Class A Certificates has been reduced to zero;
Second, the lesser of (x) the excess of (i) the Principal Distribution
Amount over (ii) the amount distributed to the Owners of the Class A
Certificates in clause First above and (y) the Class M-1 Principal
Distribution Amount shall be distributed to the Owners of the Class M-1
Certificates, until the Class M-1 Certificate Principal Balance has
been reduced to zero;
Third, the lesser of (x) the excess of (i) the Principal Distribution
Amount over (ii) the sum of the amount distributed to the Owners of the
Class A Certificates in clause First above and the amount distributed
to the Owners of the Class M-1 Certificates in clause Second above and
(y) the Class M-2 Principal
S-39
<PAGE>
Distribution Amount shall be distributed to the Owners of the Class M-2
Certificates, until the Class M-2 Certificate Principal Balance has
been reduced to zero;
Fourth, the lesser of (x) the excess of (i) the Principal Distribution
Amount over (ii) the sum of the amount distributed to the Owners of the
Class A Certificates pursuant to clause First above, the amount
distributed to the Owners of the Class M-1 Certificates pursuant to
clause Second above and the amount distributed to the Owners of the
Class M-2 Certificates pursuant to clause Third above and (y) the Class
B Principal Distribution Amount shall be distributed to the Owners of
the Class B Certificates, until the Class B Certificate Principal
Balance has been reduced to zero; and,
Fifth, any amount of the Principal Distribution Amount remaining after
making all of the distributions in clauses First, Second, Third and
Fourth above shall be distributed as part of the Monthly Excess
Cashflow Amount as described under "Credit Enhancement-Application of
Monthly Excess Cashflow Amounts" in the Summary of Terms.
The Class A Certificates (other than the Class A-9 and Class A-10IO
Certificates) are "sequential pay" classes such that the Owners of the Class A-8
Certificates will receive no payments of principal until the Class A-7
Certificate Principal Balance is reduced to zero, the Owners of the Class A-7
Certificates will receive no payments of principal until the Class A-6
Certificate Principal Balance is reduced to zero, the Owners of the Class A-6
Certificates will receive no payments of principal until the Class A-5
Certificate Principal Balance is reduced to zero, 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; provided, however, that
on any Payment Date on which the sum of the Certificate Principal Balance of the
Subordinate Certificates and the Overcollateralization Amount is zero, any
amounts of principal payable to the Owners of the Class A Certificates on such
Payment Date shall be distributed pro rata and not sequentially.
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.
Book Entry Registration of the Offered Certificates
The Offered 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 Offered
Certificates which in the aggregate equal the principal balance of such Offered
Certificates and will initially be registered in the name of Cede, 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 Chase 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 $1000 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, 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
S-40
<PAGE>
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 Offered
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 Offered Certificates only through
Participants and indirect participants by instructing such Participants and
indirect participants to transfer such Offered Certificates, by book-entry
transfer, through DTC for the account of the purchasers of such Offered
Certificates, which account is maintained with their respective Participants.
Under the Rules and in accordance with DTC's normal procedures, transfers of
ownership of such Offered Certificates will be executed through DTC and the
accounts of the respective Participants at DTC will be debited and credited.
Similarly, the Participants and indirect participants will make debits or
credits, as the case may be, on their records on behalf of the selling and
purchasing 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.
S-41
<PAGE>
Cedel Bank, S.A. was incorporated in 1970 as a limited company under
Luxembourg law. Cedel is owned by banks, securities dealers and financial
institutions, and currently has about 100 shareholders, including United States
financial institutions or their subsidiaries. No single entity may own more than
five percent of Cedel's stock.
Cedel is registered as a bank in Luxembourg, and as such is subject to
regulation by the Institut Monetaire Luxembourgeois, "IML," the Luxembourg
Monetary Authority, which supervises Luxembourg banks.
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
S-42
<PAGE>
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 Offered Certificates which conflict with actions taken with
respect to other Offered 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.
CREDIT ENHANCEMENT
Subordination of Subordinate Certificates
The rights of the Owners of the Subordinate Certificates and the
Retained Certificates to receive distributions with respect to the Home Equity
Loans will be subordinated, to the extent described herein, to such rights of
the Owners of the Class A Certificates. This subordination is intended to
enhance the likelihood of regular
S-43
<PAGE>
receipt by the Owners of the Class A Certificates of the full amount of their
scheduled monthly payment of interest and principal and to afford such Owners
protection against Realized Losses.
The protection afforded to the Owners of the Class A Certificates by
means of the subordination of the Subordinate Certificates and the Retained
Certificates will be accomplished by the preferential right of the Owners of the
Class A Certificates to receive, prior to any distribution being made on a
Payment Date in respect of the Subordinate Certificates and the Retained
Certificates, the amounts of interest due them and principal available for
distribution on such Payment Date, and, if necessary, by the right of the Owners
of the Class A Certificates to receive future distributions of amounts that
would otherwise be payable to the Owners of the Subordinate Certificates and the
Retained Certificates.
In addition, the rights of the Owners of the Class M-2, Class B and
Retained Certificates to receive distributions will be subordinated, to the
extent described herein, to such rights of the Owners of the Class A and Class
M-1 Certificates. This subordination is intended to enhance the likelihood of
regular receipt by the Owners of the Class A and Class M-1 Certificates of the
amount of interest due them and principal available for distribution and to
afford such Owners with protection against Realized Losses.
The rights of the Owners of the Class B and Retained Certificates to
receive distributions will be subordinated in the same manner to such rights of
the Owners of the Class A, Class M-1 and Class M-2 Certificates and the rights
of Owners of the Retained Certificates to receive distributions will be
subordinated in the same manner to such rights of the Owners of the Offered
Certificates.
Application of Realized Losses
The Pooling and Servicing Agreement provides that if a Home Equity Loan
becomes a Liquidated Loan during a Remittance Period, the Net Liquidation
Proceeds relating thereto and allocated to principal may be less than the Loan
Balance of such Home Equity Loan. The amount of such insufficiency is a Realized
Loss. Realized Losses will, in effect, be absorbed first, by the Retained
Certificates (both through the application of the Monthly Excess Interest Amount
to fund such deficiency and through a reduction in the Overcollateralization
Amount), second, by the Owners of the Class B Certificates, third, by the Owners
of the Class M-2 Certificates, and, fourth, by the Owners of the Class M-1
Certificates.
To the extent that the pool of Home Equity Loans experiences Realized
Losses, such Realized Losses will reduce the aggregate outstanding Loan Balance
of the Home Equity Loans, i.e, a reduction in the collateral balance will occur.
Since the Overcollateralization Amount is the excess, if any, of the collateral
balance over the Aggregate Certificate Principal Balance, Realized Losses, to
the extent experienced, will in the first instance reduce the
Overcollateralization Amount.
The Pooling and Servicing Agreement requires that the
Overcollateralization Amount be initially increased to, and thereafter
maintained at, the Targeted Overcollateralization Amount. This increase and
subsequent maintenance is intended to be accomplished by the application of
Monthly Excess Interest Amounts to the funding of the Extra Principal
Distribution Amount. Such Extra Principal Distribution Amounts, since they are
funded from interest collections on the collateral but are distributed as
principal on the Offered Certificates, will increase the Overcollateralization
Amount.
If, on any Payment Date after taking into account all Realized Losses
experienced during the prior Remittance Period and after taking into account the
distribution of principal (including the Extra Principal Distribution Amount)
with respect to the Offered Certificates on such Payment Date, the Aggregate
Certificate Principal Balance exceeds the aggregate Loan Balance of the Home
Equity Loans as of the end of the related Remittance Period (i.e. if the level
of overcollateralization is negative), then the Certificate Principal Balance of
the Subordinate Certificates will be reduced (in effect, "written down") such
that the level of overcollateralization is zero, rather than negative. Such a
negative level of overcollateralization is an Applied Realized Loss Amount,
which is applied as a reduction in the Certificate Principal Balance of the
Subordinate Certificates in reverse order of seniority (i.e., first against the
Class B Certificate Principal Balance until it is reduced to zero, then against
the Class M-2 Certificate Balance until it is reduced to zero and then against
the Class M-1 Certificate Principal Balance until it is reduced to zero). The
Pooling and Servicing Agreement does not permit the "write down" of the
Certificate Principal Balance of any Class A Certificate.
S-44
<PAGE>
Once the Certificate Principal Balance of a Class of Subordinate
Certificates has been "written down," the amount of such write down will no
longer bear interest, nor will such amount thereafter be "reinstated" or
"written up," although the amount of such write down may, on future Payment
Dates be paid to Owners of the Subordinate Certificates which experienced the
write down, in direct order of seniority (i.e., first, the Class M-1
Certificates, second, the Class M-2 Certificates and, third, the Class B
Certificates). The source of funding of such payments will be the amount, if
any, of the Monthly Excess Cashflow Amount remaining on such future Payment
Dates after the funding of the Extra Principal Distribution Amount and after the
payment of Interest Carry Forward Amounts with respect to the Subordinate
Certificates on such Payment Date.
Application of Monthly Excess Cashflow Amounts
The weighted average net Coupon Rate for the Home Equity Loans is
generally expected to be higher than the weighted average of the Pass-Through
Rates on the Offered Certificates, thus generating certain excess interest
collections which, in the absence of losses will not be necessary to fund
interest distributions on the Offered Certificates. The Pooling and Servicing
Agreement provides that this excess interest be applied to the extent available,
to make accelerated payments of principal (i.e., the Extra Principal
Distribution Amount) to the Class or Classes then entitled to receive
distributions of principal; such application will cause the Aggregate
Certificate Principal Balance to amortize more rapidly than the pool of Home
Equity Loans, resulting in overcollateralization. This excess interest for a
Remittance Period, together with interest on the Overcollateralization Amount
itself, on the related Payment Date is the "Monthly Excess Interest Amount" for
such Payment Date.
The required level of overcollateralization for any Payment Date is the
Targeted Overcollateralization Amount for such Payment Date. The Targeted
Overcollateralization Amount is initially (i.e., prior to the Stepdown Date)
$4,000,000. Since the actual level of the Overcollateralization Amount is $0 as
of the Closing Date, in the early months of the transaction, subject to the
availability of Monthly Excess Interest Amounts, Extra Principal Distribution
Amounts will be paid, with the result that the Overcollateralization Amount will
increase to the level of the Targeted Overcollateralization Amount.
If, once the Targeted Overcollateralization Amount has been reached,
Realized Losses occur, such Realized Losses will result in an
Overcollateralization Deficiency (since such Realized Losses reduce the Loan
Balance of the Home Equity Loans without giving rise to a corresponding
reduction of the Aggregate Certificate Principal Balance). The cashflow
priorities of the Trust require that, in this situation, an Extra Principal
Distribution Amount be paid (subject to the availability of any Monthly Excess
Interest Amount) for the purpose of re-establishing the Overcollateralization
Amount at the then-required level of the Targeted Overcollateralization Amount.
On and after the Stepdown Date, the Targeted Overcollateralization
Amount is permitted to decrease or "step-down," below the $4,000,000 level to a
level equal to 2% of the then current aggregate outstanding Loan Balance
(subject to a floor of $2,000,000). If the Targeted Overcollateralization Amount
is permitted to "stepdown" on a Payment Date, the Pooling and Servicing
Agreement permits a portion of the Principal Remittance Amount for such Payment
Date not to be passed through as a distribution of principal on such Payment
Date. This has the effect of decelerating the amortization of the Offered
Certificates relative to the aggregate outstanding Loan Balance of the Home
Equity Loans, thereby reducing the actual level of the Overcollateralization
Amount to the new, lower Targeted Overcollateralization Amount. This portion of
the Principal Remittance Amount not distributed as principal on the Certificates
therefore releases overcollateralization from the Trust. The amount of such
releases are the Overcollateralization Release Amounts.
On any Payment Date, the sum of the Monthly Excess Interest Amount and
the Overcollateralization Release Amount is the Monthly Excess Cashflow Amount,
which is required to be applied in the following order of priority on such
Payment Date:
(1) to fund the Extra Principal Distribution Amount for such
Payment Date;
(2) to fund the Class M-1 Interest Carry Forward Amount, if any;
(3) to fund the Class M-1 Realized Loss Amortization Amount for
such Payment Date;
(4) to fund the Class M-2 Interest Carry Forward Amount, if any;
S-45
<PAGE>
(5) to fund the Class M-2 Realized Loss Amortization Amount for
such Payment Date;
(6) to fund the Class B Interest Carry Forward Amount, if any;
(7) to fund the Class B Realized Loss Amortization Amount for such
Payment Date;
(8) to the Servicer to the extent of any unreimbursed Delinquency
Advances or Servicing Advances; and
(9) to fund a distribution to Owners of the Class C Certificates.
The Certificate Principal Balance of any Class of the Class A
Certificates is the Original Certificate Principal Balance of such Class as
reduced by all amounts actually distributed to the Owners of such Class of Class
A Certificates on all prior Payment Dates.
"Class B Applied Realized Loss Amount" means, as to any Payment Date,
the lesser of (x) the Class B Certificate Principal Balance (after taking into
account the distribution of the Principal Distribution Amount on such Payment
Date, but prior to the application of the Class B Applied Realized Loss Amount,
if any, on such Payment Date) and (y) the Applied Realized Loss Amount as of
such Payment Date.
"Class B Certificate Principal Balance" means, as of any date of
determination, the Original Class B Certificate Principal Balance as reduced by
the sum of (x) all amounts actually distributed to the Owners of the Class B
Certificates on all prior Payment Dates on account of principal and (y) the
aggregate, cumulative amount of Class B Applied Realized Loss Amounts on all
prior Payment Dates.
"Class B Realized Loss Amortization Amount" means, as of any Payment
Date, the lesser of (x) the Class B Unpaid Realized Loss Amount as of such
Payment Date and (y) the excess of (i) the Monthly Excess Cashflow Amount over
(ii) the sum of the Extra Principal Distribution Amount, the Class M-1 Realized
Loss Amortization Amount, the Class M-2 Realized Loss Amortization Amount, the
Class M-1 Interest Carry Forward Amount, the Class M-2 Interest Carry Forward
Amount and the Class B Interest Carry Forward Amount in each case for such
Payment Date.
"Class M-1 Applied Realized Loss Amount" means, as to any Payment Date,
the lesser of (x) the Class M-1 Certificate Principal Balance (after taking into
account the distribution of the Principal Distribution Amount on such Payment
Date, but prior to the application of the Class M-1 Applied Realized Loss
Amount, if any, on such Payment Date) and (y) the excess of (i) the Applied
Realized Loss Amount as of such Payment Date over (ii) the sum of the Class M-2
Applied Realized Loss Amount and the Class B Applied Realized Loss Amount, in
each case as of such Payment Date.
"Class M-1 Certificate Principal Balance" means, as of any date of
determination, the Original Class M-1 Certificate Principal Balance as reduced
by the sum of (x) all amounts actually distributed to the Owners of the Class
M-1 Certificates on all prior Payment Dates on account of principal and (y) the
aggregate, cumulative amount of Class M-1 Applied Realized Loss Amounts on all
prior Payment Dates.
"Class M-1 Realized Loss Amortization Amount" means, as of any Payment
Date, the lesser of (x) the Class M-1 Unpaid Realized Loss Amount as of such
Payment Date and (y) the excess of (i) the Monthly Excess Cashflow Amount over
(ii) the sum of the Extra Principal Distribution Amount and the Class M-1
Interest Carry Forward Amount, in each case for such Payment Date.
"Class M-2 Applied Realized Loss Amount" means, as to any Payment Date,
the lesser of (x) the Class M-2 Certificate Principal Balance (after taking into
account the distribution of the Principal Distribution Amount on such Payment
Date, but prior to the application of the Class M-2 Applied Realized Loss
Amount, if any, on such Payment Date) and (y) the excess of (i) the Applied
Realized Loss Amount as of such Payment Date over (ii) the sum of the Class B
Applied Realized Loss Amount and the Class M-1 Applied Realized Loss Amount, in
each case as of such Payment Date.
"Class M-2 Certificate Principal Balance" means, as of any date of
determination, the Original Class M-2 Certificate Principal Balance as reduced
by the sum of (x) all amounts actually distributed to the Owners of the Class
S-46
<PAGE>
M-2 Certificates on all prior Payment Dates on account of principal and (y) the
aggregate, cumulative amount of Class M-2 Applied Realized Loss Amounts on all
prior Payment Dates.
"Class M-2 Realized Loss Amortization Amount" means, as of any Payment
Date, the lesser of (x) the Class M-2 Unpaid Realized Loss Amount as of such
Payment Date and (y) the excess of (i) the Monthly Excess Cashflow Amount over
(ii) the sum of the Extra Principal Distribution Amount, the Class M-1 Realized
Loss Amortization Amount, the Class M-1 Interest Carry Forward Amount and the
Class M-2 Interest Carry Forward Amount, in each case for such Payment Date.
"Unpaid Realized Loss Amount" means for any Class of the Subordinate
Certificates and as to any Payment Date, the excess of (x) the aggregate
cumulative amount of related Applied Realized Loss Amounts with respect to such
Class for all prior Payment Dates over (y) the aggregate, cumulative amount of
related Realized Loss Amortization Amounts with respect to such Class for all
prior Payment Dates.
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 Sellers 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, either Seller, the Servicer, 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 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 either 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, such 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, such 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 such Seller obtains for the
Trustee an opinion of counsel experienced in federal income tax matters and
acceptable to the Trustee 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 either the
Upper-Tier REMIC or the Lower-Tier REMIC as a REMIC (a "REMIC Opinion")
addressed to the Trustee and acceptable to the Trustee. 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 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, each
of the Sellers has agreed that it shall, at its expense, furnish the Trustee
with a REMIC Opinion as a result of any such repurchase or substitution. The
obligation of the Sellers 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
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 Owner
and the Trustee.
"Loan Purchase Price" means the outstanding Loan Balance of the related
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 together with the
aggregate amount of all unreimbursed Delinquency Advances and Servicing Advances
theretofore made with respect to such Home Equity
S-47
<PAGE>
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, each 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 and all its respective
right, title and interest in and to principal and interest due on each such Home
Equity Loan after the Cut-Off Date; provided, however, that each Seller will
reserve and retain all of 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,
each 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 Home Equity Loans
on the Closing Date, each Seller will be required to:
(i) deliver without recourse to the Trustee (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 such 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,
assignments of the Mortgages to "Manufacturers and Traders Trust
Company, as Trustee of ContiMortgage Home Equity Loan Trust 1997-1
under the Pooling and Servicing Agreement dated as of February 1, 1997"
to be submitted for recording in the appropriate jurisdictions;
provided, however, that a 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 such Seller furnishes to the Trustee, on or before the
Closing Date, at its 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 Rating Agencies); and
(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 related Seller (but in any
event, with respect to any Mortgage as to which original recording
information has been made available to such Seller within one year
after the Closing Date).
The Trustee will agree, for the benefit of the Owners, to review each
File within 45 days after the Closing 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 and the appropriate Seller. Each 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, such Seller will be required on the
S-48
<PAGE>
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
monitor 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) reimbursements for
Delinquency Advances, and (v) 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, 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;
S-49
<PAGE>
(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 and
(II) the Principal Remittance Amount 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 or from Monthly Excess Cashflow
Amount 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; the Trustee shall promptly furnish
a copy of such notice to the Owners of the Class R 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 reimburse itself for 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 Monthly Excess
Cashflow Amount 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 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 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 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.
S-50
<PAGE>
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 Sellers and the 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 $5,000,000 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 Manufacturers and Traders Trust Company if it is
required to succeed the Servicer under the Pooling and Servicing Agreement)
agrees to indemnify and hold the Trustee 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 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 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 and/or Owner in respect of such claim. The Trustee may, if necessary,
reimburse the Servicer from amounts otherwise distributable on the Retained
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 and the Rating
Agencies: (1) on or before March 31 of each year, commencing in 1998, 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 June 30 of any year
commencing in 1998, a letter or letters of a firm of independent, nationally
recognized certified public accountants as of the date of the Servicer's fiscal
audit stating that such firm has examined the Servicer's overall servicing
operations in accordance with the requirements of the Uniform Single Attestation
Program for Mortgage Bankers, and stating such firm's conclusions relating
thereto.
S-51
<PAGE>
Removal and Resignation of Servicer
The Owners 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 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.
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 $5,000,000, and
acceptable to the Owners of the Class R Certificates, 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
Manufacturers and Traders Trust Company, a New York banking
corporation, having its principal corporate trust office at One M&T Plaza,
Buffalo, New York, 14240 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:
(i) the amount of the distribution with respect to the each
Class of Certificates (based on a Certificate in the original principal
amount of $1,000);
(ii) the amount of such distribution allocable to principal on
the Home Equity Loans, separately identifying the aggregate amount of
any Prepayments or other recoveries of principal included therein;
(iii) the amount of such distribution allocable to interest on
the Home Equity Loans (based on a Certificate in the original principal
amount of $1,000);
(iv) the Interest Carry Forward Amount for each Class;
(v) the principal amount (or Notional Principal Amount) of
each Class of the Offered Certificates (based on a Certificate in the
original principal (or notional principal) amount of $1,000) which will
be outstanding after giving effect to any payment of principal on such
Payment Date;
(vi) the aggregate Loan Balance of all Home Equity Loans after
giving effect to any payment of principal on such Payment Date;
(vii) 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;
S-52
<PAGE>
(viii) the total of any Substitution Amounts or Loan Purchase
Price amounts included in such distribution;
(ix) the weighted average Coupon Rate of the Home Equity
Loans;
(x) whether a Trigger Event has occurred;
(xi) the Senior Enhancement Percentage;
(xii) the Overcollateralization Amount and the Certificate
Principal Balance of each Class of the Offered Certificates then
outstanding after giving effect to any payment of principal on such
Payment Date; and
(xiii) the amount of any Applied Realized Loss Amount,
Realized Loss Amortization Amount and Unpaid Realized Loss Amount for
each Class as of the close of such Payment Date.
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, together with the information described above, the
following information prepared by the Servicer and furnished to the Trustee for
such purpose;
(a) the number and aggregate principal balances of Home Equity
Loans (i) 30-59 days delinquent, (ii) 60-89 days delinquent and (iii)
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 number and aggregate Loan Balances of the 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;
(f) the amount of cumulative Realized Losses; and
(g) the aggregate Loan Balance of 60+ Day Delinquent Loans.
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
(x) the Sellers or (y) the Owners of a majority of the Percentage Interests
represented by the Offered Certificates or, if there are no Offered
S-53
<PAGE>
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 New York
applicable to agreements made and to be performed therein.
Amendments
The Trustee, the Depositor, the Sellers and the Servicer 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, (iv) correcting or supplementing any
provisions therein which are inconsistent with any other provisions therein or
(v) for any other purpose, provided that in the case of clause (v), such
amendment shall not adversely affect in any material respect any Owner. Any such
amendment shall be deemed not to adversely affect in any material respect any
Owner if there is delivered to the Trustee written notification from each Rating
Agency that such amendment will not cause such Rating Agency to reduce its then
current rating assigned to any Class of the Offered Certificates.
Notwithstanding anything to the contrary, 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
or (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.
Termination of the Trust
The Pooling and Servicing Agreement provides that the Trust will
terminate upon the payment to the Owners of all Certificates 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 Lower-Tier 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 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 may, on any Payment Date when the aggregate outstanding Loan
Balances of the Home Equity Loans is less than 10% of the original aggregate
Loan Balance as of the Closing Date (the "Clean-Up Call Date"), 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 at a price equal to 100% 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 either the
Upper-Tier REMIC or Lower-Tier 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
S-54
<PAGE>
on or after the date which is 30 calendar days following such Final
Determination, the Owners of a majority in Percentage Interests represented by
the Offered Certificates then Outstanding 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 discussion of 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 Trust Estate created by the Pooling and Servicing Agreement will
consist of two segregated asset pools with respect to which elections will be
made to treat each as a separate REMIC for federal income tax purposes. The
Lower-Tier REMIC will issue several uncertificated subclasses of non-voting
interests and the Class A-10IO Certificates (the "Lower-Tier REMIC Regular
Interests"), which will be designated as the regular interests in the Lower-Tier
REMIC, and the Class R Certificate, which will be designated as the residual
interest in the Lower-Tier REMIC. The assets of the Lower-Tier REMIC will
consist of the Home Equity Loans and all other property in the Trust Estate
except for the property in the Trust Estate allocated to the Upper-Tier REMIC.
The Upper-Tier REMIC will issue the Offered Certificates (other than the Class
A-10IO Certificates) which will be designated as the regular interests in the
Upper-Tier REMIC, and an uncertificated "Upper-Tier REMIC Residual Interest,"
which will be designated as the residual interest in the Upper-Tier REMIC. The
assets of the Upper-Tier REMIC will consist of the Lower-Tier REMIC Regular
Interests. See "Formation of the Trust and Trust Property" herein.
The Offered Certificates are expected to be sold at a slight 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. Arter & Hadden, 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 Pooling and Servicing Agreement, each REMIC will be treated
as a REMIC, the Lower-Tier REMIC Regular Interests will be treated as "regular
interests" in the Lower-Tier REMIC, the Offered Certificates (other than the
Class A-10IO Certificates) will be treated as "regular interests" in the
Upper-Tier REMIC, the Upper-Tier REMIC Residual Interest will be treated as the
sole "residual interest" in the Upper-Tier REMIC and the Class R Certificates
will be the sole "residual interest" in the Lower-Tier 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 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 prepayment assumption for the Offered Certificates for calculating
original issue discount is 120% of the Prepayment Assumption. See "Prepayment
and Yield Considerations -- Projected Prepayment and Yield for Offered
Certificates" herein.
As a result of the qualification of the Lower-Tier REMIC and the
Upper-Tier REMIC as REMICs, 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). The total income of the Trust (exclusive of any income that is
taxed at the REMIC level) will be taxable to the Beneficial Owners of the
Certificates.
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.
S-55
<PAGE>
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA") and the Code impose certain restrictions on employee benefit plans
subject to ERISA and other plans or arrangements subject to Section 4975 of the
Code ("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.
The DOL has granted administrative exemptions to each of the
Underwriters (collectively, the "Exemptions"), which exempt 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 any 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 Exemptions are satisfied.
The general conditions which must be satisfied for the Exemption to
apply to 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 Standard & Poor's Ratings Services,
Moody's, Fitch or Duff & Phelps Credit Rating Co.;
S-56
<PAGE>
(iv) the Trustee is not an affiliate of the Underwriters, the
Depositor, the Sellers, the Servicer, any sub-servicer, any borrower whose
obligations under one or more Home Equity Loans constitute more than 5% 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, the 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.
Section I.A of the Exemptions 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 Exemptions 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 Exemptions, the following conditions
are satisfied: (i) such Plan is not sponsored by a member of the Restricted
Group; (ii) at least 50% of each Class of Class A Certificates is acquired by
persons independent of the Restricted Group and at least 50% of the aggregate
interest in the Trust is acquired by persons independent of the Restricted
Group; (iii) the total investment of such Plan in each Class of Class A
Certificates does not exceed 25% of all such Class of Class A Certificates
outstanding at the time of the acquisition; and (iv) immediately after such
investment, no more than 25% 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.
Section I.C of the Exemptions 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 Exemptions, 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.
Section I.D of the Exemptions 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 Class A
Certificates.
The exemptions do not apply to the initial purchase, the holding or the
subsequent resale of the Mezzanine Certificates and Class B Certificates because
such Certificates are subordinate to certain other Classes of Certificates.
Accordingly, Plans may not purchase the Mezzanine Certificates or Class B
Certificates, except that any insurance company may purchase such Certificates
with assets of its general account if the exemptive relief granted by the DOL
for transactions involving insurance company general accounts in Prohibited
Transaction Exemption 95-60, 60 Fed. Reg. 35925 (July 12, 1995) is available
with respect to such investment. Any insurance company proposing to purchase
such Certificates for its general account should consider whether such relief
would be available.
S-57
<PAGE>
Before purchasing an Offered Certificate, a fiduciary of a Plan should
make its own determination as to the availability of the exemptive relief
provided in the Exemptions, and whether the conditions of the Exemptions will be
applicable to such Offered Certificate. Any fiduciary of a Plan considering
whether to purchase an Offered Certificate should consult with its own legal
advisors concerning the impact of ERISA and the Code and the potential
consequences to its 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.
In addition to the matters described above, purchasers of an Offered
Certificate that are insurance companies should consult with their counsel with
respect to the recent United States Supreme Court case interpreting the
fiduciary responsibility rules of ERISA, John Hancock Mutual Life Insurance Co.
v. Harris Trust and Savings Bank 114 S.Ct. 517 (1993). In John Hancock, the
Supreme Court ruled that assets held in an insurance company's general account
may be deemed to be "plan assets" for ERISA purposes under certain
circumstances. Prospective purchasers using insurance company general account
assets should determine whether the decision affects their ability to make
purchases of the Offered Certificates.
RATINGS
It is a condition of the issuance of the Class A Certificates that the
Class A Certificates receive ratings of "Aaa" by Moody's and "AAA" by Fitch. It
is a condition of issuance that the Class M-1, Class M-2 and Class B
Certificates receive ratings of "Aa2," "A3" and "Baa3," respectively, from
Moody's and "AA," "A" and "BBB," respectively, from Fitch. Explanations of the
significance of such ratings may be obtained from Moody's, 99 Church Street, New
York, New York 10007 and Fitch, One State Street Plaza, 33rd Floor, New York,
New York 10004. Such ratings will be the views only of such rating agencies.
There is no assurance that 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.
The ratings assigned by Fitch to pass-through certificates address the
likelihood of the receipt by the Owners of all distributions to which such
Owners are entitled. Fitch's ratings address the structural and legal aspects
associated with the Certificates, including the nature of the underlying loans
and the credit quality of the credit support provider. Fitch's ratings on home
equity pass-through Certificates do not represent any assessment of the
likelihood or rate of principal prepayments. The ratings do not address the
possibility that Owners might suffer a lower than anticipated yield or that
investors in the Class A-10IO Certificates may not fully recover their
investment.
The ratings of Moody's on home equity pass-through certificates address
the likelihood of the receipt by the Owners of all distributions to which such
Owners are entitled. Moody's rating opinions address the structural and legal
issues and tax-related aspects associated with the Certificates, including the
nature of the underlying home equity loans and the credit quality of the credit
support provider, if any. Moody's ratings on pass-through certificates do not
represent any assessment of the likelihood that principal prepayments may differ
from those originally anticipated.
The ratings of Moody's and Fitch do not address the possibility that,
as a result of principal prepayments, certificateholders may receive a lower
than anticipated yield.
The ratings of the Certificates should be evaluated independently from
similar ratings on other types of securities. A security rating is not a
recommendation to buy, sell or hold securities and may be subject to revision or
withdrawal at any time by the assigning rating agency.
The Depositor has not requested a rating of the Certificates offered
hereby by any rating agency other than Moody's and Fitch and the Depositor has
not provided information relating to the Certificates offered hereby or the Home
Equity Loans to any rating agency other than Moody's and Fitch. However, there
can be no assurance as to whether any other rating agency will rate the
Certificates offered hereby or, if another rating agency rates such
Certificates, what rating would be assigned to such Certificates by such rating
agency. Any such unsolicited rating assigned by another rating agency to the
Certificates offered hereby may be lower than the rating assigned to such
Certificates by either or both of Moody's and Fitch.
S-58
<PAGE>
LEGAL INVESTMENT CONSIDERATIONS
The Certificates offered hereby will not constitute "mortgage related
securities" for purpose of SMMEA. The appropriate characterization of the
Certificates offered hereby under various legal investment restrictions, and
thus the ability of investors subject to these restrictions to purchase the
Certificates offered hereby, may be subject to significant interpretive
uncertainties. All investors whose investment authority is subject to legal
restrictions should consult their own legal advisors to determine whether and to
what extent the Certificates offered hereby will constitute legal investments
for them.
The Depositor makes no representation as to the proper characterization
of the Certificates offered hereby for legal investment of financial institution
regulatory purposes, or as to the ability of particular investors to purchase
the Certificates offered hereby under applicable legal investment restrictions.
The uncertainties described above (and any unfavorable future determinations
concerning legal investment or financial institution regulatory characteristics
of the Certificates offered hereby) may adversely affect the liquidity of the
Certificates offered hereby.
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 Offered
Certificates set forth opposite its name below:
Class A-1 Certificates
Underwriters Principal Amount
------------ ----------------
Greenwich Capital Markets, Inc. $20,375,000
ContiFinancial Services Corporation 10,000,000
Morgan Stanley & Co. Incorporated 20,375,000
Class A-2 Certificates
Underwriters Principal Amount
------------ ----------------
Greenwich Capital Markets, Inc. $28,750,000
Morgan Stanley & Co. Incorporated 28,750,000
Class A-3 Certificates
Underwriters Principal Amount
------------ ----------------
Greenwich Capital Markets, Inc. $42,250,000
Morgan Stanley & Co. Incorporated 42,250,000
Class A-4 Certificates
Underwriters Principal Amount
------------ ----------------
Greenwich Capital Markets, Inc. $18,625,000
Morgan Stanley & Co. Incorporated 18,625,000
S-59
<PAGE>
Class A-5 Certificates
Underwriters Principal Amount
------------ ----------------
Greenwich Capital Markets, Inc. $14,125,000
Morgan Stanley & Co. Incorporated 14,125,000
Class A-6 Certificates
Underwriters Principal Amount
------------ ----------------
Greenwich Capital Markets, Inc. $10,000,000
Morgan Stanley & Co. Incorporated 10,000,000
Class A-7 Certificates
Underwriters Principal Amount
------------ ----------------
Greenwich Capital Markets, Inc. $12,125,000
Morgan Stanley & Co. Incorporated 12,125,000
Class A-8 Certificates
Underwriters Principal Amount
------------ ----------------
Greenwich Capital Markets, Inc. $10,750,000
Morgan Stanley & Co. Incorporated 10,750,000
Class A-9 Certificates
Underwriters Principal Amount
------------ ----------------
Greenwich Capital Markets, Inc. $15,000,000
Morgan Stanley & Co. Incorporated 15,000,000
Class A-10IO Certificates
Underwriters Percentage Interest
------------ -------------------
Greenwich Capital Markets, Inc. 100%
Class M-1 Certificates
Underwriters Principal Amount
------------ ----------------
Greenwich Capital Markets, Inc. $9,000,000
Morgan Stanley & Co. Incorporated 9,000,000
Class M-2 Certificates
Underwriters Principal Amount
------------ ----------------
Greenwich Capital Markets, Inc. $11,500,000
Morgan Stanley & Co. Incorporated 11,500,000
S-60
<PAGE>
Class B Certificates
Underwriters Principal Amount
------------ ----------------
Greenwich Capital Markets, Inc. $2,500,000
Morgan Stanley & Co. Incorporated 2,500,000
In the Underwriting Agreement, the Underwriters have agreed, subject to
the terms and conditions set forth therein, to purchase all of the Certificates
offered hereby, if any are purchased. The Depositor has been advised by the
Underwriters that they propose initially to offer the Offered Certificates
(other than the Class A-10IO Certificates) to the public at the respective
offering prices set forth on the cover page hereof and to certain dealers at
such price less a concession not in excess of the respective amounts set forth
in the table below (expressed as a percentage of the relative Certificate
Principal Balance). The Underwriters may allow and such dealers may reallow a
discount not in excess of the respective amounts set forth in the table below to
certain other dealers.
Selling Reallowance
Class Concession Discount
----- ---------- --------
A-1..................... 0.075% 0.050%
A-2..................... 0.080 0.060
A-3..................... 0.105 0.070
A-4..................... 0.135 0.090
A-5..................... 0.165 0.110
A-6..................... 0.195 0.130
A-7..................... 0.225 0.150
A-8..................... 0.240 0.160
A-9..................... 0.225 0.150
M-1..................... 0.240 0.160
M-2..................... 0.255 0.170
B....................... 0.270 0.180
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.
The Depositor is an affiliate of ContiFinancial Services Corporation.
CERTAIN LEGAL MATTERS
Certain legal matters relating to the validity of the issuance of the
Certificates will be passed upon for the Sellers by Arter & Hadden, Washington,
D.C. 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
Arter & Hadden. Certain legal matters relating to the issuance of the
Certificates will be passed upon for the Underwriters by Dewey Ballantine, New
York, New York.
S-61
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered
ContiMortgage Home Equity Loan Trust 1997-1 Home Equity Loan Pass-Through
Certificates, Class A, Class M-1, Class M-2 and Class B (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 home
equity 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
I-1
<PAGE>
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:
I-2
<PAGE>
(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 30% 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.
I-3
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
APPENDIX A
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS
Accrual Period S-4
Actuarial Loans S-29
Aggregate Certificate Principal Balance S-2
Applied Realized Loss Amount S-11
Appraised Values S-24
Balloon Loans S-18
Beneficial Owners S-14
Book-Entry Certificates S-40
Business Day S-4
Cede S-14
Cedel S-14
CEDEL Participants S-42
Certificate Account S-38
Chase S-14
Citibank S-14
Class S-1
Class A Certificates S-1
Class A Principal Distribution Amount S-8
Class A-1 Certificates S-1
Class A-2 Certificates S-1
Class A-3 Certificates S-1
Class A-4 Certificates S-1
Class A-5 Certificates S-1
Class A-6 Certificates S-1
Class A-7 Certificates S-1
Class A-8 Certificates S-1
Class A-9 Certificates S-1
Class A-9 Lockout Distribution Amount S-7
Class A-9 Lockout Percentage S-7
Class A-9 Lockout Pro Rata Distribution Amount S-7
Class A-10IO Certificates S-1
Class B Applied Realized Loss Amount S-46
Class B Certificate Principal Balance S-46
Class B Certificates S-1
Class B Principal Distribution Amount S-8
Class B Realized Loss Amortization Amount S-46
Class Distribution Amount S-4
Class M-1 Applied Realized Loss Amount S-46
Class M-1 Certificate Principal Balance S-46
Class M-1 Certificates S-1
Class M-1 Principal Distribution Amount S-8
Class M-2 Applied Realized Loss Amount S-46
Class M-2 Certificate Principal Balance S-46
Class M-2 Certificates S-1
Class M-2 Principal Distribution Amount S-8
Class M-2 Realized Loss Amortization Amount S-47
Class M-1 Realized Loss Amortization Amount S-46
Class R Certificates S-2
Clean-Up Call Date S-13
Closing Date S-2
Code S-15
Combined Loan-to-Value Ratios S-26
Commission 3
Compensating Interest S-50
Cooperative S-42
Coupon Rates S-3
Current Interest S-5
Cut-Off Date S-2
Daily Collections S-49
Date-of-Payment Loans S-29
Definitive Certificate S-40
Delinquency Advances S-50
Depositor S-2
DOL S-56
DTC S-14
DTC Participants S-41
ERISA S-56
Euroclear S-14
Euroclear Operator S-42
Euroclear Participants S-42
European Depositaries S-14
Extra Principal Distribution Amount S-9
FHLMC S-52
Final Certification S-49
Final Scheduled Payment Dates S-30
Financial Intermediary S-40
Fitch S-14
FNMA S-52
FNMA Guide S-49
Home Equity Loans S-2
Initial Certificate Principal Balance S-30
Interest Amount Available S-4
Interest Carry Forward Amount S-5
Interest Remittance Amount S-5
Liquidated Home Equity Loan S-7
<PAGE>
Loan Balance S-2
Loan Purchase Price S-47
Lower-Tier REMIC S-14
Lower-Tier REMIC Regular Interests S-55
Mezzanine Certificates S-1
Monthly Excess Cashflow Amount S-4
Monthly Excess Interest Amount S-11
Monthly Remittance Date S-7
Moody's S-14
Mortgages S-2
Mortgagor S-29
Net Liquidation Proceeds S-49
Notes S-2
Notional Principal Amount S-1
Offered Certificates S-1
Originator S-2
Overcollateralization Amount S-8
Overcollateralization Deficiency S-9
Overcollateralization Release Amount S-9
Participants S-40
Pass-Through Rate S-39
Payment Date S-4
Percentage Interest S-38
Plans S-56
Pooling and Servicing Agreement S-2
Preference Amount S-9
Prepayment Assumption S-31
Prepayments S-16
Preservation Expenses S-50
Principal and Interest Account S-49
Principal Distribution Amount S-6
Principal Remittance Amount S-7
Properties S-2
Qualified Replacement Mortgage S-49
Rating Agencies S-14
Realized Loss S-10
Record Date S-4
Register S-38
Registrar S-38
Relevant Depositary S-40
REMIC S-15
REMIC Opinion S-47
Remittance Period S-7
Retained Certificates S-2
Riegle Act S-18
Rules S-41
Sellers S-2
Senior Enhancement Percentage S-8
Senior Specified Enhancement Percentage S-9
Servicer S-2
Servicing Advance S-50
Servicing Fee S-9
SMMEA S-15
Stepdown Date S-8
Sub-Servicers S-19
Subordinate Certificates S-1
Sub-Servicing Agreements S-19
Substitution Amount S-49
Targeted Overcollateralization Amount S-9
Terms and Conditions S-42
Trigger Event S-7
Trust S-37
Trust Estate S-37
Trustee S-2
Unpaid Realized Loss Amount S-47
Upper-Tier REMIC S-14
Upper-Tier REMIC Residual Interest S-55
Weighted average life S-30
A-1
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<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, or the debt obligation of,
such Trust. The assets of a Trust will include one or more of the following: (i)
single family 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, an election 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."
An investor should carefully review the information in the related
Prospectus Supplement concerning the risks associated with the different types
and classes of Certificates.
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 CERTIFICATES 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 April 17, 1996.
<PAGE>
[THIS PAGE INTENTIONALY LEFT BLANK]
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page Page
<S> <C>
SUMMARY OF PROSPECTUS................................... 1 USE OF PROCEEDS......................................... 34
RISK FACTORS............................................ 6 THE DEPOSITOR........................................... 34
DESCRIPTION OF THE CERTIFICATES......................... 9 CERTAIN LEGAL ASPECTS OF THE MORTGAGE
General............................................ 9 ASSETS............................................. 34
Classes of Certificates............................ 10 General............................................ 34
Distributions of Principal and Interest............ 11 Foreclosure........................................ 35
Book Entry Registration............................ 13 Soldiers' and Sailors' Civil Relief Act............ 40
List of Owners of Certificates..................... 13 The Contracts...................................... 40
THE TRUSTS.............................................. 13 The Title I Program................................ 43
Mortgage Loans..................................... 14 LEGAL INVESTMENT MATTERS................................ 47
Contracts.......................................... 15 ERISA CONSIDERATIONS.................................... 48
Mortgage-Backed Securities......................... 16 CERTAIN FEDERAL INCOME TAX CONSEQUENCES................. 50
Other Mortgage Securities.......................... 17 Federal Income Tax Consequences For REMIC
CREDIT ENHANCEMENT...................................... 17 Certificates................................... 50
SERVICING OF MORTGAGE LOANS AND Taxation of Regular Certificates................... 51
CONTRACTS.......................................... 22 Taxation of Residual Certificates.................. 57
Payments on Mortgage Loans......................... 22 Treatment of Certain Items of REMIC Income and
Advances........................................... 23 Expense........................................ 59
Collection and Other Servicing Procedures.......... 23 Tax-Related Restrictions on Transfer of Residual
Primary Mortgage Insurance......................... 25 Certificates................................... 61
Standard Hazard Insurance.......................... 25 Sale or Exchange of a Residual Certificate......... 63
Title Insurance Policies........................... 26 Taxes That May Be Imposed on the REMIC Pool........ 63
Claims Under Primary Mortgage Insurance Policies Liquidation of the REMIC Pool...................... 64
and Standard Hazard Insurance Policies; Other Administrative Matters............................. 64
Realization Upon Defaulted Loan................ 26 Limitations on Deduction of Certain Expenses....... 64
Servicing Compensation and Payment of Expenses..... 27 Taxation of Certain Foreign Investors.............. 65
Master Servicer.................................... 27 Backup Withholding................................. 66
ADMINISTRATION.......................................... 28 Reporting Requirements............................. 66
Assignment of Mortgage Assets...................... 28 Federal Income Tax Consequences for Certificates as
Evidence as to Compliance.......................... 30 to Which No REMIC Election Is Made............. 67
The Trustee........................................ 30 Premium and Discount............................... 68
Administration of the Certificate Account.......... 31 Stripped Certificates.............................. 70
Reports............................................ 32 Reporting Requirements and Backup Withholding...... 72
Forward Commitments; Pre-Funding................... 32 Taxation of Certain Foreign Investors.............. 72
Servicer Events of Default......................... 32 Taxation of Securities Classified as Partnership
Rights Upon Servicer Event of Default.............. 33 Interests...................................... 73
Amendment.......................................... 33 PLAN OF DISTRIBUTION.................................... 73
Termination........................................ 33 LEGAL MATTERS........................................... 73
FINANCIAL INFORMATION................................... 73
INDEX TO LOCATION OF PRINCIPAL DEFINED
TERMS..............................................A-1
</TABLE>
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 Securities Exchange Act of 1934
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>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<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
and in the related Prospectus Supplement.
Securities............... Asset Backed Certificates, issuable 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") or the
debt obligation of a Trust issued under an
indenture.
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 the 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) 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, (iii) Mortgage Loans
secured by junior liens on the related mortgaged
properties, including Title I Loans and other types
of home improvement retail installment contracts.
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
1
<PAGE>
(i.e., not insured or guaranteed by any government
agency) or insured by the Federal Housing
Administration ("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
2
<PAGE>
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.
3
<PAGE>
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 subordination, cross
support, mortgage pool insurance, special hazard
insurance, a bankruptcy bond, reserve funds, other
insurance, guaranties and similar instruments and
arrangements. The protection against losses afforded
by any such Credit Enhancement will be limited. 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.
4
<PAGE>
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 a REMIC election
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.
5
<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
6
<PAGE>
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.
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. 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
7
<PAGE>
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
8
<PAGE>
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; Certificates which represent debt obligations of the
Trust will be issued pursuant to an indenture between the Trust and an indenture
trustee (the "Indenture Trustee"). 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 the Indenture Trustee in the case of Certificates which
represent debt obligations of a Trust) or such other office or agency maintained
for such purposes by the Trustee (or the Indenture Trustee in the case of
Certificates which represent debt obligations of a Trust). The Trustee (or the
Indenture 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
9
<PAGE>
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, or the debt obligations payable from,
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, or the debt obligations payable
from, 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.
10
<PAGE>
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
11
<PAGE>
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.
12
<PAGE>
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 (or Indenture Trustee in the case of
Certificates representing debt obligations of a Trust) 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; and (vi) 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
13
<PAGE>
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 (and of the indenture in
the case of Certificates which represent debt obligations of a Trust) 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 classification of single family mortgage loans, defined
generally as loans on residences containing one to four dwelling units. 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. 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.
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.
14
<PAGE>
(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.
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.
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
15
<PAGE>
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
16
<PAGE>
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 transferrable 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.
17
<PAGE>
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
18
<PAGE>
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.
19
<PAGE>
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 -- 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 -- 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
area), 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.
20
<PAGE>
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.
21
<PAGE>
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
22
<PAGE>
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 -- 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.
23
<PAGE>
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.
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.
24
<PAGE>
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".
25
<PAGE>
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.
26
<PAGE>
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.
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.
27
<PAGE>
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
28
<PAGE>
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
29
<PAGE>
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.
In the case of Certificates representing debt obligations of a Trust
all assets of the Trust will be pledged to the Indenture Trustee.
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,
30
<PAGE>
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.
31
<PAGE>
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
32
<PAGE>
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
33
<PAGE>
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
34
<PAGE>
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
35
<PAGE>
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
36
<PAGE>
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.
37
<PAGE>
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.
38
<PAGE>
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
39
<PAGE>
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
40
<PAGE>
repay the loan evidenced thereby, and (b) the grant of a security interest in
the Manufactured Home to secure repayment of such lois. 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
41
<PAGE>
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.
42
<PAGE>
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
43
<PAGE>
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, ia 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
44
<PAGE>
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
45
<PAGE>
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.
46
<PAGE>
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
judgement 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
47
<PAGE>
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
48
<PAGE>
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 trans
action and will satisfy the other requirements of ERISA and the Code.
49
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is based upon the opinion of Arter & Hadden, 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 including recent amendments under the Omnibus
Budget Reconciliation Act of 1993 ("OBRA"), as well as final regulations
concerning REMICs (the "REMIC Regulations") promulgated on December 23, 1992,
and final regulations under Sections 1271 through 1273 and 1275 of the Code
concerning debt instruments promulgated on January 27, 1994 (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, particularly with respect to federal income tax changes effected
by OBRA and the REMIC Regulations. 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, Arter & Hadden, 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 mutual
savings bank or a domestic building and loan association (a "Thrift
Institution") will constitute "qualifying real property loans" within the
meaning of Code Section 593(d)(1) in the same proportion that the assets of the
REMIC Pool would be so treated. 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
50
<PAGE>
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 Thrift Institutions 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 593(d)(1) and
856(c)(5)(A), 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 might be entitled to treatment as a grantor trust under the rules
described in "Federal Income Tax Consequences for Certificates as to Which No
REMIC Election Is Made." In that case, no entity-level tax would be imposed on
the REMIC Pool. Alternatively, the Regular Certificates may continue to be
treated as debt instruments for federal income tax purposes; but the REMIC Pool
could be treated as a taxable mortgage pool (a "TMP"). If the REMIC Pool is
treated as a TMP, any residual income of the REMIC Pool (income from the
Mortgage Assets less 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. On the other
hand, an entity with multiple classes of ownership interests may be treated as a
separate association taxable as a corporation under Treasury regulations, and
the Regular Certificates may be treated as equity interests therein. 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,
51
<PAGE>
original issue discount and market 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 a
late payment or nonpayment is expected to be penalized or reasonable remedies
exist to compel payment. Certain debt securities may provide for default
remedies in the event of late payment or nonpayment of interest. The interest on
such debt securities will be unconditionally payable and constitute qualified
stated interest, not OID. However, absent clarification of the OID Regulations,
where debt securities do not provide for default remedies, the interest payments
will 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. Regular
Certificateholders should consult their own tax advisors to determine the issue
price and stated redemption price at maturity of a Regular Certificate.
52
<PAGE>
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 or 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. In the
event of a change in circumstances that does not result in a substantially
contemporaneous pro rata prepayment, the yield and maturity of the Regular
Certificates are redetermined by treating the Regular Certificates as reissued
on the date of the change for an amount equal to the adjusted issue price of the
Regular Certificates. 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.
53
<PAGE>
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 zero 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 is a rate based on changes in the
price of actively traded property or an index of such prices or is a rate based
on (including multiples of) one or more qualified floating rates. 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. 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
54
<PAGE>
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.
Where the issue price of a Regular Certificate exceeds the original
principal amount of the Regular Certificate, it appears appropriate to reduce
the ordinary income reportable for an accrual period by a portion of such excess
in a manner similar to the amortization of premium on the constant yield method.
Under proposed regulations (the "contingent payment rules"), a Regular
Certificate that provides for (i) non-contingent payments greater than or equal
to its issue price and (ii) one or more contingent payments determined by
reference to the value of publicly traded stock, securities, commodities, or
other publicly traded property must be divided into its component parts for
purposes of performing original issue discount calculations (and possibly for
other federal income tax purposes as well). The non-contingent portion of the
Regular Certificate would be treated as a debt instrument, and the original
issue discount accruals on that portion would be computed in the same manner as
with any non-contingent debt instrument. The issue price of the non-contingent
portion would be that portion of the issue price of the Regular Certificate that
reflects the right to receive the non-contingent payments, determined in the
same manner as if the separate non-contingent debt instrument were a debt
instrument issued as part of an investment unit. The contingent components of
the Regular Certificate would constitute options or other property rights and
would be taxed as if issued as a separate instrument. No accrual of original
issue discount generally would be required with respect to such components under
the contingent payment rules. Accordingly, the rate at which income is accrued
by a Certificateholder may vary depending on whether the original issue discount
rules or the contingent payment rules apply to certain variable rate debt
instruments.
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
55
<PAGE>
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 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, although it is unclear
whether the alternatives to the constant interest method described above under
"Market Discount" are available. Except as otherwise provided in Treasury
regulations yet to be issued amortizable bond premium will be treated as an
offset to interest income on a Regular Certificate rather than as a separate
deduction item. Purchasers who pay a premium for their Regular Certificates
should consult their tax advisors regarding the election to amortize premium and
the method to be employed.
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). The maximum tax rate for individuals on the excess of net long-term
capital gain over net short-term capital loss is 28%.
56
<PAGE>
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 to the extent that such classes are not issued
with substantial discount. 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 Certificateholders 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. Investors
57
<PAGE>
should consult their own advisors concerning the proper tax and accounting
treatment of their investment in Residual Certificates.
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 same 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 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 18, 1993, the Internal Revenue Service released temporary
regulations (the "Temporary 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 Temporary Regulations provide that for purposes of this
mark-to-market requirement, a "negative value" Residual Certificate is not
treated as a security and thus may not be marked to market. In general, a
Residual Certificate has negative value if, as of the date a taxpayer acquires
the Residual Certificate, the present value of the tax liabilities associated
with holding the Residual Certificate exceeds the sum of (i) the present value
of the expected future distributions on the Residual Certificate, and (ii) the
present value of the anticipated tax savings associated with holding the
Residual Certificate as the REMIC generates losses. The amounts and present
values of the anticipated tax liabilities, expected future distributions and
anticipated tax savings are all to be determined using (i) the prepayment and
reinvestment assumptions adopted under Section 1272(a)(6), or that would have
been adopted had the REMIC's regular interests been issued with original issue
discount, (ii) any required or permitted clean up calls, or required qualified
liquidation, provided for in the REMIC's organizational documents
58
<PAGE>
and (iii) a discount rate equal to the "applicable Federal rate" instrument
issued on the date of acquisition of the Residual Certificate ending on or after
December 31, 1993. Prospective purchasers of a Residual Certificate should
consult their tax advisors regarding the possible application of the Temporary
Regulations.
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." However, the rules of Code Section 1276 concerning market
discount income will not apply in the case of Mortgage Assets originated on or
prior to July 18, 1984, if any. With respect to such Mortgage Assets market
discount is generally includible in REMIC taxable income or ordinary gross
income pro rata as principal payments are received. Under another interpretation
of the Code and relevant legislative history, market discount on such Mortgage
Assets might be required to be recognized currently by the REMIC, in the same
manner that market discount would be recognized with respect to Mortgage Assets
originated after July 18, 1984. Under that method, a REMIC would tend to
recognize market discount more rapidly than it would otherwise. In either case,
the deduction of a portion of the interest expense on the Regular Certificates
allocable to such discount may be deferred until such discount is included in
income, and any gain on the sale or exchange thereof will be treated as ordinary
income to the extent of the deferred interest deductible at that time.
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. Because substantially all the mortgagors with
respect to the Mortgage Assets are expected to be individuals, Code Section 171
will not be available. 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, with an exception
discussed below for certain thrift institutions, 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. Except as
discussed below with respect
59
<PAGE>
to excess inclusions from Residual Certificates without "significant value,"
this general rule does not apply to thrift institutions to which Code Section
593 applies. For this purpose a thrift institution and its qualified subsidiary
are considered a single corporation. A qualified subsidiary is one all the stock
of which, and substantially all the debt of which, is held by the thrift
institution and which is organized and operating exclusively in connection with
the organization and operation of one or more REMICs. Except in the case of a
thrift institution (including qualified subsidiaries) members of an affiliated
group are treated as one corporation for purposes of applying the limitation on
offset of excess inclusion income.
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 purposes 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. However, the exception from
the excess inclusion rules applicable to thrift institutions does not apply if
the Residual Certificates do not have significant value. Under the REMIC
Regulations, the Residual Certificates will have significant value if: (i) the
aggregate of the issue prices of the Residual Certificates is at least two
percent of the aggregate issue prices of all Regular Certificates and Residual
Certificates in the REMIC and (ii) the anticipated weighted average life of the
Residual Certificates is at least 20 percent of the REMIC's anticipated weighted
average life based on the prepayment and reinvestment assumptions used in
pricing the transaction and any recognized or permitted clean up calls or any
required qualified liquidation. Although not entirely clear, the REMIC
Regulations indicate that the significant value determination is made only on
the Startup Day. The anticipated weighted average life of a Residual Certificate
with a principal balance and a market rate of interest is computed by
multiplying the amount of each expected principal payment by the number of years
(or portions thereof) from the Startup Day, adding these sums and dividing by
the total principal expected to be paid on such Residual Certificate based on
the relevant prepayment assumption and expected reinvestment income. The
anticipated weighted average life of a Residual Certificate with either no
specified principal balance or a principal balance and rights to interest
payments disproportionate to such principal balance, would be computed under the
formula described above but would include all payments expected on the Residual
Certificate instead of only the principal payments. The anticipated weighted
average life of a REMIC is a weighted average of the anticipated weighted
average lives of all classes of interest in the REMIC.
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.
60
<PAGE>
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.
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
61
<PAGE>
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 of 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. This rule appears intended to
apply to a transferee who is not a "U.S. Person" (as defined below), unless such
transferee's income is effectively connected with the conduct of a trade or
business within the United States. 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
62
<PAGE>
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.
The Conference Committee Report to the 1986 Act provides that, except
as provided in Treasury regulations yet to be issued the wash sale rules of Code
Section 1091 will apply to disposition of Residual Certificates. Consequently,
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 including the was not created to avoid
prohibited transaction rules.
63
<PAGE>
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 two years, with 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 other
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
64
<PAGE>
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
from the 30% withholding tax (or lower treaty rate) 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
65
<PAGE>
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." Investors who are Non-U.S. Persons
should consult their own tax advisors regarding the specific tax consequences to
them of owning Residual Certificates.
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 for
calendar years beginning after 1990.
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 by the end of the month
following the close of each calendar quarter (41 days after the end of a quarter
under proposed Treasury regulations) in which the REMIC Pool is in existence.
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."
66
<PAGE>
Federal Income Tax Consequences for Certificates as to Which No REMIC Election
Is Made
Arter & Hadden, 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 be subject to limitation
with respect to 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 an 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, Arter & Hadden, 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 financial institution
described in Code Section 593(a) will be considered to represent
"qualifying real property loans" within the meaning of Code Section
592(d)(1), provided that the real property securing the Mortgage Assets
represented by that Certificate is of the type described in such
section.
67
<PAGE>
3. 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) (5) (A) 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)(B).
4. 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. Code Section 593(d)(l)(C) provides that the
term "qualifying real property loan" does not include a loan "to the extent
secured by a deposit in or share of the taxpayer." The application of this
provision to a buy-down fund with respect to a buy-down Mortgage Loan is
uncertain, but may require that a taxpayer's investment in a buy-down Mortgage
Loan be reduced by the buy-down fund. As to the treatment of buy-down Mortgage
Assets as "qualifying real property loans" under Code Section 593(d)(i) if the
exception of Code Section 593(d)(1)(C) is inapplicable, as "loans . . . secured
"by an interest in real property" under Code Section 7701(a)(19)(C)(v), as "real
estate assets" under Code Section 856(c)(5)(A), and as "obligation[s]
principally secured by an interest in real property" under Code Section
860G(a)(3)(A), 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
68
<PAGE>
the issue price and the original principal amount of such Mortgage Assets (i.e.,
points) will be includible by such holder.
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, except that the income reported by a cash method holder may
be slightly accelerated. 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.
69
<PAGE>
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) a class of 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 servicing fees will be allocated 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 limitation 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
70
<PAGE>
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
"qualifying real property loans" within the meaning or Code Section 593(d)(1),
"real estate assets" within the meaning of Code Section 856(c)(A),
"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)(3)(B),
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 "-- 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.
As an alternative to the method described above, the fact that some of
or all the interest payments with respect to the Stripped Certificates will not
be made if the Mortgage Assets are prepaid could lead to the interpretation that
such interest payments are "contingent" within the meaning of the proposed
regulations issued under Code Section 1274 that address the treatment of
contingent payments. If the rules of those proposed regulations apply, treatment
of a Stripped Certificate under such rules depends on whether the aggregate
amount of principal payments, if any, to be made on the Stripped Certificate is
less than or greater than its issue price. If the aggregate principal payments
are greater than or equal to the issue price, the principal payments would be
treated as a separate installment obligation issued at a price equal to the
purchase price for the Stripped Certificate. In such case, original issue
discount would be calculated and accrued under the method described above
without consideration of the interest payments with respect to the Stripped
Certificate. Such payments of interest would be includible in the Stripped
Certificateholder's gross income in the taxable year in which the amounts become
fixed.
71
<PAGE>
If the aggregate amount of principal payments to be made on the Stripped
Certificate is less than its issue price, each payment of principal would be
treated as a return of basis. Each payment of interest would be treated as
includible in gross income to the extent of the applicable Federal rate under
Code Section 1274(d), as applied to the adjusted basis of the Stripped
Certificate, while amounts received in excess of the applicable Federal rate, as
applied to the adjusted basis of the Stripped Certificate, would be
characterized as a return of basis until the total amount of interest payments
treated as a return of basis equalled the excess of the purchase price over the
aggregate stated principal payments. Any additional interest payments thereafter
would be treated as ordinary income. While not free from doubt uncertainty as to
the payment of interest arising as a result of the possibility of prepayment of
the Mortgage Assets should not cause the rules under the proposed contingent
payment regulations to apply to interest with respect to the Stripped
Certificates.
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 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 original Stripped
Certificateholder should be 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.
72
<PAGE>
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."
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, Arter & Hadden, special counsel
to the Depositor, is of the opinion that (unless otherwise limited in the
related Prospectus Supplement) the Trust will be characterized as a partnership
and not an association taxable as a corporation for federal income tax purposes,
which will also cover any material federal income tax consequences applicable to
the Owners.
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 Arter & Hadden,
Washington, D.C. 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
Arter & Hadden.
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
73
<PAGE>
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]
74
<PAGE>
<TABLE>
<CAPTION>
APPENDIX A
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS
Page Page
<S> <C>
1986 Act...............................51 Mortgages..............................14
Agreement...............................1 Mortgagors.............................22
Annual Reduction.......................46 NCUA...................................22
Applicable Accounting Standards........30 Non-Priority Certificates..............11
Balloon Loans...........................6 Non-U.S. Person........................65
Beneficial Owners.......................4 Noneconomic Residual Interest..........62
BIF....................................31 Nonrecoverable Advance.................23
Book Entry Certificates.................4 Notional Principal Balance.............12
Certificate Account....................11 OBRA...................................50
Certificate Interest Rate..............10 OID Regulations........................50
Certificate Principal Balance...........9 Original Value.........................15
Certificate Register....................9 OTS....................................39
Certificate Registrar...................9 Owners.................................11
Certificateholder......................67 Partnership Interests..................73
Certificates............................1 Pass-Through Entity....................61
Clearing Agency.........................4 Pass-Through Rate.......................3
Clearing Agency Participants............4 Plans..................................48
Code....................................5 Policy Statement.......................48
Companion Certificates.................11 Pool Insurer...........................19
Compound Interest Certificates.........10 Pre-Funding Account.....................3
Contract Loan Schedule.................29 Pre-Funding Agreement...................3
Contract Pool..........................15 Prepayment Assumption..................53
Contracts..............................15 Principal Balance......................15
Cooperative Loans......................14 Principal Prepayments..................12
Cooperatives............................1 Priority Certificates..................11
Credit Enhancement......................4 Property Improvement Loans.............43
Credit Enhancer.........................8 PTE 83-1...............................49
Custodial Account......................22 Record Date............................11
Cut-Off Date...........................10 Regular Certificateholder..............52
Defective Mortgage Loan................30 Regular Certificates...................50
Delivery Date...........................9 REIT...................................50
Deposit Date...........................29 Relief Act..............................8
Depositor...............................1 REMIC...................................5
Disqualified Organization..............61 REMIC Certificates.....................50
Distribution Date......................11 REMIC Pool.............................50
DOL....................................48 REMIC Regulations......................50
Eligible Investments...................31 Remittance Date........................22
ERISA...................................5 Remittance Rate........................22
Events of Default......................32 Reserve Fund...........................21
FDIC...................................22 Residual Certificateholders............57
FHA.....................................2 Residual Certificates..................50
FHLMC...................................2 Retail Class Certificate...............52
Financial Guaranty Insurance Policy....17 SAIF...................................31
Financial Guaranty Insurer.............17 Scheduled Amortization Certificates....11
FNMA....................................2 Seller................................. 1
Garn-St. Germain Act...................39 Senior Certificates....................18
GNMA....................................2 Servicer................................1
HUD....................................44 SMMEA...................................5
Indenture Trustee.......................9 Special Allocation Certificates........11
Insurance Paying Agent.................17 Special Hazard Insurance Policy........20
Insurance Proceeds.....................22 Special Hazard Insurer.................20
Insured Payment........................17 Standard Certificate...................67
Interest Accrual Period................11 Stripped Certificateholder.............70
Liquidation Proceeds...................22 Stripped Certificates..................70
Loan-to-Value Ratio....................15 Subordinated Certificates..............18
Manufactured Home......................15 Thrift Institution.....................50
Manufactured Home Loans................43 Title I Contracts......................43
Manufacturer's Invoice Price...........16 Title I Loans..........................43
Master Servicer.........................1 Title I Program........................43
MBS.....................................2 TMP....................................51
MBS Agreement..........................16 Trust...................................1
MBS Issuer.............................16 Trustee.................................1
MBS Servicer...........................16 U.S. Person............................62
MBS Trustee............................16 UCC....................................37
Monthly Advance........................23 Underwriters...........................73
Mortgage Assets.........................1 VA......................................2
Mortgage Loans..........................1
</TABLE>
A-1
<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............................................................S-1
Risk Factors ...............................................................S-16
The Sellers and Servicer....................................................S-18
Use of Proceeds.............................................................S-23
The Depositor...............................................................S-23
The Home Equity Loan Pool...................................................S-23
Prepayment and Yield Considerations.........................................S-29
Formation of the Trust and Trust Property...................................S-37
Additional Information......................................................S-38
Description of the Offered Certificates.....................................S-38
Credit Enhancement..........................................................S-43
The Pooling and Servicing Agreement.........................................S-47
Certain Federal Income Tax Consequences.....................................S-55
ERISA Considerations........................................................S-56
Ratings.....................................................................S-58
Legal Investment Considerations.............................................S-59
Underwriting................................................................S-59
Certain Legal Matters.......................................................S-61
Global Clearance, Settlement and Tax
Documentation Procedures........................................Annex I
Index to Location of Principal Defined Terms.................................A-1
PROSPECTUS
Summary of Prospectus..........................................................1
Risk Factors...................................................................6
Description of the Certificates................................................9
The Trusts....................................................................13
Credit Enhancement............................................................17
Servicing of the Mortgage Loans and Contracts.................................22
Administration................................................................28
Use of Proceeds...............................................................34
The Depositor.................................................................34
Certain Legal Aspects of the Mortgage Assets..................................34
Legal Investment Matters......................................................47
ERISA Considerations..........................................................48
Certain Federal Income Tax Consequences.......................................50
Plan of Distribution..........................................................73
Legal Matters.................................................................73
Financial Information.........................................................73
Index to Location of Principal Defined Terms.................................A-1
- -----------------------------------------------------
- -----------------------------------------------------
- -----------------------------------------------------
- -----------------------------------------------------
$400,000,000
ContiMortgage Home Equity
Loan Trust 1997-1
ContiMortgage Home Equity
Pass-Through Certificates
Series 1997-1
ContiMortgage Corporation
Seller and Servicer
ContiWest Corporation
Seller
ContiSecurities Asset Funding Corp.
Depositor
-----------
PROSPECTUS SUPPLEMENT
-----------
GREENWICH CAPITAL MARKETS,
INC.
CONTIFINANCIAL SERVICES
CORPORATION
MORGAN STANLEY & CO.
INCORPORATED
January 30, 1997
