<PAGE>
As filed with the Securities and Exchange Commission on August 19, 1998
Registration Statement No. 333-_____
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------------------
CONTISECURITIES ASSET FUNDING CORP.
(Exact name of registrant as specified in governing instruments)
Delaware 13-2937238
(State of incorporation) (IRS Employee Identification Number)
277 Park Avenue
New York, New York 10172
(212) 207-2840
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
James E. Moore
President
ContiSecurities Asset Funding Corp.
277 Park Avenue
New York, New York 10172
Tel: (212) 207-2842
Fax: (212) 207-5251
(Name and Address of agent for service)
Please send copies of communication to:
Christopher DiAngelo, Esq. Alan L. Langus, Esq.
DEWEY BALLANTINE LLP Chief Counsel
1301 Avenue of the Americas ContiTrade Services L.L.C.
New York, New York 10019-6092 277 Park Avenue, 38th Floor
Tel: (212) 259-8000 New York, New York 10172
Fax: (212) 259-6333 Tel: (212) 207-2822
Fax: (212) 207-2937
Approximate date of commencement of proposed
sale to the public: From time to time after the
effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. |_|
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other then securities offered only in connection with dividend or
interest reinvestment plans, check the following box. |X|
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
Pursuant to Rule 429 under the Securities Act of 1933, the Prospectus
filed as part of this Registration Statement may be used in connection with
the securities covered by Registration Statement No. 333-39505.
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Title of each class Proposed Proposed Maximum
of securities being Amount To Be Maximum Offering Aggregate Offering Amount Of
registered Registered (1)(2) Price Per Unit(1) Price Registration Fee (3)
===================================================================================================================================
<S> <C> <C> <C> <C>
Asset-Backed Certificates $891,000,000 100% $891,000,000 $262,845
===================================================================================================================================
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee.
(2) In accordance with Rule 429 of the Securities and Exchange Commission's
Rules and Regulations under Securities Act of 1933, as amended, the Prospectus
included herein is a combined prospectus which also relates to the
Registrant's Registration Statement on Form S-3 (Registration No. 333-39505)
(the "Prior Registration Statement"). The amount of securities eligible to be
sold under the Prior Registration Statement ($890,000,000 as of July 1, 1998)
shall be carried forward to this Registration Statement.
<PAGE>
(3) $295 is paid pursuant to this Registration Statement. The remaining
$262,550 of such amount is attributable to the amount carried forward from
the Prior Registration Statement for which a filing fee was paid at the time of
registration.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
Pursuant to Rule 429 of the Securities and Exchange Commission's
Rules and Regulations under the Securities Act of 1933, as amended, the
Prospectuses contained in this Registration Statement also relate to the
Registrant's Registration Statement on Form S-3 (Registration No. 333-39505).
================================================================================
2
<PAGE>
PROSPECTUS
Asset Backed Certificates
(Issuable in Series)
ContiSecurities Asset Funding Corp.
(Depositor)
This Prospectus relates to Asset Backed Certificates to be issued from
time to time in one or more series (and one or more classes within a series),
certain classes of which may be offered on terms determined at the time of
sale and described in this Prospectus and the related Prospectus Supplement.
Each series of Certificates will be issued by a separate trust (each, a
"Trust") and will evidence either a beneficial ownership interest in, such
Trust. The assets of a Trust will include one or more of the following: (i)
one-to-four family and/or multifamily residential mortgage loans, including
mortgage loans secured by junior liens on the related mortgaged properties and
Title I loans and other types of home improvement retail installment
contracts, (ii) conditional sales contracts and installment sales or loan
agreements or participation interests therein secured by manufactured housing,
(iii) mortgage-backed securities, (iv) other mortgage-related assets and
securities and (v) reinvestment income, reserve funds, cash accounts,
insurance policies, guaranties, letters of credit or other assets as described
in the related Prospectus Supplement.
One or more classes of Certificates of a series may be (i) entitled to
receive distributions allocable to principal, principal prepayments, interest
or any combination thereof prior to one or more other classes of Certificates
of such series or after the occurrence of certain events or (ii) subordinated
in the right to receive such distributions to one or more senior classes of
Certificates of such series, in each case as specified in the related
Prospectus Supplement. Interest on each class of Certificates entitled to
distributions allocable to interest may accrue at a fixed rate or at a rate
that is subject to change from time to time as specified in the related
Prospectus Supplement. The Depositor or its affiliates may retain or hold for
sale from time to time one or more classes of a series of Certificates.
Distributions on the Certificates will be made at the intervals and on
the dates specified in the related Prospectus Supplement from the assets of
the related Trust and any other assets pledged for the benefit of the
Certificates. An affiliate of the Depositor may make or obtain for the benefit
of the Certificates limited representations and warranties with respect to
mortgage assets assigned to the related Trust. Neither the Depositor nor any
affiliates will have any other obligation with respect to the Certificates.
The yield on Certificates will be affected by the rate of payment of
principal (including prepayments) of mortgage assets in the related Trust.
Each series of Certificates will be subject to early termination under the
circumstances described herein and in the related Prospectus Supplement.
If specified in a Prospectus Supplement, one or more separate elections
may be made to treat the Trust for the related series or specified portions
thereof as a "real estate mortgage investment conduit" ("REMIC") for federal
income tax purposes. See "Certain Federal Income Tax Consequences" herein and
in the related Prospectus Supplement.
It is a condition to the issuance of the Certificates that the
Certificates be rated in not less than the fourth highest rating category by a
nationally recognized rating organization.
See "Risk Factors" beginning on page 6 herein and in the related
Prospectus Supplement for a discussion of significant matters affecting
investments in the Certificates.
See "ERISA Considerations" herein and in the related Prospectus
Supplement for a discussion of restrictions on the acquisition of Certificates
by "plan fiduciaries."
THE ASSETS OF A TRUST ARE THE SOLE SOURCE OF PAYMENTS ON THE RELATED
CERTIFICATES. THE CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION
OF THE DEPOSITOR, ANY SERVICER, ANY MASTER SERVICER, ANY ORIGINATOR, ANY
TRUSTEE OR ANY OF THEIR AFFILIATES, EXCEPT AS SET FORTH HEREIN AND IN THE
RELATED PROSPECTUS SUPPLEMENT. NEITHER THE CERTIFICATES NOR THE UNDERLYING
MORTGAGE ASSETS WILL BE GUARANTEED OR INSURED BY ANY GOVERNMENTAL AGENCY OR
INSTRUMENTALITY OR BY THE DEPOSITOR, ANY SERVICER, ANY MASTER SERVICER, ANY
ORIGINATOR, ANY TRUSTEE OR ANY OF THEIR AFFILIATES, EXCEPT AS SET FORTH IN THE
RELATED PROSPECTUS SUPPLEMENT.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS OR ANY RELATED PROSPECTUS SUPPLEMENT.
ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
Offers of the Certificates may be made through one or more different
methods, including offerings through underwriters, as more fully described
herein and in the related Prospectus Supplement. See "Plan of Distribution"
herein and in the related Prospectus Supplement.
Prior to their issuance there will have been no market for the
Certificates nor can there by any assurance that one will develop or if it
does develop, that it will provide the Owners of the Certificates with
liquidity or will continue for the life of the Certificates.
Retain this Prospectus for future reference. This Prospectus may not be
used to consummate sales of Certificates unless accompanied by a Prospectus
Supplement.
The date of this Prospectus is August 19, 1998
<PAGE>
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and any
Prospectus Supplement with respect hereto and, if given or made, such
information or representations must not be relied upon. This Prospectus and
any Prospectus Supplement with respect hereto do not constitute an offer to
sell or a solicitation of an offer to buy any securities other than the
Certificates offered hereby and thereby or an offer of such Certificates to
any person in any state or other jurisdiction in which such offer would be
unlawful. The delivery of this Prospectus at any time does not imply that
information herein is correct as of any time subsequent to its date; however,
if any material change occurs while this Prospectus is required by law to be
delivered, this Prospectus will be amended or supplemented accordingly.
TABLE OF CONTENTS
Page
SUMMARY OF PROSPECTUS........................................1
RISK FACTORS.................................................6
DESCRIPTION OF THE CERTIFICATES..............................9
General.................................................9
Classes of Certificates................................10
Distributions of Principal and Interest................11
Book Entry Registration................................13
List of Owners of Certificates.........................13
THE TRUSTS..................................................13
Mortgage Loans.........................................14
Contracts..............................................17
Mortgage-Backed Securities.............................17
Other Mortgage Securities..............................18
CREDIT ENHANCEMENT..........................................18
SERVICING OF MORTGAGE LOANS AND CONTRACTS...................23
Payments on Mortgage Loans.............................23
Advances...............................................24
Primary Mortgage Insurance.............................26
Standard Hazard Insurance..............................26
Title Insurance Policies...............................28
Claims Under Primary Mortgage Insurance Policies
and Standard Hazard Insurance Policies;
Other Realization Upon Defaulted Loan................28
Realization Upon or Sale of Defaulted
Multifamily Loans....................................28
Master Servicer........................................29
ADMINISTRATION..............................................29
Assignment of Mortgage Assets..........................30
Evidence as to Compliance..............................32
The Trustee............................................32
Administration of the Certificate Account..............32
Reports................................................33
Forward Commitments; Pre-Funding.......................34
Servicer Events of Default.............................34
Rights Upon Servicer Event of Default..................34
Amendment..............................................35
Termination............................................35
USE OF PROCEEDS.............................................36
THE DEPOSITOR...............................................36
CERTAIN LEGAL ASPECTS OF THE MORTGAGE ASSETS................36
General................................................36
Foreclosure............................................37
Soldiers' and Sailors' Civil Relief Act................42
The Contracts..........................................42
The Title I Program....................................44
LEGAL INVESTMENT MATTERS....................................48
ERISA CONSIDERATIONS........................................49
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.....................51
Federal Income Tax Consequences For REMIC Certificates.51
Taxation of Regular Certificates.......................52
Taxation of Residual Certificates......................57
Treatment of Certain Items of REMIC
Income and Expense...................................58
Tax-Related Restrictions on Transfer of
Residual Certificates................................60
Sale or Exchange of a Residual Certificate.............62
Taxes That May Be Imposed on the REMIC Pool............62
Liquidation of the REMIC Pool..........................63
Administrative Matters.................................63
Limitations on Deduction of Certain Expenses...........63
Taxation of Certain Foreign Investors..................64
Backup Withholding.....................................65
Reporting Requirements.................................65
Federal Income Tax Consequences for Certificates
as to Which No REMIC Election Is Made................65
Standard Certificates..................................66
Premium and Discount...................................67
Stripped Certificates..................................68
Reporting Requirements and Backup Withholding..........70
Taxation of Certain Foreign Investors..................71
Taxation of Securities Classified as
Partnership Interests................................71
PLAN OF DISTRIBUTION........................................71
LEGAL MATTERS...............................................72
FINANCIAL INFORMATION.......................................72
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS................73
Until 90 days after the date of each Prospectus Supplement, all
dealers effecting transactions in the related Certificates, whether or not
participating in the distribution thereof, may be required to deliver this
Prospectus and the related Prospectus Supplement. This delivery requirement is
in addition to the obligation of dealers to deliver a Prospectus Supplement
and Prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
AVAILABLE INFORMATION
The Depositor is subject to the informational requirements of the
Securities Exchange Act of 1934 (the "Exchange Act") and in accordance
therewith files reports and other information with the Securities and Exchange
Commission (the "Commission"). Such reports and other information filed by the
Depositor can be inspected and copied at the public reference facilities
maintained by the Commission at its Public Reference Section, 450 Fifth
Street, N.W., Washington, D.C. 20549, and its Regional Offices located as
follows: Chicago Regional Office, 500 West Madison, 14th Floor, Chicago,
Illinois 60661; New York Regional Office, Seven World Trade Center, New York,
New York 10048. Copies of such material can also be obtained at prescribed
rates from the Public Reference Section of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549, and electronically through the Commission's
Electronic Data Gathering, Analysis and Retrieval System at the Commission's
web site (http:\\www.sec.gov). The Depositor does not intend to send any
financial reports to Owners.
<PAGE>
This Prospectus does not contain all of the information set forth in
the Registration Statement (of which this Prospectus forms a part) and
exhibits thereto which the Depositor has filed with the Commission under the
Securities act of 1933 (the "Securities Act") and to which reference is hereby
made.
REPORTS TO OWNERS
The Trustee or other designated person will be required to provide
periodic unaudited reports concerning the Certificates and the Trust to all
registered holders of Certificates of the related series. See
"Administration-Reports."
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed with respect to each respective Trust pursuant to
Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act subsequent to the date
of this Prospectus and prior to the termination of the offering of the
securities of such Trust offered hereby shall be deemed to be incorporated by
reference into this Prospectus when delivered with respect to such Trust. Any
statement contained in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any
other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
Any person receiving a copy of this Prospectus may obtain, without
charge, upon written or oral request, a copy of any of the documents
incorporated by reference herein, except for the exhibits to such documents
(other than the documents expressly incorporated therein by reference).
Requests should be directed to ContiSecurities Asset Funding Corp., 277 Park
Avenue, 38th Floor, New York, New York 10172 (telephone number (212)
207-2840).
<PAGE>
SUMMARY OF PROSPECTUS
The following summary is qualified in its entirety by reference to
the detailed information appearing elsewhere in this Prospectus and by
reference to the Prospectus Supplement relating to a particular series of
Certificates and to the related Agreement which will be prepared in connection
with each series of Certificates. Unless otherwise specified, capitalized
terms used and not defined in this Summary of Prospectus have the meanings
given to them in this Prospectus. An index indicating where certain
capitalized terms used herein are defined appears in Appendix A hereto.
Securities............................ Asset Backed Certificates, issuable
from time to time in series, in
fully registered form or book entry
only form, in authorized
denominations, as described in the
Prospectus Supplement (the
"Certificates"). Each Certificate
will represent a beneficial ownership
interest in a trust (a "Trust")
created from time to time pursuant to
a pooling and servicing agreement or
trust agreement (each, an
"Agreement").
The Depositor......................... ContiSecurities Asset Funding Corp.
(the "Depositor") is a Delaware
corporation. The Depositor's principal
executive offices are located at 277
Park Avenue, 38th Floor, New York, New
York, 10172; telephone number (212)
207-2840. See "The Depositor" herein.
The Depositor or its affiliates may
retain or hold for sale from time to
time one or more classes of a series
of Certificates.
The Servicer.......................... The entity or entities named as the
Servicer in the Prospectus Supplement
(the "Servicer"), will act as
servicer, with respect to the Mortgage
Loans and Contracts included in the
related Trust. The Servicer may be an
affiliate of the Depositor and may be
a seller of Mortgage Assets to the
Depositor (each, a "Seller").
The Master Servicer................... A "Master Servicer" may be specified
in the related Prospectus Supplement
for the related series of Certificates.
The Trustee........................... The trustee (the "Trustee") for each
series of Certificates will be
specified in the related Prospectus
Supplement.
Trust Assets.......................... The assets of a Trust will be
mortgage-related assets (the "Mortgage
Assets") consisting of one or more
of the following types of assets:
A. The Mortgage Loans................ "Mortgage Loans" may include:
(i) conventional (i.e., not insured or
guaranteed by any governmental agency)
Mortgage Loans secured by one-to-four
family residential properties;
(ii) conventional multifamily
mortgage loans ("Conventional
Multifamily Loans") or mortgages
insured by the Federal Housing
Administration (the "FHA")
("FHA-Insured Multifamily Loans"
and together with the Conventional
Multifamily Loans, the "Multifamily
Loans"); (iii) Mortgage Loans secured
by security interests in shares issued
by private, non-profit, cooperative
housing corporations ("Cooperatives")
and in the related proprietary leases
or occupancy agreements granting
exclusive rights to occupy specific
dwelling units in such Cooperatives'
buildings;
<PAGE>
and, (iv) Mortgage Loans secured by
junior liens on the related mortgaged
properties, including Title I Loans
and other types of home improvement
retail installment contracts. The
Mortgage Loans may be located in any
one of the 50 states, the District of
Columbia or the Commonwealth of Puerto
Rico. See "The Trusts - Mortgage
Loans" herein.
B. Contracts......................... Contracts may include conditional
sales contracts and installment sales
or loan agreements or participation
interests therein secured by new or
used Manufactured Homes (as defined
herein). Contracts may be conventional
(i.e., not insured or guaranteed by
any government agency) or insured by
the FHA, including Title I Contracts,
or partially guaranteed by the
Veterans Administration ("VA"), as
specified in the related Prospectus
Supplement. See "The Trusts -
Contracts" herein.
C. Mortgage-
Backed Securities................ "Mortgage-Backed Securities" (or
"MBS") may include (i) private (that
is, not guaranteed or insured by the
United States or any agency or
instrumentality thereof) mortgage
participations, mortgage pass-through
certificates or other mortgage-backed
securities or (ii) certificates
insured or guaranteed by Federal Home
Loan Mortgage Corporation ("FHLMC") or
Federal National Mortgage Association
("FNMA") or Government National
Mortgage Association ("GNMA"). See
"The Trusts - Mortgage-Backed
Securities" herein.
D. Other Mortgage Securities......... Other Mortgage Securities may include
other securities that directly or
indirectly represent an ownership
interest in, or are secured by and
payable from, mortgage loans on real
property or mortgage-backed
securities, such as residual interests
in issuances of collateralized
mortgage obligations or mortgage
pass-through certificates. See "The
Trusts - Other Mortgage Securities"
herein.
Trust assets may also include
reinvestment income, reserve funds,
cash accounts, insurance policies,
guaranties, letters of credit or
other assets as described in the
related Prospectus Supplement.
The related Prospectus Supplement for
a series of Certificates will
describe the Mortgage Assets to be
included in the Trust for such
series.
The Certificates...................... The Certificates of any series may be
issued in one or more classes, as
specified in the Prospectus
Supplement. One or more classes of
Certificates of each series (i) may be
entitled to receive distributions
allocable only to principal, only to
interest or to any combination
thereof; (ii) may be entitled to
receive distributions only of
prepayments of principal throughout
the lives of the Certificates or
during specified periods; (iii) may be
subordinated in the right to receive
distributions of scheduled payments of
principal, prepayments of principal,
interest or any combination thereof to
one or more other classes of
Certificates of such series throughout
the lives of the Certificates or
during specified periods; (iv) may be
entitled to receive such distributions
only after the occurrence of events
specified in the Prospectus
Supplement; (v) may be entitled to
2
<PAGE>
receive distributions in accordance
with a schedule or formula or on the
basis of collections from designated
portions of the assets in the related
Trust; (vi) as to Certificates
entitled to distributions allocable to
interest, may be entitled to receive
interest at a fixed rate or a rate
that is subject to change from time to
time; (vii) may accrue interest, with
such accrued interest added to the
principal or notional amount of the
Certificates, and no payments being
made thereon until certain other
classes of the series have been paid
in full; and (viii) as to Certificates
entitled to distributions allocable to
interest, may be entitled to
distributions allocable to interest
only after the occurrence of events
specified in the Prospectus Supplement
and may accrue interest until such
events occur, in each case as
specified in the related Prospectus
Supplement. The timing and amounts of
such distributions may vary among
classes, over time, or otherwise as
specified in the related Prospectus
Supplement.
Distributions on
the Certificates................. The related Prospectus Supplement will
specify (i) whether distributions on
the Certificates entitled thereto will
be made monthly, quarterly,
semi-annually or at other intervals
and dates out of the payments received
in respect of the Mortgage Assets
included in the related Trust and
other assets, if any, pledged for the
benefit of the related Owners of
Certificates; (ii) the amount
allocable to payments of principal and
interest on any Distribution Date; and
(iii) whether all distributions will
be made pro rata to Owners of
Certificates of the class entitled
thereto.
The aggregate original principal
balance of the Certificates will
equal the aggregate distributions
allocable to principal that such
Certificates will be entitled to
receive; the Certificates will have
an aggregate original principal
balance equal to or less than the
aggregate unpaid principal balance of
the related Mortgage Assets (plus
amounts held in a Pre-Funding
Account, if any) as of the first day
of the month of creation of the
Trust; and the Certificates will bear
interest in the aggregate at a rate
(the "Pass-Through Rate") equal to
the interest rate borne by the
related Mortgage Assets net of
servicing fees and any other
specified amounts.
Pre-Funding Account................... A Trust may enter into an agreement
(each, a "Pre-Funding Agreement") with
the Depositor whereby the Depositor
will agree to transfer additional
Mortgage Assets to such Trust
following the date on which such Trust
is established and the related
Certificates are issued. Any
Pre-Funding Agreement will require
that any Mortgage Loans so transferred
conform to the requirements specified
in such Pre-Funding Agreement. If a
Pre-Funding Agreement is to be
utilized, the related Trustee will be
required to deposit in a segregated
account (each, a "Pre-Funding
Account") all or a portion of the
proceeds received by the Trustee in
connection with the sale of one or
more classes of Certificates of the
related series; subsequently, the
additional Mortgage Assets will be
transferred to the related Trust in
exchange for money released to the
Depositor from the related Pre-Funding
Account. Each Pre-Funding Agreement
will set a specified period during
which any such transfers must occur.
If all moneys originally deposited to
such Pre-Funding Account are not used
by the end of such specified period,
then any remaining moneys will be
applied as a mandatory prepayment of a
class or classes of Certificates as
specified in the related
3
<PAGE>
Prospectus Supplement. The specified
period for the acquisition by a Trust
of additional Mortgage Loans will
generally not exceed three months from
the date such Trust is established.
Optional Termination.................. The Servicer, the Seller, the
Depositor, or, if specified in the
related Prospectus Supplement, the
Owners of a related class of
Certificates or a credit enhancer may
at their respective options effect
early retirement of a series of
Certificates through the purchase of
the Mortgage Assets in the related
Trust. See "Administration -
Termination" herein.
Mandatory Termination................. The Trustee, the Servicer or certain
other entities specified in the
related Prospectus Supplement may be
required to effect early retirement of
a series of Certificates by soliciting
competitive bids for the purchase of
the assets of the related Trust or
otherwise. See "Administration -
Termination" herein.
Advances.............................. The Servicer of the Mortgage Loans and
Contracts will be obligated (but only
to the extent set forth in the related
Prospectus Supplement) to advance
delinquent installments of principal
and/or interest (less applicable
servicing fees) on the Mortgage Loans
and Contracts in a Trust. Any such
obligation to make advances may be
limited to amounts due to the Owners
of Certificates of the related series,
to amounts deemed to be recoverable
from late payments or liquidation
proceeds, to specified periods or to
any combination thereof, in each case
as specified in the related Prospectus
Supplement. Any such advance will be
recoverable as specified in the
related Prospectus Supplement. See
"Servicing of Mortgage Loans and
Contracts" herein.
Credit Enhancement.................... If specified in the related Prospectus
Supplement, a series of Certificates,
or certain classes within such series,
may have the benefit of one or more
types of credit enhancement ("Credit
Enhancement") including but not
limited to overcollateralization,
cross support, mortgage pool
insurance, special hazard insurance, a
bankruptcy bond, reserve funds, other
insurance, guaranties and similar
instruments and arrangements. Credit
Enhancement also may be provided in
the form of subordination of one or
more classes of Certificates in a
series under which losses are first
allocated to any Subordinated
Certificates up to a specified limit.
The protection against losses afforded
by any such Credit Enhancement will be
limited as described in the related
Prospectus Supplement. See "Credit
Enhancement" herein.
Book Entry Registration............... Certificates of one or more classes of
a series may be issued in book entry
form ("Book Entry Certificates") in
the name of a clearing agency (a
"Clearing Agency") registered with the
Securities and Exchange Commission, or
its nominee. Transfers and pledges of
Book Entry Certificates may be made
only through entries on the books of
the Clearing Agency in the name of
brokers, dealers, banks and other
organizations eligible to maintain
accounts with the Clearing Agency
("Clearing Agency Participants") or
their nominees. Transfers and pledges
by purchasers and other beneficial
owners of Book Entry Certificates
("Beneficial Owners") other than
Clearing Agency Participants may be
effected only through Clearing Agency
Participants. All references to the
Owners of Certificates shall mean
4
<PAGE>
Beneficial Owners to the extent
Beneficial Owners may exercise their
rights through a Clearing Agency.
Except as otherwise specified in this
Prospectus or a related Prospectus
Supplement, the term "Owners" shall be
deemed to include Beneficial Owners.
See "Risk Factors - Book Entry
Registration" and "Description of the
Certificates - Book Entry
Registration" herein.
Certain Federal Income Tax
Consequences..................... Federal income tax consequences will
depend on, among other factors,
whether one or more elections are made
to treat a Trust or specified portions
thereof as a "real estate mortgage
investment conduit" ("REMIC") under
the Internal Revenue Code of 1986, as
amended (the "Code"), or, if no REMIC
election is made, whether the
Certificates are considered to be
Standard Certificates, Stripped
Certificates or Partnership Interests.
The related Prospectus Supplement for
each series of Certificates will
specify whether one or more REMIC
elections will be made. See "Certain
Federal Income Tax Consequences"
herein and in the related Prospectus
Supplement.
ERISA Considerations.................. A fiduciary of any employee benefit
plan subject to the Employee
Retirement Income Security Act of
1974, as amended ("ERISA"), or the
Code should carefully review with its
own legal advisors whether the
purchase or holding of Certificates
could give rise to a transaction
prohibited or otherwise impermissible
under ERISA or the Code. Certain
classes of Certificates may not be
transferred unless the Trustee and the
Depositor are furnished with a letter
of representation or an opinion of
counsel to the effect that such
transfer will not result in a
violation of the prohibited
transaction provisions of ERISA and
the Code and will not subject the
Trustee, the Depositor or the Servicer
to additional obligations. See
"Description of the Certificates -
General" herein and "ERISA
Considerations" herein and in the
related Prospectus Supplement.
Legal Investment Matters.............. Certificates that constitute "mortgage
related securities" under the
Secondary Mortgage Market Enhancement
Act of 1984 ("SMMEA") will be so
described in the related Prospectus
Supplement. Certificates that are not
so qualified may not be legal
investments for certain types of
institutional investors, subject, in
any case, to any other regulations
which may govern investments by such
institutional investors. See "Legal
Investment Matters" herein and in the
related Prospectus Supplement.
Use of Proceeds....................... Substantially all the net proceeds
from the sale of a series of
Certificates will be applied to the
simultaneous purchase of the Mortgage
Assets included in the related Trust
(or to reimburse the amounts
previously used to effect such
purchase), the costs of carrying the
Mortgage Assets until sale of the
Certificates and to pay other
expenses. See "Use of Proceeds"
herein.
Rating................................ Each class of Certificates offered by
a Prospectus Supplement will be rated
in one of the four highest rating
categories of a nationally recognized
statistical rating agency; provided,
however, that one or more classes of
Subordinated Certificates and Residual
Certificates, which will not be so
offered, need not be so rated.
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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.
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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
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such warranty that materially adversely affects any Contract would create an
obligation of the Seller to repurchase such Contract unless such breach is
cured. If any related Credit Enhancement is exhausted and recovery of amounts
due on the Contracts is dependent on repossession and resale of Manufactured
Homes securing Contracts that are in default, certain other factors may limit
the ability of the Trust to realize upon the Manufactured Homes or may limit the
amount realized to less than the amount due. See "Certain Legal Aspects of the
Mortgage Assets - The Contracts" herein.
Limited Liquidity. There will be no market for the Certificates of
any series prior to the issuance thereof, and there can be no assurance that a
secondary market will develop or, if it does develop, that it will provide
liquidity of investment or will continue for the life of the Certificates of
such series. The market value of the Certificates will fluctuate with changes
in prevailing rates of interest. Consequently, the sale of Certificates in any
market that may develop may be at a discount from the Certificates' par value
or purchase price. Owners of Certificates generally have no right to request
redemption of Certificates, and the Certificates are subject to redemption
only under the limited circumstances described in the related Prospectus
Supplement. In addition, the Certificates will not be listed on any securities
exchange.
Limited Assets. Owners of Certificates of each series must rely upon
distributions on the related Mortgage Assets, together with the other specific
assets pledged for the benefit of such series (which assets may be subject to
release from such pledge prior to payment in full of the Certificates), for
the payment of principal of, and interest on, that series of Certificates. If
the assets comprising the Trust are insufficient to make payments on such
Certificates, no other assets of the Depositor will be available for payment
of the deficiency. Because payments of principal will be applied to classes of
outstanding Certificates of a series in the priority specified in the related
Prospectus Supplement, a deficiency may have a disproportionately greater
effect on the Certificates of classes having lower priority in payment. In
addition, due to the priority of payments and the allocation of losses,
defaults experienced on the assets comprising a Trust may have a
disproportionate effect on a specified class or classes within such series.
Certain of the Mortgage Loans included in a Trust, particularly those
secured by Multifamily Properties, may not be fully amortizing (or may not
amortize at all) over their terms to maturity and, thus, will require
substantial payments of principal and interest (that is, balloon payments) at
their stated maturity. Mortgage Loans of this type involve a greater degree of
risk than self-amortizing loans because the ability of a Mortgagor to make a
balloon payment typically will depend upon its ability either to fully
refinance the loan or to sell the related Mortgaged Property at a price
sufficient to permit the Mortgagor to make the balloon payment. The ability of
a Mortgagor to accomplish either of these goals will be affected by a number
of factors, including the value of the related Mortgaged Property, the level
of available mortgage rates at the time of sale or refinancing, the
Mortgagor's equity in the related Mortgaged Property, prevailing general
economic conditions, the availability of credit for loans secured by
comparable real properties and, in the case of Multifamily Properties, the
financial condition and operating history of the Mortgagor and the related
Mortgaged Property, tax laws and rent control laws.
It is anticipated that some or all of the Mortgage Loans included in
any Trust, particularly Mortgage Loans secured by Multifamily Properties, will
be nonrecourse loans or loans for which recourse may be restricted or
unenforceable. As to those Mortgage Loans, recourse in the event of Mortgagor
default will be limited to the specific real property and other assets, if
any, that were pledged to secure the Mortgage Loan. However, even with respect
to those Mortgage Loans that provide for recourse against the Mortgagor and
its assets generally, there can be no assurance that enforcement of such
recourse provisions will be practicable, or that the other assets of the
Mortgagor will be sufficient to permit a recovery in respect of a defaulted
Mortgage Loan in excess of the liquidation value of the related Mortgaged
Property.
Limitations, Reduction and Substitution of Credit Enhancement. Credit
Enhancement may be provided in one or more of the forms described in the
related Prospectus Supplement, including, but not limited to, prioritization
as to payments of one or more classes of such series, a Mortgage Pool
Insurance Policy, a Special Hazard Insurance Policy, a bankruptcy bond, one or
more Reserve Funds, other insurance, guaranties and similar instruments and
agreements, or any combination thereof. See "Credit Enhancement" herein.
Regardless of the Credit Enhancement provided, the amount of coverage may be
limited in amount and in most cases will be subject to periodic reduction in
accordance with a schedule or formula. Furthermore, such Credit Enhancement
may
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provide only very limited coverage as to certain types of losses and may provide
no coverage as to certain other types of losses. The Trustee may be permitted to
reduce, terminate or substitute all or a portion of the Credit Enhancement for
any series of Certificates, if the applicable rating agencies indicate that the
then-current rating thereof will not be adversely affected.
Original Issue Discount. All the Compound Interest Certificates and
Stripped Certificates that are entitled only to interest distributions will
be, and certain of the other Certificates may be, issued with original issue
discount for federal income tax purposes. An Owner of a Certificate issued
with original issue discount will be required to include original issue
discount in ordinary gross income for federal income tax purposes as it
accrues, in advance of receipt of the cash attributable to such income.
Accrued but unpaid interest on such Certificates generally will be treated as
original issue discount for this purpose. See "Certain Federal Income Tax
Consequences - Federal Income Tax Consequences for REMIC Certificates," "-
Taxation of Regular Certificates - Variable Rate Regular Certificates,"
"Certain Federal Income Tax Consequences - Federal Income Tax Consequences for
Certificates as to Which No REMIC Election Is Made - Standard Certificates,"
and "Certain Federal Income Tax Consequences - Premium and Discount" and "-
Stripped Certificates" herein.
Book Entry Registration. Because transfers and pledges of Book Entry
Certificates may be effected only through book entries at a Clearing Agency
through Clearing Agency Participants, the liquidity of the secondary market
for Book Entry Certificates may be reduced to the extent that some investors
are unwilling to hold Certificates in book entry form in the name of Clearing
Agency Participants and the ability to pledge Book Entry Certificates may be
limited due to lack of a physical certificate. Beneficial Owners of Book Entry
Certificates may, in certain cases, experience delay in the receipt of
payments of principal and interest because such payments will be forwarded by
the Trustee to the Clearing Agency who will then forward payment to the
Clearing Agency Participants who will thereafter forward payment to Beneficial
Owners. In the event of the insolvency of the Clearing Agency or of a Clearing
Agency Participant in whose name Certificates are recorded, the ability of
Beneficial Owners to obtain timely payment and (if the limits of applicable
insurance coverage by the Securities Investor Protection Corporation are
exceeded, or if such coverage is otherwise unavailable) ultimate payment of
principal and interest on Book Entry Certificates may be impaired.
Certain Matters Relating to Insolvency. The Sellers of the Mortgage
Assets to the Depositor and the Depositor intend that the transfers of such
Mortgage Assets to the Depositor, and in turn to the applicable Trust,
constitute sales rather than pledges to secure indebtedness for insolvency
purposes. If, however, a seller of Mortgage Assets were to become a debtor
under the federal bankruptcy code, it is possible that a creditor,
trustee-in-bankruptcy or receiver of such seller may argue that the sale
thereof by such Seller is a pledge rather than a sale. This position, if
argued or accepted by a court, could result in a delay in or reduction of
distributions on the related Certificates.
Junior Lien Mortgage Loans. Because Mortgage Loans secured by junior
(i.e., second, third, etc.) liens are subordinate to the rights of the
beneficiaries under the related senior deeds of trust or senior mortgages, a
decline in the residential real estate market would adversely affect the
position of the related Trust as a junior beneficiary or junior mortgagee
before having such an effect on the position of the related senior
beneficiaries or senior mortgagees. A rise in interest rates over a period of
time, the general condition of a Mortgaged Property and other factors may also
have the effect of reducing the value of the Mortgaged Property from the value
at the time the junior lien Mortgage Loan was originated and, as a result, may
reduce the likelihood that, in the event of a default by the borrower,
liquidation or other proceeds will be sufficient to satisfy the junior lien
Mortgage Loan after satisfaction of any senior liens and the payment of any
liquidation expenses.
Liquidation expenses with respect to defaulted Mortgage Loans do not
vary directly with the outstanding principal balance of the Mortgage Loans at
the time of default. Therefore, assuming that a Servicer took the same steps
in realizing upon defaulted Mortgage Loans having small remaining principal
balances as in the case of defaulted Mortgage Loans having larger principal
balances, the amount realized after expenses of liquidation would be smaller
as a percentage of the outstanding principal balance of the smaller Mortgage
Loans. To the extent the average outstanding principal balances of the
Mortgage Loans in a Trust are relatively small, realizations net of
liquidation expenses may also be relatively small as a percentage of the
principal amount of the Mortgage Loans.
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Limitations on Interest Payments and Foreclosures. Generally, under
the terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as amended
(the "Relief Act"), or similar state legislation, a Mortgagor who enters
military service after the origination of the related Mortgage Loan (including
a Mortgagor who is a member of the National Guard or is in reserve status at
the time of the origination of the Mortgage Loan and is later called to active
duty) may not be charged interest (including fees and charges) above an annual
rate of 6% during the period of such Mortgagor's active duty status, unless a
court orders otherwise upon application of the lender. It is possible that
such action could have an effect, for an indeterminate period of time, on the
ability of the related Servicer to collect full amounts of interest on certain
of the Mortgage Loans. In addition, the Relief Act imposes limitations that
would impair the ability of the related Servicer to foreclose on an affected
Mortgage Loan during the Mortgagor's period of active duty status. Thus, in
the event that such a Mortgage Loan goes into default, there may be delays and
losses occasioned by the inability to realize upon the Mortgaged Property in a
timely fashion.
Security Ratings. The rating of Certificates credit enhanced through
external credit enhancement such as a letter of credit, financial guaranty
insurance policy or mortgage pool insurance will depend primarily on the
creditworthiness of the issuer of such external credit enhancement device (a
"Credit Enhancer"). Any reduction in the rating assigned to the claims-paying
ability of the related Credit Enhancer below the rating initially given to the
related Certificates would likely result in a reduction in the rating of the
Certificates. See "Ratings" in the Prospectus Supplement.
Other Legal Considerations. Applicable federal and state laws
generally regulate interest rates and other charges, require certain
disclosures, prohibit unfair and deceptive practices, regulate debt
collection, and require licensing of the originators of the mortgage loans and
contracts. Depending on the provisions of the applicable law and the specified
facts and circumstances involved, violations of those laws, policies and
principles may limit the ability to collect all or part of the principal of or
interest on the Mortgage Loans and Contracts and may entitle the borrower to a
refund of amounts previously paid. See "Certain Legal Aspects of the Mortgage
Assets" herein.
DESCRIPTION OF THE CERTIFICATES
Each Trust will be created pursuant to an Agreement entered into
among the Depositor, the Trustee, the Master Servicer, if any, and the
Servicer. The provisions of each Agreement will vary depending upon the nature
of the Certificates to be issued thereunder and the nature of the related
Trust. Certificates which represent beneficial interests in the Trust will be
issued pursuant to the Agreement similar to the form filed as an Exhibit to
the Registration Statement of which this Prospectus is a part. The following
summaries and the summaries set forth under "Administration" describe certain
provisions relating to each series of Certificates. The Prospectus Supplement
for a series of Certificates will describe the specific provisions relating to
such series. The Depositor will provide Owners of Certificates, without
charge, on written request a copy of the Agreement for the related series.
Requests should be addressed to ContiSecurities Asset Funding Corp., 277 Park
Avenue, 38th Floor, New York, New York 10172. The Agreement relating to a
series of Certificates will be filed with the Securities and Exchange
Commission within 15 days after the date of issuance of such series of
Certificates (the "Delivery Date").
The Certificates of a series will be entitled to payment only from
the assets of the Trust and any other assets pledged for the benefit of the
Certificates and will not be entitled to payments in respect of the assets
included in any other trust fund established by the Depositor. The
Certificates will not represent obligations of the Depositor, the Trustee, the
Master Servicer, if any, any Servicer or any affiliate thereof and will not be
guaranteed by any governmental agency. See "The Trusts" herein.
The Mortgage Assets relating to a series of Certificates, other than
Title I Loans and GNMA MBS, will not be insured or guaranteed by any
governmental entity and, to the extent that delinquent payments on or losses
in respect of defaulted Mortgage Assets, are not advanced or paid from any
applicable Credit Enhancement, such delinquencies may result in delays in the
distribution of payments on, or losses allocated to one or more classes of
Certificates of such series.
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General
The Certificates of each series will be issued either in book entry
form or in fully registered form. The minimum original denomination of each
class of Certificates will be specified in the related Prospectus Supplement.
The original "Certificate Principal Balance" of each Certificate will equal
the aggregate distributions or payments allocable to principal to which such
Certificate is entitled and distributions allocable to interest on each
Certificate that is not entitled to distributions allocable to principal will
be calculated based on the "Notional Principal Balance" of such Certificate.
The Notional Principal Balance of a Certificate will not evidence an interest
in or entitlement to distributions allocable to principal but will be used
solely for convenience in expressing the calculation of interest and for
certain other purposes.
Except as described below under "Book Entry Registration" with
respect to Book Entry Certificates, the Certificates of each series will be
transferable and exchangeable on a "Certificate Register" to be maintained at
the corporate trust office or such other office or agency maintained for such
purposes by the Trustee. The Trustee will be appointed initially as the
"Certificate Registrar" and no service charge will be made for any
registration of transfer or exchange of Certificates, but payment of a sum
sufficient to cover any tax or other governmental charge may be required.
Under current law the purchase and holding of certain classes of
Certificates may result in "prohibited transactions" within the meaning of
ERISA and the Code. See "ERISA Considerations" herein and in the related
Prospectus Supplement. Transfer of Certificates of such a class will not be
registered unless the transferee (i) executes a representation letter stating
that it is not, and is not purchasing on behalf of, any such plan, account or
arrangement or (ii) provides an opinion of counsel satisfactory to the Trustee
and the Depositor that the purchase of Certificates of such a class by or on
behalf of such plan, account or arrangement is permissible under applicable
law and will not subject the Trustee, the Servicer or the Depositor to any
obligation or liability in addition to those undertaken in the Agreement.
As to each series, one or more elections may be made to treat the
related Trust or designated portions thereof as a REMIC for federal income tax
purposes. The related Prospectus Supplement will specify whether a REMIC
election is to be made. Alternatively, the Agreement for a series may provide
that a REMIC election may be made at the discretion of the Depositor or the
Servicer and may only be made if certain conditions are satisfied. See
"Certain Federal Income Tax Considerations" herein. As to any such series, the
terms and provisions applicable to the making of a REMIC election, as well as
any material federal income tax consequences to Owners of Certificates not
otherwise described herein, will be set forth in the related Prospectus
Supplement. If such an election is made with respect to a series, one of the
classes will be designated as evidencing the "residual interests" in the
related REMIC, as defined in the Code. All other classes of Certificates in
such a series will constitute "regular interests" in the related REMIC, as
defined in the Code. As to each series with respect to which a REMIC election
is to be made, the Servicer, the Trustee, an Owner of Residual Certificates or
another person as specified in the related Prospectus Supplement will be
obligated to take all actions required in order to comply with applicable laws
and regulations and will be obligated to pay any prohibited transaction taxes.
The person so specified will be entitled to reimbursement for any such
payment.
Classes of Certificates
Each series of Certificates will be issued in one or more classes
which will evidence the beneficial ownership in the assets of the Trust that
are allocable to (i) principal of such class of Certificates and (ii) interest
on such Certificates. If specified in the Prospectus Supplement, one or more
classes of a series of Certificates may evidence beneficial ownership
interests in separate groups of assets included in the related Trust.
The Certificates will have an aggregate original Certificate
Principal Balance equal to the aggregate unpaid principal balance of the
Mortgage Assets (plus, amounts held in a Pre-Funding Account, if any) as of
the time and day prior to creation of the Trust specified in the related
Prospectus Supplement (the "Cut-Off Date") after deducting payments of
principal due before the Cut-Off Date and will bear interest at rates which,
on a weighted basis, will be equal to the Pass-Through Rate. The Pass-Through
Rate will equal the weighted average rate
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of interest borne by the related Mortgage Assets, net of the aggregate servicing
fees, amounts allocated to the residual interests and any other amounts as are
specified in the Prospectus Supplement. The original Certificate Principal
Balance (or Notional Principal Balance) of the Certificates of a series and the
interest rate on the classes of such Certificates will be determined in the
manner specified in the Prospectus Supplement.
Each class of Certificates that is entitled to distributions
allocable to interest will bear interest at a fixed rate or a rate that is
subject to change from time to time (a) in accordance with a schedule, (b) by
reference to an index, or (c) otherwise (each, a "Certificate Interest Rate").
One or more classes of Certificates may provide for interest that accrues but
is not currently payable ("Compound Interest Certificates"). With respect to
any class of Compound Interest Certificates, any interest that has accrued but
is not paid on a given Distribution Date will be added to the aggregate
Certificate Principal Balance of such class of Certificates on that
Distribution Date.
A series of Certificates may include one or more classes entitled
only to distributions or payments (i) allocable to interest, (ii) allocable to
principal (and allocable as between scheduled payments of principal and
Principal Prepayments, as defined below), or (iii) allocable to both principal
(and allocable as between scheduled payments of principal and Principal
Prepayments) and interest. A series of Certificates may consist of one or more
classes as to which distributions or payments will be allocated (i) on the
basis of collections from designated portions of the assets of the Trust, (ii)
in accordance with a schedule or formula, (iii) in relation to the occurrence
of events, or (iv) otherwise. The timing and amounts of such distributions or
payments may vary among classes, over time or otherwise.
A series of Certificates may include one or more Classes of Scheduled
Amortization Certificates and Companion Certificates. "Scheduled Amortization
Certificates" are Certificates with respect to which payments of principal are
to be made in specified amounts on specified Distribution Dates, to the extent
of funds available on such Distribution Date. "Companion Certificates" are
Certificates which receive payments of all or a portion of any funds available
on a given Distribution Date which are in excess of amounts required to be
applied to payments on Scheduled Amortization Certificates on such
Distribution Date. Because of the manner of application of payments of
principal to Companion Certificates, the weighted average lives of Companion
Certificates of a series may be expected to be more sensitive to the actual
rate of prepayments on the Mortgage Assets in the related Trust than will the
Scheduled Amortization Certificates of such series.
One or more series of Certificates may constitute series of "Special
Allocation Certificates", which may include Senior Certificates, Subordinated
Certificates, Priority Certificates and Non-Priority Certificates. As
specified in the related Prospectus Supplement for a series of Special
Allocation Certificates, the timing and/or priority of payments of principal
and/or interest may favor one or more classes of Certificates over one or more
other classes of Certificates. Such timing and/or priority may be modified or
reordered upon the occurrence of one or more specified events. Losses on Trust
assets for such series may be disproportionately borne by one or more classes
of such series, and the proceeds and distributions from such assets may be
applied to the payment in full of one or more classes within such series
before the balance, if any, of such proceeds are applied to one or more other
classes within such series. For example, Special Allocation Certificates in a
series may be comprised of one or more classes of Senior Certificates having a
priority in right to distributions of principal and interest over one or more
classes of Subordinated Certificates, as a form of Credit Enhancement. See
"Credit Enhancement - Subordination" herein. Typically, the Subordinated
Certificates will carry a rating by the rating agencies lower than that of the
Senior Certificates. In addition, one or more classes of Certificates
("Priority Certificates") may be entitled to a priority of distributions of
principal or interest from assets in the Trust over another class of
Certificates ("Non-Priority Certificates"), but only after the exhaustion of
other Credit Enhancement applicable to such series. The Priority Certificates
and Non-Priority Certificates nonetheless may be within the same rating
category.
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Distributions of Principal and Interest
General. Distributions of principal and interest will be made to the
extent of funds available therefor, on the dates specified in the Prospectus
Supplement (each, a "Distribution Date") to the persons in whose names the
Certificates are registered (the "Owners") at the close of business on the
dates specified in the Prospectus Supplement (each, a "Record Date"). With
respect to Certificates other than Book Entry Certificates, distributions will
be made by check or money order mailed to the person entitled thereto at the
address appearing in the Certificate Register or, if specified in the
Prospectus Supplement, in the case of Certificates that are of a certain
minimum denomination as specified in the Prospectus Supplement, upon written
request by the Owner of a Certificate, by wire transfer or by such other means
as are agreed upon with the person entitled thereto; provided, however, that
the final distribution in retirement of the Certificates (other than Book
Entry Certificates) will be made only upon presentation and surrender of the
Certificates at the office or agency of the Trustee specified in the notice of
such final distribution. With respect to Book Entry Certificates, such
payments will be made as described below under "Book Entry Registration".
Distributions will be made out of, and only to the extent of, funds
in a separate account established and maintained for the benefit of the
Certificates of the related series (the "Certificate Account" with respect to
such series), including any funds transferred from any related Reserve Fund.
Amounts may be invested in the Eligible Investments specified herein and in
the Prospectus Supplement, and all income or other gain from such investments
will be deposited in the related Certificate Account and may be available to
make payments on the Certificates of the applicable series on the next
succeeding Distribution Date or pay after amounts owed by the Trust.
Distributions of Interest. Interest will accrue on the aggregate
Certificate Principal Balance (or, in the case of Certificates entitled only
to distributions allocable to interest, the aggregate Notional Principal
Balance (as defined below)) of each class of Certificates entitled to interest
from the date, at the applicable Certificate Interest Rate and for the periods
(each, an "Interest Accrual Period") specified in the Prospectus Supplement.
The aggregate Certificate Principal Balance of any class of Certificates
entitled to distributions of principal will be the aggregate original
Certificate Principal Balance of such class of Certificates, reduced by all
distributions allocable to principal, and, in the case of Compound Interest
Certificates, increased by all interest accrued but not then distributable on
such Compound Interest Certificates. With respect to a class of Certificates
entitled only to distributions allocable to interest, such interest will
accrue on a notional principal balance (the "Notional Principal Balance") of
such class, computed solely for purposes of determining the amount of interest
accrued and payable on such class of Certificates.
To the extent funds are available therefor, interest accrued during
each Interest Accrual Period on each class of Certificates entitled to
interest (other than a class of Compound Interest Certificates) will be
distributable on the Distribution Dates specified in the Prospectus Supplement
until the aggregate Certificate Principal Balance of the Certificates of such
class has been distributed in full or, in the case of Certificates entitled
only to distributions allocable to interest, until the aggregate Notional
Principal Balance of such Certificates is reduced to zero or for the period of
time designated in the Prospectus Supplement. Distributions of interest on
each class of Compound Interest Certificates will commence only after the
occurrence of the events specified in the Prospectus Supplement and, prior to
such time, the aggregate Certificate Principal Balance (or Notional Principal
Balance) of such class of Compound Interest Certificates, will increase on
each Distribution Date by the amount of interest that accrued on such class of
Compound Interest Certificates during the preceding Interest Accrual Period
but that was not required to be distributed to such class on such Distribution
Date. Any such class of Compound Interest Certificates will thereafter accrue
interest on its outstanding Certificate Principal Balance (or Notional
Principal Balance) as so adjusted.
Distributions of Principal. The Prospectus Supplement will specify
the method by which the amount of principal to be distributed on the
Certificates on each Distribution Date will be calculated and the manner in
which such amount will be allocated among the classes of Certificates entitled
to distributions of principal.
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One or more classes of Certificates may be entitled to receive all or
a disproportionate percentage of the payments of principal which are received
on the related Mortgage Assets in advance of their scheduled due dates and are
not accompanied by amounts representing scheduled interest due after the month
of such payments ("Principal Prepayments"). Any such allocation may have the
effect of accelerating the amortization of such Certificates relative to the
interests evidenced by the other Certificates.
Unscheduled Distributions. The Certificates of a series may be
subject to receipt of distributions before the next scheduled Distribution
Date under the circumstances and in the manner described below and in the
related Prospectus Supplement. If applicable, such unscheduled distributions
will be made on the Certificates of a series on the date and in the amount
specified in the related Prospectus Supplement if, due to substantial payments
of principal (including Principal Prepayments) on the related Mortgage Assets,
low rates then available for reinvestment of such payments or both, it is
determined, based on specified assumptions, that the amount anticipated to be
on deposit in the Certificate Account for such series on the next related
Distribution Date, together with, if applicable, any amounts available to be
withdrawn from any related Reserve Fund or from any other Credit Enhancement
provided for such series, may be insufficient to make required distributions
on the Certificates on such Distribution Date. The amount of any such
unscheduled distribution that is allocable to principal will not exceed the
amount that would otherwise have been required to be distributed as principal
on the Certificates on the next Distribution Date and will include interest at
the applicable Certificate Interest Rate (if any) on the amount of the
unscheduled distribution allocable to principal for the period and to the date
specified in the Prospectus Supplement.
All distributions allocable to principal in any unscheduled
distribution will be made in the same priority and manner as distributions of
principal on the Certificates would have been made on the next Distribution
Date except as otherwise stated in the related Prospectus Supplement, and,
with respect to Certificates of the same class, unscheduled distributions of
principal will be made on a pro rata basis. Notice of any unscheduled
distribution will be given by the Trustee prior to the date of such
distribution.
Book Entry Registration
Certificates may be issued as Book Entry Certificates and held in the
name of a Clearing Agency registered with the Securities and Exchange
Commission or its nominee. Transfers and pledges of Book Entry Certificates
may be made only through entries on the books of the Clearing Agency in the
name of Clearing Agency Participants or their nominees. Clearing Agency
Participants may also be Beneficial Owners of Book Entry Certificates.
Purchasers and other Beneficial Owners may not hold Book Entry
Certificates directly but may hold, transfer or pledge their ownership
interest in the Certificates only through Clearing Agency Participants.
Furthermore, Beneficial Owners will receive all payments of principal and
interest with respect to the Certificates and, if applicable, may request
redemption of Certificates, only through the Clearing Agency and the Clearing
Agency Participants. Beneficial Owners will not be registered Owners of
Certificates or be entitled to receive definitive certificates representing
their ownership interest in the Certificates except under the limited
circumstances, if any, described in the related Prospectus Supplement. See
"Risk Factors - Book Entry Registration" herein.
If Certificates of a series are issued as Book Entry Certificates,
the Clearing Agency will be required to make book entry transfers among
Clearing Agency Participants, to receive and transmit payments of principal
and interest with respect to the Certificates of such series, and to receive
and transmit requests for redemption with respect to such Certificates.
Clearing Agency Participants with whom Beneficial Owners have accounts with
respect to such Book Entry Certificates will be similarly required to make
book entry transfers and receive and transmit payments and redemption requests
on behalf of their respective Beneficial Owners. Accordingly, although
Beneficial Owners will not be registered Owners of Certificates and will not
possess physical certificates, a method will be provided whereby Beneficial
Owners may receive payments, transfer their interests, and submit redemption
requests.
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List of Owners of Certificates
Upon written request of a specified number or percentage interests of
Owners of Certificates of record of a series of Certificates for purposes of
communicating with other Owners of Certificates with respect to their rights
as Owners of Certificates, the Trustee will afford such Owners access during
business hours to the most recent list of Owners of Certificates of that
series held by the Trustee. With respect to Book Entry Certificates, the only
named Owner on the Certificate Register will be the Clearing Agency.
The Agreement will not provide for the holding of any annual or other
meetings of Owners of Certificates.
THE TRUSTS
The Trust for a series of Certificates will consist of: (i) the
Mortgage Assets (subject, if specified in the Prospectus Supplement, to
certain exclusions) received on and after the related Cut-Off Date; (ii) all
payments (subject, if specified in the Prospectus Supplement, to certain
exclusions) in respect of such Mortgage Assets, which may be adjusted, to the
extent specified in the related Prospectus Supplement, in the case of interest
payments on Mortgage Assets, to the Pass-Through Rate; (iii) if specified in
the Prospectus Supplement, reinvestment income on such payments; (iv) with
respect to a Trust that includes Mortgage Loans, or Contracts, all property
acquired by foreclosure or deed in lieu of foreclosure with respect to any
such Mortgage Loan or Contract; (v) certain rights of the Trustee, the
Depositor and the Servicer under any policies required to be maintained in
respect of the related Mortgage Assets; (vi) certain rights of the Depositor
or one of its affiliates under any Mortgage Loan purchase agreement, including
in respect of any representations and warranties therein; and (vii) if so
specified in the Prospectus Supplement, one or more forms of Credit
Enhancement.
The Certificates of each series will be entitled to payment only from
the assets of the related Trust and any other assets pledged therefor and will
not be entitled to payments in respect of the assets of any other trust
established by the Depositor.
Mortgage Assets may be acquired by the Depositor from affiliated or
unaffiliated originators. The following is a brief description of the Mortgage
Assets expected to be included in the Trusts. If specific information
respecting the Mortgage Assets is not known at the time the related series of
Certificates initially are offered, more general information of the nature
described below will be provided in the related Prospectus Supplement, and
specific information will be set forth in a report on Form 8-K to be filed
with the Securities and Exchange Commission within fifteen days after the
initial issuance of such Certificates. A copy of the Agreement with respect to
each series of Certificates will be attached to the Form 8-K and will be
available for inspection at the corporate trust office of the Trustee
specified in the related Prospectus Supplement. A schedule of the Mortgage
Assets relating to each series of Certificates, will be attached to the
related Agreement delivered to the Trustee upon delivery of such Certificates.
Mortgage Loans
The Mortgage Loans will be evidenced by promissory notes (the
"Mortgage Notes") secured by mortgages or deeds of trust (the "Mortgages")
creating liens on residential properties (the "Mortgaged Properties"). Such
Mortgage Loans will be within the broad classifications of single family
mortgage loans, defined generally as loans on residences containing
one-to-four dwelling units or multifamily loans. If specified in the
Prospectus Supplement, the Mortgage Loans may include cooperative apartment
loans ("Cooperative Loans") secured by security interests in shares issued by
Cooperatives and in the related proprietary leases or occupancy agreements
granting exclusive rights to occupy specific dwelling units in such
Cooperatives' buildings, or the Mortgage Loans may be secured by junior liens
on the related mortgaged properties, including Title I Loans and other types
of home improvement retail installment contracts. The Mortgaged Properties
securing the Mortgage Loans may include investment properties and vacation and
second homes. The Mortgaged Property for such loans may also consist of
residential properties consisting of five or more rental or
cooperatively-owned dwelling units in high-rise, mid-rise or garden apartment
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buildings or projects ("Multifamily Properties"). Each Mortgage Loan will be
selected by the Depositor for inclusion in the Trust from among those acquired
by the Depositor or originated or acquired by one or more affiliated or
unaffiliated originators, including newly originated loans. Mortgaged
Properties may be located in any one of the 50 states, the District of
Columbia or the Commonwealth of Puerto Rico.
The Mortgage Loans will be "conventional" mortgage loans, that is
they will not be insured or guaranteed by any governmental agency, the
principal and interest on the Mortgage Loans included in the Trust for a
series of Certificates will be payable either on the first day of each month
or on different scheduled days throughout each month, and the interest will be
calculated either on a simple-interest or accrual method as described in the
related Prospectus Supplement. When a full principal amount is paid on a
Mortgage Loan during a month, the mortgagor is generally charged interest only
on the days of the month actually elapsed up to the date of such prepayment,
at a daily interest rate that is applied to the principal amount of the
Mortgage Loan so prepaid.
The payment terms of the Mortgage Loans to be included in a Trust for
a series will be described in the related Prospectus Supplement and may
include any of the following features or combinations thereof or other
features described in the related Prospectus Supplement:
(a) Interest may be payable at a fixed rate, a rate
adjustable from time to time in relation to an index, a rate that is
fixed for a period of time or under certain circumstances and
followed by an adjustable rate, a rate that otherwise varies from
time to time, or a rate that is convertible from an adjustable rate
to a fixed rate. Changes to an adjustable rate may be subject to
periodic limitations, maximum rates, minimum rates or a combination
of such limitations. Accrued interest may be deferred and added to
the principal of a Mortgage Loan for such periods and under such
circumstances as may be specified in the related Prospectus
Supplement. Mortgage Loans may provide for the payment of interest at
a rate lower than the specified mortgage rate for a period of time or
for the life of the Mortgage Loan with the amount of any difference
contributed from funds supplied by the seller of the Mortgaged
Property or another source.
(b) Principal may be payable on a level debt service basis
to fully amortize the Mortgage Loan over its term, may be calculated
on the basis of an amortization schedule that is longer than the
original term to maturity or on an interest rate that is different
from the interest rate on the Mortgage Loan or may not be amortized
during all or a portion of the original term. Payment of all or a
substantial portion of the principal may be due on maturity.
Principal may include interest that has been deferred and added to
the principal balance of the Mortgage Loan.
(c) Monthly payments of principal and interest may be fixed
for the life of the Mortgage Loan, may increase over a specified
period of time or may change from period to period. Mortgage Loans
may include limits on periodic increases or decreases in the amount
of monthly payments and may include maximum or minimum amounts of
monthly payments.
(d) Prepayments of principal may be subject to a prepayment
fee, which may be fixed for the life of the Mortgage Loan or may
decline over time, and may be prohibited for the life of the Mortgage
Loan or for certain periods ("lockout periods"). Certain Mortgage
Loans may permit prepayments after expiration of the applicable
lockout period and may require the payment of a prepayment fee in
connection with any such subsequent prepayment. Other Mortgage Loans
may permit prepayments without payment of a fee unless the prepayment
occurs during specified time periods. The Mortgage Loans may include
"due-on-sale" clauses which permit the mortgagee to demand payment of
the entire Mortgage Loan in connection with the sale or certain
transfers of the related mortgaged property. Other Mortgage Loans may
be assumable by persons meeting the then applicable underwriting
standards of the Servicer, or as may be required by any applicable
government program.
(e) Another type of mortgage loan described in the
Prospectus Supplement.
With respect to a series for which the related Trust includes
Mortgage Loans, the related Prospectus Supplement may specify, among other
things, information regarding the interest rates (the "Mortgage Rates"),
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the average Principal Balance and the aggregate Principal Balance, the years of
origination and original principal balances and the original loan-to-value
ratios. The "Principal Balance" of any Mortgage Loan will be the unpaid
principal balance of such Mortgage Loan as of the Cut-Off Date, after deducting
any principal payments due before the Cut-Off Date, reduced by all principal
payments, including principal payments advanced pursuant to the related
Agreement, previously distributed with respect to such Mortgage Loan and
reported as allocable to principal.
The "Loan-to-Value Ratio" of any Mortgage Loan will be determined by
dividing the amount of the Mortgage Loan by the Original Value (defined below)
of the related Mortgaged Property. The "principal amount" of the Mortgage
Loan, for purposes of computation of the Loan-to-Value Ratio of any Mortgage
Loan, will include any part of an origination fee that has been financed. In
some instances, it may also include amounts which the seller or some other
party to the transaction has paid to the mortgagee, such as minor reductions
in the purchase price made at the closing. The "Original Value" of a Mortgage
Loan is (a) in the case of any purchase money Mortgage Loan, the lesser of (i)
the value of the mortgaged property, based on an appraisal thereof and (ii)
the selling price, and (b) otherwise the value of the mortgaged property,
based on an appraisal thereof.
There can be no assurance that the Original Value will reflect actual
real estate values during the term of a Mortgage Loan. If the residential real
estate market should experience an overall decline in property values such
that the outstanding principal balances of the Mortgage Loans become equal to
or greater than the values of the Mortgaged Properties, the actual rates of
delinquencies, foreclosures and losses could be significantly higher than
those now generally experienced in the mortgage lending industry. In addition,
adverse economic conditions (which may or may not affect real estate values)
may affect the timely and ultimate payment by mortgagors of scheduled payments
of principal and interest on the Mortgage Loans and, accordingly, the actual
rates of delinquencies, foreclosures and losses with respect to the Mortgage
Loans.
Multifamily Loans will consist of Multifamily Loans consisting of
either Conventional Multifamily Loans or FHA-Insured Multifamily Loans secured
by mortgages or deeds of trust or other similar security instruments creating
a lien on rental apartment buildings or projects containing five or more
units, including, but not limited to, high-rise, mid-rise and garden
apartments or secured by apartment buildings owned by cooperative housing
corporations. The Multifamily Properties may include mixed commercial and
residential structures. Unless otherwise specified in the related Prospectus
Supplement, each Mortgage Loan will create a first priority mortgage lien on a
Mortgaged Property. A Multifamily Loan may create a lien on a borrower's
leasehold estate in a property; however, unless otherwise specified in the
related Prospectus Supplement, the term of any such leasehold will exceed the
term of the Mortgage Loan by at least two years. The Depositor expects that
Mortgage Loans will have been originated by mortgagees in the ordinary course
of their real estate lending activities. Each Multifamily Loan will bear
interest at an annual fixed rate or adjustable rate of interest specified in
the Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, all
of the Multifamily Loans will have had original terms to maturity of not more
than 40 years and will provide for scheduled payments of principal, interest
or both, to be made on specified dates ("Due Dates") that occur monthly,
quarterly or semi-annually. A Multifamily Loan (i) may provide for accrual of
interest thereon at an interest rate (a "Mortgage Loan Rate") that is fixed
over its term of that adjusts from time to time, or that may be converted at
the borrower's election from an adjustable to a fixed Mortgage Loan Rate, or
from a fixed to an adjustable Mortgage Loan Rate, (ii) may provide for level
payments to maturity or for payments that adjust from time to time to
accommodate changes in the Mortgage Loan Rate or to reflect the occurrence of
certain events, and may permit negative amortization, (iii) may be fully
amortizing over its term to maturity, or may provide for little or no
amortization over its term and thus require a balloon payment on its stated
maturity date, and (iv) may contain a prohibition on prepayment (the period of
such prohibition, a "Lock-out Period" and its date of expiration, a "Lock-out
Expiration Date") or require payment of a premium or a yield maintenance
penalty (a "Prepayment Premium") in connection with a prepayment, in each case
as described in the related Prospectus Supplement. A Multifamily Loan may also
contain a provision that entitles the lender to a share of profits realized
from the operation or disposition of the Mortgaged Property (an "Equity
Participation"), as described in the related Prospectus Supplement. If holders
of
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any class or classes of Certificates of a series will be entitled to all or a
portion of an Equity Participation, the related Prospectus Supplement will
describe the Equity Participation and the method or methods by which
distributions in respect thereof will be made to such holders.
Lenders typically look to the Debt Service Coverage Ratio of a loan
secured by income-producing property as an important measure of the risk of
default on such loan. Unless otherwise defined in the related Prospectus
Supplement, the "Debt Service Coverage Ratio" of a Multifamily Loan at any
given time is the ratio of (i) the Net Operating Income of the related
Mortgaged Property for a twelve-month period to (ii) the annualized scheduled
payments on the Multifamily Loan and on any other loan that is secured by a
lien on the Mortgaged Property prior to the lien of the related Mortgage.
Unless otherwise defined in the related Prospectus Supplement, "Net Operating
Income" means, for any given period, the total operating revenues derived from
a Mortgaged Property during such period, minus the total operating expenses
incurred in respect of such Mortgaged Property during such period other than
(i) non-cash items such as depreciation and amortization, (ii) capital
expenditures and (iii) debt service on loans (including the related
Multifamily Loan) secured by liens on the Mortgaged Property. The Net
Operating Income of a Mortgage Property will fluctuate over time and may or
may not be sufficient to cover debt service on the related Multifamily Loan at
any given time. As the primary source of the operating revenues of a non-owner
occupied income-producing property, rental income (and maintenance payments
from tenant-stockholders of a Cooperative) may be affected by the condition of
the applicable real estate market and/or area economy.
Increases in operating expenses due to the general economic climate
or economic conditions in a locality or industry segment, such as increases in
interest rates, real estate tax rates, energy costs, labor costs and other
operating expenses and/or to changes in governmental rules, regulations and
fiscal policies, may also affect the risk of default on a Multifamily Loan. As
may be further described in the related Prospectus Supplement, in some cases
leases of Mortgaged Properties may provide that the lessee, rather than the
borrower/landlord, is responsible for payment of operating expenses ("Net
Leases"). However, the existence of such "net of expense" provisions will
result in stable Net Operating Income to the borrower/landlord only to the
extent that the lessee is able to absorb operating expense increases while
continuing to make rent payments.
Contracts
Each pool of Contracts included in the Trust with respect to a series
of Certificates (the "Contract Pool") will consist of manufactured housing
conditional sales contracts and installment loan agreements or participation
interests therein (collectively, "Contracts"). The Contracts may be
conventional manufactured housing contracts or contracts insured by the FHA,
including Title I Contracts, or partially guaranteed by the VA. Each Contract
is secured by a Manufactured Home. The Prospectus Supplement will specify
whether the Contracts will be fully amortizing or have a balloon payment and
whether they will bear interest at a fixed or variable rate.
The Manufactured Homes securing the Contracts consist of manufactured
homes within the meaning of 42 United States Code, Section 5402(6), which
defines a "Manufactured Home" as "a structure, transportable in one or more
sections, which in the traveling mode, is eight body feet or more in width or
forty body feet or more in length, or, when erected on site, is three hundred
twenty or more square feet, and which is built on a permanent chassis and
designed to be used as a dwelling with or without permanent foundation when
connected to the required utilities, and includes the plumbing, heating,
air-conditioning, and electrical systems contained therein; except that such
term shall include any structure which meets all the requirements of this
paragraph except the size requirements and with respect to which the
manufacturer voluntarily files a certification required by the Secretary of
Housing and Urban Development and complies with the standards established
under [this] chapter." Moreover, if an election is made to treat the Trust as
a REMIC as described in "Certain Federal Income Tax Consequences - Federal
Income Tax Consequences for REMIC Certificates" herein, Manufactured Homes
will have a minimum of 400 square feet of living space and a minimum width in
excess of 102 inches.
For purposes of calculating the loan-to- value ratio of a Contract
relating to a new Manufactured Home, the "Collateral Value" is no greater than
the sum of a fixed percentage of the list price of the unit actually billed by
the
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manufacturer to the dealer (exclusive of freight to the dealer site) including
"accessories" identified in the invoice (the "Manufacturer's Invoice Price"),
plus the actual cost of any accessories purchased from the dealer, a delivery
and set-up allowance, depending on the size of the unit and the cost of state
and local taxes, filing fees and up to three years prepaid hazard insurance
premiums. The Collateral Value of a used Manufactured Home is the least of the
sales price, the appraised value, and the National Automobile Dealer's
Association book value plus prepaid taxes and hazard insurance premiums. The
appraised value of a Manufactured Home is based upon the age and condition of
the manufactured housing unit and the quality and condition of the mobile home
park in which it is situated, if applicable.
The related Prospectus Supplement may specify for the Contracts
contained in the related Contract Pool, among other things, the date of
origination of the Contracts; the annual percentage rates on the Contracts;
the loan-to-value ratios; the minimum and maximum outstanding principal
balance as of the Cut-Off Date and the average outstanding principal balance;
the outstanding principal balances of the Contracts included in the Contract
Pool; the original maturities of the Contracts; and the last maturity date of
any Contract.
Mortgage-Backed Securities
"Mortgage-Backed Securities" (or "MBS") may include (i) private (that
is, not guaranteed or insured by the United States or any agency or
instrumentality thereof) mortgage participations, mortgage pass-through
certificates or other mortgage-backed securities or (ii) certificates insured
or guaranteed by FHLMC or FNMA or GNMA.
Any MBS will have been issued pursuant to a participation and
servicing agreement, a pooling and servicing agreement, an indenture or
similar agreement (an "MBS Agreement"). A seller (the "MBS Issuer") and/or
servicer (the "MBS Servicer") of the underlying mortgage loans will have
entered into the MBS Agreement with a trustee or a custodian under the MBS
Agreement (the "MBS Trustee"), if any, or with the original purchaser or
purchasers of the MBS.
The MBS may have been issued in one or more classes with
characteristics similar to the classes of Certificates described herein.
Distributions in respect of the MBS will be made by the MBS Servicer or the
MBS Trustee on the dates specified in the related Prospectus Supplement. The
MBS Issuer or the MBS Servicer or another person specified in the related
Prospectus Supplement may have the right or obligation to repurchase or
substitute assets underlying the MBS after a certain date or under other
circumstances specified in the related Prospectus Supplement.
Reserve funds, subordination, cross-support or other credit
enhancement similar to that described for the Certificates under "Credit
Enhancement" may have been provided with respect to the MBS. The type,
characteristics and amount of such credit enhancement, if any, will be a
function of the characteristics of the underlying mortgage loans and other
factors and generally will have been established on the basis of the
requirements of any rating agency that may have assigned a rating to the MBS,
or by the initial purchasers of the MBS.
The Prospectus Supplement for a series of Certificates that evidence
interests in MBS will specify, to the extent available, (i) the aggregate
approximate initial and outstanding principal amount and type of the MBS to be
included in the Trust, (ii) the original and remaining term to stated maturity
of the MBS, if applicable, (iii) the pass-through or bond rate of the MBS or
the formula for determining such rates, (iv) the payment characteristics of
the MBS, (v) the MBS Issuer, MBS Servicer and MBS Trustee, as applicable, (vi)
a description of the credit support, if any, (vii) the circumstances under
which the stated underlying mortgage loans, or the MBS themselves may be
purchased prior to their maturity, (viii) the terms on which mortgage loans
may be substituted for those originally underlying the MBS, (ix) the servicing
fees payable under the MBS Agreement, (x) to the extent available to the
Depositor, information in respect of the underlying mortgage loans, and (xi)
the characteristics of any cash flow agreements that relate to the MBS.
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Other Mortgage Securities
Other Mortgage Securities include other securities that directly or
indirectly represent an ownership interest in, or are secured by and payable
from, mortgage loans on real property or mortgage-backed securities, including
residual interests in issuances of collateralized mortgage obligations or
mortgage pass-through certificates. Any Other Mortgage Securities that are
privately placed securities will not be included in a Trust until such time as
such privately placed securities would be freely transferable pursuant to Rule
144A of the Securities Act of 1933, as amended. Further (i) such privately
placed securities will have been acquired in the secondary market and not
pursuant to an initial offering thereof and (ii) the underlying issuer of such
securities will not be affiliated with the Depositor and will not have an
interest in the Trust. The Prospectus Supplement for a series of Certificates
will describe any Other Mortgage Securities to be included in the Trust for
such series.
CREDIT ENHANCEMENT
General. Various forms of Credit Enhancement may be provided with
respect to one or more classes of a series of Certificates or with respect to
the assets in the related Trust. Credit Enhancement may be in the form of the
subordination of one or more classes of the Certificates of such series, the
establishment of one or more Reserve Funds, the use of a cross-support
feature, use of a Mortgage Pool Insurance Policy, Special Hazard Insurance
Policy, bankruptcy bond, or another form of Credit Enhancement described in
the related Prospectus Supplement, or any combination of the foregoing. Credit
Enhancement may not provide protection against all risks of loss and may not
guarantee repayment of the entire principal balance of the Certificates and
interest thereon. If losses occur which exceed the amount covered by Credit
Enhancement or which are not covered by the Credit Enhancement, Owners of
Certificates will bear their allocable share of deficiencies.
Financial Guaranty Insurance Policies. If so specified in the related
Prospectus Supplement, a financial guaranty insurance policy or surety bond
("Financial Guaranty Insurance Policy") may be obtained and maintained for
each class or series of Certificates. The issuer of any Financial Guaranty
Insurance Policy (a "Financial Guaranty Insurer") will be described in the
related Prospectus Supplement. Such description will include financial
information on the Financial Guaranty Insurer. In addition, the audited
financial statements of a Financial Guaranty Insurer and an auditors consent
to use such financial statements will be filed with the Securities and
Exchange Commission on Form 8-K or will be incorporated by reference to
financial statements already on file with the Securities and Exchange
Commission.
Unless otherwise specified in the related Prospectus Supplement, a
Financial Guaranty Insurance Policy will unconditionally and irrevocably
guarantee to Certificateholders that an amount equal to each full and
completed insured payment will be received by an agent of the Trustee (an
"Insurance Paying Agent") on behalf of Certificateholders, for distribution by
the Trustee to each Certificateholder. The "insured payment" will be defined
in the related Prospectus Supplement, and will generally equal the full amount
of the distributions of principal and interest to which Certificateholders are
entitled under the related Agreement plus any other amounts specified therein
or in the related Prospectus Supplement (the "Insured Payment").
Financial Guaranty Insurance Policies may apply only to certain
specified classes, or may apply at the Mortgage Asset level and only to
specified Mortgage Assets.
The specific terms of any Financial Guaranty Insurance Policy will be
as set forth in the related Prospectus Supplement. Financial Guaranty
Insurance Policies may have limitations including (but not limited to)
limitations on the insurer's obligation to guarantee the obligations of the
Seller or Depositor to repurchase or substitute for any Mortgage Loans,
Financial Guaranty Insurance Policies will not guarantee any specified rate of
prepayments and/or to provide funds to redeem Certificates on any specified
date.
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Subject to the terms of the related Agreement, the Financial Guaranty
Insurer may be subrogated to the rights of Certificateholder to receive
payments under the Certificates to the extent of any payment by such Financial
Guaranty Insurer under the related Financial Guaranty Insurance Policy.
Subordination. Distributions in respect of scheduled principal,
interest or any combination thereof otherwise payable to one or more classes
of Certificates of a series (the "Subordinated Certificates") may be paid to
one or more other classes of such series (the "Senior Certificates") under the
circumstances and to the extent provided in the Prospectus Supplement. If
specified in the Prospectus Supplement, delays in receipt of scheduled
payments on the Mortgage Assets and losses on defaulted Mortgage Assets will
be borne first by the various classes of Subordinated Certificates and
thereafter by the various classes of Senior Certificates, in each case under
the circumstances and subject to the limitations specified in the Prospectus
Supplement. The aggregate distributions in respect of delinquent payments on
the Mortgage Assets over the lives of the Certificates or at any time, the
aggregate losses in respect of defaulted Mortgage Assets which must be borne
by the Subordinated Certificates by virtue of subordination and the amount of
the distributions otherwise distributable to the Subordinated Certificates
that will be distributable to Owners of Senior Certificates on any
Distribution Date may be limited as specified in the Prospectus Supplement. If
aggregate distributions in respect of delinquent payments on the Mortgage
Assets or aggregate losses in respect of such Mortgage Assets were to exceed
the total amounts payable and available for distribution to Owners of
Subordinated Certificates or, if applicable, were to exceed the specified
maximum amount, Owners of Senior Certificates could experience losses on the
Certificates.
In addition to or in lieu of the foregoing, all or any portion of
distributions otherwise payable to Subordinated Certificates on any
Distribution Date may instead be deposited into one or more Reserve Funds (as
defined below) established by the Trustee. If so specified in the Prospectus
Supplement, such deposits may be made on each Distribution Date, on each
Distribution Date for specified periods, or on each Distribution Date until
the balance in the Reserve Fund has reached a specified amount and, following
payments from the Reserve Fund to Owners of Senior Certificates or otherwise,
thereafter to the extent necessary to restore the balance in the Reserve Fund
to required levels, in each case as specified in the Prospectus Supplement. If
so specified in the Prospectus Supplement, amounts on deposit in the Reserve
Fund may be released to the Depositor or the Owners of any class of
Certificates at the times and under the circumstances specified in the
Prospectus Supplement.
If specified in the Prospectus Supplement, various classes of
Subordinate Certificates and Subordinated Certificates may themselves be
subordinate in their right to receive certain distributions to other classes
of Senior and Subordinated Certificates, respectively, through a cross-support
mechanism or otherwise.
As between classes of Senior Certificates and as between classes of
Subordinated Certificates, distributions may be allocated among such classes
(i) in the order of their scheduled final distribution dates, (ii) in
accordance with a schedule or formula, (iii) in relation to the occurrence of
events, or (iv) otherwise, in each case as specified in the Prospectus
Supplement. As between classes of Subordinated Certificates, payments with
respect to Senior Certificates on account of delinquencies or losses and
payments to any Reserve Fund will be allocated as specified in the Prospectus
Supplement.
Overcollateralization. If specified in the Prospectus Supplement,
subordination provisions of a Trust may be used to accelerate to a limited
extent the amortization of one or more classes of Certificates relative to the
amortization of the related Mortgage Loans. The accelerated amortization is
achieved by the application of certain excess interest to the payment of
principal of one or more classes of Certificates. This acceleration feature
creates, with respect to the Mortgage Loans or groups thereof,
overcollateralization which results from the excess of the aggregate principal
balance of the related Mortgage Loans, or a group thereof, over the principal
balance of the related class of Certificates. Such acceleration may continue
for the life of the related Certificates, or may be limited. In the case of
limited acceleration, once the required level of overcollateralization is
reached, and subject to certain provisions specified in the related Prospectus
Supplement, such limited acceleration feature may cease, unless necessary to
maintain the required level of overcollateralization.
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Cross-Support. If specified in the related Prospectus Supplement, the
beneficial ownership of separate groups of assets included in the Trust for a
series may be evidenced by separate classes of related series of Certificates.
In such case, Credit Enhancement may be provided by a cross-support feature
which may require that distributions be made with respect to Certificates
evidencing beneficial ownership of one or more asset groups prior to
distributions to Subordinated Certificates evidencing a beneficial ownership
interest in other asset groups within the same Trust. The Prospectus
Supplement for a series which includes a cross-support feature will describe
the manner and conditions for applying such cross-support feature.
If specified in the Prospectus Supplement, the coverage provided by
one or more forms of Credit Enhancement may apply concurrently to two or more
separate Trusts for a separate series of Certificates. If applicable, the
Prospectus Supplement will identify the Trusts to which such credit support
relates and the manner of determining the amount of the coverage provided
thereby and of the application of such coverage to the identified Trusts.
Pool Insurance. If specified in the related Prospectus Supplement,
one or more mortgage pool insurance policies (each, a "Mortgage Pool Insurance
Policy") will be obtained.
Any such Mortgage Pool Insurance Policy will, subject to the
limitations described below and in the Prospectus Supplement, cover loss by
reason of default in payments on such Mortgage Loans up to the amounts
specified in the Prospectus Supplement or report on Form 8-K and for the
periods specified in the Prospectus Supplement. The Trustee under the related
Agreement will agree to use its best reasonable efforts to cause to be
maintained in effect any such Mortgage Pool Insurance Policy and to supervise
the filing of claims thereunder to the issuer of such Mortgage Pool Insurance
Policy (the "Pool Insurer") for the period of time specified in the related
Prospectus Supplement. A Mortgage Pool Insurance Policy, however, is not a
blanket policy against loss, because claims thereunder may only be made
respecting particular defaulted Mortgage Loans and only upon satisfaction of
certain conditions precedent set forth in such policy as described in the
related Prospectus Supplement. The Mortgage Pool Insurance Policies, if any,
will not cover loss due to a failure to pay or denial of a claim under a
primary mortgage insurance policy, irrespective of the reason therefor. The
related Prospectus Supplement will describe the terms of any applicable
Mortgage Pool Insurance Policy and will set forth certain information with
respect to the related Pool Insurer.
In general, a Mortgage Pool Insurance Policy may not insure against
loss sustained by reason of a default arising from, among other things, (i)
fraud or negligence in the origination or servicing of a Mortgage Loan,
including misrepresentation by the Mortgagor or persons involved in the
origination thereof or (ii) failure to construct a Mortgaged Property in
accordance with plans and specifications. If so specified in the related
Prospectus Supplement, a failure of coverage attributable to one of the
foregoing events might result in a breach of a representation of the Seller
and in such event might give rise to an obligation on the part of the Seller
to purchase the defaulted Mortgage Loan if the breach materially and adversely
affects the interests of the Owners of the Certificates and cannot be cured by
the Seller.
The original amount of coverage under any Mortgage Pool Insurance
Policy will be reduced over the life of such Certificates by the aggregate
dollar amount of claims paid less the aggregate of the net amounts realized by
the Pool Insurer upon disposition of all foreclosed properties. The amount of
claims paid will generally include certain expenses incurred with respect to
the applicable Mortgage Loans as well as accrued interest on delinquent
Mortgage Loans to the date of payment of the claim. See "Certain Legal Aspects
of the Mortgage Assets - Foreclosure" herein. Accordingly, if aggregate net
claims paid under any Mortgage Pool Insurance Policy reach the original policy
limit, coverage under that Mortgage Pool Insurance Policy will be exhausted
and any further losses will be borne by one or more classes of Certificates
unless otherwise covered by another form of Credit Enhancement, as specified
in the Prospectus Supplement.
Since any Mortgage Pool Insurance Policy may require that the
Mortgaged Property subject to a defaulted Mortgage Loan be restored to its
original condition prior to claiming against the Pool Insurer, such policy may
not provide coverage against hazard losses. As set forth under "Servicing of
Mortgage Loans and Contracts C Standard Hazard Insurance", the hazard policies
concerning the Mortgage Loans typically exclude from coverage physical
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damage resulting from a number of causes and even when the damage is covered,
may afford recoveries which are significantly less than the full replacement
cost of such losses. Even if special hazard insurance is applicable as specified
in the Prospectus Supplement, no coverage in respect of special hazard losses
will cover all risks, and the amount of any such coverage will be limited. See
"Special Hazard Insurance" below. As a result, certain hazard risks will not be
insured against and will therefore be borne by Owners of the Certificates,
unless otherwise covered by another form of Credit Enhancement, as specified in
the Prospectus Supplement.
The terms of any Mortgage Pool Insurance Policy relating to a
Contract Pool will be described in the related Prospectus Supplement.
Special Hazard Insurance. If specified in the related Prospectus
Supplement, one or more special hazard insurance policies (each, a "Special
Hazard Insurance Policy") will be obtained.
Any such Special Hazard Insurance Policy will, subject to limitations
described below and in the Prospectus Supplement, cover (i) loss by reason of
damage to Mortgaged Properties caused by certain hazards (including
earthquakes and, to a limited extent, tidal waves and related water damage)
not covered by the standard form of hazard insurance policy for the respective
states in which the Mortgaged Properties are located or under flood insurance
policies, if any, covering the Mortgaged Properties, and (ii) loss caused by
reason of the application of the coinsurance clause contained in hazard
insurance policies. See "Servicing of Mortgage Loans and Contracts C Standard
Hazard Insurance." Any Special Hazard Insurance Policy may not cover losses
occasioned by war, civil insurrection, certain governmental actions, errors in
design, faulty workmanship or materials (except under certain circumstances),
nuclear reaction, flood (if the Mortgaged Property is located in a federally
designated flood are"-, chemical contamination and certain other risks.
Aggregate claims under each Special Hazard Insurance Policy will be limited as
described in the related Prospectus Supplement. Any Special Hazard Insurance
Policy may also provide that no claim may be paid unless hazard and, if
applicable, flood insurance on the Mortgaged Property has been kept in force
and other protection and preservation expenses have been paid.
Subject to the foregoing limitations, any Special Hazard Insurance
Policy generally will provide that, where there has been damage to property
securing a foreclosed Mortgage Loan (title to which has been acquired by the
insured) and to the extent such damage is not covered by the hazard insurance
policy or flood insurance policy, if any, maintained with respect to such
Mortgage Loan, the issuer of the Special Hazard Insurance Policy (the "Special
Hazard Insurer") will pay the lesser of (i) the cost of repair or replacement
of such property or (ii) upon transfer of the property to the special hazard
insurer, the unpaid principal balance of such Mortgage Loan at the time of
acquisition of such property by foreclosure or deed in lieu of foreclosure,
plus accrued interest to the date of claim settlement and certain expenses
incurred with respect to such property. If the unpaid principal balance plus
accrued interest and certain expenses is paid by the Special Hazard Insurer,
the amount of further coverage under the related Special Hazard Insurance
Policy will be reduced by such amount less any net proceeds from the sale of
the property. Any amount paid as the cost of repair or replacement of the
property will also reduce coverage by such amount. Restoration of the property
with the proceeds described under (i) above will satisfy the condition under
any applicable Mortgage Pool Insurance Policy that the property be restored
before a claim under such Mortgage Pool Insurance Policy may be validly
presented with respect to the defaulted Mortgage Loan secured by such
property. The payment described under (ii) above will render unnecessary
presentation of a claim in respect of such Mortgage Loan under any related
Mortgage Pool Insurance Policy. Therefore, so long as a Mortgage Pool
Insurance Policy remains in effect, the payment by the Special Hazard Insurer
under a Special Hazard Insurance Policy of the cost of repair or replacement
or the unpaid principal balance of the Mortgage Loan plus accrued interest and
certain expenses will not affect the total insurance proceeds but will affect
the relative amounts of coverage remaining under any related Special Hazard
Insurance Policy and any related Mortgage Pool Insurance Policy.
The terms of any Special Hazard Insurance Policy relating to a
Contract Pool will be described in the related Prospectus Supplement.
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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.
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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
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month specified in the related Prospectus Supplement (the "Remittance Date"),
each Servicer of the Mortgage Loans will remit to the Trustee all funds held in
its Custodial Account with respect to each Mortgage Loan; provided, however,
that Principal Prepayments may be remitted on the Remittance Date in the month
following the month of such prepayment. Each Servicer will be required pursuant
to the terms of the Agreement and as specified in the related Prospectus
Supplement, to remit with each Principal Prepayment interest thereon at the
Remittance Rate through the last day of the month in which such Principal
Prepayment is made. Each Servicer may also be required to advance its own funds
as described below.
Advances
With respect to a delinquent Mortgage Loan or Contract, the related
Servicer may be obligated (but only to the extent set forth in the related
Prospectus Supplement) to advance its own funds or funds from its Custodial
Account equal to the aggregate amount of payments of principal and interest
(adjusted to the applicable Remittance Rate) which were due on a due date and
which are delinquent as of the close of business on the business day preceding
the Remittance Date ("Monthly Advance"). Generally, such advances will be
required to be made by the Servicer unless the Servicer determines that such
advances ultimately would not be recoverable under any applicable insurance
policy, from the proceeds of liquidation of the related Mortgaged Properties,
or from any other source (any amount not so reimbursable being referred to
herein as a "Nonrecoverable Advance"). Such advance obligation generally will
continue through the month following the month of final liquidation of such
Mortgage Loan or Contract. Any Servicer funds thus advanced will be
reimbursable to such Servicer out of recoveries on the Mortgage Loans or
Contracts with respect to which such amounts were advanced. Each Servicer will
also be obligated to make advances with respect to certain taxes and insurance
premiums not paid by Mortgagors on a timely basis. Funds so advanced are
reimbursable to the Servicers out of recoveries on the related Mortgage Loans
or Contracts. Each Servicer's right of reimbursement for any advance will be
prior to the rights of the Trust to receive any related Insurance Proceeds or
Liquidation Proceeds. Failure by a Servicer to make a required Monthly Advance
will be grounds for termination under the related Agreement.
Collection and Other Servicing Procedures
Each Servicer will service the Mortgage Loans and Contracts pursuant
to guidelines established in the related Agreement.
Mortgage Loans. The Servicer will be responsible for making
reasonable efforts to collect all payments called for under the Mortgage
Loans. The Servicer will be obligated to follow such normal practices and
procedures as it deems necessary or advisable to realize upon a defaulted
Mortgage Loan. In this regard, the Servicer may (directly or through a local
assignee) sell the property at a foreclosure or trustee's sale, negotiate with
the Mortgagor for a deed in lieu of foreclosure or, in the event a deficiency
judgment is available against the Mortgagor or other person (see "Certain
Legal Aspects of the Mortgage Assets C Foreclosure - Anti-Deficiency
Legislation and Other Limitations on Lenders" for a description of the limited
availability of deficiency judgments), foreclose against such property and
proceed for the deficiency against the appropriate person. The amount of the
ultimate net recovery (including the proceeds of any Mortgage Pool Insurance
Policy or other applicable Credit Enhancement), after reimbursement to the
Servicer of its expenses incurred in connection with the liquidation of any
such defaulted Mortgage Loan and prior unreimbursed advances of principal and
interest with respect thereto will be deposited in the Certificate Account
when realized and will be distributed to Owners of Certificates on the next
Distribution Date following the month of receipt.
With respect to Cooperative Loans, any prospective purchaser will
generally have to obtain the approval of the board of directors of the
relevant Cooperative before purchasing the shares and acquiring rights under
the related proprietary lease or occupancy agreement. See "Certain Legal
Aspects of the Mortgage Assets" herein. This approval is usually based on the
purchaser's income and net worth and numerous other factors. Although the
Cooperative's approval is unlikely to be unreasonably withheld or delayed, the
necessity of acquiring such approval could limit the number of potential
purchasers for those shares and otherwise limit the Trust's ability to sell
and realize the value of those shares.
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In general, a "tenant-stockholder" (as defined in Code Section 216(b)
(2)) of a corporation that qualifies as a "cooperative housing corporation"
within the meaning of Code Section 216(b)(1) is allowed a deduction for
amounts paid or accrued within his taxable year to the corporation
representing his proportionate share of certain interest expenses and certain
real estate taxes allowable as a deduction under Code Section 216(a) to the
corporation under Code Sections 163 and 164. In order for a corporation to
qualify under Code Section 216(b)(1) for its taxable year in which such items
are allowable as a deduction to the corporation, such Section requires, among
other things, that at least 80% of the gross income of the corporation be
derived from its tenant-stockholders. By virtue of this requirement, the
status of a corporation for purposes of Code Section 216(b)(1) must be
determined on a year-to-year basis. Consequently, there can be no assurance
that Cooperatives relating to the Cooperative Loans will qualify under such
Section for any particular year. In the event that such a Cooperative fails to
qualify for one or more years, the value of the collateral securing any
related Cooperative Loans could be significantly impaired because no deduction
would be allowable to its tenant-stockholders under Code Section 216(a) with
respect to those years. In view of the significance of the tax benefits
accorded tenant-stockholders of a corporation that qualifies as a cooperative
housing corporation, however, the likelihood that such a failure would be
permitted to continue over a period of years appears remote.
The Servicer will expend its own funds to restore property securing a
Mortgage Loan which has sustained uninsured damage only if it determines that
such restoration will increase the proceeds to the Trust of liquidation of the
Mortgage Loan after the reimbursement to the Servicer of its expenses.
If a Mortgaged Property has been or is about to be conveyed by the
Mortgagor, the Servicer will be obligated (to the extent it has knowledge of
such conveyance) to accelerate the maturity of the Mortgage Loan, unless it
reasonably believes it is unable to enforce that Mortgage Loan's "due-on-sale"
clause under the applicable law. If it reasonably believes it may be
restricted by law, for any reason, from enforcing such a "due-on-sale" clause,
the Servicer may enter into an assumption and modification agreement with the
person to whom such property has been or is about to be conveyed, pursuant to
which such person becomes liable under the Mortgage Note, provided such person
satisfies the criteria required to maintain the coverage provided by
applicable insurance policies (unless otherwise restricted by applicable law).
Any fee collected by the Servicer for entering into an assumption agreement
will be retained by the Servicer as additional servicing compensation. For a
description of circumstances in which the Servicer may be unable to enforce
"due-on-sale" clauses, see "Certain Legal Aspects of the Mortgage Assets -
Foreclosure - Enforceability of Certain Provisions" herein. In connection with
any such assumption, the Mortgage Rate borne by the related Mortgage Note may
not be decreased.
If specified in the related Prospectus Supplement, the Servicer will
maintain with one or more depository institutions one or more accounts into
which it will deposit all payments of taxes, insurance premiums, assessments
or comparable items received for the account of the Mortgagors. Withdrawals
from such account or accounts may be made only to effect payment of taxes,
insurance premiums, assessments or comparable items, to reimburse the Servicer
out of related collections for any cost incurred in paying taxes, insurance
premiums and assessments or otherwise preserving or protecting the value of
the Mortgages, to refund to mortgagors any amounts determined to be overages
and to pay interest to Mortgagors on balances in such account or accounts to
the extent required by law.
So long as it acts as servicer of the Mortgage Loans, the Servicer
will be required to maintain certain insurance covering errors and omissions
in the performance of its obligations as servicer and certain fidelity bond
coverage ensuring against losses through wrongdoing of its officers, employees
and agents.
In the case of Multifamily Loans, a Mortgagor's failure to make
required Mortgage Loan payments may mean that operating income is insufficient
to service the mortgage debt, or may reflect the diversion of that income from
the servicing of the mortgage debt. In addition, a Mortgagor under a
Multifamily Loan that is unable to make Mortgage Loan payments may also be
unable to make timely payment of taxes and otherwise to maintain and insure
the related Mortgaged Property. In general, the Servicer will be required to
monitor any Multifamily Loan that is in default, evaluate whether the causes
of the default can be corrected over a reasonable period without significant
impairment of the value of the related Mortgaged Property, initiate corrective
action in cooperation with the Mortgagor if cure is likely, inspect the
related Mortgaged Property and take such other actions as are consistent with
the Agreement. A significant period of time may elapse before the Servicer is
able to assess the success of any such corrective action or the need for
additional in initiatives. The time within which the Servicer can make the
initial
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determination of appropriate action, evaluate the success of corrective action,
develop additional initiatives, institute foreclosure proceedings and actually
foreclose (or accept a deed to a Mortgaged Property in lieu of foreclosure) on
behalf of the Owners of the related series may vary considerably depending on
the particular Multifamily Loan, the Mortgaged Property, the Mortgagor, the
presence of an acceptable party to assume the Multifamily Loan and the laws of
the jurisdiction in which the Mortgaged Property is located. If a Mortgagor
files a bankruptcy petition, the Servicer may not be permitted to accelerate the
maturity of the related Multifamily Loan or to foreclose on the Mortgaged
Property for a considerable period of time. See "Certain Legal Aspects of
Mortgage Loans."
Contracts. Pursuant to the Agreement, the Servicer will service and
administer the Contracts assigned to the Trustee as more fully set forth
below. The Servicer, either directly or through sub-servicers subject to
general supervision by the Servicer, will perform diligently all services and
duties required to be performed under the Agreement, in the same manner as
performed by prudent lending institutions of manufactured housing installment
sales contracts of the same type as the Contracts in those jurisdictions where
the related Manufactured Homes are located. The duties to be performed by the
Servicer will include collection and remittance of principal and interest
payments, collection of insurance claims and, if necessary, repossession.
Each Agreement will provide that when any Manufactured Home securing
a Contract is about to be conveyed by the borrower, the Servicer (to the
extent it has knowledge of such prospective conveyance and prior to the time
of the consummation of such conveyance) may exercise its rights to accelerate
the maturity of such Contract under the applicable "due-on-sale" clause, if
any, unless the Servicer reasonably believes it is unable to enforce such
"due-on-sale" clause under applicable law. In such case the Servicer is
authorized to take or enter into an assumption agreement from or with the
person to whom such Manufactured Home has been or is about to be conveyed,
pursuant to which such person becomes liable under the Contract, provided such
person satisfies the criteria required to maintain the coverage provided by
applicable insurance policies (unless otherwise restricted by applicable law).
Where authorized by the Contract, the annual percentage rate may be increased,
upon assumption, to the then-prevailing market rate but will not be decreased.
Under each Agreement the Servicer will repossess or otherwise
comparably convert the ownership of properties securing such of the related
Contracts as come into and continue in default and as to which no satisfactory
arrangements can be made for collection of delinquent payments. In connection
with such repossession or other conversion, the Servicer will follow such
practices and procedures as it deems necessary or advisable and as shall be
normal and usual in its general servicing activities. The Servicer, however,
will not be required to expend its own funds in connection with any
repossession or towards the restoration of any property unless it determines
(i) that such restoration or repossession will increase the proceeds of
liquidation of the related Contract to the Trust after reimbursement to itself
for such expenses and (ii) that such expenses will be recoverable to it either
through Liquidation Proceeds or through Insurance Proceeds.
Primary Mortgage Insurance
Mortgage Loans that the Depositor acquires will generally not have
primary mortgage insurance. If obtained, the primary mortgage insurance
policies will not insure against certain losses which may be sustained in the
event of a personal bankruptcy of the mortgagor under a Mortgage Loan.
Standard Hazard Insurance
Mortgage Loans. The Servicer will be required to cause to be
maintained for each Mortgage Loan a standard hazard insurance policy. The
coverage of such policy is required to be in an amount not less than the
maximum insurable value of the improvements securing such Mortgage Loan from
time to time or the principal balance owing on such Mortgage Loan from time to
time, whichever is less. In all events, such coverage shall be in an amount
sufficient to ensure avoidance of the applicability of the co-insurance
provisions under the terms and conditions of the applicable policy. The
ability of each Servicer to assure that hazard insurance proceeds are
appropriately applied may be dependent on its being named as an additional
insured under any standard hazard insurance policy and under any flood
insurance policy referred to below, or upon the extent to which information in
this regard is furnished to such Servicer by Mortgagors. Each Agreement may
provide that the related Servicer may
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satisfy its obligation to cause hazard insurance policies to be maintained by
maintaining a blanket policy insuring against hazard losses on the Mortgage
Loans serviced by such Servicer.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements on the property
by fire, lightning, explosion, smoke, wind-storm and hail, riot, strike and
civil commotion, subject to the conditions and exclusions particularized in
each policy. Although the policies relating to the Mortgage Loans will be
underwritten by different insurers and, therefore, will not contain identical
terms and conditions, the basic terms thereof are dictated by state law. Such
policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other
water-related causes, earth movement (including earthquakes, landslides and
mud flow), nuclear reactions, wet or dry rot, vermin, rodents, insects or
domestic animals, theft and, in certain cases, vandalism. The foregoing list
is merely indicative of certain kinds of uninsured risks and is not intended
to be all-inclusive. If the property securing a Mortgage Loan is located in a
federally designated flood area, flood insurance will be required to be
maintained in such amounts as would be required by FNMA in connection with its
mortgage loan purchase program. The Depositor may also purchase special hazard
insurance against certain of the uninsured risks described above. See "Credit
Enhancement - Special Hazard Insurance".
Since the amount of hazard insurance the Servicer is required to
cause to be maintained on the improvements securing the Mortgage Loans
declines as the principal balances owing thereon decrease, if the residential
properties securing the Mortgage Loans appreciate in value over time, the
effect of coinsurance in the event of partial loss may be that hazard
insurance proceeds will be insufficient to restore fully the damaged property.
The Depositor will not require that a standard hazard or flood
insurance policy be maintained on the cooperative dwelling relating to any
Cooperative Loan. Generally, the Cooperative itself is responsible for
maintenance of hazard insurance for the property owned by the Cooperative and
the tenant-stockholders of that Cooperative do not maintain individual hazard
insurance policies. To the extent, however, that a Cooperative and the related
borrower on a Cooperative Loan do not maintain such insurance or do not
maintain adequate coverage or any insurance proceeds are not applied to the
restoration of damaged property, any damage to such borrower's cooperative
dwelling or such Cooperative's building could significantly reduce the value
of the collateral securing such Cooperative Loan to the extent not covered by
other credit support.
Contracts. The Servicer will generally be required to cause to be
maintained with respect to each Contract one or more hazard insurance policies
which provide, at a minimum, the same coverage as a standard form fire and
extended coverage insurance policy that is customary for manufactured housing,
issued by a company authorized to issue such policies in the state in which
the Manufactured Home is located and in an amount which is not less than the
maximum insurable value of such Manufactured Home or the principal balance due
from the borrower on the related Contract, whichever is less. When a
Manufactured Home's location was, at the time of origination of the related
Contract, within a federally designated special flood hazard area, the
Servicer also shall cause such flood insurance to be maintained, which
coverage shall be at least equal to the minimum amount specified in the
preceding sentence or such lesser amount as may be available under the federal
flood insurance program.
The Servicer may maintain, in lieu of causing individual hazard
insurance policies to be maintained with respect to each Manufactured Home,
and shall maintain, to the extent that the related Contract does not require
the borrower to maintain a hazard insurance policy with respect to the related
Manufactured Home, one or more blanket insurance policies covering losses on
the borrowers' interests in the Contracts resulting from the absence or
insufficiency of individual hazard insurance policies.
The Servicer, to the extent practicable, will cause the borrowers to
pay all taxes and similar governmental charges when and as due. To the extent
that nonpayment of any taxes or charges would result in the creation of a lien
upon any Manufactured Home having a priority equal or senior to the lien of
the related Contract, the Servicer will pay any such delinquent tax or charge.
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If the Servicer repossesses a Manufactured Home on behalf of the
Trustee, the Servicer will either (i) maintain at its expense hazard insurance
with respect to such Manufactured Home or (ii) indemnify the Trustee against
any damage to such Manufactured Home prior to resale or other disposition.
Title Insurance Policies
The Agreements will generally require that a title insurance policy
be in effect on each of the Mortgaged Properties and that such title insurance
policy contain no coverage exceptions, except customary exceptions generally
accepted in the mortgage banking industry.
Claims Under Primary Mortgage Insurance Policies and Standard Hazard Insurance
Policies; Other Realization Upon Defaulted Loan
Each Servicer will present claims to any primary insurer under any
related primary mortgage insurance policy and to the hazard insurer under any
related standard hazard insurance policy. All collections under any related
primary mortgage insurance policy or any related standard hazard insurance
policy (less any proceeds to be applied to the restoration or repair of the
related Mortgaged Property or to the reimbursement of Advances by the
Servicer) will be remitted to the Trustee.
If any Mortgaged Property securing a defaulted Mortgage Loan is
damaged and proceeds, if any, from the related standard hazard insurance
policy are insufficient to restore the damaged property to a condition
sufficient to permit recovery under any applicable Mortgage Pool Insurance
Policy or any related primary mortgage insurance policy, each Servicer may be
required to expend its own finds to restore the damaged property to the extent
specified in the related Prospectus Supplement, but only to the extent it
determines such expenditures are recoverable from Insurance Proceeds or
Liquidation Proceeds.
If recovery under any applicable Mortgage Pool Insurance Policy or
any related primary mortgage insurance policy is not available, the Servicer
will nevertheless be obligated to attempt to realize upon the defaulted
Mortgage Loan. Foreclosure proceedings will be conducted by the Servicer in
accordance with the Agreement. If the proceeds of any liquidation of the
Mortgaged Property securing the defaulted Mortgage Loan are less than the
Principal Balance of the defaulted Mortgage Loan plus interest accrued
thereon, a loss will be realized on such Mortgage Loan, to the extent the
applicable Credit Enhancement is not sufficient, in the amount of such
difference plus the aggregate of expenses which are incurred by the Servicer
in connection with such proceedings and are reimbursable under the Agreement.
In such case there will be a reduction in the value of the Mortgage Loans and
Trust may be unable to recover the full amount of principal and interest due
thereon.
In addition, where a Mortgaged Property securing a defaulted Mortgage
Loan can be resold for an amount exceeding the principal balance of the
related Mortgage Loan together with accrued interest and expenses, it may be
expected that, where retention of any such amount is legally permissible, the
Pool Insurer will exercise its right under the related Mortgage Pool Insurance
Policy, if any, to purchase such Mortgaged Property and realize for itself any
excess proceeds. Any amounts remaining in the Certificate Account after such
foreclosure or liquidation and attributable to such Mortgage Loan will be
distributed to Owners of the Certificates.
Realization Upon or Sale of Defaulted Multifamily Loans
Unless otherwise specified in the related Prospectus Supplement, the
Servicer may not acquire title to any Multifamily Property securing a Mortgage
Loan or take any other action that would cause the related Trustee, for the
benefit of Owners of the related series, or any other specified person to be
considered to hold title to, to be a "mortgagee-in-possession" of, or to be an
"owner" or an "operator" of such Mortgaged Property within the meaning of
certain federal environmental laws, unless the Servicer has previously
determined, based on a report prepared by a person who regularly conducts
environmental audits, that either:
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(i) the Mortgaged Property is in compliance with applicable
environmental laws and regulations or, if not, that taking such
actions are necessary to bring the Mortgaged Property into compliance
therewith is reasonably likely to produce a greater recovery on a
present value basis than not taking such actions; and
(ii) there are no circumstances or conditions present at the
Mortgaged Property that have resulted in any contamination for which
investigation, testing, monitoring, containment, clean-up or
remediation could be required under any applicable environmental laws
and regulations or, if such circumstances or conditions are present
for which any such action could be required, taking such actions with
respect to the Mortgaged Property is reasonably likely to produce a
greater recovery on a present value basis than not taking such
actions. See "Certain Legal Aspects of Mortgage Loans)Foreclosure
Environmental Legislation."
In addition, unless otherwise specified in the related Prospectus
Supplement, the Servicer will not be obligated to foreclose upon or otherwise
convert the ownership of any Mortgaged Property securing a single family
Mortgage Loan if it has received notice or has actual knowledge that such
property may be contaminated with or affected by hazardous wastes or hazardous
substances; however, no environmental testing will generally be required. The
Servicer will not be liable to the Owners of the related series if, based on
its belief that no such contamination or affect exists, the Servicer
forecloses on a Mortgaged Property and takes title to such Mortgaged Property,
and thereafter such Mortgaged Property is determined to be so contaminated or
affected.
Servicing Compensation and Payment of Expenses
As compensation for its servicing duties, each Servicer will be
entitled to a monthly servicing fee in the amount specified in the related
Prospectus Supplement. In addition to the primary compensation, a Servicer may
be permitted to retain all assumption underwriting fees and late payment
charges, to the extent collected from Mortgagors.
As set forth above, each Servicer will be entitled to reimbursement
for certain expenses incurred by it in connection with the liquidation of
defaulted Mortgage Loans and Contracts and in connection with advancing
delinquent payments. No loss will be suffered on the Certificates by reason of
such expenses to the extent claims for such expenses are paid directly under
any applicable Mortgage Pool Insurance Policy, a primary mortgage insurance
policy, the special hazard insurance policy or from other forms of Credit
Enhancement. In the event, however, that the defaulted Mortgage Loans are not
covered by a Mortgage Pool Insurance Policy, primary mortgage insurance
policies, the Special Hazard Insurance Policy or another form of Credit
Enhancement, or claims are either not made or paid under such policies or
Credit Enhancement, or if coverage thereunder has ceased, such a loss will
occur to the extent that the proceeds from the liquidation of a defaulted
Mortgage Loan or Contract, after reimbursement of the Servicer's expenses, are
less than the Principal Balance of such defaulted Mortgage Loan or Contract.
Master Servicer
A Master Servicer may be specified in the related Prospectus
Supplement for the related series of Certificates. Customary servicing
functions with respect to Mortgage Loans constituting the Mortgage Pool will
be provided by the Servicer directly or through one or more Sub-Servicers
subject to supervision by the Master Servicer. If the Master Servicer is not
directly servicing the Mortgage Loans, then the Master Servicer will (i)
administer and supervise the performance by the Servicer of its servicing
responsibilities under the Agreement with the Master Servicer, (ii) maintain a
current data base with the payment histories of each Mortgagor, (iii) review
monthly servicing reports and data relating to the Mortgage Pool for
discrepancies and errors, and (iv) act as back-up Servicer during the term of
the transaction unless the Servicer is terminated or resigns in such case the
Master Servicer shall assume the obligations of the Servicer.
The Master Servicer will be a party to the Agreement for any series
for which Mortgage Loans comprise the assets of a Trust. The Master Servicer
will be required to satisfy the standard established for the qualification of
the Master Servicer in the related Agreement. The Master Servicer will be
compensated for the performance of its services and duties under each
Agreement as specified in the related Prospectus Supplement.
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ADMINISTRATION
The following summary describes certain provisions which will be
common to each Agreement. The summary does not purport to be complete and is
subject to the provisions of a particular Agreement.
Assignment of Mortgage Assets
Assignment of the Mortgage Loans. At the time of issuance of the
Certificates, the Depositor will assign the Mortgage Loans to the Trustee,
together with all principal and interest adjusted to the Remittance Rate,
subject to exclusions specified in the Prospectus Supplement, due on or with
respect to such Mortgage Loans on or after the Cut-Off Date. The Trustee will,
concurrently with such assignment, execute, countersign and deliver the
Certificates to the Depositor in exchange for the Mortgage Loans. Each
Mortgage Loan will be identified in a schedule appearing as an exhibit to the
Agreement. Such schedule may include information as to the Principal Balance
of each Mortgage Loan as of the Cut-Off Date, as well as information
respecting the Mortgage Rate, the scheduled monthly payment of principal and
interest as of the Cut-Off Date and the maturity date of each Mortgage Note.
In addition, as to each Mortgage Loan, the Depositor will deliver to
the Trustee the Mortgage Note and Mortgage, any assumption and modification
agreement, an assignment of the Mortgage in recordable form (but not
necessarily recorded), evidence of title insurance, if obtained, and, if
applicable, the certificate of private mortgage insurance. In instances where
recorded documents cannot be delivered due to delays in connection with
recording, the Depositor may deliver copies thereof and deliver the original
recorded documents promptly upon receipt.
With respect to any Mortgage Loans which are Cooperative Loans, the
Depositor will cause to be delivered to the Trustee, the related original
Cooperative note endorsed to the order of the Trustee, the original security
agreement, the proprietary lease or occupancy agreement, the recognition
agreement, an executed financing agreement and the relevant stock certificate
and related blank stock powers. The Depositor will file in the appropriate
office an assignment and a financing statement evidencing the Trustee's
security interest in each Cooperative Loan.
Each Seller generally will represent and warrant to the Depositor
with respect to the Mortgage Loans sold by it, among other things, that (i)
the information set forth in the schedule of Mortgage Loans attached thereto
is correct in all material respects: (ii) a lender's title insurance policy or
binder for each Mortgage Loan subject to the Agreement was issued on the date
of origination thereof and each such policy or binder assurance is valid and
remains in full force and effect or a legal opinion concerning title or title
search was obtained or conducted in connection with the origination of the
Mortgage Loans; (iii) at the date of initial issuance of the Certificates, the
Seller has good title to the Mortgage Loans and the Mortgage Loans are free of
offsets, defenses or counterclaims; (iv) at the date of initial issuance of
the Certificates, each Mortgage is a valid first lien on the property securing
the Mortgage Note (subject only to (a) the lien of current real property taxes
and assessments, (b) covenants, conditions, and restrictions, rights of way,
easements and other matters of public record as of the date of the recording
of such Mortgage, such exceptions appearing of record being acceptable to
mortgage lending institutions generally in the area wherein the property
subject to the Mortgage is located or specifically reflected in the appraisal
obtained by the Depositor and (c) other matters to which like properties are
commonly subject which do not materially interfere with the benefits of the
security intended to be provided by such Mortgage) and such property is free
of material damage and is in good repair or, with respect to a junior lien
Mortgage Loan, that such Mortgage is a valid junior lien Mortgage, as the case
may be and specifying the percentage of the Mortgage Loan Pool comprised of
junior lien Mortgage Loans; (v) at the date of initial issuance of the
Certificates, no Mortgage Loan is 31 or more days delinquent (with such
exceptions as may be specified in the related Prospectus Supplement) and there
are no delinquent tax or assessment liens against the property covered by the
related Mortgage; (vi) at the date of initial issuance of the Certificates,
the portion of each Mortgage Loan, if any, which in the circumstances set
forth below under "Servicing of Mortgage Loans and Contracts - Primary
Mortgage Insurance" should be insured with a private mortgage insurer is so
insured; and (vii) each Mortgage Loan at the time it was made complied in all
material respects with applicable state and federal laws, including, with out
limitation, usury, equal credit opportunity and disclosure laws. The
Depositor's rights against the Seller in the event of a breach of its
representations will be assigned to the Trustee for the benefit of the
Certificates of such series.
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Assignment of Contracts. The Depositor will cause the Contracts to be
assigned to the Trustee, together with principal and interest due on or with
respect to the Contracts on and after the Cut-Off Date. Each Contract will be
identified in a loan schedule ("Contract Loan Schedule") appearing as an
exhibit to the related Agreement. Such Contract Loan Schedule may specify,
with respect to each Contract, among other things: the original principal
balance and the outstanding Principal Balance as of the Cut-Off Date; the
interest rate; the current scheduled payment of principal and interest; and
the maturity date.
In addition, with respect to each Contract, the Depositor will
deliver or cause to be delivered to the Trustee, the original Contract and
copies of documents and instruments related to each Contract and the security
interest in the Manufactured Home securing each Contract. To give notice of
the right, title and interest of the Trust to the Contracts, the Depositor
will cause a UCC-1 financing statement to be filed identifying the Trustee as
the secured party and identifying all Contracts as collateral. The Contracts
will not be stamped or otherwise marked to reflect their assignment from the
Depositor to the Trustee. Therefore, if a subsequent purchaser were able to
take physical possession of the Contracts without notice of such assignment,
the interest of the Trust in the Contracts could be defeated. See "Certain
Legal Aspects of the Mortgage Assets" herein.
The Depositor or the related Seller, as the case may be, may provide
limited representations and warranties to the Trustee concerning the
Contracts. Such representations and warranties may include: (i) that the
information contained in the Contract Loan Schedule provides an accurate
listing of the Contracts and that the information respecting such Contracts
set forth in such Contract Loan Schedule is true and correct in all material
respects at the date or dates respecting which such information is furnished;
(ii) that, immediately prior to the conveyance of the Contracts, the Depositor
had good title to and was sole owner of, each such Contract; and (iii) that
there has been no other sale by it of such Contract and that the Contract is
not subject to any lien, charge, security interest or other encumbrance.
Assignment of Mortgage-Backed Securities and Other Mortgage
Securities. With respect to each series, the Depositor will cause any
Mortgage-Backed Securities and Other Mortgage Securities included in the
related Trust to be registered in the name of the Trustee (directly or through
a participant in a depository). The Trustee (or its custodian) will have
possession of any certificated Mortgage-Backed Securities and Other Mortgage
Securities. The Trustee will not be in possession of or be assignee of record
of any underlying assets for a Mortgage-Backed Security or Other Mortgage
Security. Each Mortgage-Backed Security and Other Mortgage Security will be
identified in a schedule appearing as an exhibit to the related Agreement
which may specify certain information with respect to such security,
including, as applicable, the original principal amount, outstanding principal
balance as of the Cut-Off Date, annual pass-through rate or interest rate and
maturity date and certain other pertinent information for each such security.
The Depositor will represent and warrant to the Trustee, among other things,
the information contained in such schedule is true and correct and that
immediately prior to the transfer of the related securities to the Trustee,
the Depositor had good title to, and was the sole owner of, each such
security.
Repurchase or Substitution of Mortgage Loans and Contracts. The
Trustee will review the documents delivered to it with respect to the Mortgage
Loans and Contracts included in the related Trust. If any document is not
delivered or is found to be defective in any material respect and the
Depositor or the related Seller, if so required cannot deliver such document
or cure such defect within the period specified in the related Prospectus
Supplement after notice thereof (which the Trustee will undertake to give
within the period specified in the related Prospectus Supplement), and if any
other party obligated to deliver such document or cure such defect has not
done so and has not substituted or repurchased the affected Mortgage Loan or
Contract then the Depositor will cause the Seller, not later than the first
date designated for the deposit of payments into the Certificate Account (a
"Deposit Date") which is more than a specified number of days after such
period, (a) if so provided in the Prospectus Supplement to remove the affected
Mortgage Loan or Contract from the Trust and substitute one or more other
Mortgage Loans or Contracts therefor or (b) repurchase the Mortgage Loan or
Contract from the Trustee for a price equal to 100% of its Principal Balance
plus one month's interest thereon at the applicable Remittance Rate. This
repurchase and, if applicable, substitution obligation will generally
constitute the sole remedy available to the Trustee for a material defect in a
document relating to a Mortgage Loan or Contract.
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The Depositor is required to cause the Seller to do either of the
following (a) cure any breach of any representation or warranty that
materially and adversely affects the interests of the Owners of the
Certificates in a Mortgage Loan (each, a "Defective Mortgage Loan") or
Contract within a specified number of days of its discovery by the Depositor
or its receipt of notice thereof from the Trustee, (b) repurchase such
Defective Mortgage Loan or Contract not later than the first Deposit Date
which is more than a specified number of days after such period for a price
equal to 100% of its Principal Balance plus one month's interest thereon at
the applicable Remittance Rate, or (c) if so specified in the Prospectus
Supplement, remove the affected Mortgage Loan or Contract from the Trust and
substitute one or more other mortgage loans or contracts therefor. This
repurchase and, if applicable, substitution obligation will generally
constitute the sole remedies available to the Trustee for any such breach.
If the related Prospectus Supplement so provides, the Depositor or a
designated affiliate may be obligated to repurchase or substitute Mortgage
Loans or Contracts as described above, whether or not the Depositor obtains
such an agreement from the Seller which sold such Mortgage Loans or Contracts.
If a REMIC election is to be made with respect to all or a portion of
a Trust, there may be federal income tax limitations on the right to
substitute Mortgage Loans or Contracts.
Evidence as to Compliance
The Agreement will provide that on or before a specified date in each
year, beginning the first such date that is at least a specified number of
months on and after the Cut-Off Date, a firm of independent public accountants
will furnish a statement to the Trustee to the effect that, based on an
examination of certain specified documents and records relating to the
servicing of the Depositor's mortgage loan portfolio conducted substantially
in compliance with the audit program for mortgages serviced for FNMA or FHLMC,
the United States Department of Housing and Urban Development Mortgage Audit
Standards or the Uniform Single Audit Program for Mortgage Bankers or in
accordance with other standards specified in the Agreement (the "Applicable
Accounting Standards"), such firm is of the opinion that such servicing has
been conducted in compliance with the Applicable Accounting Standards except
for (a) such exceptions as such firm shall believe to be immaterial and (b)
such other exceptions as shall be set forth in such statement.
The Trustee
Any commercial bank or trust company serving as Trustee may have
normal banking relationships with the Depositor. In addition, the Depositor
and the Trustee acting jointly will have the power and the responsibility for
appointing co-trustees or separate trustees of all or any part of the Trust
relating to a particular series of Certificates. In the event of such
appointment, all rights, powers, duties and obligations conferred or imposed
upon the Trustee by the Agreement shall be conferred or imposed upon the
Trustee and such separate trustee or co-trustee jointly, or, in any
jurisdiction in which the Trustee shall be incompetent or unqualified to
perform certain acts, singly upon such separate trustee or co-trustee who
shall exercise and perform such rights, powers, duties and obligations solely
at the direction of the Trustee.
The Trustee will make no representations as to the validity or
sufficiency of the Agreement, the Certificates or of any Mortgage Asset or
related document, and will not be accountable for the use or application by
the Depositor of any funds paid to the Depositor in respect of the
Certificates or the related assets, or amounts deposited in the Certificate
Account or deposited into the Distribution Account. If no Event of Default has
occurred, the Trustee will be required to perform only those duties
specifically required of it under the Agreement. However, upon receipt of the
various certificates, reports or other instruments required to be furnished to
it, the Trustee will be required to examine them to determine whether they
conform to the requirements of the Agreement.
The Trustee may resign at any time, and the Depositor may remove the
Trustee if the Trustee ceases to be eligible to continue as such under the
Agreement, if the Trustee becomes insolvent or in such other instances, if
any, as are set forth in the Agreement. Following any resignation or removal
of the Trustee, the Depositor will be
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obligated to appoint a successor Trustee. Any resignation or removal of the
Trustee and appointment of a successor Trustee will not become effective until
acceptance of the appointment by the successor Trustee.
Administration of the Certificate Account
The Agreement will require that the Certificate Account be either (i)
maintained with a depository institution the debt obligations of which (or, in
the case of a depository institution which is a part of a holding company
structure, the debt obligations of the holding company of which) have a rating
acceptable to each rating agency that was requested to rate the Certificates,
or (ii) an account or accounts the deposits in which are fully insured by
either the Bank Insurance Fund (the "BIF") of the FDIC or the Savings
Association Insurance Fund (as successor to the Federal Savings and Loan
Insurance Corporation) ("SAIF") of the FDIC. The collateral eligible to secure
amounts in the Certificate Account is limited to United States government
securities and other investments acceptable to the rating agencies rating such
series of Certificates, and may include one or more Certificates of a series
("Eligible Investments"). If so specified in the related Prospectus
Supplement, a Certificate Account may be maintained as an interest bearing
account, or the funds held therein may be invested pending each succeeding
Payment Date in Eligible Investments. If so specified in the related
Prospectus Supplement, the Servicer or its designee will be entitled to
receive any such interest or other income earned on funds in the Certificate
Account as additional compensation. The Servicer will deposit in the
Certificate Account from amounts previously deposited by it into the
Servicer's Custodial Account on the related Remittance Date the following
payments and collections received or made by it on and after the Cut-Off Date
(including scheduled payments of principal and interest due on and after the
Cut-Off Date but received before the Cut-Off Date):
(i) all Mortgagor payments on account of principal,
including Principal Prepayments and, if specified in the related
Prospectus Supplement, prepayment penalties;
(ii) all Mortgagor payments on account of interest, adjusted
to the Remittance Rate;
(iii) all Liquidation Proceeds net of certain amounts
reimbursed to the Servicer or other person entitled thereto, as
described above;
(iv) all Insurance Proceeds, other than proceeds to be
applied to the restoration or repair of the related property or
released to the Mortgagor and net of certain amounts reimbursed to
the Servicer or other person entitled thereto, as described above;
(v) all condemnation awards or settlements which are not
released to the Mortgagor in accordance with normal servicing
procedures;
(vi) any Advances made as described under "Servicing of
Mortgage Loans and Contracts - Advances" herein and certain other
amounts required under the Agreement to be deposited in the
Certificate Account;
(vii) all proceeds of any Mortgage Loan or Contract or
property acquired in respect thereof repurchased by the Depositor,
the Seller or otherwise as described above or under "Termination"
below;
(viii) all amounts, if any, required to be deposited in the
Certificate Account from any Credit Enhancement for the related
series; and
(ix) all other amounts required to be deposited in the
Certificate Account pursuant to the related Agreement.
Reports
Concurrently with each distribution on the Certificates, there will
be mailed to Owners a statement generally setting forth, to the extent
applicable to any series, among other things:
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(i) the aggregate amount of such distribution allocable to
principal, separately identifying the amount allocable to each class;
(ii) the amount of such distribution allocable to interest,
separately identifying the amount allocable to each class;
(iii) the aggregate Certificate Principal Balance of each
class of the Certificates after giving effect to distributions on
such Distribution Date;
(iv) the aggregate Certificate Principal Balance of any
class of Compound Interest Certificates after giving effect to any
increase in such Principal Balance that results from the accrual of
interest that is not yet distributable thereon;
(v) if applicable, the amount otherwise distributable to any
class of Certificates that was distributed to other classes of
Certificates;
(vi) if any class of Certificates has priority in the right
to receive Principal Prepayments, the amount of Principal Prepayments
in respect of the related Mortgage Assets;
(vii) the aggregate Principal Balance and number of Mortgage
Loans and Contracts which were delinquent as to a total of two
installments of principal and interest; and
(viii) the aggregate Principal Balances of Mortgage Loans
and Contracts which (a) were delinquent 30-59 days, 60-89 days, and
90 days or more, and (b) were in foreclosure.
Customary information deemed necessary for Owners to prepare their
tax returns will be furnished annually.
Forward Commitments; Pre-Funding
The Trustee of a Trust may enter into a Pre-Funding Agreement for the
transfer of additional Mortgage Loans to such Trust following the date on
which such Trust is established and the related Certificates are issued. The
Trustee of a Trust may enter into Pre-Funding Agreements to permit the
acquisition of additional Mortgage Loans that could not be delivered by the
Depositor or have not formally completed the origination process, in each case
prior to the Delivery Date. Any Pre-Funding Agreement will require that any
Mortgage Loans so transferred to a Trust conform to the requirements specified
in such Pre-Funding Agreement. If a Pre-Funding Agreement is to be utilized,
the related Trustee will be required to deposit in the Purchase Account all or
a portion of the proceeds received by the Trustee in connection with the sale
of one or more classes of Certificates of the related series; the additional
Mortgage Loans will be transferred to the related Trust in exchange for money
released from the related Pre-Funding Account. Each Pre-Funding Agreement will
set a specified period during which any such transfers must occur. The
Pre-Funding Agreement or the related Agreement will require that, if all
moneys originally deposited to such Pre-Funding Account are not so used by the
end of such specified period, then any remaining moneys will be applied as a
mandatory prepayment of the related class or classes of Certificates as
specified in the related Prospectus Supplement. The specified period for the
acquisition by a Trust of additional Mortgage Loans is not expected to exceed
three months from the date such Trust is established.
Servicer Events of Default
"Events of Default" under the Agreement will consist of (i) any
failure by the Servicer to duly observe or perform in any material respect any
other of its covenants or agreements in the Agreement materially affecting the
rights of Owners which continues unremedied for a specified number of days
after the giving of written notice of such failure to the Depositor by the
Trustee or to the Servicer and the Trustee by the Owners of Certificates
evidencing interests aggregating not less than 25% of the affected class of
Certificates; and (ii) certain events of insolvency, readjustment of debt,
marshaling of assets and liabilities or similar proceedings and certain
actions by the Servicer indicating its insolvency, reorganization or inability
to pay its obligations.
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Rights Upon Servicer Event of Default
As long as an Event of Default under the Agreement remains unremedied
by the Servicer, the Trustee, or Owners of Certificates may terminate all the
rights and obligations of the Servicer under the Agreement, whereupon the
Trustee or Master Servicer, if any, or a new Servicer appointed pursuant to
the Agreement, will succeed to all the responsibilities, duties and
liabilities of the Servicer under the Agreement and will be entitled to
similar compensation arrangements. Following such termination, the Depositor
shall appoint any established mortgage loan servicer satisfying the
qualification standards established in the Agreement to act as successor to
the Servicer under the Agreement. If no such successor shall have been
appointed within a specified number of days following such termination, then
either the Depositor or the Trustee may petition a court of competent
jurisdiction for the appointment of a successor Servicer. Pending the
appointment of a successor Servicer, the Trustee or the Master Servicer, if
any, shall act as Servicer.
The Owners of Certificates will not have any right under the
Agreement to institute any proceeding with respect to the Agreement, unless
they previously have given to the Trustee written notice of default and unless
the Owners of the percentage of the Certificates specified in the Prospectus
Supplement have made written request to the Trustee to institute such
proceeding in its own name as Trustee thereunder and have offered to the
Trustee reasonable indemnity and the Trustee for a specified number of days
has neglected or refused to institute any such proceedings. However, the
Trustee is under no obligation to exercise any of the trusts or powers vested
in it by the Agreement or to make any investigation of matters arising
thereunder or to institute, conduct or defend any litigation thereunder or in
relation thereto at the request, order or direction of any of the Owners,
unless such Owners have offered to the Trustee reasonable security or
indemnity against the costs, expenses and liabilities which may be incurred
therein or thereby.
Amendment
An Agreement generally may be amended by the Depositor, the Servicer
and the Trustee, without the consent of the Owners of the Certificates, to
cure any ambiguity, to correct or supplement any provision therein which may
be defective or inconsistent with any other provision therein, to take any
action necessary to maintain REMIC status of any Trust as to which a REMIC
election has been made, to add any other provisions with respect to matters or
questions arising under the Agreement which are not materially inconsistent
with the provisions of the Agreement or for any other purpose, provided that
with respect to amendments for any other purpose (a) the Depositor shall
deliver an opinion of counsel satisfactory to the Trustee, that such amendment
will not adversely affect in any material respect the interests of any Owners
of Certificates of that series and (B) such amendment will not result in a
withdrawal or reduction of the rating of any rated Certificate.
Notwithstanding the foregoing, no such amendment may (i) reduce in any manner
the amount of, or delay the timing of, collections of payments received on the
related Mortgage Assets or distributions which are required to be made on any
Certificate without the consent of the Owner of such Certificate, (ii)
adversely affect in any material respect the interests of the Owners of any
class of Certificates in any manner other than as described in (i), without
the consent of the Owners of Certificates of such class evidencing not less
than a majority of the interests of such class or (iii) reduce the aforesaid
percentage of Certificates of any class required to consent to any such
amendment, without the consent of the Owners of all Certificates of such class
then outstanding. Any other amendment provisions inconsistent with the
foregoing shall be specified in the related Prospectus Supplement.
Termination
The obligations of the Depositor, the Servicer, and the Trustee
created by the Agreement will terminate upon the payment as required by the
Agreement of all amounts held by the Servicer or in the Certificate Account
and required to be paid to them pursuant to the Agreement after the later of
(i) the maturity or other liquidation of the last Mortgage Asset subject
thereto or the disposition of all property acquired upon foreclosure of any
such Mortgage Loan or Contract or (ii) the repurchase by the Depositor from
the Trust of all the outstanding Certificates or all remaining assets in the
Trust. The Agreement will establish the repurchase price for the assets in the
Trust and the allocation of such purchase price among the classes of
Certificates. The exercise of such right will effect early retirement of the
Certificates of that series, but the Depositor's right so to repurchase will
be subject to the conditions
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described in the related Prospectus Supplement. If a REMIC election is to be
made with respect to all or a portion of a Trust, there may be additional
conditions to the termination of such Trust which will be described in the
related Prospectus Supplement. In no event, however, will the trust created by
the Agreement continue beyond the expiration of 21 years from the death of the
survivor of certain persons named in the Agreement. The Trustee will give
written notice of termination of the Agreement to each Owner, and the final
distribution will be made only upon surrender and cancellation of the
Certificates at an office or agency of the Trustee specified in such notice of
termination.
USE OF PROCEEDS
Substantially all the net proceeds to be received from the sale of
each series of Certificates will be applied to the simultaneous purchase of
the Mortgage Assets related to such series (or to reimburse the amounts
previously used to effect such a purchase), the costs of carrying such
Mortgage Assets until sale of the Certificates and to pay other expenses.
THE DEPOSITOR
The Depositor will have no ongoing servicing obligations or
responsibilities with respect to any Mortgage Pool or Contract Pool. The
Depositor does not have, nor is it expected in the future to have, any
significant net worth.
The Depositor anticipates that it will acquire Mortgage Assets in the
open market or in privately negotiated transactions, which may be through or
from an affiliate.
Neither the Depositor nor any of its affiliates will insure or
guarantee the Certificates of any series.
CERTAIN LEGAL ASPECTS OF THE MORTGAGE ASSETS
The following discussion contains summaries of certain legal aspects
of mortgage loans and manufactured housing contracts which are general in
nature. Because such legal aspects are governed primarily by applicable state
law (which laws may differ substantially), the summaries do not purport to be
complete nor to reflect the laws of any particular state, nor to encompass the
laws of all states in which the security for the Mortgage Loans and Contracts
is situated. The summaries are qualified by reference to the applicable
federal and state laws governing the Mortgage Loans and Contracts.
General
Mortgages. The Mortgage Loans will be secured either by deeds of
trust or mortgages. A mortgage creates a lien upon the real property
encumbered by the mortgage. It is not prior to liens for real estate taxes and
assessments. Priority between mortgages depends on their terms and generally
on the order of filing with a state or county office. There are two parties to
a mortgage: the mortgagor, who is the borrower and homeowner or the land
trustee (as described below), and the mortgagee, who is the lender. Under the
mortgage instrument, the mortgagor delivers to the mortgagee a note or bond
and the mortgage. Although a deed of trust is similar to a mortgage, a deed of
trust formally has three parties, the borrower-homeowner called the trustor
(similar to a mortgager), a lender (similar to a mortgagee) called the
beneficiary, and a third-party grantee called the trustee. Under a deed of
trust, the borrower grants the property, irrevocably until the debt is paid,
in trust and generally with a power of sale, to the trustee to secure payment
of the obligation. The trustee's authority under a deed of trust and the
mortgagee's authority under a mortgage are governed by law, the express
provisions of the deed of trust or mortgage and, in some cases, the directions
of the beneficiary.
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Cooperatives. Certain of the Mortgage Loans may be Cooperative Loans.
The private, non-profit, cooperative apartment corporation owns all the real
property that comprises the project, including the land, separate dwelling
units and all common areas. The cooperative is directly responsible for
project management and, in most cases, payment of real estate taxes and hazard
and liability insurance. If there is a blanket mortgage on the cooperative
apartment building and or underlying land, as is generally the case, the
cooperative, as project mortgagor, is also responsible for meeting these
mortgage obligations. A blanket mortgage is ordinarily incurred by the
cooperative in connection with the construction or purchase of the
cooperative's apartment building. The interest of the occupant under
proprietary leases or occupancy agreements to which that cooperative is a
party are generally subordinate to the interest of the holder of the blanket
mortgage in that building. If the cooperative is unable to meet the payment
obligations arising under its blanket mortgage, the mortgagee holding the
blanket mortgage could foreclose on that mortgage and terminate all
subordinate proprietary leases and occupancy agreements. In addition, the
blanket mortgage on a cooperative may provide financing in the form of a
mortgage that does not fully amortize with a significant portion of principal
being due in one lump sum at final maturity. The inability of the cooperative
to refinance this mortgage and its consequent inability to make such final
payment could lead to foreclosure by the mortgagee providing the financing. A
foreclosure in either event by the holder of the blanket mortgage could
eliminate or significantly diminish the value of any collateral held by the
lender who financed the purchase by an individual tenant-stockholder of
cooperative shares or in the case of a Trust including Cooperative Loans, the
collateral securing the Cooperative Loans.
The cooperative is owned by tenant-stockholders who, through
ownership of stock shares or membership certificates in the corporation,
receive proprietary leases or occupancy agreements which confer exclusive
rights to occupy specific units. Generally, a tenant-stockholder of a
cooperative must make a monthly payment to the cooperative representing such
tenant-stockholder's pro rata share of the cooperative's payments for its
blanket mortgage, real property taxes, maintenance expenses and other capital
or ordinary expenses. An ownership interest in a cooperative and accompanying
occupancy rights is financed through a cooperative share loan evidenced by a
promissory note and secured by a security interest in the occupancy agreement
or proprietary lease and in the related cooperative shares. The lender takes
possession of the share certificate and a counterpart of the proprietary lease
or occupancy agreement and a financing statement covering the proprietary
lease or occupancy agreement and the cooperative shares is filed in the
appropriate state and local offices to perfect the lenders interest in its
collateral. Subject to the limitations discussed below, upon default of the
tenant-stockholder, the lender may sue for judgment on the promissory note,
dispose of the collateral at a public or private sale or otherwise proceed
against the collateral or tenant-stockholder as an individual as provided in
the security agreement covering the assignment of the proprietary lease or
occupancy agreement and the pledge of cooperative shares.
Foreclosure
Mortgages. Foreclosure of a deed of trust is generally accomplished
by a non-judicial trustee's sale under a specific provision in the deed of
trust that authorizes the trustee to sell the property to a third party upon
any default by the borrower under the terms of the note or deed of trust. In
some states, the trustee must record a notice of default and send a copy to
the borrower-trustor or and any person who has recorded a request for a copy
of a notice of default and notice of sale. In addition, the trustee must
provide notice in some states to any other individual having an interest in
the real property, including any junior lienholders. The borrower, or any
other person having a junior encumbrance on the real estate, may, during a
reinstatement period, cure the default by paying the entire amount in arrears
plus the costs and expenses incurred in enforcing the obligation. Generally,
state law controls the amount of foreclosure expenses and costs, including
attorney's fees' which may be recovered by a lender. If the deed of trust is
not reinstated, a notice of sale must be posted in a public place and, in most
states, published for a specific period of time in one or more newspapers. In
addition, some state laws require that a copy of the notice of sale be posted
on the property and sent to all parties having an interest in the real
property.
Foreclosure of a mortgage is generally accomplished by judicial
action. The action is initiated by the service of legal pleadings upon all
parties having an interest in the real property. Delays in completion of the
foreclosure may occasionally result from difficulties in locating necessary
parties defendant. Judicial foreclosure proceedings are often not protested by
any of the parties defendant. However, when the mortgagee's right to foreclose
is contested, the legal proceedings necessary to resolve the issue can be time
consuming. After the
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completion of judicial foreclosure, the court generally issues a judgment of
foreclosure and appoints a referee or other court officer to conduct the sale of
the property.
In case of foreclosure under either a mortgage or a deed of trust,
the sale by the referee or other designated officer or by the trustee is a
public sale. However, because of the difficulty a potential buyer at the sale
would have in determining the exact status of title and because the physical
condition of the property may have deteriorated during foreclosure
proceedings, it is uncommon for a third party to purchase the property at the
foreclosure sale. Rather it is common for the lender to purchase the property
from the trustee or referee for an amount equal to the principal amount of the
mortgage or deed of trust, accrued and unpaid interest and expenses of
foreclosure. Thereafter, the lender will assume the burdens of ownership,
including paying real estate taxes, obtaining casualty insurance and making
such repairs at its own expense as are necessary to render the property
suitable for sale. The lender will commonly obtain the services of a real
estate broker and pay the broker's commission in connection with the sale of
the property. Depending upon market conditions, the ultimate proceeds of the
sale of the property may not equal the lender's investment in the property.
Any loss may be reduced by the receipt of any mortgage insurance proceeds.
When the junior mortgagee or beneficiary under a junior deed of trust
cures the default and state law allows it to reinstate or redeem by paying the
full amount of the senior mortgage or deed of trust, then in those states the
amount paid so to cure or redeem generally becomes a part of the indebtedness
secured by the junior mortgage or deed of trust. See "Junior Liens; Rights of
Senior Mortgagors or Beneficiaries" below.
A sale conducted in accordance with the terms of the power of sale
contained in a mortgage or deed of trust is generally presumed to be conducted
regularly and fairly, and a conveyance of the real property by the trustee
confers, in most states, legal title to the real property to the purchaser,
free of all junior mortgages or deeds of trust and free of all other liens and
claims subordinate to the mortgage or deed of trust under which the sale is
made (with the exception of certain governmental liens). The purchaser's title
is, however, subject to all senior liens, encumbrances and mortgages and may
be subject to mechanic's and materialman's liens in some states. Thus, if the
mortgage or deed of trust being foreclosed is a junior mortgage or deed of
trust, the sheriff or trustee will convey title to the purchaser of the real
property, subject to any existing first mortgage or deed of trust and any
other prior liens and claims. The foreclosure of a junior mortgage or deed of
trust, generally, will have an effect on the first mortgage or deed of trust,
if the senior mortgage or deed of trust grants to the senior mortgagee or
beneficiary the right to accelerate its indebtedness under a "due-on-sale"
clause or "due on further encumbrance" clause contained in the senior mortgage
or deed of trust.
See "Anti-Deficiency Legislation and Other Limitations on Lenders" below.
The proceeds received by the sheriff or trustee from the sale are
applied pursuant to the terms of the deed of trust, which may require
application first to the costs, fees and expenses of sale and then in
satisfaction of the indebtedness secured by the mortgage or deed of trust
under which the sale was conducted. In some states, any surplus money
remaining may be available to satisfy claims of the holders of junior
mortgages or deeds of trust and other junior liens and claims in order of
their priority, whether or not the mortgagor or trustee is in default, while
in some states, any surplus money remaining may be payable directly to the
mortgagor or trustor. Any balance remaining is generally payable to the
mortgagor or trustor. Following the sale, in some states the mortgagee or
beneficiary following a foreclosure of a mortgage or deed of trust may not
obtain a deficiency judgment against the mortgagor or trustor. A junior
lienholder whose rights in the property are terminated by the foreclosure by a
senior lienholder will not share in the proceeds from the subsequent
disposition of the property.
Cooperative Loans. The cooperative shares owned by the
tenant-stockholder and pledged to the lender are, in almost all cases, subject
to restrictions on transfer as set forth in the cooperative's Certificate of
Incorporation and Bylaws, as well as the proprietary lease or occupancy
agreement, and may be canceled by the cooperative for failure by the
tenant-stockholder to pay rent or other obligations or charges owned by such
tenant-stockholder, including mechanics' liens against the cooperative
apartment building incurred by such tenant-stockholder. The proprietary lease
or occupancy agreement generally permits the cooperative to terminate such
lease or agreement in the event an obligor fails to make payments or defaults
in the performance of covenants required thereunder. Typically, the lender and
the cooperative enter into a recognition agreement which establishes the
rights and obligations of both parties in the event of a default by the
tenant-stockholder on its obligations under the proprietary lease or occupancy
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agreement. A default by the tenant-stockholder under the proprietary lease or
occupancy agreement will usually constitute a default under the security
agreement between the lender and the tenant-stockholder.
The recognition agreement generally provides that, in the event that
the tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the cooperative will recognize the
lender's lien against proceeds from a sale of the cooperative apartment,
subject, however, to the cooperative's right to sums due under such
proprietary lease or occupancy agreement. The total amount owed to the
cooperative by the tenant-stockholder, which the lender generally cannot
restrict and does not monitor, could reduce the value of the collateral below
the outstanding principal balance of the cooperative loan and accrued and
unpaid interest thereon.
Recognition agreements also provide that in the event of a
foreclosure on a cooperative loan, the lender must obtain the approval or
consent of the cooperative as required by the proprietary lease before
transferring the cooperative shares or assigning the proprietary lease.
Generally, the lender is not limited in any rights it may have to dispossess
the tenant-stockholders.
In some states, foreclosure on the cooperative shares is accomplished
by a sale in accordance with the provisions of Article 9 of the Uniform
Commercial Code (the "UCC") and the security agreement relating to those
shares. Article 9 of the UCC requires that a sale be conducted in a
"commercially reasonable" manner. Whether a foreclosure sale has been
conducted in a "commercially reasonable" manner will depend on the facts in
each case. In determining commercial reasonableness, a court will look to the
notice given the debtor and the method, manner, time, place and terms of the
foreclosure. Generally, a sale conducted according to the usual practice of
banks selling similar collateral will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to
reimbursement is subject to the right of the cooperative corporation to
receive sums due under the proprietary lease or occupancy agreement. If there
are proceeds remaining, the lender must account to the tenant-stockholder for
the surplus. Conversely, if a portion of the indebtedness remains unpaid, the
tenant-stockholder is generally responsible for the deficiency. See
"Anti-Deficiency Legislation and Other Limitations on Lenders" below.
Junior Liens; Rights of Senior Mortgagees or Beneficiaries. Certain
of the Mortgage Loans, including Title I Loans, may be secured by mortgages or
deeds of trust providing for junior (i.e., second, third, etc.) liens on the
related Mortgaged Properties which are junior to the other mortgages or deeds
of trust held by other lenders or institutional investors. The rights of the
beneficiary under a junior deed of trust or as mortgagee under a junior
mortgage are subordinate to those of the mortgagee or beneficiary under the
senior mortgage or deed of trust, including the prior rights of the senior
mortgagee or beneficiary to receive hazard insurance and condemnation proceeds
and to cause the property securing the Mortgage Loans to be sold upon default
of the mortgagor or trustor. As discussed more fully below, a junior mortgagee
or beneficiary in some states may satisfy a defaulted senior loan in full and
in some states may cure such default and bring the senior loan current, in
either event adding the amounts expended to the balance due on the junior
loan. In most states, absent a provision in the senior mortgage or deed of
trust, no notice of default is required to be given to a junior mortgagee or
beneficiary.
The forms of the mortgage or deed of trust used by most institutional
lenders generally confer on the mortgagee or beneficiary the right both to
receive all proceeds collected under any hazard insurance policy and all
awards made in connection with any condemnation proceedings, and to apply such
proceeds and awards to any indebtedness secured by the mortgage or deed of
trust, in such order as the mortgagee or beneficiary may determine. Thus, in
the event improvements on the property are damaged or destroyed by fire or
other casualty, or in the event the bankruptcy is taken by condemnation, the
mortgagee or beneficiary under the underlying first mortgage or deed of trust
may have the prior right to collect any insurance proceeds payable under a
hazard insurance policy and any award of damages in connection with the
condemnation and to apply the same to the indebtedness secured by the
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first mortgage or deed of trust. In those situations, proceeds in excess of the
amount of first mortgage indebtedness generally may be applied to the
indebtedness of a junior mortgage or trust deed.
Other provisions typically found in the form of the mortgagee or deed
of trust generally used by most institutional lenders obligate the mortgagor
or trustor to pay before delinquency all taxes and assessments on the property
and, when due, all encumbrances, charges and liens on the property which
appear prior to the mortgage or deed of trust, to provide and maintain fire
insurance on the property, to maintain and repair the property and not to
commit or permit any waste thereof, and to appear in and defend any action or
proceeding purporting to affect the property or the rights of the mortgagee or
beneficiary under the mortgage or deed of trust. Upon a failure of the
mortgagor or trustor to perform any of these obligations, the mortgagee or
beneficiary typically is given the right under the mortgage or deed of trust
to perform the obligation itself at its election, with the mortgagor or
trustor agreeing to reimburse the mortgagee or beneficiary for any sums
expended by the mortgagee or beneficiary on behalf of the trustor. All sums so
expended by the mortgagee or beneficiary generally become part of the
indebtedness secured by the mortgage or deed of trust
Right of Redemption. In some states, after sale pursuant to a deed of
trust or foreclosure of a mortgage, the borrower and foreclosed junior lienors
are given a statutory period in which to redeem the property following
foreclosure. In some states, redemption may occur only upon payment of the
entire principal balance of the loan, accrued interest and expenses of
foreclosure. In other states, redemption may be authorized if the former
borrower pays only a portion of the sums due. The effect of a statutory right
of redemption is to diminish the ability of the lender to sell the foreclosed
property. The rights of redemption would defeat the title of any purchaser
from the lender subsequent to foreclosure or sale under a deed of trust.
Consequently, the practical effect of the redemption right is to force the
lender to retain the property and pay the expenses of ownership until the
redemption period has run.
Anti-Deficiency Legislation and Other Limitations on Lenders. Certain
states have imposed statutory prohibitions that limit the remedies of a
beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment would be a personal judgment against the
former borrower equal in most cases to the difference between the net amount
realized upon the public sale of the real property and the amount due to the
lender. Other statutes require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an
attempt to satisfy the full debt before bringing a personal action against the
borrower. Finally, other statutory provisions limit any deficiency judgment
against the former borrower following a judicial sale to the excess of the
outstanding debt over the fair market value of the property at the time of the
public sale. The purpose of these statutes is generally to prevent a
beneficiary or a mortgagee from obtaining a large deficiency judgment against
the former borrower as a result of low or no bids at the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments,
numerous other statutory provisions, including the federal bankruptcy laws and
state laws affording relief to debtors, may interfere with or affect the
ability of the secured mortgage lender to realize upon collateral and/or
enforce a deficiency judgment. For example, with respect to federal bankruptcy
law, a court with federal bankruptcy jurisdiction may permit a debtor through
his or her Chapter 11 or Chapter 13 rehabilitative plan to cure a monetary
default in respect of a mortgage loan on a debtor's residence by paying
arrearages within a reasonable time period and reinstating the original
mortgage loan payment schedule even though the lender accelerated the mortgage
loan and final judgment of foreclosure had been entered in state court
(provided no sale of the residence had yet occurred) prior to the filing of
the debtor's petition. Some courts with federal bankruptcy jurisdiction have
approved plans, based on the particular fact of the reorganization case, that
effected the curing of a mortgage loan default by paying arrearages over a
number of years.
Courts with federal bankruptcy jurisdiction have also indicated that
the terms of a mortgage loan secured by property of the debtor may be
modified. These courts have suggested that such modifications may include
reducing the amount of each monthly payment, changing the rate of interest,
altering the repayment schedule and reducing the lender's security interest to
the value of the residence, thus leaving the lender a general unsecured
creditor for the difference between the value of the residence and the
outstanding balance of the loan. Federal
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bankruptcy law and limited case law indicate that the foregoing modifications
could not be applied to the terms of a loan secured by property that is the
principal residence of the debtor.
The Code provides priority to certain tax liens over the lien of the
mortgage. In addition, substantive requirements are imposed upon mortgage
lenders in connection with the origination and the servicing of mortgage loans
by numerous federal and some state consumer protection laws. These laws
include the federal Truth-in-Lending Act, Real Estate Settlement Procedures
Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair Credit
Reporting Act and related statutes. These federal laws impose specific
statutory liabilities upon lenders who originate mortgage loans and who fail
to comply with the provisions of the law. In some cases, this liability may
affect assignees of the mortgage loans.
Generally, Article 9 of the UCC governs foreclosure on cooperative
shares and the related proprietary lease or occupancy agreement. Some courts
have interpreted section 9-504 of the UCC to prohibit a deficiency award
unless the creditor establishes that the sale of the collateral (which, in the
case of a Cooperative Loan, would be the shares of the cooperative and the
related proprietary lease or occupancy agreement) was conducted in a
commercially reasonable manner.
Enforceability of Certain Provisions. Certain of the Mortgage Loans
will contain due-on-sale clauses. These clauses permit the lender to
accelerate the maturity of a loan if the borrower sells, transfers, or conveys
the property. The enforceability of these clauses was the subject of
legislation or litigation in many states, and in some cases the enforceability
of these clauses was limited or denied. However, the Garn-St. Germain
Depository Institutions Act of 1982 (the "Garn-St. Germain Act") preempts
state constitutional, statutory and case law prohibiting the enforcement of
due-on-sale clauses and permits lenders to enforce these clauses in accordance
with their terms, subject to certain limited exceptions. The Garn-St. Germain
Act does "encourage" lenders to permit assumption of loans at the original
rate of interest or at some other rate less than the average of the original
rate and the market rate.
The Garn-St. Germain Act also sets forth nine specific instances in
which a mortgage lender covered by the Garn-St. Germain Act (including federal
savings and loan associations and federal savings banks) may not exercise a
due-on-sale clause, notwithstanding the fact that a transfer of the property
may have occurred. These include intra-family transfers, certain transfers by
operation of law, leases of fewer than three years and the creation of a
junior encumbrance. Regulations promulgated under the Garn-St. Germain Act by
the Federal Home Loan Bank Board as succeeded by the Office of Thrift
Supervision (the "OTS"), also prohibit the imposition of a prepayment penalty
upon the acceleration of a loan pursuant to a due-on-sale clause. Any
inability of the Depositor to enforce due-on-sale clauses may affect the
average life of the Mortgage Loans and the number of Mortgage Loans that may
be outstanding until maturity.
Upon foreclosure, courts have imposed general equitable principles.
These equitable principles are generally designed to relieve the borrower from
the legal effect of his defaults under the loan documents. Examples of
judicial remedies that have been fashioned include requirements that the
lender undertake affirmative and expensive actions to determine the causes for
the borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's judgment and have required that lenders reinstate loans or recast
payment schedules in order to accommodate borrowers who are suffering from
temporary financial disability. In other cases, courts have limited the right
of the lender to foreclose if the default under the mortgage instrument is not
monetary, such as the borrower falling to adequately maintain the property or
the borrower executing a second mortgage or deed of trust affecting the
property. Finally, some courts have been faced with the issue of whether or
not federal or state constitutional provisions reflecting due process concerns
for adequate notice require that borrowers under deeds of trust or mortgages
receive notices in addition to the statutory-prescribed minimum. For the most
part, these cases have upheld the notice provisions as being reasonable or
have found that the sale by a trustee under a deed of trust, or under a
mortgage having a power of sale, does not involve sufficient state action to
afford constitutional protections to the borrower.
The standard forms of note, mortgage and deed of trust generally
contain provisions obligating the borrower to pay a late charge if payments
are not timely made, and in some circumstances may provide for prepayment fees
or
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penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations upon late charges which a lender may collect
from a borrower for delinquent payments. Certain states also limit the amounts
that a lender may collect from a borrower as an additional charge if the loan is
prepaid. Under the Agreement, late charges (to the extent permitted by law and
not waived by the Servicer) will be retained by the Servicer as additional
servicing compensation.
Adjustable Rate Loans. The laws of certain states may provide that
mortgage notes relating to adjustable rate loans are not negotiable
instruments under the UCC. In such event, the Trustee will not be deemed to be
a "holder in due course," within the meaning of the UCC and may take such a
mortgage note subject to certain restrictions on its ability to foreclose and
to certain contractual defenses available to a mortgagor.
Environmental Legislation. Certain states impose a statutory lien for
associated costs on property that is the subject of a cleanup action by the
state on account of hazardous wastes or hazardous substances released or
disposed of on the property. Such a lien will generally have priority over all
subsequent liens on the property and, in certain of these states, will have
priority over prior recorded liens including the lien of a mortgage. In
addition, under federal environmental legislation and under state law in a
number of states, a secured party which takes a deed in lieu of foreclosure or
acquires a mortgaged property at a foreclosure sale or assumes active control
over the operation or management of a property so as to be deemed an "owner"
or "operator" of the property may be liable for the costs of cleaning up a
contaminated site. Although such costs could be substantial, it is unclear
whether they would be imposed on a secured lender (such as a Trust) to
homeowners. In the event that title to a Mortgaged Property securing a
Mortgage Loan in a Trust was acquired by the Trust and cleanup costs were
incurred in respect of the Mortgaged Property, the Trust might realize a loss
if such costs were required to be paid by the Trust.
Soldiers' and Sailors' Civil Relief Act
Generally, under the terms of the Relief Act, a borrower who enters
military service after the origination of a Mortgage Loan or Contract by such
borrower (including a borrower who is a member of the National Guard or is in
reserve status at the time of the origination of the Mortgage Loan and is
later called to active duty) may not be charged interest above an annual rate
of 6% during the period of such borrower's active duty status, unless a court
orders otherwise upon application of the lender. It is possible that such
interest rate limitation or similar limitations under state law could have an
effect, for an indeterminate period of time, on the ability of the Servicer to
collect full amounts of interest on certain of the Mortgage Loans. In
addition, the Relief Act imposes limitations which would impair the ability of
the Servicer to foreclose on an affected Mortgage Loan during the borrower's
period of active duty status. Thus, in the event that such a Mortgage Loan
goes into default there may be delays and losses occasioned by the inability
to realize upon the Mortgaged Property in a timely fashion.
Any shortfalls in interest collections resulting from application of
the Relief Act could adversely affect Certificates.
The Contracts
General. As a result of the Depositor's assignment of the Contracts
to the Trustee, the Owners of Certificates will succeed collectively to all
the rights (including the right to receive payment on the Contracts) and will
assume certain obligations of the Depositor. Each Contract evidences both (a)
the obligation of the obligor to repay the loan evidenced thereby, and (b) the
grant of a security interest in the Manufactured Home to secure repayment of
such loans. Certain aspects of both features of the Contracts are described
more fully below.
The Contracts generally are "chattel paper" as defined in the UCC in
effect in the states which the Manufactured Homes initially were registered.
Pursuant to the UCC, the sale of chattel paper is treated in a manner similar
to perfection of a security interest in chattel paper. Under the Agreement,
the Depositor will transfer physical possession of the Contracts to the
Trustee or its custodians. In addition, the Depositor will make an appropriate
filing of a UCC-1 financing statement in the appropriate states to give notice
of the Trustee's ownership of the Contracts. The Contracts will not be stamped
or marked otherwise to reflect their assignment from the Depositor to
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the Trustee. Therefore, if a subsequent purchaser were able to take physical
possession of the Contracts without notice of such assignment the Trustee's
interest in Contracts could be defeated.
Security Interests in the Manufactured Homes. The Manufactured Homes
securing the Contracts may be located in all 50 states. Security interests in
manufactured homes may be perfected either by notation of the secured party's
lien on the certificate of title or by delivery of the required documents and
payment of a fee to the state motor vehicle authority, depending on state law.
In some nontitle states, perfection pursuant to the provisions of the UCC is
required. The Depositor may effect such notation or delivery of the required
documents and fees, and obtain possession of the certificate of title, as
appropriate under the laws of the state in which any manufactured home
securing a manufactured housing conditional sales contract is registered. In
the event the Depositor fails, due to clerical errors, to effect such notation
or delivery, or files the security interest under the wrong law (for example,
under a motor vehicle title statute rather than under the UCC, in a few
states), the Trustee may not have a first priority security interest in the
Manufactured Home securing a Contract. As manufactured homes have become
larger and often have been attached to their sites without any apparent
intention to move them, courts in many states have held that manufactured
homes, under certain circumstances, may become subject to real estate title
and recording laws. As a result, a security interest in a manufactured home
could be rendered subordinate to the interests of other parties claiming an
interest in the home under applicable state real estate law. In order to
perfect a security interest in a manufactured home under real estate law, the
holder of the security interest must file either a "fixture filing" under the
provisions of the UCC or a real estate mortgage under the real estate laws of
the state where the home is located. These filings must be made in the real
state records office of the county where the home is located. So long as the
borrower does not violate this agreement, a security interest in the
Manufactured Home will be governed by the certificate of title laws or the
UCC, and the notation of the security interest on the certificate of title or
the filing of a UCC financing statement will be effective to maintain the
priority of the security interest in the Manufactured Home. If, however, a
Manufactured Home is permanently attached to this site, other parties could
obtain an interest in the Manufactured Home which is prior to the security
interest transferred to the Trustee. With respect to a series of Certificates
and as described in the related Prospectus Supplement, the Depositor may be
required to perfect a security interest in the Manufactured Home under
applicable real estate laws. If such real estate filings are not required and
if any of the foregoing events were to occur, the only recourse would be to
pursue the Trust's rights to require repurchase for breach of warranties.
The Depositor will assign its security interest in the Manufactured
Homes to the Trustee. Neither the Depositor nor the Trustee will amend the
certificates of title to identify the Trust as the new secured party.
Accordingly, the Depositor will continue to be named as the secured party on
the certificates of title relating to the Manufactured Homes. In most states,
such assignment is an effective conveyance of such security interest without
amendment of any lien noted on the related certificate of title and the new
secured party succeeds to the Depositor's rights as the secured party.
However, in some states there exists a risk that, in the absence of an
amendment to the certificate of title, such assignment of the security
interest might not be held effective against creditors of the Depositor.
In the absence of fraud, forgery or permanent affixation of the
Manufactured Home to its site by the Manufactured Home owner, or
administrative error by state recording officials, the notation of the lien of
the Depositor on the certificate of title or delivery of the required
documents and fees will be sufficient to protect the Trust against the rights
of subsequent purchasers of a Manufactured Home or subsequent lenders who take
a security interest in the Manufactured Home. If there are any Manufactured
Homes as to which the security interest is not perfected, such security
interest would be subordinate to, among others, subsequent purchasers for
value of Manufactured Homes and holders of perfected security interests. There
also exists a risk in not identifying the Trust as the new secured party on
the certificate of title that, through fraud or negligence, the security
interest of the Trust could be released.
Enforcement of Security Interests in Manufactured Homes. The Servicer
on behalf of the Trustee, to the extent required by the related Agreement, may
take action to enforce the Trustee's security interest with respect to
Contracts in default by repossession and resale of the Manufactured Homes
securing such Contracts in default. So long as the Manufactured Home has not
become subject to the real estate law, a creditor can repossess a Manufactured
Home securing a Contract by voluntary surrender, by "self-help" repossession
that is "peaceful" (i.e., without breach of the peace) or in the absence of
voluntary surrender and the ability to repossess without breach of
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the peace, by judicial process. The holder of a Contract must give the debtor a
number of days' notice, which varies from 10 to 30 days depending on the state,
prior to commencement of any repossession. The UCC and consumer protection laws
in most states place restrictions on repossession sales, including requiring
prior notice to the debtor and commercial reasonableness in effecting such a
sale. The law in most states also requires that the debtor be given notice of
any sale prior to resale of the unit so that the debtor may redeem at or before
such resale. In the event of such repossession and resale of a Manufactured
Home, the Trustee would be entitled to be paid out of the sale proceeds before
such proceeds could be applied to the payment of the claims of unsecured
creditors or the holders of subsequently perfected security interests or,
thereafter, to the debtor.
If the owner of a Manufactured Home moves it to a state other than
the state in which such Manufactured Home initially is registered, under the
laws of most states the perfected security interest in the Manufactured Home
would continue for four months after such relocation and thereafter only if
and after the owner registers the Manufactured Home in such state. If the
owner were to relocate a Manufactured Home to another state and not
re-register the Manufactured Home in such state, and if steps are not taken to
re-perfect the Trustee's security interest in such state, the security
interest in the Manufactured Home would cease to be perfected. A majority of
states generally requires surrender of a certificate of title to re-register a
Manufactured Home; accordingly, the Trustee must surrender possession if it
holds the certificate of title to such Manufactured Home or, in the case of
Manufactured Homes registered in states which provide for notation of lien,
the Trustee would receive notice of surrender if the security interest in the
Manufactured Home is noted on the certificate of title. Accordingly, the
Trustee would have the opportunity to re-perfect its security interest in the
Manufactured Home in the state of relocation. In states which do not require a
certificate of title for registration of a manufactured home, re-registration
could defeat perfection. In the ordinary course of servicing the manufactured
housing conditional sales contracts, the Servicer will be required to take
steps to effect such re-perfection upon receipt of notice of re-registration
or information from the obligor as to relocation. Similarly, when an obligor
under a manufactured housing conditional sales contract sells a manufactured
home, the Trustee must surrender possession of the certificate of title or
will receive notice as a result of its lien noted thereon and accordingly will
have an opportunity to require satisfaction of the related manufactured
housing conditional sales contract before release of the lien. Under each
Agreement the Servicer is obligated to take such steps, at the Servicer's
expense, as are necessary to maintain perfection of security interests in the
Manufactured Homes.
Under the laws of most states, liens for repairs performed on a
Manufactured Home take priority even over a perfected security interest. The
Depositor will represent in the Agreement that it has no knowledge of any such
liens with respect to any Manufactured Home securing payment on any Contract.
However, such liens could arise at any time during the term of a Contract. No
notice will be given to the Trustee in the event such a lien arises.
Under the laws applicable in most states, a creditor is entitled to
obtain a deficiency judgment from a debtor for any deficiency on repossession
and resale of the manufactured home securing such debtor's loan.
However, some states impose prohibitions or limitations on deficiency
judgments.
Certain other statutory provisions, including federal and state
bankruptcy and insolvency laws and general equitable principles, may limit or
delay the ability of a lender to repossess and resell collateral or enforce a
deficiency judgment.
Consumer Protection Laws. The so-called "Holder-in-Due-Course" rule
of the Federal Trade Commission is intended to defeat the ability of the
transferor of a consumer credit contract which is the seller of goods which
gave rise to the transaction (and certain related lenders and assignees) to
transfer such contract free of notice of claims by the debtor thereunder. The
effect of this rule is to subject the assignee of such a contract to all
claims and defenses which the debtor could assert against the seller of goods.
Liability under this rule is limited to amounts paid under a Contract;
however, the obligor also may be able to assert the rule to set off remaining
amounts due as a defense against a claim brought by the Trust against such
obligor. Numerous other federal and state consumer protection laws impose
requirements applicable to the origination of and lending pursuant to the
Contracts, including the Truth-in-Lending Act, the Federal Trade Commission
Act, the Fair Credit Billing Act, the Fair Credit Reporting Act, the Equal
Credit Opportunity Act, the Fair Debt Collection Practices Act and the Uniform
Consumer Credit Code. In the case of some of these laws, the failure to comply
with their provisions may affect the enforceability of the related Contract
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Transfers of Manufactured Homes; Enforceability of "Due-on-Sale"
Clauses. The Contracts, in general, prohibit the sale or transfer of the
related Manufactured Homes without the consent of the Depositor and permit the
acceleration of the maturity of the Contracts by the Depositor upon any such
sale or transfer for which consent has not been granted. In certain cases, the
transfer may be made by a delinquent obligor in order to avoid a repossession
proceeding with respect to a Manufactured Home.
In the case of a transfer of a Manufactured Home after which the
Servicer desires to accelerate the maturity of the related Contract, the
Servicer's ability to do so will depend on the enforceability under state law
of the "due-on-sale" clause. The Garn-St. Germain Act preempts, subject to
certain exceptions and conditions, state laws prohibiting enforcement of
"due-on-sale" clauses applicable to the Manufactured Homes. Consequently, in
some states the Servicer may be prohibited from enforcing a "due-on-sale"
clause in respect of certain Manufactured Homes.
The Title I Program
Certain of the Mortgage Loans or Contracts contained in a Trust may
be loans insured under the FHA Title I credit insurance program created
pursuant to Sections 1 and 2(a) of the National Housing Act of 1934 (the
"Title I Program"). Under the Title I Program, the FHA is authorized and
empowered to insure qualified lending institutions against losses on eligible
loans. The Title I Program operates as a coinsurance program in which the FHA
insures up to 90% of certain losses incurred on an individual insured loan,
including the unpaid principal balance of the loan, but only to the extent of
the insurance coverage available in the lender's FHA insurance coverage
reserve account. The owner of the loan bears the uninsured loss on each loan.
The types of loans, which are eligible for insurance by the FHA under
the Title I Program, include property improvement loans ("Property Improvement
Loans" or "Title I Loans") and manufactured home loans ("Manufactured Home
Loans" or "Title I Contracts"). A Property Improvement Loan or Title I Loan
means a loan made to finance actions or items that substantially protect or
improve the basic livability or utility of a property and includes: (1) single
family, multifamily and nonresidential property improvement loans; (2)
manufactured home improvement loans, where the home is classified as
personalty; (3) historic preservation loans; and (4) fire safety equipment
loans in existing health care facilities. A Manufactured Home Loan or Title I
Contract means a loan for the purchase or refinancing of a manufactured home
and/or the lot on which to place such home and includes: (1) manufactured home
purchase loans; (2) manufactured home lot loans; and (3) combination loans.
In addition to these types of loans, there are two basic methods of
lending or originating loans which include a "direct loan" or a "dealer loan".
With respect to a direct loan, the borrower makes application directly to a
lender without any assistance from a dealer, which application may be filled
out by the borrower or by a person acting at the direction of the borrower who
does not have a financial interest in the loan transaction, and the lender may
disburse the loan proceeds solely to the borrower or jointly to the borrower
and other parties to the transaction. With respect to a dealer loan, the
dealer, who has a direct or indirect financial interest in the loan
transaction, assists the borrower in preparing the loan application or
otherwise assists the borrower in obtaining the loan from the lender and the
lender may disburse proceeds solely to the dealer or the borrower or jointly
to the borrower and the dealer or other parties. With respect to a dealer
Title I Loan, a dealer may include a seller, a contractor or supplier of goods
or services' and with respect to a dealer Title I Contract, a dealer is a
person engaged in the business of manufactured home retail sales.
Loans insured under the Title I Program are required to have fixed
interest rates and, generally, provide for equal installment payments due
weekly, biweekly, semi-monthly, or monthly, except that a loan may be payable
quarterly or semi-annually in order to correspond with the borrower's irregular
flow of income The first or last payments (or both) may vary in amount but may
not exceed 150% of the regular installment payment, and the first payment may be
due no later than two months from the date of the loan. The note must contain a
provision permitting full or partial prepayment of the loan. The interest rate
may be established by the lender and must be fixed for the term of the loan and
recited in the note. Interest on an insured loan must accrue from the date of
the
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loan and be calculated according to the actuarial method. The lender must assure
that the note and all other documents evidencing the loan are in compliance with
applicable Federal, state and local laws.
Each insured lender is required to use prudent lending standards in
underwriting individual loans and to satisfy the applicable loan underwriting
requirements under the Title I Program prior to its approval of the loan and
disbursement of loan proceeds. Generally, the lender must exercise prudence
and diligence to determine whether the borrower and any co-maker are solvent
and acceptable credit risks, with a reasonable ability to make payments on the
loan obligation. The lender's credit application and review must determine
whether the borrower's income will be adequate to meet the periodic payments
required by the loan, as well as the borrower's other housing and recurring
expenses, which determination must be made in accordance with the
expense-to-income ratios published by the Secretary of the United States
Department of Housing and Urban Development ("HUD").
Under the Title I Program, the FHA does not review or approve for
qualification for insurance the individual loans insured thereunder at the
time of approval by the lending institution. If, after a loan has been made
and reported for insurance under the Title I Program, the lender discovers any
material misstatement of fact or that the loan proceeds have been misused by
the borrower, dealer or any other party, it shall promptly report this to the
FHA. In such case, provided that the validity of any lien on the property has
not been impaired, the insurance of the loan under the Title I Program will
not be affected unless such material misstatement of fact or misuse of loan
proceeds was caused by (or was knowingly sanctioned by) the lender or its
employees.
Requirements for Title I Loans. The maximum principal amounts for
Title I Loans must not exceed the actual cost of the project plus any
applicable fees and charges allowed under the Title I Program; provided that
such maximum amount does not exceed the following loan amounts: (i) $25,000
for a single family property improvement loan and nonresidential property
improvement loans; (ii) the lesser of $60,000 or an average of $12,000 per
dwelling unit for multifamily property improvement loans; and (iii) $17,500
for a manufactured home improvement loan. Generally, the term of a Title I
Loan may not be less than six months nor greater than 20 years and 32 days,
except that the maximum term of a single family property improvement loan on a
manufactured home is limited to 15 years and 32 days and the maximum term of a
manufactured home improvement loan is limited to 12 years and 32 days. A
borrower may obtain multiple Title I Loans with respect to multiple
properties, and a borrower may obtain more than one Title I Loan with respect
to a single property, in each case as long as the total outstanding balance of
all Title I Loans on the same property does not exceed the maximum loan amount
for the type of Title I Loan thereon having the highest permissible loan
amount
Borrower eligibility for a Title I Loan requires that the borrower
have at least a one-half interest in either fee simple title to the real
property, a lease thereof for a term expiring at least six months after the
final maturity of the Title I Loan or a recorded land installment contract for
the purchase of the real property, and that the borrower have equity in the
property being improved at least equal to the amount of the Title I Loan if
such loan amount exceeds $15,000. Any Title I Loan in excess of $5,000 must be
secured by a recorded lien on the improved property which is evidenced by a
mortgage or deed of trust executed by the borrower and all other owners in fee
simple.
The proceeds from a Title I Loan may be used only to finance property
improvements which substantially protect or improve the basic livability or
utility of the property as disclosed in the loan application. The Secretary of
HUD has published a list of items and activities which cannot be financed with
proceeds from any Title I Loan and from time to time the Secretary of HUD may
amend such list of items and activities. With respect to any dealer Title I
Loan, before the lender may disburse funds, the lender must have in its
possession a completion certificate on a HUD-approved form, signed by the
borrower and the dealer. With respect to any direct Title I Loan the lender is
required to obtain, promptly upon completion of the improvements but not later
than 6 months after disbursement of the loan proceeds with one 6 month
extension if necessary, a completion certificate, signed by the borrower. The
lender is required to conduct an on-site inspection on any Title I Loan where
the principal obligation is $7,500 or more, and or any direct Title I Loan
where the borrower fails to submit a completion certificate.
Requirements for Title I Contracts. The maximum principal amount for
any Title I Contract must not exceed the sum of certain itemized amounts,
which include a specified percentage of the purchase price of the manufactured
home depending on whether it is a new or existing home; provided that such
maximum amount does
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not exceed the following loan amounts: (i) $40,500 for a new or existing
manufactured home purchase loan; (ii) $13,500 for a manufactured home lot
purchase; and (iii) $54,000 for a combination loan (i.e., a loan to purchase a
new or existing manufactured home and the lot for such home). Generally, the
term of a Title I Contract may not be less than six months nor greater than 20
years and 32 days, except that the maximum term of a manufactured home lot loan
is limited to 15 years and 32 days and the maximum term of a multimodule
manufactured home and lot in combination is limited to 25 years and 32 days.
Borrower eligibility for a Title I Contract requires that the
borrower become the owner of the property to be financed with such loan and
occupy the manufactured home as the borrower's principal residence, except for
a manufactured home lot loan which allows six months to occupy the home as the
borrower's principal residence. If a manufactured home is classified as
realty, then ownership of the home must be in fee simple, and also, the
ownership of the manufactured home lot must be in fee simple, except for a lot
which consists of a share in a cooperative association that owns the
manufactured home park. The borrower's minimum cash down payment requirement
to obtain financing through a Title I Contract is as follows: (i) at least 5%
of the first $5,000 and 10% of the balance of the purchase price of a new
manufactured home and at least 10% of the purchase price of an existing
manufactured home for a manufactured home purchase loan, or in lieu of a full
or partial cash down payment, the trade-in of the borrower's equity in an
existing manufactured home; (ii) at least 10% of the purchase price and
development costs of a lot for a manufactured home lot loan; and (iii) at
least 5% of the first $5,000 and 10% of the balance of the purchase price of
the manufactured home and lot for a combination loan.
Any manufactured home financed by a Title I Contract must be
certified by the manufacturer to have been constructed in compliance with the
National Manufactured Housing Construction and Safety Standards Act of 1974
(42 U.S.C. 5401-5426), so as to conform to all applicable Federal construction
and safety standards, and with respect to the purchase of a new manufactured
home, the manufacture must furnish the borrower with a one year written
warranty on a HUD approved form which obligates the manufacturer to correct
any nonconformity with all applicable Federal construction and safety
standards or any defects in materials or workmanship for the one year period
after the date of delivery. The proceeds from a Title I Contract may be used
as follows: the purchase or refinancing of a manufactured home, a suitably
developed lot for a manufactured home already owned by the borrower, or a
manufactured home and suitably developed lot for the home in combination; or
the refinancing of an existing manufactured home already owned by the borrower
in connection with the purchase of a manufactured home lot or an existing lot
already owned by the borrower in connection with the purchase of a
manufactured home. In addition, the proceeds for a Title I Contract which is a
manufactured home purchase loan or a combination loan may be used for the
purchase, construction or installation of a garage, carport, patio or other
comparable appurtenance to the home. The proceeds from a Title I Contract
cannot be used for the purchase of furniture or the financing of any items and
activities which are set forth on the list published by the Secretary of HUD
as amended from time to time.
Any Title I Contract must be secured by a recorded lien on the
manufactured home, its furnishings, equipment, accessories and appurtenance,
which lien must be a first lien, superior to any other lien on the property.
With respect to any Title I Contract involving a manufactured home purchase
loan or combination loan and the sale of the manufactured home by a dealer,
the lender or its agent (other than the dealer) must conduct a
site-of-placement inspection within 60 days after the date of the loan to
verify that the terms and conditions of the purchase contract have been met,
the manufactured home and any options and appurtenances included in the
purchase price or financed with the loan have been delivered and installed,
and the placement certificate executed by the borrower and the dealer is in
order.
FHA Insurance Coverage. Under the Title I Program the FHA establishes
an insurance coverage reserve account for each lender which has been granted a
Title I insurance contract. The amount of insurance coverage in this account
is 10% of the amount disbursed, advanced or expended by the lender in
originating or purchasing eligible loans registered with the FHA for Title I
insurance, with certain adjustments. The balance in the insurance coverage
reserve account is the maximum amount of insurance claims the FHA is required
to pay. Loans to be insured under the Title I Program will be registered for
insurance by the FHA and the insurance coverage attributable to such loans
will be included in the insurance coverage reserve account for the originating
or purchasing lender following the receipt and acknowledgment by the FHA of a
loan report on the prescribed form pursuant to the Title I regulations. The
FHA charges a fee of 0.50% per annum of the net proceeds (the original
balance) of any eligible loan so reported and acknowledged for insurance by
the originating lender. The FHA bills the lender for the
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insurance premium on each insured loan annually, on approximately the
anniversary date of the loan's origination. If an insured loan is prepaid during
the year, the FHA will not refund or abate the insurance premium.
Under the Title I Program the FHA will reduce the insurance coverage
available in the lender's FHA insurance coverage reserve account with respect
to loans insured under the lender's contract of insurance by (i) the amount of
the FHA insurance claims approved for payment relating to such insured loans,
(ii) the amount of the Annual Reductions attributable to such insured loans
and (iii) the amount of insurance coverage attributable to insured loans sold
by the lender, and such insurance coverage may be reduced for any FHA
insurance claims rejected by the FHA. After a lender has held its Title I
contract of insurance for five years, the lender's FHA insurance coverage
reserve account is subject to an annual reduction (the "Annual Reduction") on
each October in an amount equal to 10% of the insurance coverage reserves
available on such date with respect to such contract of insurance; provided
that such Annual Reduction shall not reduce the insurance coverage to an
amount less than $50,000. The balance of the lender's FHA insurance coverage
reserve account will be further adjusted as required under Title I or by the
FHA, and the insurance coverage therein may be earmarked with respect to each
or any eligible loans insured thereunder, if a determination is made by the
Secretary of HUD that it is in its interest to do so. Originations and
acquisitions of new eligible loans will continue to increase a lender's
insurance coverage reserve account balance by 10% of the amount disbursed,
advanced or expended in originating or acquiring such eligible loans
registered with the FHA for insurance under the Title I Program. The Secretary
of HUD may transfer insurance coverage between insurance coverage reserve
accounts with earmarking with respect to a particular insured loan or group of
insured loans when a determination is made that it is in the Secretary's
interest to do so.
The lender may transfer (except as collateral in a bona fide loan
transaction) insured loans and loans reported for insurance only to another
qualified lender under a valid Title I contract of insurance. Unless an
insured loan is transferred with recourse or with a guarantee or repurchase
agreement, the FHA, upon receipt of written notification of the transfer of
such loan in accordance with the Title I regulations, will transfer from the
transferor's insurance coverage reserve account to the transferee's insurance
coverage reserve account an amount, if available, equal to 10% of the actual
purchase price or the net unpaid principal balance of such loan (whichever is
less). However, under the Title I Program not more than $5,000 in insurance
coverage shall be transferred to or from a lender's insurance coverage reserve
account during any October 1 to September 30 period without the prior approval
of the Secretary of HUD.
Claims Procedures Under Title I. Under the Title I Program the lender
may accelerate an insured loan following a default on such loan only after the
lender or its agent has contacted the borrower in a face-to-face meeting or by
telephone to discuss the reasons for the default and to seek its cure. If the
borrower does not cure the default or agree to a modification agreement or
repayment plan, the lender will notify the borrower in writing that, unless
within 30 days the default is cured or the borrower enters into a modification
agreement or repayment plan, the loan will be accelerated and that, if the
default persists, the lender will report the default to an appropriate credit
agency. The lender may rescind the acceleration of maturity after full payment
is due and reinstate the loan only if the borrower brings the loan current,
executes a modification agreement or agrees to an acceptable repayment plan.
Following acceleration of maturity upon a secured Title I Loan, the
lender may either (a) proceed against the Mortgaged Property under any
security instrument or (b) make a claim under the lender's contract of
insurance. If the lender chooses to proceed against the Mortgaged Property
under a security instrument (or if it accepts a voluntary conveyance or
surrender of the Mortgaged Property), the lender may file an insurance claim
only with the prior approval of the Secretary of HUD. After acceleration of
maturity on a defaulted Title I Contract, the lender must proceed against the
loan security by foreclosure or repossession, as appropriate, and acquire
good, marketable title to the property securing the loan. The lender must take
all actions necessary under applicable law to preserve its rights, if any, to
obtain a deficiency judgment against the borrower. Before filing a claim for
insurance with the FHA, the lender must sell for the best price obtainable any
property which the lender acquired by the foreclosure or repossession of such
property securing a defaulted Title I Contract.
When a lender files an insurance claim with the FHA under the Title I
Program, the FHA reviews the claim, the complete loan file and documentation
of the lender's efforts to obtain recourse against any dealer who has agreed
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thereto, certification of compliance with applicable state and local laws in
carrying out any foreclosure or repossession, and evidence that the lender has
properly filed proofs of claims, where the borrower is bankrupt or deceased.
Generally, a claim for reimbursement for loss on any eligible loan must be
filed with the FHA no later than (i) for any Title I Loan, 9 months after the
date of default of such loan, or (ii) for any Title I Contract, 3 months after
the date of sale of the property securing such loan, but not to exceed 18
months after the date of default. Concurrently with filing the insurance
claim, the lender shall assign to the United States of America the lender's
entire interest in the loan note (or a judgment in lieu of the note), in any
security held and in any claim filed in any legal proceedings. If, at the time
the note is assigned the Secretary has reason to believe that the note is not
valid or enforceable against the borrower, the FHA may deny the claim and
reassign the note to the lender. If either such defect is discovered after the
FHA has paid a claim, the FHA may require the lender to repurchase the paid
claim and to accept a reassignment of the loan note. If the lender
subsequently obtains a valid and enforceable judgment against the borrower,
the lender may resubmit a new insurance claim with an assignment of the
judgment. The FHA may contest any insurance claim and make a demand for
repurchase of the loan at any time up to two years from the date the claim was
certified for payment and may do so thereafter in the event of fraud or
misrepresentation on the part of the lender.
Under the Title I Program the amount of an FHA insurance claim
payment, when made, is equal to the Claimable Amount, up to the amount of
insurance coverage in the lender's insurance coverage reserve account. The
"Claimable Amount" is equal to 90% of the sum of: (a) the unpaid loan
obligation (net unpaid principal and the uncollected interest earned to the
date of default) with adjustments thereto if the lender has proceeded against
property securing such loan; (b) the interest on the unpaid amount of the loan
obligation from the date of default to the date of the claim's initial
submission for payment plus 15 calendar days (but not to exceed 9 months from
the date of default), calculated at the rate of 7% per annum; (c) the
uncollected court costs; (d) the attorneys fees not to exceed $500; (e) the
expenses for recording the assignment of the security to the United States;
and (f) if the loan is a Title I Contract, certain costs incurred in
connection with the foreclosure or repossession of the manufactured home
and/or lot.
LEGAL INVESTMENT MATTERS
The Certificates may constitute "mortgage related securities" for
purposes of SMMEA, so long as they are rated in one of the two highest rating
categories by the Rating Agency or Agencies identified in the related
Prospectus Supplement and, as such, would be legal investments for persons,
trusts, corporations, partnerships, associations, business trusts and business
entities (including but not limited to state-chartered savings banks,
commercial banks, saving and loan associations and insurance companies, as
well as trustees and state government employee retirement systems) created
pursuant to or existing under the laws of the United States or any State
(including the District of Columbia and Puerto Rico) whose authorized
investments are subject to State regulation to the same extent that, under
applicable law, obligations issued by or guaranteed as to principal and
interest by the United States or any agency or instrumentality thereof
constitute legal investments for such entities. Under SMMEA, in all States
which enacted legislation prior to October 4, 1991 specifically limiting the
legal investment authority of any of such entities with respect to "mortgage
related securities," the Certificates will constitute legal investments for
entities subject to such legislation only to the extent provided in such
legislation SMMEA provides, however, that in no event will the enactment of
any such legislation affect the validity of any contractual commitment to
purchase, bold or invest in any securities or require the sale or over
disposition of any securities, so long as such contractual commitment was made
or such securities were acquired prior to the enactment of such legislation.
Alaska, Arkansas, Colorado, Connecticut, Delaware, Florida, Georgia, Illinois,
Kansas, Louisiana, Maryland, Michigan, Missouri, Nebraska, New Hampshire, New
York, North Carolina, Ohio, South Dakota, Utah, Virginia and West Virginia
each enacted legislation overriding the exemption afforded by SMMEA prior to
the October 4, 1991 deadline.
Institutions whose investment activities are subject to legal
investment laws or regulations or review by certain regulatory authorities may
be subject to restrictions on investment in certain classes of the
Certificates. Any financial institution which is subject to the jurisdiction
of the Comptroller of the Currency, the Board of Governors of the Federal
Reserve System, the FDIC, the OTS, the NCUA or other federal or state agencies
with similar
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authority should review any applicable rules, guidelines and regulations prior
to purchasing the certificates. The Federal Financial Institutions Examination
Council, for example, has issued a Supervisory Policy Statement on Securities
Activities effective February 10, 1992 (the "Policy Statement"). The Policy
Statement has been adopted by the Comptroller of the Currency, the Federal
Reserve Board, the FDIC and the OTS with respect to the depository institutions
that they regulate. The Policy Statement prohibits depository institutions from
investing in certain "high-risk mortgage securities" except under limited
circumstances, and sets forth certain investment practices deemed to be
unsuitable for regulated institutions. The NCUA issued final regulations
effective December 2, 1991 that restrict and in some instances prohibit the
investment by federal credit unions in certain types of mortgage related
securities.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not
limited to "prudent investor" provisions, percentage-of-assets limits and
provisions which may restrict or prohibit investment in securities which are
not "interest bearing" or "income paying," or in securities which are issued
in book-entry form.
Investors should consult their own legal advisors in determining
whether and to what extent the Certificates constitute legal investments for
such investors.
ERISA CONSIDERATIONS
ERISA imposes requirements on employee benefit plans (and on certain
other retirement plans and arrangements, including individual retirement
accounts and annuities, Keogh plans and collective investment funds and
separate accounts in which such plans, accounts or arrangements are invested)
(collectively, "Plans") subject to ERISA and on persons who are fiduciaries
with respect to such Plans. Among other things, ERISA requires that the assets
of Plans be held in trust and that the trustee, or other duly authorized
fiduciary, have exclusive authority and discretion to manage and control the
assets of such Plans. ERISA also imposes certain duties on persons who are
fiduciaries of Plans. Under ERISA, any person who exercises any authority or
control respecting the management or disposition of the assets of a Plan is
considered to be a fiduciary of such Plan (subject to certain exceptions not
here relevant). In addition to the imposition of general fiduciary standards
of investment prudence and diversification, ERISA prohibits a broad range of
transactions involving Plan assets and persons ("Parties in Interest") having
certain specified relationships to a Plan and imposes additional prohibitions
where Parties in Interest are fiduciaries with respect to such Plan.
The United States Department of Labor (the "DOL") has issued
regulations concerning the definition of what constitutes the assets of a
Plan. (DOL Reg Section 2510.3-101). Under this regulation, the underlying
assets and properties of corporations, partnerships and certain other entities
in which a Plan makes an "equity" investment could be deemed for purposes of
ERISA to be assets of the investing Plan in certain circumstances. In such
case, the fiduciary making such an investment for the Plan could be deemed to
have delegated his or her asset management responsibility, and the underlying
assets and properties could be subject to ERISA reporting and disclosure.
Certain exceptions to the regulation may apply in the case of a Plan's
investment in the Certificates, but the Depositor cannot predict in advance
whether such exceptions apply due to the factual nature of the conditions to
be met. Accordingly, because the Mortgage Loans may be deemed Plan assets of
each Plan that purchases Certificates, an investment in the Certificates by a
Plan might give rise to a prohibited transaction under ERISA Sections 406 and
407 and be subject to an excise tax under Code Section 4975 unless a statutory
or administrative exemption applies.
DOL Prohibited Transaction Exemption 83-1 ("PTE 83-1") exempts from
ERISA's prohibited transaction rules certain transactions relating to the
operation of residential mortgage investment trusts and the purchase, sale and
holding of "mortgage pool pass-through certificates" in the initial issuance
of such certificates. PTE 83-1 permits, subject to certain conditions,
transactions which might otherwise be prohibited between Plans and Parties in
Interest with respect to those Plans involving the origination, maintenance
and termination of mortgage pools consisting of mortgage loans secured by
first or second mortgages or deeds of trust on
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single-family residential property, and the acquisition and holding of certain
mortgage pool pass-through certificates representing an interest in such
mortgage pools by PTE.
PTE 83-1 sets forth three general conditions which must be satisfied
for any transaction to be eligible for exemption: (i) the maintenance of a
system of insurance or other protection for the pooled mortgage loans and
property securing such loans, and for indemnifying Owners against reductions
in pass-through payments due to property damage or defaults in loan payments
in an amount not less than the greater of one percent of the aggregate
principal balance of all covered pooled mortgage loans or the principal
balance of the largest covered pooled mortgage loan, (ii) the existence of a
pool trustee who is not an affiliate of the sponsor, and (iii) a limitation on
the amount of the payments retained by the pool sponsor, together with other
funds inuring to its benefit, to not more than adequate consideration for
selling the mortgage loans plus reasonable compensation for services provided
by the pool sponsor.
Although the Trustee for any series of Certificates will be
unaffiliated with the Depositor, there can be no assurance that the system of
insurance or subordination will meet the general or specific conditions
referred to above. In addition, the nature of a Trust's assets or the
characteristics of one or more classes of the related series of Certificates
may not be included within the scope of PTE 83-1 or any other class exemption
under ERISA. The Prospectus Supplement will provide additional information
with respect to the application of ERISA and the Code to the related
Certificates.
Several underwriters of mortgage-backed securities have applied for
and obtained ERISA prohibited transactions exemptions which are in some
respects broader than PTE 83-1. Such exemptions can only apply to
mortgage-backed securities which, among other conditions, are sold in an
offering with respect to which such underwriter serves as the sole or a
managing underwriter, or as a selling or placement agent. Several other
underwriters have applied for similar exemptions. If such an exemption might
be applicable to a series of Certificates, the related Prospectus Supplement
will refer to such possibility.
Each Plan fiduciary who is responsible for making the investment
decisions whether to purchase or commit to purchase and to hold Certificates
must make its own determination as to whether the general and the specific
conditions of PTE 83-1 have been satisfied or as to the availability of any
other prohibited transaction exemptions Each Plan fiduciary should also
determine whether, under the general fiduciary standards of investment
prudence and diversification, an investment in the Certificates is appropriate
for the Plan, taking into account the overall investment policy of the Plan
and the composition of the Plan's investment portfolio.
Any Plan proposing to invest in Certificates should consult with its
counsel to confirm that such investment will not result in a prohibited
transaction and will satisfy the other requirements of ERISA and the Code.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is based upon the opinion of Dewey Ballantine LLP,
special counsel to the Depositor with respect to the material federal income
tax consequences of the purchase, ownership and disposition of Certificates.
The discussion below does not purport to address all federal income tax
consequences that may be applicable to particular categories of investors,
some of which may be subject to special rules. The authorities on which this
discussion is based are subject to change or differing interpretations, and
any such change or interpretation could apply retroactively. This discussion
reflects the applicable provisions of the Code, as well as final regulations
concerning REMICs (the "REMIC Regulations") and final regulations under
Sections 1271 through 1273 and 1275 of the Code concerning debt instruments
(the "OID Regulations"). The Depositor intends to rely on the OID Regulations
for all Certificates offered pursuant to this Prospectus; however, investors
should be aware that the OID Regulations do not adequately address certain
issues relevant to prepayable securities, such as the Certificates. Investors
should consult their own tax advisors in determining the federal, state, local
and any other tax consequences to them of the purchase, ownership and
disposition of Certificates. The Prospectus Supplement for each series of
Certificates will discuss any special tax
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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, Dewey Ballantine LLP, special counsel to
the Depositor, has advised the Depositor that in their opinion, assuming (i)
the making of an appropriate election, (ii) compliance with the Agreement and
(iii) compliance with any changes in the law, including any amendments to the
Code or applicable Treasury regulations thereunder, each REMIC Pool will
qualify as a REMIC and that if a Trust qualifies as a REMIC, the tax
consequences to the Owners will be as described below. In such case, the
Regular Certificates will be considered to be "regular interests" in the REMIC
Pool and generally will be treated for federal income tax purposes as if they
were newly originated debt instruments, and the Residual Certificates will be
considered to be "residual interests" in the REMIC Pool. The Prospectus
Supplement for each series of Certificates will indicate whether one or more
REMIC elections with respect to the related Trust will be made, in which event
references to "REMIC" or "REMIC Pool" herein shall be deemed to refer to each
such REMIC Pool.
Status of REMIC Certificates. REMIC Certificates held by a domestic
building and loan association will constitute "a regular or residual interest
in a REMIC" within the meaning of Code Section 7701(a)(19)(C) (xi) in the same
proportion that the assets of the REMIC Pool would be treated as "loans
secured by an interest in real property" within the meaning of Code Section
7701(a)(19)(C)(v) or as other assets described in Code Section 7701(a)(19)(C).
REMIC Certificates held by a real estate investment trust (a "REIT") will
constitute "real estate assets" within the meaning of Code Section
856(c)(5)(a), and interest on the REMIC Certificates will be considered
"interest on obligations secured by mortgages on real property or on interests
in real property" within the meaning of Code Section 856(c) in the same
proportion that, for both purposes, the assets of the REMIC Pool would be so
treated. If at all times 95% or more of the assets of the REMIC Pool
constitute qualifying assets for domestic building and loan associations and
REITs, the REMIC Certificates will be treated entirely as qualifying assets
for such entities. Moreover, the REMIC Regulations provide that, for purposes
of Code Sections 856(c), payments of principal and interest on the Mortgage
Assets that are reinvested pending distribution to holders of REMIC
Certificates, constitute qualifying assets for REIT. 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).
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Qualification as a REMIC. In order for the REMIC Pool to qualify as a
REMIC, there must be ongoing compliance on the part of the REMIC Pool with the
requirements set forth in the Code. The REMIC Pool must fulfill an asset test,
which requires that no more than a de minimis amount of the assets of the
REMIC Pool, as of the close of the third calendar month beginning after the
Delivery Date (which for purposes of this discussion is the date of issuance
of the REMIC Certificates) and at all times thereafter, may consist of assets
other than "qualified mortgages" and "permitted investments." The REMIC
Regulations provide a "safe harbor" pursuant to which the de minimis
requirement will be met if at all times the aggregate adjusted basis of any
nonqualified assets (i.e., assets other than qualified mortgages and permitted
investments) is less than 1% of the aggregate adjusted basis of all the REMIC
Pool's assets.
If a REMIC Pool fails to comply with one or more of the requirements
of the Code for REMIC status during any taxable year, the REMIC Pool will not
be treated as a REMIC for such year and thereafter. In this event, the
classification of the REMIC Pool for federal income tax purposes is uncertain.
The REMIC Pool could be treated as a taxable mortgage pool (a "TMP"), in which
case any residual income of the REMIC Pool (income from the Mortgage Assets
(possibly without a deduction for interest and original issue discount expense
allocable to the Regular Certificates) would be subject to corporate income
tax at the REMIC Pool level. The Code, however, authorizes the Treasury
Department to issue regulations that address situations where failure to meet
one or more of the requirements for REMIC status occurs inadvertently and in
good faith, and disqualification of the REMIC Pool would occur absent
regulatory relief. Investors should be aware, however, that the Conference
Committee Report to the Tax Reform Act of 1986 (the "1986 Act") indicates that
the relief may be accompanied by sanctions, such as the imposition of a
corporate tax on all or a portion of the REMIC Pool's income for the period of
time in which the requirements for REMIC status are not satisfied.
Taxation of Regular Certificates
General. Payments received by holders of Regular Certificates
generally should be accorded the same tax treatment under the Code as payments
received on ordinary taxable corporate debt instruments. In general, interest
and original issue discount on a Regular Certificate will be treated as
ordinary income to a holder of the Regular Certificate (the "Regular
Certificateholder") as they accrue, and principal payments on a Regular
Certificate will be treated as a return of capital to the extent of the
Regular Certificateholder's basis in the Regular Certificate allocable
thereto. Regular Certificateholders must use the accrual method of accounting
with regard to Regular Certificates, regardless of the method of accounting
otherwise used by such Regular Certificateholders.
Original Issue Discount. Regular Certificates may be issued with
"original issue discount" within the meaning of Code Section 1273(a). Holders
of any class of Regular Certificates having original issue discount generally
must include original issue discount in ordinary income for federal income tax
purposes as it accrues, in accordance with a constant interest method that
takes into account the compounding of interest, in advance of receipt of the
cash attributable to such income. The Depositor anticipates that the amount of
original issue discount required to be included in a Regular
Certificateholder's income in any taxable year will be computed as described
below.
Each Regular Certificate (except to the extent described below with
respect to a Regular Certificate on which distributions of principal are made
in a single installment or upon an earlier distribution by lot of a specified
principal amount upon the request of a Regular Certificateholder or by random
lot (a "Retail Class Certificate")) will be treated as a single installment
obligation for purposes of determining the original issue discount includible
in a Regular Certificateholder's income. The total amount of original issue
discount on a Regular Certificate is the excess of the "stated redemption
price at maturity" of the Regular Certificate over its "issue price." The
issue price of a Regular Certificate is the first price at which a substantial
amount of Regular Certificates of that class are first sold to the public. The
Depositor will determine original issue discount by including the amount paid
by an initial Regular Certificateholder for accrued interest that relates to a
period prior to the issue date of the Regular Certificate in the issue price
of a Regular Certificate and will include in the stated redemption price at
maturity any interest paid on the first Distribution Date to the extent such
interest is attributable to a period in excess of the number of days between
the issue date and such first Distribution Date. The stated redemption price
at maturity of a Regular Certificate always includes the original principal
amount of the Regular Certificate, but
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generally will not include distributions of stated interest if such interest
distributions constitute "qualified stated interest." Qualified stated interest
generally means stated interest that is unconditionally payable in cash or in
property (other than debt instruments of the issuer) at least annually at (i) a
single fixed rate, (ii) one or more qualified floating rates (as described
below), (iii) a fixed rate followed by one or more qualified floating rates,
(iv) a single objective rate (as described below) or (v) a fixed rate and an
objective rate that is a qualified inverse floating rate. The OID Regulations
state that interest payments are unconditionally payable only if reasonable
remedies exist to compel payment or late payment and nonpayment are remote.
Because the debt securities will generally not provide the holders with the
ability to compel payment, interest payments may be included in the debt
security's stated redemption price at maturity and taxed as OID. Any stated
interest in excess of the qualified stated interest is included in the stated
redemption price at maturity. If the amount of original issue discount is "de
minimis" as described below, the amount of original issue discount is treated as
zero, and all stated interest is treated as qualified stated interest.
Distributions of interest on Regular Certificates with respect to which deferred
interest will accrue may not constitute qualified stated interest, in which case
the stated redemption price at maturity of such Regular Certificates includes
all distributions of interest as well as principal thereon. Moreover, if the
interval between the issue date and the first Distribution Date on a Regular
Certificate is longer than the interval between subsequent Distribution Dates
(and interest paid on the first Distribution Date is less than would have been
earned if the stated interest rate were applied to outstanding principal during
each day in such interval), the stated interest distributions on such Regular
Certificate technically do not constitute qualified stated interest. In such
case a special rule, applying solely for the purpose of determining whether
original issue discount is de minimis, provides that the interest shortfall for
the long first period (i.e., the interest that would have been earned if
interest had been paid on the first Distribution Date for each day the Regular
Certificate was outstanding) is treated as made at a fixed rate if the value of
the rate on which the payment is based is adjusted in a reasonable manner to
take into account the length of the interval. There is also a special "teaser"
rule which may be available to treat OID arising from a long first accrual
period as de minimis OID. Regular Certificateholders should consult their own
tax advisors to determine the issue price and stated redemption price at
maturity of a Regular Certificate.
Under a de minimis rule, original issue discount on a Regular
Certificate will be considered to be zero if such original issue discount is
less than 0.25% of the stated redemption price at maturity of the Regular
Certificate multiplied by the weighted average maturity of the Regular
Certificate. For this purpose, the weighted maturity of the Regular
Certificate is computed as the sum of the amounts determined by multiplying
the number of full years (i.e., rounding down partial years) from the issue
date until each distribution in reduction of stated redemption price at
maturity is scheduled to be made by a fraction, the numerator of which is the
amount of each distribution included in the stated redemption price at
maturity of the Regular Certificate and the denominator of which is the stated
redemption price at maturity of the Regular Certificate. Although currently
unclear, it appears that the schedule of such distributions should be
determined in accordance with the assumed rate of prepayment of the Mortgage
Assets and the anticipated reinvestment rate, if any, relating to the Regular
Certificates (the "Prepayment Assumption"). The Prepayment Assumption with
respect to a series of Regular Certificates will be set forth in the related
Prospectus Supplement. The holder of a debt instrument includes any de minimis
original issue discount in income pro rata as stated principal payments are
received.
Of the total amount of original issue discount on a Regular
Certificate, the Regular Certificateholder generally must include in gross
income for any taxable year the sum of the "daily portions," as defined below,
of the original issue discount on the Regular Certificate accrued during an
accrual period for each day on which he holds the Regular Certificate,
including the date of purchase but excluding the date of disposition. Although
not free from doubt, the Depositor intends to treat the monthly period ending
on the day before each Distribution Date as the accrual period, rather than
the monthly period corresponding to the prior calendar month. With respect to
each Regular Certificate, a calculation will be made of the original issue
discount that accrues during each successive full accrual period (or shorter
period from the date of original issue) that ends on the day before the
related Distribution Date on the Regular Certificate. For a Regular
Certificate, original issue discount is to be calculated initially based on a
schedule of maturity dates that takes into account the level of prepayments
and an anticipated reinvestment rate that are most likely to occur, which is
expected to be based on the Prepayment Assumption. The original issue discount
accruing in a full accrual period would be the excess, if any, of (i) the sum
of (a) the present value of all of the remaining distributions to be made on
the Regular Certificate as of the end of that accrual period that are included
in the Regular Certificate's stated redemption price at maturity and (b) the
distributions made on the Regular Certificate during the accrual period that
are included in the Regular Certificate's stated redemption price at
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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. To the extent specified in the applicable Prospectus Supplement,
an increase in prepayments on the Mortgage Assets with respect to a series of
Regular Certificates can result in both a change in the priority of principal
payments with respect to certain classes of Regular Certificates and either an
increase or decrease in the daily portions of original issue discount with
respect to such Regular Certificates.
A purchaser of a Regular Certificate at a price greater than the
issue price also will be required to include in gross income the daily
portions of the original issue discount on the Regular Certificate. With
respect to such a purchaser, the daily portion for any day is reduced by the
amount that would be the daily portion for such day (computed in accordance
with the rules set forth above) multiplied by a fraction, the numerator of
which is the amount, if any, by which the price paid by such purchaser for the
Regular Certificate exceeds the sum of the issue price and the aggregate
amount of original issue discount that would have been includible in the gross
income of an original holder of the Regular Certificate who purchased the
Regular Certificate at its issue price, less any prior distributions included
in the stated redemption price at maturity, and the denominator of which is
the sum of the daily portions for such Regular Certificate (computed in
accordance with the rules set forth above) for all days after the date of
purchase and ending on the date on which the remaining principal amount of
such Regular Certificate is expected to be reduced to zero under the
Prepayment Assumption.
A Certificateholder may elect to include in gross income all stated
interest, original issue discount, de minimis original issue discount, market
discount (as described below under "Market Discount"), de minimis market
discount and unstated interest (as adjusted for any amortizable bond premium
or acquisition premium) currently as it accrues using the constant yield to
maturity method. If this election is made, the holder is treated as satisfying
the requirements for making the elections with respect to amortization of
premium and current inclusion of market discount, each as described under
"Premium" and "Market Discount" below.
Variable Rate Regular Certificates. Regular Certificates may provide
for interest based on a variable rate. The OID Regulations provide special
rules for variable rate instruments that meet three requirements. First, the
noncontingent principal payments may not exceed the instrument's issue price
by more than a specified amount equal to the lesser of (i) .015 multiplied by
the product of the total noncontingent payments and the weighted average
maturity or (ii) 15% of the total noncontingent principal payments. Second,
the instrument must provide for stated interest (compounded or paid at least
annually) at (i) one or more qualified floating rates, (ii) a single fixed
rate followed by one or more qualified floating rates, (iii) a single
objective rate or (iv) a single fixed rate and a single objective rate that is
a qualified inverse floating rate. Third, the instrument must provide that
each qualified floating rate or objective rate in effect during an accrual
period is set at a current value of that rate (one occurring in the interval
beginning three months before and ending one year after the rate is first in
effect on the Regular Certificate). A rate is a qualified floating rate if
variations in the rate can reasonably be expected to measure contemporaneous
variations in the cost of newly borrowed funds. Generally, neither (i) a
multiple of a qualified floating rate in excess of a fixed multiple that is
greater than 0.65 but not more than 1.35 (and increased or decreased by a
fixed rate) nor (ii) a cap or floor that is likely to cause the interest rate
on a Regular Certificate to be significantly less or more than the overall
expected return on the Regular Certificate is considered a qualified floating
rate. An objective
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rate generally is a rate based on a single fixed formula and on objective
financial or economic information. An objective rate is a qualified inverse
floating rate if the rate is equal to a fixed rate minus a qualified floating
rate and variations in such rate can reasonably be expected to reflect inversely
contemporaneous variations in the cost of newly borrowed funds. A rate will not
be an objective rate if it is reasonably expected that the average rate during
the first half of the instrument's term will be significantly more or less than
the average rate in the final term. An objective rate must be determined
according to a single formula that is fixed throughout the term of the Regular
Certificate and is based on objective financial information or economic
information; however, an objective rate does not include a rate based on
information that is in the control of the issuer or that is unique to the
circumstances of a related party. Stated interest on a variable rate debt
instrument is qualified stated interest if the interest is unconditionally
payable in cash or property at least annually.
In general, the determination of original issue discount and
qualified stated interest on a variable rate debt instrument is made by
converting the debt instrument into a fixed rate debt instrument and then
applying the general original issue discount rules described above to the
instrument. If a variable rate debt instrument provides for stated interest at
a single qualified floating rate or objective rate, all stated interest is
qualified stated interest and the amount of original issue discount, if any,
is determined by assuming the variable rate is a fixed rate equal to (a) in
the case of a qualified floating or inverse floating rate, the value, as of
the issue date, of the qualified floating inverse floating rate or (b) in the
case of an objective rate (other than a qualified inverse floating rate), a
fixed rate that reflects the yield that is reasonably expected for the debt
instrument. For all other variable rate debt instruments, the amount of
interest and original issue discount accruals are determined using the
following steps. First, a fixed rate substitute for each variable rate under
the debt instrument is determined. In general, the fixed rate substitute is a
fixed rate equal to the rate of the applicable type of variable rate as of the
issue date. Second, an equivalent fixed rate debt instrument is constructed
using the fixed rate substitute(s) in lieu of the variable rates and keeping
all other terms identical. Third, the amount of qualified stated interest and
original issue discount with respect to the equivalent fixed rate debt
instrument are determined under the rules for fixed rate debt instruments.
Finally, appropriate adjustments for actual variable rates are made during the
term by increasing or decreasing the qualified stated interest to reflect the
amount actually paid during the applicable accrual period as compared to the
interest assumed to be accrued or paid under the equivalent fixed rate debt
instrument. If there is no qualified stated interest under the equivalent
fixed rate debt instrument, the adjustment is made to the original issue
discount for the period.
The application of the OID Regulations to variable rate debt
instruments is limited and may not apply to some Regular Certificates having
variable rates. Furthermore, by their terms, the provisions of regulations
issued on June 11, 1996, applicable to instruments having contingent payments,
may apply to those Regular Certificates. Prospective purchasers of variable rate
Regular Certificates are advised to consult their tax advisers concerning the
tax treatment of such Regular Certificates.
Market Discount. A purchaser of a Regular Certificate also may be
subject to the market discount rules of Code Sections 1276 through 1278. Under
these sections and the principles applied by the OID Regulations in the context
of original issue discount, "market discount" is the amount by which a
subsequent purchaser's initial basis in the Regular Certificate (i) is exceeded
by the stated redemption price at maturity of the Regular Certificate or (ii) in
the case of a Regular Certificate having original issue discount, is exceed by
the sum of the issue price of such Regular Certificate plus any original issue
discount that would have previously accrued thereon if held by an original
Regular Certificateholder (who purchased the Regular Certificate at its issue
price), in either case less any prior distributions included in the stated
redemption price at maturity of such Regular Certificate. Such purchaser
generally will be required to recognize accrued market discount as ordinary
income as distributions includible in the stated redemption price at maturity of
such Regular Certificate are received in an amount not exceeding any such
distribution. That recognition rule would apply regardless of whether the
purchaser is a cash-basis or accrual-basis taxpayer. Such market discount would
accrue in a manner to be provided in Treasury regulations and should take into
account the Prepayment Assumption. The Conference Committee Report to the 1986
Act provides that until such regulations are issued, such market discount would
accrue either (i) on the basis of a constant interest rate or (ii) in the ratio
of stated interest allocable to the relevant period to the sum of the interest
for such period plus the remaining interest as of the end of such period, or in
the case of a Regular Certificate issued with original issue discount, in the
ratio of original issue discount accrued for the relevant period to the sum of
the original issue discount accrued for such period plus the remaining original
issue discount as of the end of such period. Such purchaser also generally will
be required to treat a portion of any gain on a sale or exchange of the Regular
Certificate as ordinary income to the extent of the market discount accrued to
the date of disposition under one of the
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foregoing methods, less any accrued market discount previously reported as
ordinary income as partial distributions in reduction of the stated redemption
price at maturity were received. Such purchaser will be required to defer
deduction of a portion of the excess of the interest paid or accrued on
indebtedness incurred to purchase or carry a Regular Certificate over the
interest distributable thereon. The deferred portion of such interest expense in
any taxable year generally will not exceed the accrued market discount on the
Regular Certificate for such year. Any such deferred interest expense is, in
general, allowed as a deduction not later than the year in which the related
market discount income is recognized or the Regular Certificate is disposed of.
As an alternative to the inclusion of market discount in income on the foregoing
basis, the Regular Certificateholder may elect to include market discount in
income currently as it accrues in all market discount instruments acquired by
such Regular Certificateholder in that taxable year or thereafter, in which case
the interest deferral rule will not apply. In Revenue Procedure 92-67, the
Internal Revenue Service set forth procedures for taxpayers (1) electing under
Code Section 1278(b) to include market discount in income currently, (2)
electing under rules of Code Section 1276(b) to use a constant interest rate to
determine accrued market discount on a bond where the holder of the bond is
required to determine the amount of accrued market discount at a time prior to
the holder's disposition of the bond, and (3) requesting consent to revoke an
election under Code Section 1278(b).
By analogy to the OID Regulations, market discount with respect to a
Regular Certificate will be considered to be zero if such market discount is
less than 0.25% of the remaining stated redemption price at maturity of such
Regular Certificate multiplied by the weighted average maturity of the Regular
Certificate (determined as described above under "Original Issue Discount")
remaining after the date of purchase. Treasury regulations implementing the
market discount rules have not yet been issued, and therefore investors should
consult their own tax advisors regarding the application of these rules as
well as the advisability of making any of the elections with respect thereto.
Premium. A Regular Certificate purchased at a cost greater than its
remaining stated redemption price at maturity generally is considered to be
purchased at a premium. If the Regular Certificateholder holds such Regular
Certificate as a "capital asset" within the meaning of Code Section 1221, the
Regular Certificateholder may elect under Code Section 171 to amortize such
premium as an offset to interest income under a constant yield method that
reflects compounding based on the interval between payments on the Regular
Certificates. This election, once made, applies to all obligations held by the
taxpayer at the beginning of the first taxable year to which such section
applies and to all taxable debt obligations thereafter acquired and is binding
on such taxpayer in all subsequent years. The Conference Committee Report to
the 1986 Act indicates a Congressional intent that the same rules that apply
to the accrual of market discount on installment obligations will also apply
to amortizing bond premium under Code Section 171 on installment obligations
such as the Regular Certificates.
Sale or Exchange of Regular Certificates. If a Regular
Certificateholder sells or exchanges a Regular Certificate, the Regular
Certificateholder will recognize gain or loss equal to the difference, if any,
between the amount received and his adjusted basis in the Regular Certificate.
The adjusted basis of a Regular Certificate generally will equal the cost of
the Regular Certificate to the seller, increased by any original issue
discount or market discount previously included in the seller's gross income
with respect to the Regular Certificate and reduced by amounts included in the
stated redemption price at maturity of the Regular Certificate that were
previously received by the seller and by any amortized premium.
Except as described above with respect to market discount, and except
as provided in this paragraph, any gain or loss on the sale or exchange of a
Regular Certificate realized by an investor who holds the Regular Certificate
as a capital asset will be capital gain or loss and will be long-term or
short-term depending on whether the Regular Certificate has been held for the
long-term capital gain holding period (currently more than one year). Gain
from the disposition of a Regular Certificate that might otherwise be capital
gain will be treated as ordinary income to the extent that such gain does not
exceed the excess, if any, of (i) the amount that would have been includible
in the gross income of the holder if his yield on such Regular Certificate
were 110% of the applicable Federal rate under Code Section 1274(d) as of the
date of purchase over (ii) the amount of income actually includible in the
gross income of such holder with respect to the Regular Certificate. In
addition, gain or loss recognized from the sale of a Regular Certificate by
certain banks or thrift institutions will be treated as ordinary income or
loss pursuant to Code Section 582(c).
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Taxation of Residual Certificates
Taxation of REMIC Income. Generally, the "daily portions" of REMIC
taxable income or net loss will be includible as ordinary income or loss in
determining the federal taxable income of holders of Residual Certificates
("Residual Certificateholders") and will not be taxed separately to the REMIC
Pool. The daily portions of REMIC taxable income or net loss of a Residual
Certificateholder are determined by allocating the REMIC Pool's taxable income
or net loss for each calendar quarter ratably to each day in such quarter and
by allocating such daily portion among the Residual Certificateholders in
proportion to their respective holdings of Residual Certificates in the REMIC
Pool on such day. REMIC taxable income is generally determined in the same
manner as the taxable income of an individual using a calendar year and the
accrual method of accounting, except that (i) the limitation on deductibility
of investment interest expense and expenses for the production of income do
not apply, (ii) all bad loans will be deductible as business bad debts and
(iii) the limitation on the deductibility of interest and expenses related to
tax-exempt income will apply. REMIC taxable income generally means the REMIC
Pool's gross income, including interest, original issue discount income and
market discount income, if any, on the Mortgage Assets, plus income on
reinvestment of cashflows and reserve assets, minus deductions, including
interest and original issue discount expense on the Regular Certificates,
servicing fees on the Mortgage Assets and other administrative expenses of the
REMIC Pool, amortization of premium, if any, with respect to the Mortgage
Assets, and any tax imposed on the REMIC's income from foreclosure property.
The requirement that Residual Certificateholders report their pro rata share
of taxable income or net loss of the REMIC Pool will continue until there are
no Certificates of any class of the related series outstanding.
The taxable income recognized by a Residual Certificateholder in any
taxable year will be affected by, among other factors, the relationship
between the timing of recognition of interest and original issue discount or
market discount income or amortization of premium with respect to the Mortgage
Assets, on the one hand, and the timing of deductions for interest (including
original issue discount) on the Regular Certificates, on the other hand.
Because of the way REMIC taxable income is calculated, a Residual
Certificateholder may recognize "phantom" income (i.e., income recognized for
tax purposes in excess of income as determined under financial accounting or
economic principles) which will be matched in later years by a corresponding
tax loss or reduction in taxable income, but which could lower the yield to
Residual Certificateholders due to the lower present value of such future loss
or reduction. For example, if an interest in the Mortgage Assets is acquired
by the REMIC Pool at a discount, and one or more of such Mortgage Assets is
prepaid, the Residual Certificateholder may recognize taxable income without
being entitled to receive a corresponding amount of cash because (i) the
prepayment may be used in whole or in part to make distributions in reduction
of principal on the Regular Certificates and (ii) the discount income on the
Mortgage Loan which is includible in the REMIC's taxable income may exceed the
discount deduction allowed to the REMIC upon such distributions on the Regular
Certificates. When there is more than one class of Regular Certificates that
distribute principal sequentially, this mismatching of income and deductions
is particularly likely to occur in the early years following issuance of the
Regular Certificates when distributions in reduction of principal are being
made in respect of earlier maturing classes of Certificates. If taxable income
attributable to such a mismatching is realized in general, losses would be
allowed in later years as distributions on the later classes of Regular
Certificates are made. Taxable income may also be greater in earlier years
than in later years as a result of the fact that interest expense deductions,
expressed as a percentage of the outstanding principal amount of such a series
of Regular Certificates, may increase over time as distributions in reduction
of principal are made on the lower yielding classes of Regular Certificates,
where interest income with respect to any given Mortgage Loan will remain
constant over time as a percentage of the outstanding principal amount of that
loan. Consequently, Residual Certificateholders must have sufficient other
sources of cash to pay any federal, state or local income taxes due as a
result of such mismatching or unrelated deductions against which to offset
such income. Prospective investors should be aware, however, that a portion of
such income may be ineligible for offset by such investor's unrelated
deductions. See the discussion of "excess inclusions" below under "Limitations
on Offset or Exemption of REMIC Income; Excess Inclusions." The timing of such
mismatching of income and deductions described in this paragraph, if present
with respect to a series of Certificates, may have a significant adverse
effect upon the Residual Certificateholder's after-tax rate of return. In
addition, a Residual Certificateholder's taxable income during certain periods
may exceed the income reflected by such Certificateholder for such periods in
accordance with generally accepted accounting principles.
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Basis and Losses. The amount of any net loss of the REMIC Pool that
may be taken into account by the Residual Certificateholder is limited to the
adjusted basis of the Residual Certificate as of the close of the quarter (or
time of disposition of the Residual Certificate if earlier), determined
without taking into account the net loss for the quarter. The initial adjusted
basis of a purchaser of a Residual Certificate is the amount paid for such
Residual Certificate. Such adjusted basis will be increased by the amount of
taxable income of the REMIC Pool reportable by the Residual Certificateholder
and decreased by the amount of loss of the REMIC Pool reportable by the
Residual Certificateholder. A cash distribution from the REMIC Pool also will
reduce such adjusted basis (but not below zero). Any loss that is disallowed
on account of this limitation may be carried over indefinitely with respect to
the Residual Certificateholder as to whom such loss was disallowed and may be
used by such Residual Certificateholder only to offset any income generated by
the residual from such REMIC Pool. Residual Certificateholders should consult
their tax advisors about other limitations on the deductibility of net losses
that may apply to them.
A Residual Certificateholder will not be permitted to amortize
directly the cost of its Residual Certificate as an offset to its share of the
taxable income of the related REMIC Pool. However, such taxable income will
not include cash received by the REMIC Pool that represents a recovery of the
REMIC Pool's basis in its assets. Such recovery of basis by the REMIC Pool
will have the effect of amortization of the issue price of the Residual
Certificates over their life. However, in view of the possible acceleration of
the income of Residual Certificateholders described above under "Taxation of
REMIC Income," the period of time over which such issue price is effectively
amortized may be longer than the economic life of the Residual Certificates.
If a Residual Certificate has a negative value, it is not clear
whether its issue price would be considered to be zero or such negative amount
for purposes of determining the REMIC Pool's basis in its assets. The REMIC
Regulations do not address whether residual interests could have a negative
basis and a negative issue price. The Depositor does not intend to treat a
class of Residual Certificates as having a value of less than zero for
purposes of determining the bases of the related REMIC Pool in its assets.
Further, to the extent that the initial adjusted basis of a Residual
Certificateholder (other than an original holder) in the Residual Certificate
is greater than the corresponding portion of the REMIC Pool's basis in the
Mortgage Assets, the Residual Certificateholder will not recover a portion of
such basis until termination of the REMIC Pool unless Treasury regulations yet
to be issued provide for periodic adjustments to the REMIC income otherwise
reportable by such holder. The REMIC Regulations do not so provide. See
"Treatment of Certain Items of REMIC Income and Expense - Market Discount"
below regarding the basis of Mortgage Assets to the REMIC Pool and "Sale or
Exchange of Residual Certificates" below regarding possible treatment of a
loss upon termination of the REMIC Pool as a capital loss.
Mark to Market Rules
Prospective purchasers of a Residual Certificate should be aware that
on December 24, 1996, the Internal Revenue Service issued final regulations
(the "Mark to Market Regulations") relating to the requirement that a
securities dealer mark to market securities held for sale to customers. This
mark-to-market requirement applies to all securities of a dealer, except to
the extent that the dealer has specifically identified a security as held for
investment. The Mark to Market Regulations provide that for purposes of this
mark-to-market requirement, a Residual Certificate acquired after January 4,
1995, is not treated as a security and thus may not be marked to market.
Treatment of Certain Items of REMIC Income and Expense
Original Issue Discount. Generally, the REMIC Pool's deductions for
original issue discount will be determined in the same manner as original
issue discount income on Regular Certificates as described above under
"Taxation of Regular Certificates - Original Issue Discount" and "Variable
Rate Regular Certificates," without regard to the de minimis rule described
therein.
Market Discount. The REMIC Pool will have market discount income in
respect of Mortgage Assets if, in general, the basis of the REMIC Pool in such
Mortgage Assets is exceeded by their unpaid principal balances. The
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REMIC Pool's basis in such Mortgage Assets is generally the fair market value of
the Mortgage Assets immediately after the transfer thereof to the REMIC Pool.
The REMIC Regulations provide that such basis is equal in the aggregate to the
issue prices of all regular and residual interests in the REMIC Pool. In respect
of Mortgage Assets that have market discount to which Code Section 1276 applies,
the accrued portion of such market discount would be recognized currently by the
REMIC as an item of ordinary income. Market discount income generally should
accrue in the manner described above under "Taxation of Regular Certificates -
Market Discount."
Premium. Generally, if the basis of the REMIC Pool in the Mortgage
Assets exceeds the unpaid principal balances thereof, the REMIC Pool will be
considered to have acquired such Mortgage Assets at a premium equal to the
amount of such excess. As stated above, the REMIC Pool's basis in the Mortgage
Assets is the fair market value of the Mortgage Assets, based on the aggregate
of the issue prices of the regular and residual interests in the REMIC Pool
immediately after the transfer thereof to the REMIC Pool. In a manner
analogous to the discussion above under "Taxation of Regular Certificates -
Premium," a person that holds a Mortgage Loan as a capital asset under Code
Section 1221 may elect under Code Section 171 to amortize premium on Mortgage
Assets originated after September 27, 1985 under a constant yield method.
Amortizable bond premium will be treated as an offset to interest income on
the Mortgage Assets, rather than as a separate deduction item. Premium on
Mortgage Assets may be deductible in accordance with a reasonable method
regularly employed by the holder thereof. The allocation of such premium pro
rata among principal payments should be considered a reasonable method;
however, the Internal Revenue Service may argue that such premium should be
allocated in a different manner, such as allocating such premium entirely to
the final payment of principal.
Limitations on Offset or Exemption of REMIC Income; Excess
Inclusions. A portion of the income allocable to a Residual Certificate
(referred to in the Code as an "excess inclusion") for any calendar quarter,
with will be subject to federal income tax in all events. Thus, for example,
an excess inclusion (i) cannot, except as described below, be offset by any
unrelated losses or loss carryovers of a Residual Certificateholder, (ii) will
be treated as "unrelated business taxable income" within the meaning of Code
Section 512 if the Residual Certificateholder is a pension fund or any other
organization that is subject to tax only on its unrelated business taxable
income and (iii) is not eligible for any reduction in the rate of withholding
tax in the case of a Residual Certificateholder that is a foreign investor, as
further discussed in "Taxation of Certain Foreign Investors - Residual
Certificates" below. Members of an affiliated group are treated as one
corporation for purposes of applying the limitation on offset of excess
inclusion income. The Small Business Protection Act of 1996 (the "1996 Act")
eliminated a special rule that permitted thrift institutions to use net
operating losses and other allowable deductions to offset their excess
inclusion income from Residual Certificates with significant value for taxable
years beginning after December 31, 1995 (subject to exceptions for certain
certificates held continuously since November 1, 1995). The 1996 Act also
provides new rules affecting the determination of alternative maximum taxable
income ("AMTI") of a Residual Certificateholder. First, AMTI is calculated
without regard to the special rule that taxable income cannot be less than
excess inclusion income for the year. Second, AMTI cannot be less than excess
inclusion income for the year. Finally, any AMTI net operating loss deduction
is computed without regard to excess inclusion income. These new rules are
effective for tax years beginning after December 31, 1986, unless a Residual
Certificateholder elects to have the rules apply only to tax years ending
after August 20, 1996.
Except as discussed in the following paragraph, with respect to
excess inclusions from Residual Certificates without "significant value," for
any Residual Certificateholder, the excess inclusion for any calendar quarter
is the excess, if any, of (i) the income of such Residual Certificateholder
for that calendar quarter from its Residual Certificate over (ii) the sum of
the "daily accruals" (as defined below) for all days during the calendar
quarter on which the Residual Certificateholder holds such Residual
Certificate. For this purpose, the daily accruals with respect to a Residual
Certificate are determined by allocating to each day in the calendar quarter
its ratable portion of the product of the "adjusted issue price" (as defined
below) of the Residual Certificate at the beginning of the calendar quarter
and 120 percent of the "Federal long-term rate" in effect at the time the
Residual Certificate is issued. For this 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.
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The Code provides that to the extent provided in regulations, as an
exception to the general rule described above, the entire amount of income
accruing on a Residual Certificate will be treated as an excess inclusion if
the Residual Certificates in the aggregate are considered not to have
"significant value." The Treasury Department has not yet provided regulations
in this respect and the REMIC Regulations did not adopt this rule.
Under Treasury regulations to be promulgated, a portion of the
dividends paid by a REIT which owns a Residual Certificate are to be designated
as excess inclusions in an amount corresponding to the Residual Certificate's
allocable share of the excess inclusions. Similar rules apply in the case of
regulated investment companies, common trust funds and cooperatives. Thus,
investors in such entities which own a Residual Certificate will be subject to
the limitations on excess inclusions described above. The REMIC Regulations do
not provide guidance on this issue.
Tax-Related Restrictions on Transfer of Residual Certificates
Disqualified Organizations. If legal title or beneficial interest in
a Residual Certificate is transferred to a Disqualified Organization (as
defined below), a tax would be imposed in an amount equal to the product of
(i) the present value of the total anticipated excess inclusions with respect
to such Residual Certificate for periods after the transfer and (ii) the
highest marginal federal corporate income tax rate. The REMIC Regulations
provide that the anticipated excess inclusion are based on actual prepayment
experience to the date of the transfer and projected payments based on the
Prepayment Assumption. The present value discount rate equals the applicable
Federal rate under Code Section 1274(d) that would apply to a debt instrument
that was issued on the date the Disqualified Organization acquired the
Residual Certificate and whose term ended on the close of the last quarter in
which excess inclusion was expected to accrue with respect to the Residual
Certificate. Such a tax generally would be imposed on the transferor of the
Residual Certificate, except that where such transfer is through an agent
(including a broker, nominee, or other middleman) for a Disqualified
Organization, the tax would instead be imposed on such agent. However, a
transferor of a Residual Certificate would in no event be liable for such tax
with respect to a transfer if the transferee furnishes to the transferor an
affidavit that the transferee is not a Disqualified Organization and, as of
the time of the transfer, the transferor does not have actual knowledge that
such affidavit is false. The tax also may be waived by the Treasury Department
if the Disqualified Organization promptly disposes of the Residual Certificate
and the transferor pays income tax at the highest corporate rate on the excess
inclusion for the period the Residual Certificate is actually held by the
Disqualified Organization.
In addition, if a "Pass-Through Entity" (a "Pass-Through Entity")
(as defined below) has excess inclusion income with respect to a Residual
Certificate during a taxable year and a Disqualified Organization is the record
holder of an equity interest in such entity, then a tax is imposed on such
entity equal to the product of (i) the amount of excess inclusions that are
allocable to the interest in the Pass-Through Entity during the period such
interest is held by such Disqualified Organization and (ii) the highest marginal
federal corporate income tax rate. Such tax would be deductible from the
ordinary gross income of the Pass-Through Entity for the taxable year. The
Pass-Through Entity would not be liable for such tax if it has received an
affidavit from such record holder that (i) states under penalty of perjury that
it is not a Disqualified Organization or (ii) furnishes a social security number
and states under penalties of perjury that the social security number is that of
the transferee, provided that during the period such person is the record holder
of the Residual Certificate, the Pass-Through Entity does not have actual
knowledge that such affidavit is false. Excess inclusion income of a Residual
Certificate held by an electing large partnership (as defined in Code section
775) is subject to tax in the hands of the partnership.
For these purposes, (i) "Disqualified Organization" (a "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" (a "Pass-Through Entity") means any
regulated investment company, real estate investment trust, common trust fund,
partnership, trust or estate and
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certain corporations operating on a cooperative basis. Except as may be provided
in Treasury regulations yet to be issued, any person holding an interest in a
Pass-Through Entity as a nominee for another will, with respect to such
interest, be treated as a Pass-Through Entity.
The Agreement with respect to a series of Certificates will provide
that neither legal title nor beneficial interest in a Residual Certificate may
be transferred or registered unless (i) the proposed transferee provides to
the Depositor and the Trustee an affidavit to the effect that such transferee
is not a Disqualified Organization, is not purchasing such Residual
Certificates on behalf of a Disqualified Organization (i.e., as a broker,
nominee or middleman thereof) and is not an entity that holds REMIC residual
securities as nominee to facilitate the clearance and settlement of such
securities through electronic book-entry changes in accounts of participating
organizations and (ii) the transferor provides a statement in writing to the
Depositor and the Trustee that it has no actual knowledge that such affidavit
is false. Moreover, the Agreement will provide that any attempted or purported
transfer in violation of these transfer restrictions will be null and void and
will vest no rights in any purported transferee. Each Residual Certificate
with respect to a series will have a legend referring to such restrictions on
transfer, and each Residual Certificateholder will be deemed to have agreed,
as a condition of ownership thereof, to any amendments to the related
Agreement required under the Code or applicable Treasury regulations to
effectuate the foregoing restrictions. Information necessary to compute an
applicable excise tax must be furnished to the Internal Revenue Service and to
the requesting party within 60 days of the request, and the Depositor or the
Trustee may charge a fee for computing and providing such information.
Noneconomic Residual Interests. Under the REMIC Regulations certain
transfers of Residual Certificates are disregarded, in which case the
transferor continues to be treated as the owner of the Residual Certificates
and thus continues to be subject to tax on its allocable portion of the net
income of the REMIC Pool. Under the Final REMIC Regulations, a transfer of a
Noneconomic Residual Interest (defined below) to a Residual Certificateholder
(other than a Residual Certificateholder who is not a U.S. Person, as defined
below under "Foreign Investors") is disregarded for all federal income tax
purposes unless no significant purpose of the transfer is to impede the
assessment or collection of tax. A residual interest in a REMIC (including a
residual interest with a positive value at issuance) is a "Noneconomic
Residual Interest" unless, at the time of the transfer, (i) the present value
of the expected future distributions on the residual interest at least equals
the product of the present value of the anticipated excess inclusions and the
highest federal corporate income tax rate in effect for the year in which the
transfer occurs, and (ii) the transferor reasonably expects that the
transferee will receive distributions from the REMIC at or after the time at
which taxes accrue on the anticipated excess inclusions in an amount
sufficient to satisfy the accrued taxes. The anticipated excess inclusions and
the present value rate are determined in the same manner as set forth above
under "Disqualified Organizations." A significant purpose to impede the
assessment or collection of tax exists if the transferor, at the time of the
transfer, either knew or should have known (had "improper knowledge") that the
transferor would be unwilling or unable to pay taxes due on its share of the
taxable income of the REMIC. Under the REMIC Regulations, a transferor is
presumed not to have improper knowledge if (i) the transferor conducted, at
the time of the transfer, a reasonable investigation of the financial
condition of the transferee and, as a result of the investigation, the
transferor found that the transferee had historically paid its debts as they
came due and found no significant evidence to indicate that the transferor
will not continue to pay its debts as they come due in the future; and (ii)
the transferee represents to the transferor that it understands that, as the
holder of the Noneconomic Residual Interest, the transferee may incur tax
liabilities in excess of any cash flows generated by the residual interest and
that the transferee intends to pay taxes associated with holding 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. 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
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equal at least 30% of the excess inclusions and (ii) that each such amount will
be distributed at or after the time at which the excess inclusion accrues and
not later than the close of the calendar year following the calendar year of
accrual. If the non-U.S. Person transfers the Residual Certificate back to a
U.S. Person, the transfer will be disregarded and the foreign transferor will
continue to be treated as the owner unless arrangements are made so that the
transfer does not have the effect of allowing the transferor to avoid tax on
accrued excess inclusions.
The Prospectus Supplement relating to a series of Certificates may
provide that a Residual Certificate may not be purchased by or transferred to
any person that is not a U.S. Person or may describe the circumstances and
restrictions pursuant to which such a transfer may be made. The term "U.S.
Person" means a citizen or resident of the United States, a corporation,
partnership or other entity created or organized in or under the laws of the
United States or any political subdivision thereof, an estate that is subject
to U.S. federal income tax regardless of the source of its income or a trust
described in Code section 7701(a)(30).
Sale or Exchange of a Residual Certificate
Upon the sale or exchange of a Residual Certificate, the Residual
Certificateholder will recognize gain or loss equal to the excess, if any, of
the amount realized over the adjusted basis (as described above under
"Taxation of Residual Certificates - Basis and Losses") of such Residual
Certificateholder in such Residual Certificate at the time of the sale or
exchange. In addition to reporting the taxable income of the REMIC Pool, a
Residual Certificateholder will have taxable income to the extent that any
cash distribution to him from the REMIC Pool exceeds such adjusted basis on
that Distribution Date. Such income will be treated as gain from the sale or
exchange of the Residual Certificate. It is possible that the termination of
the REMIC Pool may be treated as a sale or exchange of a Residual
Certificateholder's Residual Certificate, in which case, if the Residual
Certificateholder has an adjusted basis in his Residual Certificate remaining
when his interest in the REMIC Pool terminates, and if he holds such Residual
Certificate as a capital asset under Code Section 1221, then he will recognize
a capital loss at that time in the amount of such remaining adjusted basis.
Losses on dispositions of Residual Certificates will be disallowed
where the seller of the Residual Certificate, during the period beginning six
months before the sale or disposition of the Residual Certificate and ending
six months after such sale or disposition, acquires (or enters into any other
transaction that results in the application of Code Section 1091) any residual
interest in any REMIC or any interest in a "taxable mortgage pool" (such as
certain non-REMIC owner trusts) 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
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modification of the Mortgage-Backed Securities, provided that the trust
issuing the Mortgage-Backed Securities was not created to avoid prohibited
transaction rules.
Contributions to the REMIC Pool After the Startup Day. In general,
the REMIC Pool will be subject to a tax at a 100% rate on the value of any
property contributed to the REMIC Pool after the Startup Day. Exceptions are
provided for cash contributions to the REMIC Pool (i) during the three months
following the Startup Day, (ii) made to a qualified reserve fund by a Residual
Certificateholder, (iii) in the nature of a guarantee, (iv) made to facilitate
a qualified liquidation or clean-up call and (v) as otherwise permitted in
Treasury regulations yet to be issued.
Net Income from Foreclosure Property. The REMIC Pool will be subject
to federal income tax at the highest corporate rate on "net income from
foreclosure property," determined by reference to the rules applicable to real
estate investment trusts. Generally, property acquired by the REMIC Pool
through foreclosure or deed in lieu of foreclosure would be treated as
"foreclosure property" for a period of three years, with possible extensions.
Net income from foreclosure property generally means (i) gain from the sale of
a foreclosure property that is inventory property and (ii) gross income from
foreclosure property other than qualifying rents and other qualifying income
for a real estate investment trust.
Liquidation of the REMIC Pool
If a REMIC Pool and the Trustee adopt a plan of complete liquidation,
within the meaning of Code Section 860F(a)(4)(A)(i) and sell all of the REMIC
Pool's assets (other than cash) within a 90-day period beginning on the date
of the adoption of the plan of liquidation, the REMIC Pool will recognize no
gain or loss on the sale of its assets, provided that the REMIC Pool credits
or distributes in liquidation all of the sale proceeds plus its cash (other
than amounts retained to meet claims against the REMIC Pool) to holders of
Regular Certificates and Residual Certificateholders within the 90-day period.
Administrative Matters
The REMIC Pool will be required to maintain its books on a calendar
year basis and to file federal income tax returns for federal income tax
purposes in a manner similar to a partnership. The form for such income tax
return is Form 1066, U.S. Real Estate Mortgage Investment Conduit Income Tax
Return. The Trustee will be required to sign the REMIC Pool's returns.
Treasury regulations provide that, except where there is a single Residual
Certificateholder for an entire taxable year, the REMIC Pool generally will be
subject to the procedural and administrative rules of the Code applicable to
partnerships, including the determination by the Internal Revenue Service of
any adjustments to, among other things, items of REMIC income, gain, loss,
deduction or credit in a unified administrative proceeding. The Depositor or a
designated Residual Certificateholders will be obligated to act as "tax
matters person," as defined in applicable Treasury regulations, with respect
to the REMIC Pool. If the Code or applicable Treasury regulations do not
permit the Depositor to act as tax matters person in its capacity as agent of
the Residual Certificateholders, the Residual Certificateholder chosen by the
Residual Certificateholders or such other person specified pursuant to
Treasury regulations will be required to act as tax matters person.
Treasury regulations provide that a holder of a Residual Certificate
is not required to treat items on its return consistently with their treatment
on the REMIC Pool's return if a holder owns 100% of the Residual Certificates
for the entire calendar year. Otherwise, each holder of a Residual Certificate
is required to treat items on its return consistently with their treatment on
the REMIC Pool's return, unless the holder of a Residual Certificate either
files a statement identifying the inconsistency or establishes that the
inconsistency resulted from incorrect information received from the REMIC
Pool. The Service may assess a deficiency resulting from a failure to comply
with the consistency requirement without instituting an administrative
proceeding at the REMIC Pool level.
Limitations on Deduction of Certain Expenses
An investor who is an individual, estate or trust will be subject to
limitation with respect to certain itemized deductions described in Code
Section 67, to the extent that such itemized deductions, in the aggregate, do
not exceed 2% of the investor's adjusted gross income. In addition, Code
Section 68 provides that itemized deductions
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otherwise allowable for a taxable year of an individual taxpayer will be reduced
by the lesser of (i) 3% of the excess, if any, of adjusted gross income over
$100,000, adjusted yearly for inflation ($50,000, adjusted yearly for inflation,
in the case of a married individual filing a separate return), or (ii) 80% of
the amount of itemized deductions otherwise allowable for such year. In the case
of a REMIC Pool, such deductions may include deductions under Code Section 212
for servicing fees and all administrative and other expenses relating to the
REMIC Pool or any similar expenses allocated to the REMIC Pool with respect to a
regular interest it holds in another REMIC. Such investors who hold REMIC
Certificates either directly or indirectly through certain pass-through entities
may have their pro rata share of such expenses allocated to them as additional
gross income, but may be subject to such limitation on deductions. In addition,
such expenses are not deductible at all for purposes of computing the
alternative minimum tax, and may cause such investors to be subject to
significant additional tax liability. Treasury regulations provide that the
additional gross income and corresponding amount of expenses generally are to be
allocated entirely to the holders of Residual Certificates in the case of a
REMIC Pool that would not qualify as a fixed investment trust in the absence of
a REMIC election. However, such additional gross income and limitation on
deductions will apply to the allocable portion of such expenses to holders of
Regular Certificates, as well as holders of Residual Certificates, where such
Regular Certificates are issued in a manner that is similar to pass-through
certificates in a fixed investment trust. In general, such allocable portion
will be determined based on the ratio that a REMIC Certificateholder's income,
determined on a daily basis, bears to the income of all holders of Regular
Certificates and Residual Certificates with respect to a REMIC Pool. As a
result, individuals, estates or trusts holding REMIC Certificates (either
directly or indirectly through a grantor trust, partnership, S corporation,
REMIC, or certain other pass-through entities described in the foregoing
Treasury regulations) may have taxable income in excess of the interest income
at the pass-through rate on Regular Certificates that are issued in a single
class or otherwise consistently with fixed investment trust status or in excess
of cash distributions for the related period on Residual Certificates.
Taxation of Certain Foreign Investors
Regular Certificates. Interest, including original issue discount,
distributable to Regular Certificateholders who are nonresident aliens,
foreign corporations, or other Non-U.S. Persons (as defined below), will be
considered "portfolio interest" and therefore, generally will not be subject
to 30% United States withholding tax, provided that such Non-U.S. Person (i)
is not a "10-percent shareholder" within the meaning of Code Section
871(h)(3)(B) or a controlled foreign corporation described in Code Section
881(c)(3)(C) and (ii) provides the Trustee, or the person who would otherwise
be required to withhold tax from such distributions under Code Sections 1441
or 1442, with an appropriate statement, signed under penalties of perjury,
identifying the beneficial owner and stating, among other things, that the
beneficial owner of the Regular Certificate is a Non-U.S. Person. If such
statement, or any other required statement, is not provided, 30% withholding
will apply unless reduced or eliminated pursuant to an applicable tax treaty
or unless the interest on the Regular Certificate is effectively connected
with the conduct of a trade or business within the United States by such
Non-U.S. Person. In the latter case, such Non-U.S. Person will be subject to
United States federal income tax at regular rates. Investors who are Non-U.S.
Persons should consult their own tax advisors regarding the specific tax
consequences to them of owning a Regular Certificate. The term "Non-U.S.
Person" means any person who is not a U.S. Person.
Residual Certificates. The Conference Committee Report to the 1986
Act indicates that amounts paid to Residual Certificateholders who are
Non-U.S. Persons are treated as interest for purposes of the 30% (or lower
treaty rate) United States withholding tax. Treasury regulations provide that
amounts distributed to Residual Certificateholders qualify as "portfolio
interest," subject to the conditions described in "Regular Certificates"
above, but only to the extent that (i) the Mortgage Assets were issued after
July 18, 1984 and (ii) the Trust fund or segregated pool of assets therein (as
to which a separate REMIC election will be made), to which the Residual
Certificate relates, consists of obligations issued in "registered form"
within the meaning of Code Section 163(f)(1). Generally, Mortgage Assets will
not be, but regular interests in another REMIC Pool will be, considered
obligations issued in registered form. Furthermore, a Residual
Certificateholder will not be entitled to any exemption (or lower treaty rate)
from the 30% withholding tax to the extent of that portion of REMIC taxable
income that constitutes an "excess inclusion." See "Taxation of Residual
Certificates - Limitations on Offset or Exemption of REMIC Income; Excess
Inclusions." If the amounts paid to Residual Certificateholders who are
Non-U.S. Persons are effectively connected with the conduct of a trade or
business within the United States by such
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Non-U.S. Persons, 30% (or lower treaty rate) withholding will not apply.
Instead, the amounts paid to such Non-U.S. Persons will be subject to United
States federal income tax at regular rates. If 30% (or lower treaty rate)
withholding is applicable, such amounts generally will be taken into account for
purposes of withholding only when paid or otherwise distributed (or when the
Residual Certificate is disposed of) under rules similar to withholding upon
disposition of debt instruments that have original issue discount. See
"Tax-Related Restrictions on Transfer of Residual Certificates - Foreign
Investors" above concerning the disregard of certain transfers having "tax
avoidance potential."
Recently issued Treasury regulations (the "Final Withholding
Regulations"), which are generally effective with respect to payments made
after December 31, 1998, consolidate and modify the current certification
requirements and means by which a holder may claim exemption from United
States federal income tax withholding and provide certain presumptions
regarding the status of holders when payments to the holders cannot be
reliably associated with appropriate documentation provided to the payor. All
holders of Offered Certificates should consult their tax advisers regarding
the application of the Final Withholding Regulations.
Backup Withholding
Distributions made on the Regular Certificates, and proceeds from the
sale of the Regular Certificates to or through certain brokers, may be subject
to a "backup" withholding tax under Code Section 3406 of 31% on "reportable
payments" (including interest distributions, original issue discount, and,
under certain circumstances, principal distributions) unless the Regular
Certificateholder complies with certain reporting and/or certification
procedures, including the provision of its taxpayer identification number to
the Trustee, its agent or the broker who effected the sale of the Regular
Certificate, or such Certificateholder is otherwise an exempt recipient under
applicable provisions of the Code. Any amounts to be withheld from
distribution on the Regular Certificates would be refunded by the Internal
Revenue Service or allowed as a credit against the Regular Certificateholder's
federal income tax liability.
Reporting Requirements
Reports of accrued interest and original issue discount will be made
annually to the Internal Revenue Service and to individuals, estates,
non-exempt and non-charitable trusts, and partnerships who are either holders
of record of Regular Certificates or beneficial owners who own Regular
Certificates through a broker or middleman as nominee. All brokers, nominees
and all other non-exempt holders of record of Regular Certificates (including
corporations, non-calendar year taxpayers, securities or commodities dealers,
real estate investment trusts, investment companies, common trust funds,
thrift institutions and charitable trusts) may request such information for
any calendar quarter by telephone or in writing by contacting the person
designated in Internal Revenue Service Publication 938 with respect to a
particular series of Regular Certificates. Holders through nominees must
request such information from the nominee. Treasury regulations provide that
information necessary to compute the accrual of any market discount on the
Regular Certificates must be furnished.
The Internal Revenue Service's Form 1066 has an accompanying Schedule
Q, Quarterly Notice to Residual Interest Holders of REMIC Taxable Income or
Net Loss Allocation. Treasury regulations require that Schedule Q be furnished
by the REMIC Pool to each Residual Certificateholder with respect to each
calendar quarter.
Treasury regulations require that, in addition to the foregoing
requirements, information must be furnished quarterly to Residual
Certificateholders, furnished annually, if applicable, to holders of Regular
Certificates, and filed annually with the Internal Revenue Service concerning
Code Section 67 expenses (see "Limitations on Deduction of Certain Expenses"
above) allocable to such holders. Furthermore, under such regulations,
information must be furnished quarterly to Residual Certificateholders,
furnished annually to holders of Regular Certificates, and filed annually with
the Internal Revenue Service concerning the percentage of the REMIC Pool's
assets meeting the qualified asset tests described above under "Federal Income
Tax Consequences for REMIC Certificates" above.
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Federal Income Tax Consequences for Certificates as to Which No REMIC Election
Is Made
Dewey Ballantine LLP, special counsel to the Depositor, is of the
opinion that if a Trust does not elect REMIC status and is not treated as a
partnership, the tax consequences to the Owners will be as described below.
Standard Certificates
General. If no election is made to treat a Trust (or a segregated
pool of assets therein) with respect to a series of Certificates as a REMIC,
the Trust may be classified as a grantor trust under subparagraph E, Part 1 of
subchapter J of the Code and not as a partnership or an association taxable as
a corporation. Where there is no fixed retained yield with respect to the
Mortgage Assets underlying the Certificates of a series, and where such
Certificates are not designated as Stripped Certificates, as described below
under "Stripped Certificates" or as Partnership Interests described under
"Taxation of Securities Classified as Partnership Interests," the holder of
each such "Standard Certificate" in such series will be treated as the owner
of a pro rata undivided interest in the ordinary income and corpus portions of
the Trust represented by his Certificate and will be considered the beneficial
owner of a pro rata undivided interest in each of the Mortgage Assets, subject
to the discussion below under "Recharacterization of Servicing Fees."
Accordingly, the holder of a Certificate (a "Certificateholder") of a
particular series will be required to report on its federal income tax return
its pro rata share of the entire income from the Mortgage Assets, original
issue discount (if any), prepayment fees, assumption fees, and late payment
charges received by or on behalf of the Trust, in accordance with such
Certificateholder's method of accounting. A Certificateholder generally will
be able to deduct its share of servicing fees and all administrative and other
expenses of the Trust in accordance with his method of accounting, provided
that such amounts are reasonable compensation for services rendered to that
Trust. However, investors who are individuals, estates or trusts who own
Certificates, either directly or indirectly through certain pass-through
entities, will not be allowed to deduct certain itemized deductions described
in Code Section 67, including deductions under Code Section 212 for servicing
fees and all such administrative and other expenses of the Trust, to the
extent that such deductions, in the aggregate, do not exceed two percent of
the investor's adjusted gross income. In addition, Code Section 68 provides
that itemized deductions otherwise allowable for a taxable year of an
individual taxpayer will be reduced by the lesser of (i) 3% of the excess, if
any, of adjusted gross income over $100,000, adjusted yearly for inflation
($50,000, adjusted yearly for inflation, in the case of a married individual
filing a separate return), or (ii) 80% of the amount of itemized deductions
otherwise allowable for such year. As a result such investors holding
Certificates, directly or indirectly through a pass-through entity, may have
aggregate taxable income in excess of the aggregate amount of cash received on
such Certificates with respect to interest at the pass-through rate on such
Certificates or discount thereon. In addition, such expenses are not
deductible at all for purposes of computing the alternative minimum tax and
may cause such investors to be subject to significant additional tax
liability. Moreover, where there is fixed retained yield with respect to the
Mortgage Assets underlying a series of Certificates or where the servicing
fees are in excess of reasonable servicing compensation, the transaction will
be subject to the application of the "stripped bond" and "stripped coupon"
rules of the Code, as described below under "Stripped Certificates" and
"Premium and Discount - Recharacterization of Servicing Fees," respectively.
Tax Status. Subject to the discussion below, Dewey Ballantine, special
counsel to the Depositor, is of the opinion that:
1. A Standard Certificate owned by a "domestic building and
loan association" within the meaning of Code Section 7701(a)(19) will
be considered to represent "loans . . . secured by an interest in
real property" within the meaning of Code Section 7701(a)(19)(C)(v),
provided that the real property securing the Mortgage Assets
represented by that Certificate is of the type described in such
section.
2. A Standard Certificate owned by a real estate investment
trust will be considered to represent "real estate assets" within the
meaning of Code Section 856(C) (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).
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3. A Standard Certificate owned by a REMIC will be
considered to represent an "obligation (including any participation
or certificate of beneficial ownership therein) which is principally
secured by an interest in real property" within the meaning of Code
Section 860G(a)(3)(A) to the extent that the assets of the related
Trust consist of "qualified mortgages" within the meaning of Code
Section 860G(a)(3).
An issue arises as to whether buy-down Mortgage Assets may be
characterized in their entirety under the Code provisions cited in the
immediately preceding paragraph. There is indirect authority supporting
treatment of an investment in a buy-down Mortgage Loan as entirely secured by
real property if the fair market value of the real property securing the loan
exceeds the principal amount of the loan at the time of issuance or
acquisition, as the case may be. There is no assurance that the treatment
described above is proper. Accordingly, Certificateholders are urged to
consult their own tax advisors concerning the effects of such arrangements on
the characterization of such Certificateholder's investment for federal income
tax purposes.
Premium and Discount
Certificateholders are advised to consult with their tax advisors as
to the federal income tax treatment of premium and discount arising either
upon initial acquisition of Certificates or thereafter.
Premium. The treatment of premium incurred upon the purchase of a
Certificate will be determined generally as described above under "- Taxation of
Regular Certificates - Premium."
Original Issue Discount. The Internal Revenue Service has stated in
published rulings that, in circumstances similar to those described herein,
the original issue discount rules will be applicable to a Certificateholder's
interest in those Mortgage Assets as to which the conditions for the
application of those sections are met. Rules regarding periodic inclusion of
original issue discount income are applicable to mortgages of corporations
originated after May 27, 1969, mortgages of noncorporate mortgagors (other
than individuals) originated after July l, 1982, and mortgages of individuals
originated after March 2, 1984. Such original issue discount could arise by
the charging of points by the originator of the mortgages in an amount greater
than a statutory de minimis exception, to the extent that the points are not
currently deductible under applicable Code provisions or are not for services
provided by the lender. It is generally not anticipated that adjustable rate
Mortgage Assets will be treated as issued with original issue discount.
However, the application of the OID Regulations to adjustable rate mortgage
loans with incentive interest rates or annual or lifetime interest rate caps
may result in original issue discount.
Original issue discount must generally be reported as ordinary gross
income as it accrues under a constant yield method that takes into account the
compounding of interest, in advance of the cash attributable to such income.
However, Code Section 1272 provide for a reduction in the amount of original
issue discount includible in the income of a holder of an obligation that
acquires the obligation at a price greater than the sum of the original issue
price and the previously accrued original issue discount, less prior payments
of principal. Accordingly, if such Mortgage Assets acquired by a
Certificateholder are purchased at a price equal to the then unpaid principal
amount of such Mortgage Assets, no original issue discount attributable to the
difference between the issue price and the original principal amount of such
Mortgage Assets (i.e., points) will be includible by such holder. Section
1272(a)(6) provides for the use of a prepayment assumption in determining
original issue discount for any pool of debt instruments the yield on which
may be affected by reason of prepayments.
Market Discount. Certificateholders also will be subject to the
market discount rules to the extent that the conditions for application of
those sections are met. Market discount on the Mortgage Assets will be
determined and will be reported as ordinary income generally in the manner
described above under "- Taxation of Regular Certificates - Market Discount."
Recharacterization of Servicing Fees. If the servicing fees paid to
Servicers were deemed to exceed reasonable servicing compensation, the amount
of such excess would be nondeductible under Code Section 162 or 212. In this
regard, there are no authoritative guidelines for federal income tax purposes
as to either the maximum amount of servicing compensation that may be
considered reasonable in the context of this or similar transactions or
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whether, in the case of the Certificates, the reasonableness of servicing
compensation should be determined on a weighted average or loan-by-loan basis.
If a loan-by-loan basis is appropriate, the likelihood that such amount would
exceed reasonable servicing compensation as to some of the Mortgage Assets
would be increased. Recently issued Internal Revenue Service guidance
indicates that a servicing fee in excess of reasonable compensation ("excess
servicing") will cause the Mortgage Assets to be treated under the "stripped
bond" rules. Such guidance provides safe harbors for servicing deemed to be
reasonable and requires taxpayers to demonstrate that the value of servicing
fees in excess of such amounts is not greater than the value of the services
provided.
Accordingly, if the Internal Revenue Service's approach is upheld, a
servicer that receives excess servicing fees would be viewed as retaining an
ownership interest in a portion of the interest payments on the Mortgage
Assets. Under the rules of Code Section 1286, the separation of the right to
receive some or all of the interest payments on an obligation from the right
to receive some or all of the principal payments on the obligation would
result in treatment of such Mortgage Assets as "stripped coupons" and
"stripped bonds." While Certificateholders would still be treated as owners of
beneficial interests in a grantor trust for federal income tax purposes, the
corpus of such trust could be viewed as excluding the portion of the Mortgage
Assets the ownership of which is attributed to a servicer, or as including
such portion as a second class of equitable interest. Applicable Treasury
regulations treat such an arrangement as a fixed investment trust, since the
multiple classes of trust interests should be treated as merely facilitating
direct investments in the trust assets and the existence of multiple classes
of ownership interests is incidental to that purpose. In general, such a
recharacterization should not have any significant effect upon the timing or
amount of income reported by a Certificateholder. See "Stripped Certificates"
below for a further description of the federal income tax treatment of
stripped bonds and stripped coupons.
In the alternative, the amount, if any, by which the servicing fees
paid to the servicers are deemed to exceed reasonable compensation for
servicing could be treated as deferred payments of purchase price by the
Certificateholders to purchase an undivided interest in the Mortgage Assets.
In such event, the present value of such additional payments might be included
in the Certificateholder's basis in such undivided interests for purposes of
determining whether the Certificate was acquired at a discount, at par, or at
a premium. Under this alternative, Certificateholders may also be entitled to
a deduction for unstated interest with respect to each deferred payment. The
Internal Revenue Service may take the position that the specific statutory
provisions of Code Section 1286 described above override the alternative
described in this paragraph. Certificateholders are advised to consult their
tax advisors as to the proper treatment of the amounts paid to the servicers
as set forth herein as servicing compensation or under either of the
alternatives set forth above.
Sale or Exchange of Certificates. Upon sale or exchange of a
Certificate, a Certificateholder will recognize gain or loss equal to the
difference between the amount realized on the sale and its aggregate adjusted
basis in the Mortgage Assets and other assets represented by the Certificate.
In general, the aggregate adjusted basis will equal the Certificateholder's
cost for the Certificate, increased by the amount of any income previously
reported with respect to the Certificate and decreased by the amount of any
losses previously reported with respect to the Certificate and the amount of
any distributions received thereon. Except as provided above with respect to
market discount on any Mortgage Assets, and except for certain financial
institutions subject to the provisions of Code Section 582(c), any such gain
or loss would be capital gain or loss if the Certificate was held as a capital
asset.
Stripped Certificates
General. Pursuant to Code Section 1286, the separation of ownership
of the right to receive some or all of the principal payments on an obligation
from ownership of the right to receive some or all of the interest payments
results in the creation of "stripped bonds" with respect to principal payments
and "stripped coupons" with respect to interest payments. For purposes of this
discussion, Certificates that are subject to those rules will be referred to
as "Stripped Certificates." The Certificates will be subject to those rules if
(i) the Depositor or any of its affiliates retains (for its own account or for
purposes of resale), in the form of fixed retained yield or otherwise, an
ownership interest in a portion of the payments on the Mortgage Assets, (ii)
the Depositor, any of its affiliates or a servicer is treated as having an
ownership interest in the Mortgage Assets to the extent it is paid (or
retains) servicing compensation in an amount greater than reasonable
consideration for servicing the Mortgage Assets (see "Standard Certificates -
Recharacterization of the Servicing Fees" above) and (iii) Certificates are
issued in two or more classes
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or subclasses representing the right to non pro rata percentages of the interest
and principal payments on the Mortgage Assets.
In general, a holder of a Stripped Certificate (a "Stripped
Certificateholder") will be considered to own "stripped bonds" with respect to
its pro rata share of all or a portion of the principal payments on each
Mortgage Loan and/or "stripped coupons" with respect to its pro rata share of
all or a portion of the interest payments on each Mortgage Loan, including the
Stripped Certificate's allocable share of the servicing fees paid, to the
extent that such fees represent reasonable compensation for services rendered.
See discussion above under "Standard Certificates - Recharacterization of
Servicing Fees." For this purpose the Trust intends to allocate the servicing
fees to the Stripped Certificates in proportion to the respective offering
price of each class (or subclass) of Stripped Certificates. The holder of a
Stripped Certificate generally will be entitled to a deduction each year in
respect of the servicing fees, as described above under "- Federal Income Tax
Consequences for Certificates as to Which No REMIC Election is Made - Standard
Certificates - General," subject to the limitations described therein.
Code Section 1286 treats a stripped bond or a stripped coupon
generally as a new obligation issued (i) on the date that the stripped
interest is purchased and (ii) at a price equal to its purchase price or, if
more than one stripped interest is purchased, the share of the purchase price
allocable to such stripped interest. Each stripped interest generally will
have original issue discount equal to the excess of its stated redemption
price at maturity (or, in the case of a stripped coupon, the amount payable on
the due date of such coupon) over its issue price. Although the treatment of
Stripped Certificates for federal income tax purposes is not clear in certain
respects at this time, particularly where such Stripped Certificates are
issued with respect to a Trust containing variable-rate Mortgage Assets, the
Depositor has been advised by counsel that (i) the Trust will be treated as a
grantor trust under subpart E, Part 1 of subchapter J of the Code and not as
an association taxable as a corporation, and (ii) each Stripped Certificate
should be treated as a single installment obligation for purposes of
calculating original issue discount and gain or loss on disposition. This
treatment is based on the interrelationship of Code Section 1286 and the
regulations thereunder, Code Sections 1272 through 1275, and the OID
Regulations. While under Code Section 1286 computations with respect to
Stripped Certificates arguably should be made in one of the ways described
below, the OID Regulations state, in general, that all debt instruments issued
in connection with the same transaction must be treated as a single debt
instrument. The Trustee will make and report all computations described below
using this aggregate approach, unless substantial legal authority requires
otherwise.
Furthermore, the regulations under Code Section 1286 support the
treatment of a Stripped Certificate as a single debt instrument issued on the
date it is originated for purposes of calculating any original issue discount.
The preamble to such regulations state that such regulations are premised on
the assumption that an aggregation approach is appropriate in determining
whether original issue discount on a stripped bond or stripped coupon is de
minimis. In addition, under these regulations, a Stripped Certificate that
represents a right to payments of both interest and principal may be viewed
either as issued with original issue discount or market discount (as described
below), at a de minimis original issue discount, or presumably, at a premium.
The preamble to such regulations also provide that such regulations are
premised on the assumption that generally the interest component of such a
Stripped Certificate would be treated as stated interest under the original
issue discount rules. Further, the regulations provide that the purchaser of
such a Stripped Certificate may be required to account for any discount as
market discount rather than original issue discount if either (i) the initial
discount with respect to the Strip Certificate was treated as zero under the
de minimis rule or (ii) no more than 100 basis points in excess of reasonable
servicing is stripped off the related Mortgage Assets. Any such market
discount would be reportable as described above under "Federal Income Tax
Consequences for REMIC Certificates - Taxation of Regular Certificates -
Market Discount," without regard to the de minimis rule therein.
Status of Stripped Certificates. No specific legal authority exists
as to whether the character of the Stripped Certificates, for federal income
tax purposes, will be the same as that of the Mortgage Assets. Although the
issue is not free from doubt, counsel has advised the Depositor that Stripped
Certificates owned by applicable holders should be considered, "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
72
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obligations secured by mortgages on real property" within the meaning or Code
Section 856(c), provided that in each case the Mortgage Assets and interest on
such Mortgage Assets qualify for such treatment. The application of such Code
provisions to buy-down Mortgage Assets is uncertain. See "-Federal Income Tax
Consequences for Certificates as to Which No REMIC Election is Made" and "-
Standard Certificates - Tax Status" above.
Original Issue Discount. Except as described above under "- General,"
each Stripped Certificate will be considered to have been issued (i) on the
date that the stripped interest is purchased and (ii) at a price equal to its
purchase price or, if more than one stripped interest is purchased, the share
of the purchase price allocable to such stripped interest. Each stripped
interest generally will have original issue discount equal to the excess of
its stated redemption price at maturity (or, in the case of a stripped coupon,
the amount payable on the due date of such coupon) over its issue price.
Original issue discount with respect to a Stripped Certificate must be
included in ordinary income as it accrues, in accordance with a constant yield
method that takes into account the compounding of interest, which may be prior
to the receipt of the cash attributable to such income. Counsel has advised
the Depositor that the amount of original issue discount required to be
included in the income of a Stripped Certificateholder in any taxable year
likely will be computed generally as described above under "Federal Income Tax
Consequences for REMIC Certificates - Taxation of Regular Certificates -
Original Issue Discount" and "- Variable Rate Regular Certificates." However,
with the apparent exception of a Stripped Certificate issued with de minimis
original issue discount, as described above under "- General," the issue price
of a Stripped Certificate will be the purchase price paid by each holder
thereof, and the stated redemption price at maturity will include the
aggregate amount of the payments to be made on the Stripped Certificate to
such Stripped Certificateholder, presumably under the Prepayment Assumption,
other than amounts treated as qualified stated interest.
If the Mortgage Assets prepay at a rate either faster or slower than
that under the Prepayment Assumption, a Stripped Certificateholder's
recognition of original issue discount will be either accelerated or
decelerated and the amount of such original issue discount will be either
increased or decreased depending on the relative interests in principal and
interest on each Mortgage Loan represented by such Stripped
Certificateholder's Stripped Certificate. While the matter is not free from
doubt, the holder of a Stripped Certificate should be entitled in the year
that it becomes certain (assuming no further prepayments) that the holder will
not recover a portion of its adjusted basis in such Stripped Certificate to
recognize an ordinary loss equal to such portion of unrecoverable basis.
Sale or Exchange of Stripped Certificates. Sale or exchange of a
Stripped Certificate prior to its maturity will result in gain or loss equal
to the difference, if any, between the amount received and the Stripped
Certificateholder's adjusted basis in such Stripped Certificate, as described
above under "Federal Income Tax Consequences for REMIC Certificates - Taxation
of Regular Certificates - Sale or Exchange of Regular Certificates." To the
extent that a subsequent purchaser's purchase price is exceeded by the
remaining payments on the Stripped Certificates, such subsequent purchaser
will be required for federal income tax purposes to accrue and report such
excess as if it were original issue discount (or market discount) in the
manner described above. It is not clear for this purpose whether the assumed
prepayment rate that is to be used in the case of a Stripped Certificateholder
other than by original Stripped Certificateholder should be based on the
Prepayment Assumption or a new rate based on the circumstances at the date of
subsequent purchase.
Purchase of More Than One Class of Stripped Certificates. Where an
investor purchases more than one class of Stripped Certificates, it is
currently unclear whether for federal income tax purposes such classes of
Stripped Certificates should be treated separately or aggregated for purposes
of the rules described above.
Because of these possible varying characterizations of Stripped
Certificates and the resultant differing treatment of income recognition,
Stripped Certificateholders are urged to consult their own tax advisors
regarding the proper treatment of Stripped Certificates for federal income tax
purposes.
Reporting Requirements and Backup Withholding
The Trustee will furnish, within a reasonable time after the end of
each calendar year, to each Certificateholder or Stripped Certificateholder at
any time during such year, such information (prepared on the basis described
above) as the Trustee deems to be necessary or desirable to enable such
Certificateholders to prepare their
73
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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 properly certify the 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 recognized by the Certificateholder on
the sale or exchange of such a Certificate also will be subject to federal
income tax at the same rate.
Treasury regulations provide that interest or original issue discount
paid by the Trustee or other withholding agent to a Non-U.S. Person evidencing
ownership interest in Mortgage Assets issued after July 18, 1984 will be
"portfolio interest" and will be treated in the manner, and such persons will
be subject to the same certification requirements described above under "-
Taxation of Certain Foreign Investors - Regular Certificates."
Recently issued Treasury regulations (the "Final Withholding
Regulations"), which are generally effective with respect to payments made
after December 31, 1998, consolidate and modify the current certification
requirements and means by which a holder may claim exemption from United
States federal income tax withholding and provide certain presumptions
regarding the status of holders when payments to the holders cannot be
reliably associated with appropriate documentation provided to the payor. All
holders of Offered Certificates should consult their tax advisers regarding
the application of the Final Withholding Regulations.
Taxation of Securities Classified as Partnership Interests
Certain Trusts may be treated as partnerships for Federal income tax
purposes. In such event, the Trusts may issue Certificates characterized as
"Partnership Interests" as discussed in the related Prospectus Supplement.
With respect to such series of Partnership Interests, Dewey Ballantine LLP,
special counsel to the Depositor, is of the opinion that (unless otherwise
limited in the related Prospectus Supplement, which will also cover any
material federal income tax consequences applicable to the Owners), the Trust
will be characterized as a partnership and not an association taxable as a
corporation for federal income tax purposes.
PLAN OF DISTRIBUTION
Certificates are being offered hereby in series through one or more
underwriters or groups of underwriters (the "Underwriters"). The Prospectus
Supplement will set forth the terms of offering of the series of Certificates,
including the public offering or purchase price of each class of Certificates
of such series being offered thereby or the method by which such price will be
determined and the net proceeds to the Depositor from the sale of each such
class. Such Certificates will be acquired by the Underwriters for their own
account or may be offered by the Underwriters on a best efforts basis. The
Underwriters may resell such Certificates from time to time in one or more
transactions including negotiated transactions, at fixed public offering
prices or at varying prices to be determined at the time of sale or at the
time of commitment therefor. The managing Underwriter or Underwriters with
respect to the offer and sale of a particular series of Certificates will be
set forth on the cover of the Prospectus Supplement relating to such series
and the members of the underwriting syndicate, if any, will be named in such
Prospectus Supplement
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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 Dewey Ballantine LLP,
New York, NY and by Alan L. Langus, Chief Counsel for the Depositor. Certain
legal matters relating to insolvency issues and certain federal income tax
matters concerning the Certificates will be passed upon for the Depositor by
Dewey Ballantine LLP.
FINANCIAL INFORMATION
A Trust will be formed with respect to each series of Certificates.
No Trust will have any assets or obligations prior to the issuance of the
related series of Certificates. No Trust will engage in any activities other
than those described herein or in the Prospectus Supplement. Accordingly, no
financial statement with respect to any Trust is included in this Prospectus
or will be included in the Prospectus Supplement.
The Depositor has determined that its financial statements are not
material to the offering made hereby.
A Prospectus Supplement and the related Form 8-K (which will be
incorporated by reference to the Registration Statement) may contain financial
statements of the related Credit Enhancer, if any.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
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APPENDIX
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS
Page
1986 Act...........................................53
1996 Act...........................................60
Agreement...........................................1
AMTI...............................................60
Annual Reduction...................................48
Applicable Accounting Standards....................32
Balloon Loans.......................................6
Beneficial Owners...................................4
BIF................................................33
Book Entry Certificates.............................4
Certificate Account................................12
Certificate Interest Rate..........................10
Certificate Principal Balance.......................9
Certificate Register...............................10
Certificate Registrar..............................10
Certificateholder..................................66
Certificates........................................1
Clearing Agency.....................................4
Clearing Agency Participants........................4
Code................................................5
Companion Certificates.............................11
Compound Interest Certificates.....................10
Contract Loan Schedule.............................31
Contract Pool......................................17
Contracts..........................................17
Conventional Multifamily Loans......................1
Cooperative Loans..................................14
Cooperatives........................................1
Credit Enhancement...........................4, 7, 18
Credit Enhancer.....................................9
Custodial Account..................................24
Cut-Off Date.......................................10
Debt Service Coverage Ratio........................16
Defective Mortgage Loan............................32
Delivery Date.......................................9
Deposit Date.......................................32
Depositor...........................................1
Disqualified Organization..........................61
Distribution Date..................................11
DOL................................................50
Due Dates..........................................16
Eligible Investments...............................33
Equity Participation...............................16
ERISA...............................................5
Events of Default..................................35
FDIC...............................................24
FHA.................................................1
FHA-Insured Multifamily Loans.......................1
FHLMC...............................................2
Financial Guaranty Insurance Policy................19
Financial Guaranty Insurer.........................19
FNMA................................................2
Garn-St. Germain Act...............................41
GNMA................................................2
HUD................................................46
Insurance Paying Agent.............................19
Insurance Proceeds.................................23
Insured Payment....................................19
Interest Accrual Period............................12
Liquidation Proceeds...............................23
Loan-to-Value Ratio................................15
Lock-out Expiration Date...........................16
Lock-out Period....................................16
Manufactured Home..................................17
Manufactured Home Loans............................45
Mark to Market Regulations.........................59
Master Servicer.....................................1
MBS.............................................2, 17
MBS Agreement......................................17
MBS Issuer.........................................17
MBS Servicer.......................................17
MBS Trustee........................................18
Monthly Advance....................................24
Mortgage Assets.....................................1
Mortgage Loan Rate.................................16
Mortgage Loans......................................1
Mortgage Notes.....................................14
Mortgage Pool Insurance Policy.....................20
Mortgage Rates.....................................15
Mortgage-Backed Securities......................2, 17
Mortgaged Properties...............................14
Mortgages..........................................14
Mortgagors.........................................23
Multifamily Loans...................................1
Multifamily Properties.............................14
NCUA...............................................24
Net Leases.........................................17
Net Operating Income...............................16
Noneconomic Residual Interest......................62
Non-Priority Certificates..........................11
Nonrecoverable Advance.............................24
Non-U.S. Person....................................65
Notional Principal Balance.....................10, 12
OID Regulations....................................51
Original Value.....................................15
OTS................................................41
Owners..........................................4, 11
Partnership Interests..............................71
Pass-Through Entity................................61
Pass-Through Rate...................................3
Plans..............................................50
Policy Statement...................................49
Pool Insurer.......................................20
Pre-Funding Account.................................3
Pre-Funding Agreement...............................3
Prepayment Assumption..............................54
Prepayment Premium.................................16
Principal Balance..................................15
Principal Prepayments..............................12
Priority Certificates..............................11
Property Improvement Loans.........................45
PTE 83-1...........................................50
Record Date........................................11
Regular Certificateholder..........................53
Regular Certificates...........................52, 65
REIT...............................................52
Relief Act..........................................8
REMIC........................................1, 5, 52
REMIC Certificates.................................51
REMIC Pool.........................................52
REMIC Regulations..................................51
Remittance Date....................................24
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Remittance Rate....................................24
Reserve Fund.......................................22
Residual Certificateholders........................57
Residual Certificates..............................52
Retail Class Certificate...........................53
SAIF...............................................33
Scheduled Amortization Certificates................11
Seller..............................................1
Senior Certificates................................19
Servicer............................................1
SMMEA...............................................5
Special Allocation Certificates....................11
Special Hazard Insurance Policy....................21
Special Hazard Insurer.............................21
Standard Certificate...............................66
Stripped Certificateholder.........................69
Stripped Certificates..........................66, 68
Subordinated Certificates..........................19
Title I Contracts..................................45
Title I Loans......................................45
Title I Program....................................45
TMP................................................52
Trust...............................................1
Trustee.............................................1
U.S. Person........................................62
UCC................................................39
Underwriters.......................................72
VA 2
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The expenses expected to be incurred in connection with the
issuance and distribution of the securities being registered, other than
underwriting compensation, are as set forth below. All such expenses except
for the registration fees are estimated.
SEC Registration Fee $262,845
Legal Fees and Expenses* **
Accounting Fees and Expenses* **
Trustee's Fees and Expenses* **
(including counsel fees)
Printing and Engraving Fees* **
Blue Sky Fees and Expenses* **
Rating Agency Fees* **
Miscellaneous* **
Total $262,845
========
- ----------------
* Estimated in accordance with Item 511 of Regulation S-K.
** To be filed by amendment.
Item 15. Indemnification of Directors and Officers.
The form of Underwriting Agreement filed as Exhibit 1.1 to
this Registration Statement on Form S-3 provides for indemnification by each
Underwriter of any officer, director or controlling person of the Registrant
who becomes subject to liability arising out of an untrue or alleged untrue
statement of a material fact contained in this Registration Statement, the
Prospectus filed herewith or any Preliminary Prospectus, related Prospectus
Supplement or related Preliminary Prospectus Supplement, or omission or
alleged omission, that was made in reliance on written information provided to
the Registrant by such Underwriter.
The Certificate of Incorporation and Bylaws for the
Registrant filed as Exhibits 3.1 and 3.2 to this Registration Statement on
Form S-3 provide for indemnification of directors and officers to the full
extent permitted by Delaware law. Section 145 of the Delaware General
Corporation Law provides, in substance, that Delaware corporations shall have
the power, under specified circumstances, to indemnify their directors,
officers, employees and agents in connection with actions, suits or proceeding
brought against them by a third party or in the right of the corporation, by
reason of the fact that they were or are such directors, officers, employees
or agents, against expenses incurred in any such action, suit or proceeding.
The Bylaws also provide that the Registrant may, to the full
extent permitted by law, purchase and maintain insurance on behalf of any
corporate agent against any liability which may be asserted against him.
1
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Item 16. Exhibits.
(a) Financial Statements:
None.
(b) Exhibits:
**1.1 -- Form of Underwriting Agreement.
**3.1 -- Certificate of Incorporation of ContiSecurities
Asset Funding Corp.
**3.2 -- By-Laws of ContiSecurities Asset Funding Corp.
**4.1 -- Form of Pooling and Servicing Agreement.
***5.1 -- Opinion of Dewey Ballantine LLP
with respect to the securities being registered.
***8.1 -- Opinion of Dewey Ballantine LLP with respect to tax
matters (included as part of Exhibit 5.1).
***23.1 -- Consent of Dewey Ballantine LLP
(included as part of Exhibit 5.1).
***23.2 -- Consent of Independent Auditor of Certificate Insurer.
**24.1 -- Powers of Attorney (included on signature page).
- ---------------------
** Incorporated by reference to the respective exhibits of the same
numbers of the Company's Registration Statement on Form S-3,
Registration No. 333-19427.
*** To be filed by amendment.
Item 17. Undertakings.
A. Undertaking in Respect of Indemnification. Insofar as
indemnifications for liabilities arising under the Securities Act of 1933 may
be permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
B. Undertaking pursuant to Rule 415.
(1) to file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration Statement:
2
<PAGE>
(i) to include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) to reflect in the prospectus any facts or
events arising after the effective date of this Registration
Statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represents
a fundamental change in the information set forth in this
Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the
total dollar volume of securities offered would not exceed
that which is registered) and any deviation from the low or
high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20%
change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective
Registration Statement;
(iii) to include any material information with
respect to the plan of distribution not previously disclosed
in this Registration Statement or any material change to
such information in this Registration Statement;
provided, however, that paragraphs (i) and (ii) do not apply
if the Registration Statement is on Form S-3 or Form S-8,
and the information required to be included in a
post-effective amendment by those paragraphs is contained in
periodic reports filed with or furnished to the Commission
by the Registrant pursuant to Section 13 or Section 15(d) of
the Securities Exchange Act of 1934 that are incorporated by
reference in the Registration Statement.
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof;
(3) To remove from registration by means of post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
C. Undertaking pursuant to Rule 430A.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part
of this registration statement as of the time it was declared effective.
3
<PAGE>
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
4
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933,
the Registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form S-3 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of New York, State of New York on the
19th day of August 1998.
CONTISECURITIES ASSET FUNDING CORP.
By: /s/ Peter Abeles
-------------------------------
Name: Peter Abeles
Title: President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose
signature appears below constitutes and appoints Robert E. Riedl, James E.
Moore, Alan L. Langus or Peter Abeles, or any of them, his true and lawful
attorney-in-fact and agent with full power of substitution and resubstitution,
for him or her and in his name, place and stead, in any and all capacities, to
sign any and all amendments (including post-effective amendments) to this
Registration Statement, and to file the same with all exhibits thereto, and all
documents in connection therewith, with the Securities and Exchange Commission,
granting said attorney-in-fact and agent and each of them, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Peter Abeles President (Principal Executive August 19, 1998
- ----------------------------- Officer)
Peter Abeles
/s/ Robert E. Riedl Vice President (Principal Financial August 19, 1998
- ----------------------------- and Accounting Officer)
Robert E. Riedl
/s/ James J. Bigham Director August 19, 1998
- ------------------------------
James J. Bigham
/s/ Joseph G. Krassy Director August 19, 1998
- ------------------------------
Joseph G. Krassy
/s/ James E. Moore Director August 19, 1998
- ------------------------------
James E. Moore
5
<PAGE>
EXHIBIT INDEX
</TABLE>
<TABLE>
<CAPTION>
Exhibit Page
No. Description No.
------- ----------- ----
<S> <C> <C>
**1.1 Form of Underwriting Agreement.....................................................
**3.1 Certificate of Incorporation of ContiSecurities Asset Funding Corp.................
**3.2 By-Laws of ContiSecurities Asset Funding Corp......................................
**4.1 Form of Pooling and Servicing Agreement............................................
***5.1 Opinion of Dewey Ballantine LLP
with respect to the securities being registered.................................
***8.1 Opinion of Dewey Ballantine LLP
with respect to tax matters (included
as part of Exhibit 5.1).........................................................
***23.1 Consent of Dewey Ballantine LLP
(included as part of Exhibit 5.1)...............................................
***23.2 Consent of Independent Auditor of Certificate insurer
**24.1 Powers of Attorney (included on signature page).....................................
</TABLE>
- ------
** Incorporated by reference to the respective exhibits of the same numbers
of the Company's Registration Statement on Form S-3, Registration No. 333-39505.
*** To be filed by amendment.
6
<PAGE>
As filed with the Securities and Exchange Commission on August 19, 1998
Registration Statement No. 333-______
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------------
EXHIBITS TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------------------
CONTISECURITIES ASSET FUNDING CORP.
(Exact name of registrant as specified in governing instruments)
Delaware 13-2937238
(State or other jurisdiction (IRS Employee
of incorporation or organization) Identification Number)
277 Park Avenue
New York, New York 10172
(212) 207-2840
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
--------------------------------------
James E. Moore
President
ContiSecurities Asset Funding Corp.
277 Park Avenue
New York, New York 10172
(212) 207-2842
Fax: (212) 207-5251
(Name and Address of agent for service)
--------------------------------------
Please send copies of communication to:
Christopher DiAngelo Esq. Alan L. Langus, Esq.
DEWEY BALLANTINE LLP Chief Counsel
1301 Avenue of the Americas Contitrade Service, L.L.C.
New York, New York 10038 277 Park Avenue, 38th Floor
Tel: (212) 259-8000 New York, New York 10172
Fax: (212) 259-6333 Tel: (212) 207-2822
Fax: (212) 207-2937
