<PAGE>
As filed with the Securities and Exchange Commission on August 28, 1998
Registration Statement No. 333-61863
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
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 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)
-----------------------------------------------------------------
Peter Abeles
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 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.
---------------------------
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).
================================================================================
<PAGE>
FORM OF PROSPECTUS SUPPLEMENT
-----------------------------
VERSION 1
(Home Mortgage Loans)
<PAGE>
SUBJECT TO COMPLETION, DATED __________, 199_ VERSION 3
PROSPECTUS SUPPLEMENT
(To Prospectus Dated ________, 199__,
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PRELIMINARY PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY
SUCH STATE.
$-----------
_______________ Home Equity Loan Trust 199__-__
$___________ ____% Class A-1 Certificates
$___________ ____% Class A-2 Certificates
$__________ ____% Class A-3 Certificates
$__________ ____% Class A-4 Certificates
$__________ ____% Class A-5 Certificates*
$__________ Class A-6 Adjustable Rate Certificates
----------------------------
[Insert name of Servicer]
Servicer
CONTISECURITIES ASSET FUNDING CORP.
Depositor
----------------------------
The _______________ Home Equity Loan Pass-Through Certificates, Series
199__-__ (the "Certificates") will consist of (i) the Class A-1 Certificates,
Class A-2 Certificates, Class A-3 Certificates, Class A-4 Certificates and Class
A-5 Certificates (collectively, the "Fixed Rate Certificates"), (ii) the Class
A-6 Certificates (the "Adjustable Rate Certificates") and the Class A-7IO
Certificates (collectively, with the Fixed Rate Certificates and the Adjustable
Rate Certificates, the "Class A Certificates"), (iii) one or more classes of
subordinate Certificates and (iv) a residual class (the "Class R Certificates";
and together with such other subordinate Certificates, the "Subordinate
Certificates"). Only the Class A Certificates are offered hereby.
The Certificates represent undivided ownership interests in one of two
pools (each, a "Home Equity Loan Group") of fixed and adjustable rate mortgage
loans (the "Home Equity Loans") held by _______________ Home Equity Loan Trust
199__-__ (the "Trust"). The Fixed Rate Certificates will represent undivided
ownership interests in the Home Equity Loans in the Fixed Rate Group, which are
secured by first and second lien mortgages or deeds of trust. The Class A-6
Certificates will represent undivided ownership interests in the Home Equity
Loans in the Adjustable Rate Group, which are secured solely by first lien
mortgages or deeds of trust. The Class A Certificates also represent undivided
ownership interest in all monies due under the respective Home Equity Loans
(other than Retained Yield referred to herein) after _______, 199_ (the "Cut-Off
Date"), security interests in the properties which secure the Home Equity Loans
(the "Mortgaged Properties"), a certificate guaranty insurance policy, funds on
deposit in certain trust accounts, and certain other property. The Home Equity
Loans were originated or purchased by the Seller. The Trust will be created
pursuant to a Pooling and Servicing Agreement (the "Pooling and Servicing
Agreement") to be dated as of ________, 199_, among the Depositor, the Seller,
the Servicer, _______________, as Master Servicer and
_______________________________, as Trustee (the "Trustee"). For a discussion of
significant matters affecting investment in the Certificates, see "Risk Factors"
beginning on Page S-13 herein and beginning on Page 6 in the related Prospectus.
(Cover continued on next page)
----------
THE CLASS A CERTIFICATES REPRESENT BENEFICIAL INTERESTS IN THE TRUST ONLY AND DO
NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF THE DEPOSITOR, THE SELLER, THE
SERVICER OR ANY OF THEIR AFFILIATES. NEITHER THE CLASS A CERTIFICATES NOR THE
MORTGAGE LOANS ARE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
----------
The Class A Certificates will be purchased by the Underwriters from the
Depositor and will be offered by the Underwriters from time to time to the
public in negotiated transactions or otherwise at varying prices to be
determined at the time of sale. Proceeds to the Depositor from the sale of the
Class A Certificates will be approximately $_______________, plus accrued
interest on the Fixed Rate Certificates at the applicable Pass-Through Rate from
________, ____ to, but not including, the Closing Date, before deducting
expenses payable by the Depositor estimated to be approximately
$_______________.
The Class A Certificates are offered subject to prior sale, when, as,
and if accepted by the Underwriters and subject to the Underwriters' right to
reject orders in whole or in part. It is expected that delivery of the Class A
Certificates will be made in book-entry form through the facilities of The
Depository Trust Seller, CEDEL S.A. and the Euroclear System on or about
_________, 199_. The Class A Certificates will be offered in Europe and the
United States of America.
- --------------
* The Class A-5 Pass-Through Rate will be subject to certain limitations
described in the Summary herein.
[UNDERWRITERS]
The date of this Prospectus Supplement is ________, 199_
<PAGE>
(Cover continued from previous page)
On or before the issuance of the Certificates, the Depositor will
obtain from __________________________ (the "Certificate Insurer") a certificate
guaranty insurance policy relating to the Class A Certificates (the "Certificate
Insurance Policy") in favor of the Trustee. The Certificate Insurance Policy
will provide for a 100% coverage of the principal amount of, and scheduled
interest due on, the Class A Certificates.
[Guarantor Logo]
The Home Equity Loan Pool will be divided into two groups (each, a
"Home Equity Loan Group" or a "Group"). The Fixed Rate Certificates will
represent an undivided ownership interest in a group of fixed-rate Home Equity
Loans (the "Fixed Rate Group"). The Adjustable Rate Certificates will represent
an undivided ownership interest in a group of adjustable-rate Home Equity Loans
(the "Adjustable Rate Group").
The Pooling and Servicing Agreement provides that additional fixed rate
mortgage loans (the "Subsequent Home Equity Loans") may be purchased by the
Trust from the Depositor from time to time on or before __________, 199_ from
funds on deposit in the Pre-Funding Account. All Subsequent Home Equity Loans so
acquired by the Trust will be assigned to the Fixed Rate Group. On the Closing
Date an aggregate cash amount of approximately $_____________ will be deposited
with the Trustee in the Pre-Funding Account to be used to acquire Subsequent
Home Equity Loans for the Fixed Rate Group.
It is a condition to issuance of the Class A Certificates that the
Class A Certificates be rated "Aaa" by Moody's Investors Service and "AAA" by
Standard and Poor's Ratings Group.
Distributions of interest will be made to the Owners of the
Certificates on the 25th day of each month (or, if such day is not a business
day, the next business day) beginning ____________, 199_. Interest will be
passed through on each Payment Date to the Owners of the Class A Certificates
based on the related Certificate Principal Balance (as defined herein), and at
the rate applicable to each Class of the Class A Certificates (each, a
"Pass-Through Rate"). The Pass-Through Rate for each Class of the Fixed Rate
Certificates is set out on the cover hereof. The Pass-Through Rate for the
Adjustable Rate Certificates adjusts monthly based upon one-month LIBOR (as
defined herein) or as otherwise described herein. Distributions in reduction of
the Certificate Principal Balances will be made on each Payment Date in the
manner and the amounts described herein. Distributions on the Subordinate
Certificates are subordinate to distributions on the Class A Certificates to the
extent described herein.
The yield to investors on the Class A Certificates sold at prices other
than par may be extremely sensitive to the rate and timing of principal payments
(including prepayments, repurchases, defaults and liquidations) on the Home
Equity Loans, which may vary over time. See "Prepayment and Yield
Considerations" herein and "Risk Factors" and "Yield, Prepayment and Maturity
Considerations" in the Prospectus.
An election will be made to treat certain assets of the Trust as a
"real estate mortgage investment conduit" (a "REMIC") for federal income tax
purposes. All of the Class A Certificates will constitute "regular interests" in
a REMIC. See "Certain Federal Income Tax Consequences" herein and in the
Prospectus.
----------
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE CLASS A CERTIFICATES, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS TO WHICH IT RELATES. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS
TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
The Certificates offered by this Prospectus Supplement will be part of
a separate series of Certificates being offered by the Depositor pursuant to its
Prospectus dated _______, 199_, of which this Prospectus Supplement is a part
and which accompanies this Prospectus Supplement. The Prospectus contains
important information regarding this offering which is not contained herein, and
prospective investors are urged to read the Prospectus and this Prospectus
Supplement in full.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission a
Registration Statement under the Securities Act of 1933 with respect to the
Certificates. This Prospectus Supplement and the related Prospectus, which form
a part of the Registration Statement, omit certain information contained in such
Registration Statement pursuant to the Rules and Regulations of the Commission.
The Registration Statement can be inspected and copied at the Public Reference
Room of the Commission at 450 Fifth Street, N.W., Washington, D.C., and the
Commission's regional offices at Seven World Trade Center, 13th Floor, New York,
New York 10048, and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such materials can be obtained at prescribed
rates from the Public Reference Section of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549.
<PAGE>
REPORTS TO OWNERS
Monthly and annual reports concerning the Certificates and the Trust
will be sent by the Trustee to the Owners of Class A Certificates. So long as
any Class A Certificate is in book-entry form, such reports will be sent to Cede
& Co., as the nominee of DTC and as Owner of such Class A Certificates pursuant
to the Pooling and Servicing Agreement. DTC will supply such reports to Owners
of any such Class A Certificates in accordance with its procedures.
<PAGE>
TABLE OF CONTENTS
Prospectus Supplement
Page
GLOBAL CLEARANCE, SETTLEMENT AND TAX
DOCUMENTATION PROCEDURES.................................................Annex I
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS.................................A-1
AUDITED FINANCIAL STATEMENTS FOR THE
CERTIFICATE INSURER..........................................................B-1
UNAUDITED FINANCIAL STATEMENTS FOR THE
CERTIFICATE INSURER..........................................................C-1
<PAGE>
SUMMARY OF TERMS
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus Supplement and the
accompanying Prospectus. Reference is made to the Index of Principal Defined
Terms for the location of certain capitalized terms.
Issuer: _______________ Home Equity Loan Trust 199__-__
(the "Trust").
Certificates Offered: $___________ Home Equity Loan Pass-Through
Certificates, Series 199__-__, to be issued in
the following Classes (each, a "Class"):
Initial Certificate Pass-Through
Principal Balance Rate Class
$__________ ____% Class A-1 Certificates
$__________ ____% Class A-2 Certificates
$__________ ____% Class A-3 Certificates
$__________ ____% Class A-4 Certificates
$__________ ____% (1) Class A-5 Certificates
$__________ (2) Class A-6 Certificates
(1) The Pass-Through Rate with respect to the Class A-5 Certificates shall
be the lower of ____% and the weighted average of the Coupon Rates of
each Home Equity Loan in the Fixed Rate Group less ____% representing
the sum of the rates at which the Servicing Fee, the Premium Amount and
the Trustee Fee are calculated (except as otherwise set forth in the
Pooling and Servicing Agreement). Approximately ____% of the Initial
Home Equity Loans in the Fixed Rate Group by Loan Balance as of the
Cut-Off Date bear interest at Coupon Rates which, after the deduction
of ____% would be lower than ____%. As a result, it is unlikely that
the weighted average of the Coupon Rates of the Home Equity Loans in
the Fixed Rate Group will be less than ____%.
(2) On each Payment Date, the Class A-6 Pass-Through Rate will be equal to
the lesser of (i) the rate equal to the London interbank offered rate
for one-month United States dollar deposits ("LIBOR") (calculated as
described under "Description of the Class A Certificates - Calculation
of LIBOR" herein) plus ____% per annum and (ii) the weighted average of
the Coupon Rates on the Home Equity Loans in the Adjustable Rate Group,
less ____% per annum (the "Available Funds Cap"). The Class A-1
Certificates, Class A-2 Certificates, Class A-3 Certificates, Class A-4
Certificates and Class A-5 Certificates are collectively referred to
herein as the "Fixed Rate Certificates," and the Class A-6 Certificates
are also referred to herein as the "Adjustable Rate Certificates." The
Fixed Rate Certificates, the Adjustable Rate Certificates and the Class
A-7IO Certificates are collectively referred to as the "Class A
Certificates."
Depositor: ContiSecurities Asset
Funding Corp. (the "Depositor"), a
Delaware corporation.
Seller and Servicer: ______________________ (the
"Seller" and "Servicer"), a Delaware
corporation.
Trustee: _______________________________ (the
"Trustee"), a _______________ banking
corporation.
Cut-Off Date: As of the close of business on
_______, 199_.
Closing Date: On or about _________,
199_.
Description of
the Certificates: The Home Equity Loan
Pass-Through Certificates (the
"Certificates") will consist of the
Class A Certificates, one or more
classes of subordinate Certificates
and a residual class (the "Class R
Certificates" and together with such
other subordinate Certificates, the
"Subordinate Certificates"). The
Certificates will be issued pursuant
to a Pooling and Servicing Agreement
(the "Pooling and Servicing
Agreement") to be dated as of
________, 199_, among the Depositor,
the Seller, the Servicer and the
Trustee. Only the Class A
Certificates will be offered hereby.
S-1
<PAGE>
On the Closing Date, an aggregate
cash amount of approximately
$_____________ (the "Original
Pre-Funded Amount") will be deposited
in a trust account in the name of the
Trustee (the "Pre-Funding Account").
It is intended that additional
fixed-rate Home Equity Loans
satisfying the criteria specified in
the Pooling and Servicing Agreement
(the "Subsequent Home Equity Loans")
will be purchased by the Trust from
the Depositor from time to time on or
before __________, 199_ from funds on
deposit in the Pre-Funding Account.
Each Subsequent Home Equity Loan so
acquired by the Trust will be
assigned to the Fixed Rate Group. As
a result, the aggregate principal
balance of the Home Equity Loans in
the Fixed Rate Group will increase by
an amount equal to the aggregate
principal balance of the Subsequent
Home Equity Loans so purchased and
the amount in the Pre-Funding Account
will decrease proportionately.
As described below, on the Closing
Date, cash will be deposited in the
name of the Trustee in the
Capitalized Interest Account (as
defined herein). Funds in the
Capitalized Interest Account will be
applied by the Trustee to cover
shortfalls in interest during the
Funding Period (as described under
"Pre-Funding Account") on the Class A
Certificates attributable to the
provisions allowing for purchase of
Subsequent Home Equity Loans.
Denominations: The Class A Certificates are
issuable in book entry form in
minimum original principal amounts of
$_____ and integral multiples
thereof.
The Home Equity Loans: The mortgage loans to be conveyed
to the Trust by the Depositor on the
Closing Date (the "Initial Home
Equity Loans") consist of ______
fixed and adjustable rate
conventional mortgage loans evidenced
by promissory notes (the "Notes")
secured by first and second lien
deeds of trust, security deeds or
mortgages (the "Mortgages"), which
are located in _____ states and the
District of Columbia. The properties
securing the Initial Home Equity
Loans (the "Properties") consist
primarily of single-family residences
(which may be attached, detached,
part of a two-to-four family
dwelling, a condominium unit or a
unit in a planned unit development)
and also include mixed use
properties. The Properties may be
owner-occupied and non-owner occupied
investment properties. No Combined
Loan-to-Value Ratio (based upon
appraisals made at the time of
origination) exceeded _____% as of
the Cut-Off Date. The Initial Home
Equity Loans are [not] insured by
either primary or pool mortgage
insurance policies; however, certain
distributions due to the Owners of
the Class A Certificates (the
"Owners") are insured by the
Certificate Insurer pursuant to the
Certificate Insurance Policy. See
"Credit Enhancement" herein. The Home
Equity Loans are not guaranteed by
the Seller or any affiliate thereof.
The Home Equity Loans will be
serviced by the Servicer generally in
accordance with the standards and
procedures required by FNMA for FNMA
mortgage-backed securities.
Unless otherwise noted, all
statistical percentages in this
Prospectus Supplement are measured by
the aggregate principal balance of
the Initial Home Equity Loans (the
"Original Aggregate Loan Balance") or
of the Initial Home Equity.
Loans in the applicable Home Equity
Loan Group, in each case as of the
CutOff Date. The statistical
characteristics of the Home Equity
Loans will vary upon the transfer
into the Fixed Rate Group of
Subsequent Home Equity Loans.
Fixed Rate Group. As of the Cut-Off
Date, the average Loan Balance of the
Initial Home Equity Loans in the
Fixed Rate Group was $_________; the
interest rates (the "Coupon Rates")
of such Initial Home Equity Loans
ranged from ____% to _____%; the
weighted average Loan-to-Value Ratio
of such Initial Home Equity Loans was
_____%; the weighted average Combined
Loan- to-Value Ratio of the Initial
Home Equity Loans was _____%; the
weighted average Coupon Rate of such
Initial Home Equity Loans was _____%;
the weighted average of the Coupon
Rate being retained by the Seller and
not being sold to the Trust (the
"Retained Yield") for such Initial
Home Equity Loans was _______%; the
weighted average remaining term to
maturity of such Initial Home Equity
Loans was _____ months. The remaining
terms to maturity as of the Cut-Off
Date of the Initial Home Equity Loans
in the Fixed Rate Group ranged from
_____ months to _____ months. The
maximum Loan Balance of the Home
S-2
<PAGE>
Equity Loans in the Fixed Rate Group
as of the Cut-Off Date was
$__________. Initial Home Equity
Loans in the Fixed Rate Group
containing "balloon" payments
represented not more than _____% of
the Original Aggregate Loan Balance
of the Fixed Rate Group. No Initial
Home Equity Loan in the Fixed Rate
Group will mature later than
________, ____. _____ of the Initial
Home Equity Loans in the Fixed Rate
Group are secured by first mortgages
representing in the aggregate _____%
of the Original Aggregate Loan
Balance of the Fixed Rate Group and
____ of the Initial Home Equity Loans
in the Fixed Rate Group are secured
by second lien mortgages representing
in the aggregate _____% of the
Original Aggregate Loan Balance of
the Fixed Rate Group. As a percentage
of the Original Aggregate Loan
Balance of the Fixed Rate Group,
_____% were secured by mortgages on
single-family detached dwellings,
____% by mortgages on single-family
attached dwellings, ____% by
mortgages on two-to-four family
dwellings, ____% by condominiums, and
____% by other types of dwellings.
See "The Home Equity Loan Pool --
Initial Home Equity Loans -- Fixed
Rate Group" herein.
Adjustable Rate Group. [All] of the
Home Equity Loans in the Adjustable
Rate Group bear interest at rates
that adjust semiannually based on the
London interbank offered rate for
six-month United States dollar
deposits. [Other indices.] The Coupon
Rates with respect to all of the Home
Equity Loans in the Adjustable Rate
Group are subject to periodic and
lifetime interest rate adjustment
caps. See "The Home Equity Loan Pool
-- Initial Home Equity Loans -
Adjustable Rate Group."
As of the Cut-Off Date, the average
Loan Balance of the Initial Home
Equity Loans in the Adjustable Rate
Group was $_________; the Coupon
Rates of such Initial Home Equity
Loans ranged from ____% to _____%;
the weighted average Loan-to-Value
Ratio of such Initial Home Equity
Loans was _____%; the weighted
average Coupon Rate of such Initial
Home Equity Loans was _____%; the
weighted average remaining term to
maturity of such Initial Home Equity
Loans was _____ months. The remaining
terms to maturity as of the Cut-Off
Date of the Initial Home Equity Loans
in the Adjustable Rate Group ranged
from _____ months to _____ months.
The maximum Loan Balance of the Home
Equity Loans in the Adjustable Rate
Group as of the Cut-Off Date was
$__________. None of the Initial Home
Equity Loans in the Adjustable Rate
Group contain "balloon" payments. No
Initial Home Equity Loan in the
Adjustable Rate Group will mature
later than ________, ____. All of the
Initial Home Equity Loans in the
Adjustable Rate Group are secured by
first mortgages representing in the
aggregate ___% of the Original
Aggregate Loan Balance of the
Adjustable Rate Group and none of the
Initial Home Equity Loans in the
Adjustable Rate Group are secured by
a second lien mortgage. As a
percentage of the Original Aggregate
Loan Balance of the Adjustable Rate
Group, _____% were secured by
mortgages on single-family detached
dwellings, ____% by mortgages on
single-family attached dwellings,
____% by mortgages on two-to-four
family dwellings and ____% by
condominiums. See "The Home Equity
Loan Pool -- Initial Home Equity
Loans - Adjustable Rate Group"
herein.
All of the Home Equity Loans in the
Adjustable Rate Group have maximum
Coupon Rates. The weighted average
maximum Coupon Rate of the Initial
Home Equity Loans in the Adjustable
Rate Group is _____%, with maximum
Coupon Rates that range from
approximately _____% to _____%. The
Initial Home Equity Loans in the
Adjustable Rate Group have a weighted
average gross margin as of the
Cut-Off Date of ____%. The gross
margin for the Initial Home Equity
Loans in the Adjustable Rate Group
ranges from ____% to -----%.
Final Scheduled
Payment Dates: The Final Scheduled Payment
Dates for each of the respective
classes of Class A Certificates are
as follows, although it is
anticipated that the actual final
Payment Date for each Class may occur
earlier than the Final Scheduled
Payment Date. See "Prepayment and
Yield Considerations" herein.
S-3
<PAGE>
Final Scheduled
Payment Date
<TABLE>
<CAPTION>
<S> <C> <C>
Class A-1 Certificates: ____________, ____
Class A-2 Certificates: ____________, ____
Class A-3 Certificates: ____________, ____
Class A-4 Certificates: ____________, ____
Class A-5 Certificates: ____________, ____
Class A-6 Certificates: ____________, ____
</TABLE>
Distributions--General: On the _____ day of each month,
or if such day is not a Business Day,
then the next succeeding Business
Day, commencing ____________, 199_
(each such day being a "Payment
Date"), the Trustee will be required
to distribute to the Owners of the
Fixed Rate Certificates of record as
of the last day of the calendar month
immediately preceding the calendar
month in which such Payment Date
occurs and to the Owners of the
Adjustable Rate Certificates of
record as of the day immediately
preceding such Payment Date (each
such date, the "Record Date") the
"Class A Distribution Amount" which
shall be the sum of (x) Current
Interest and (y) the Principal
Distribution Amount (each as defined
below).
For each Payment Date, interest due
with respect to the Fixed Rate
Certificates will be interest which
has accrued thereon during the
calendar month immediately preceding
the month in which such Payment Date
occurs; the interest due with respect
to the Adjustable Rate Certificates
will be the interest which has
accrued thereon at the Class A-6
Pass-Through Rate from the preceding
Payment Date (or from the Closing
Date in the case of the first Payment
Date) to and including the day prior
to the current Payment Date. Each
period referred to in the prior
sentence relating to the accrual of
interest is the "Accrual Period" for
the related Class of Class A
Certificates. All calculations of
interest on the Fixed Rate
Certificates will be made on the
basis of a 360-day year assumed to
consist of twelve 30-day months.
Calculations of interest on the
Adjustable Rate Certificates will be
made on the basis of the actual
number of days elapsed in the related
Accrual Period and in a year of 360
days.
A "Business Day" is any day other
than a Saturday, Sunday or a day on
which banking institutions in New
York City or in the city in which the
corporate trust office of the Trustee
is located are authorized or
obligated by law or executive order
to close.
Allocations of Interest The Class A Distribution Amount
and Princial: relating to each Group of Home
Equity Loans for each Payment Date
(to the extent funds are available
therefor) shall be allocated among
the Class A Certificates in the
following amounts and in the
following order of priority:
(i) First, to the Owners of the Class
A Certificates of the related Group,
the related Class A Current Interest
on a pro rata basis without any
priority among such Class A
Certificates.
(ii) Second, to the Owners of the
related Class of Class A Certificates
(A) the Principal Distribution Amount
(as defined below under the heading
"Principal") applicable to the Fixed
Rate Group shall be distributed as
follows: (I) first, to the Owners of
the Class A-1 Certificates until the
Class A-1 Certificate Principal
Balance is reduced to zero; (II)
second, to the Owners of the Class
A-2 Certificates until the Class A-2
Certificate Principal Balance is
reduced to zero; (III) third, to the
Owners of the Class A-3 Certificates,
until the Class A-3 Certificate
Principal Balance is reduced to zero;
(IV) fourth, to the Owners of the
Class A-4 Certificates, until the
Class A-4 Certificate Principal
Balance is reduced to zero; and, (V)
fifth, to the Owners of the Class A-5
Certificates, until the Class A-5
Certificate Principal Balance is
reduced to zero and (B) the Principal
Distribution Amount applicable to the
Adjustable Rate Group shall be
distributed to the Owners of the
Class A-6 Certificates until the
Class A-6 Certificate Principal
Balance has been reduced to zero.
"Current Interest" with respect to
each Class of Class A Certificates
means, with respect to any Payment
Date (i) the aggregate amount of
interest accrued during the preceding
Accrual Period on the Certificate
Principal Balance of the related
Class A Certificates plus (ii) the
Preference Amount as it relates to
interest previously paid on such
Class of the Class A Certificates
prior to
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such Payment Date plus (iii) the
Carry Forward Amount, if any, with
respect to such Class of Class A
Certificates.
The "Carry Forward Amount" with
respect to any Class of the Class A
Certificates for any Payment Date is
the sum of (x) the amount, if any, by
which (i) the Class A Distribution
Amount allocable to such Class as of
the immediately preceding Payment
Date exceeded (ii) the amount of the
actual distribution made to the
Owners of such Class of Class A
Certificates on such immediately
preceding Payment Date plus (y) 30
days' interest on such amount,
calculated at the related
Pass-Through Rate in effect with
respect to such Class of Class A
Certificates.
Principal: The credit enhancement provisions
of the Trust result in a limited
acceleration of principal payments to
the Owners of the Classes of Class A
Certificates; such provisions are
more fully described under "Credit
Enhancement-- Overcollateralization
Provisions" and "Credit Enhancement--
Crosscollateralization Provisions"
herein. Such credit enhancement
provisions also have an effect on the
weighted average lives of the Class A
Certificates; see "Prepayment and
Yield Considerations" herein. In
addition, the following discussion
makes use of a number of technical
defined terms which are defined under
"Credit Enhancement--
Overcollateralization Provisions" and
"Credit Enhancement--
Crosscollateralization Provisions"
herein
The Fixed Rate Certificates are
"sequential pay" classes such that
the Owners of the Class A-5
Certificates will receive no payments
of principal until the Class A-4
Certificate Principal Balance has
been reduced to zero, the Owners of
the Class A-4 Certificates will
receive no payments of principal
until the Class A-3 Certificate
Principal Balance has been reduced to
zero, the Owners of the Class A-3
Certificates will receive no payments
of principal until the Class A-2
Certificate Principal Balance has
been reduced to zero, and the Owners
of the Class A-2 Certificates will
receive no payments of principal
until the Class A-1 Certificate
Principal Balance has been reduced to
zero.
On each Payment Date, distributions
in reduction of the Certificate
Principal Balance of the Class A
Certificates will be made in the
amounts described herein. The
"Principal Distribution Amount" for
each Home Equity Loan Group and
Payment Date shall be the lesser of:
(a) the Total Available Funds (as
defined below) for the related Home
Equity Loan Group plus any related
Insured Payments minus the related
Current Interest with respect to the
related Class A Certificates; and
(b) the excess, if any, of (i) the
sum of:
(A) the Preference Amount with
respect to principal owed to the
Owners of the Class A Certificates
for the related Group that remains
unpaid as of such Payment Date;
(B) the principal actually
collected by the Servicer with
respect to the Home Equity Loans in
the related Home Equity Loan Group
during the related Remittance Period;
(C) the Loan Balance of each
Home Equity Loan in the related Home
Equity Loan Group that was
repurchased by the Seller or
purchased by the Servicer on or prior
to the related Monthly Remittance
Date, to the extent such Loan Balance
is actually received by the Trustee
on or prior to the related Monthly
Remittance Date;
(D) any Substitution Amounts
(i.e., the excess, if any, of the
Loan Balance of a Home Equity Loan
being replaced over the outstanding
principal balance of a replacement
Home Equity Loan) delivered by the
Seller on the related Monthly
Remittance Date in connection with a
substitution of a Home Equity Loan in
the related Home Equity Loan Group,
to the extent such Substitution
Amounts are actually
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<PAGE>
received by the Trustee on or prior
to the related Monthly Remittance
Date;
(E) all Net Liquidation Proceeds
actually collected by the Servicer
with respect to the Home Equity Loans
in the related Home Equity Loan Group
during the related Remittance Period
(to the extent such Net Liquidation
Proceeds are related to principal) to
the extent such Net Liquidation
Proceeds are actually received by the
Trustee on or prior to the related
Monthly Remittance Date;
(F) the amount of any
Subordination Deficit with respect to
the related Home Equity Loan Group
for such Payment Date;
(G) the portion of the proceeds
received with respect to the related
Home Equity Loan Group by the Trustee
upon termination of the Trust (to the
extent such proceeds relate to
principal);
(H) with respect to the Fixed
Rate Group only, any moneys released
from the Pre-Funding Account as a
prepayment of the Fixed Rate
Certificates on the Payment Date
which immediately follows the end of
the Funding Period; and
(I) the amount of any
Subordination Increase Amount with
respect to the related Home Equity
Loan Group for such Payment Date to
the extent of any Net Monthly Excess
Cash Flow available for such purpose;
over
(ii) the amount of any Subordination
Reduction Amount with respect to the
related Home Equity Loan Group for
such Payment Date.
The sum of Current Interest and the
Principal Distribution Amount with
respect to each Home Equity Loan
Group and any Payment Date is the
"Class A Distribution Amount" for
such Home Equity Loan Group and
Payment Date.
The "Remittance Period" with respect
to any Monthly Remittance Date is the
calendar month immediately preceding
the calendar month in which the
Monthly Remittance Date occurs. A
"Monthly Remittance Date" is any date
on which funds on deposit in the
Principal and Interest Account are
remitted to the Certificate Account,
which is the _____ day of each month,
or if such day is not a Business Day,
the next succeeding Business Day,
commencing in the month following the
month in which the Closing Date
occurs.
A "Liquidated Home Equity Loan" is,
in general, a defaulted Home Equity
Loan as to which the Servicer has
determined that all amounts that it
expects to recover on such Home
Equity Loan have been recovered
(exclusive of any possibility of a
deficiency judgment).
The Owners of the Class A
Certificates are entitled to receive
ultimate recovery of Realized Losses
which occur in the related Home
Equity Loan Group to the extent such
Realized Losses create a
Subordination Deficit in the related
Home Equity Loan Group, and payment
in recovery of such losses will be in
the form of an Insured Payment on the
next following Payment Date if not
covered through Net Monthly Excess
Cashflow from the related Home Equity
Loan Group or cross-collateralization
from the other Home Equity Loan
Group.
A "Subordination Deficit" with
respect to a Home Equity Loan Group
and a Payment Date is the amount, if
any, by which (x) the aggregate
related Class A Certificate Principal
Balance, after taking into account
all distributions to be made on such
Payment Date, exceeds (y) the sum of
(i) the aggregate Loan Balances of
the Home Equity Loans in the related
Home Equity Loan Group as of the
close of business on the last day of
the related Remittance Period and
(ii) with respect to the Fixed Rate
Group only, the amount, if any, on
deposit in the Pre-Funding Account as
of the close of
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<PAGE>
business on the last day of the
related Remittance Period.
"Preference Amount" means any amount
previously distributed to an Owner on
a Class A Certificate that is
recoverable and sought to be
recovered as a voidable preference by
a trustee in bankruptcy under the
United States Bankruptcy Code as
amended from time to time, in
accordance with a final nonappealable
order of a court having competent
jurisdiction.
Monthly Servicing Fees: The Master Servicer is entitled to a
fee (the "[Master] Servicing Fee")
equal to ____% per annum (subject to
certain exceptions set forth in the
Pooling and Servicing Agreement),
payable monthly at one-twelfth the
annual rate, of the then outstanding
principal amount of each Home Equity
Loan as of the first day of each
calendar month. [Allocation to
servicers/subservicers or separate
payment.]
Credit Enhancement: The Credit Enhancement provided for
the benefit of the Owners of the
Class A Certificates consists of (x)
the overcollateralization and
crosscollateralization mechanics
which utilize the internal cash flows
of the Trust and (y) the Certificate
Insurance Policy (as defined below).
Overcollateralization. The credit
enhancement provisions of the Trust
result in a limited acceleration of
the Class A Certificates (in the
aggregate) relative to the
amortization of the related Home
Equity Loans in the early months of
the transaction. The accelerated
amortization is achieved by the
application of certain excess
interest and excess principal to the
payment of Class A Certificate
principal. This acceleration feature
creates, with respect to each Home
Equity Loan Group,
overcollateralization (i.e., the
excess of the aggregate outstanding
Loan Balance of the Home Equity Loans
in the related Home Equity Loan
Group, over the aggregate related
Class A Certificate Principal
Balance). Once the required level of
overcollateralization is reached, and
subject to the provisions described
in the next paragraph, the
acceleration feature will cease,
until necessary to maintain the
required level of
overcollateralization.
The Pooling and Servicing Agreement
provides that, subject to certain
floors, caps and triggers, the
required level of
overcollateralization with respect to
a Home Equity Loan Group may increase
or decrease over time. An increase
would result in a temporary period of
accelerated amortization of the Class
A Certificates to increase the actual
level of overcollateralization to its
required level; a decrease would
result in a temporary period of
decelerated amortization to reduce
the actual level of
overcollateralization to its required
level.
As a result of the "sequential pay"
feature of the Fixed Rate
Certificates, any such accelerated
principal will be paid to that class
of the Fixed Rate Certificates then
entitled to receive distributions of
principal.
Crosscollateralization. In addition
to the foregoing, the Pooling and
Servicing Agreement provides for
crosscollateralization through the
application of excess amounts
generated by one Home Equity Loan
Group to fund shortfalls in Available
Funds and the required
overcollateralization level in the
other Home Equity Loan Group, subject
to certain prior debt service and
credit enhancement requirements of
such Home Equity Loan Group. See
"Prepayment and Yield
Considerations", "Credit Enhancement
--Overcollateralization Provisions"
and "Credit Enhancement --
Crosscollateralization" herein and
"Credit Enhancement" in the
Prospectus.
Certificate Insurance Policy.
__________________________, a New
York stock insurance company (the
"Certificate Insurer"), will provide
a Certificate Insurance Policy with
respect to the Class A Certificates.
Subject to the terms thereof, the
Certificate Insurance Policy
unconditionally and irrevocably
guarantees the obligation of the
Trust on any Payment Date to pay
Current Interest and any
Subordination Deficit.
The Certificate Insurance Policy is
noncancellable for any reason.
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<PAGE>
"Insured Payments" means with respect
to any Home Equity Loan Group and
Payment Date, (A) the excess, if any,
of (i) the sum of the related Current
Interest and the then existing
Subordination Deficit for the related
Home Equity Loan Group, if any, over
(ii) Total Available Funds (net of
the Premium Amount for such Home
Equity Loan Group) for such Home
Equity Loan Group (after taking into
account the portion of any Principal
Distribution Amount to be actually
distributed on such Payment Date
without regard to any Insured Payment
to be made with respect to such
Payment Date) plus (B) an amount
equal to the Preference Amount with
respect to such Home Equity Loan
Group.
Insured Payments do not cover
Realized Losses except to the extent
that a Subordination Deficit exists.
Insured Payments do not cover the
Servicer's failure to make
Delinquency Advances, except to the
extent that a Subordination Deficit
would otherwise result therefrom.
Nevertheless, the effect of the
Certificate Insurance Policy is to
guarantee the timely payment of
interest on all classes of the Class
A Certificates and the ultimate
payment of the principal amount of
the Class A Certificates.
The Certificate Insurance Policy does
not guarantee any specified rate of
prepayments, nor does the Certificate
Insurance Policy provide funds to
redeem the Certificates on any
specified date. The Certificate
Insurer's obligation under the
Certificate Insurance Policy will be
discharged to the extent that funds
are received by the Trustee for
distribution to the Owners of the
Class A Certificates. See "The
Certificate Insurer" herein.
[Pre-Funding Account: On the Closing Date, the Original
Pre-Funded Amount will be deposited
in the Pre-Funding Account which
account will be in the name of, and
maintained by, the Trustee on behalf
of the Trust and used to acquire the
Subsequent Home Equity Loans for
addition to the Fixed Rate Group.
During the period (the "Funding
Period") from and including the
Closing Date until the earliest of
(i) the date on which the amount on
deposit in the Pre-Funding Account is
less than $_______, (ii) the date on
which an event of default under the
Pooling and Servicing Agreement
occurs and (iii) __________, 199_,
the Pre-Funded Amount will be
maintained in the Pre-Funding
Account. The Original Pre- Funded
Amount will be reduced during the
Funding Period by the amount thereof
used to purchase Subsequent Home
Equity Loans in accordance with the
Pooling and Servicing Agreement. The
amount on deposit in the Pre-Funding
Account at any time is the
"Pre-Funded Amount". Subsequent Home
Equity Loans purchased by and added
to the Fixed Rate Group on any date
(each, a "Subsequent Transfer Date")
must satisfy the criteria set forth
in the Pooling and Servicing
Agreement. Any Pre-Funded Amount
remaining at the end of the Funding
Period will be distributed to the
Owners of the Fixed Rate Certificates
then entitled to receive
distributions of principal on the
Payment Date that immediately follows
the end of the Funding Period in
reduction of the Certificate
Principal Balance of such Owners'
Certificates, thus resulting in a
partial principal prepayment of such
Class of Fixed Rate Certificates as
specified herein under "Description
of the Certificates-- Distributions."
All interest and other investment
earnings on amounts on deposit in the
Pre-Funding Account will be deposited
in the Capitalized Interest Account.
The Pre-Funding Account will not be
an asset of the REMIC (as defined
herein).]
Although no assurance can be given,
it is intended that the principal
amount of Subsequent Home Equity
Loans sold to the Trust and added to
the Fixed Rate Group will require
application of substantially all of
the Original Pre-Funded Amount and it
is not intended that there will be
any material amount of principal
prepaid to the holders of the Fixed
Rate Certificates from the
Pre-Funding Account. In the event
that the Depositor is unable to sell
Subsequent Home Equity Loans to the
Trust in an amount equal to the
Original Pre-Funded Amount, principal
prepayments to Owners of the Fixed
Rate Certificates will occur on the
Payment Date in ________ 199_ in an
amount equal to the Pre- Funded
Amount remaining at the end of the
Funding Period.
Capitalized Interest Account: On the Closing Date, cash will be
deposited in a trust account (the
"Capitalized Interest Account") in
the name of, and maintained by, the
Trustee on behalf of the Trust. The
amount on deposit in the Capitalized
Interest Account, including
reinvestment income
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<PAGE>
thereon, will be used by the Trustee
to fund the excess, if any, of (i)
the sum of the amount of interest
accruing during the related Accrual
Period at the weighted average
Pass-Through Rate on all Fixed Rate
Certificates on the amount by which
the aggregate Certificate Principal
Balance of the Fixed Rate
Certificates exceeds the aggregate
Loan Balance of the Home Equity Loans
in the Fixed Rate Group plus the
Trustee and Certificate Insurer fees
accruing during the related Accrual
Period on such excess balance over
(ii) the amount of any reinvestment
income on monies on deposit in the
Pre-Funding Account; such amounts on
deposit will be so applied by the
Trustee on each Payment Date in the
Funding Period to fund such excess,
if any. Any amounts remaining in the
Capitalized Interest Account not
needed for such purpose will be paid
to the Seller at the end of the
Funding Period. The Capitalized
Interest Account will not be an asset
of the REMIC (as defined herein).
Mandatory Prepayment of
Certificates: In the event that at the end of the
Funding Period, not all of the
Original Pre- Funded Amount has been
used to acquire Subsequent Home
Equity Loans, then the Fixed Rate
Certificates then entitled to receive
payments of principal will receive a
prepayment on the Payment Date in
________ 199_.
Optional Termination: The Owners of Class R Certificates
and, in limited circumstances, the
Certificate Insurer will have the
right to purchase all the Home Equity
Loans on any Monthly Remittance Date
when the aggregate Loan Balances of
the Home Equity Loans has declined to
less than __% of the sum of (x) the
aggregate Loan Balances of all
Initial Home Equity Loans as of the
Cut-Off Date plus (y) the original
Pre-Funded Amount (the "Maximum
Collateral Amount"). See "The Pooling
and Servicing Agreement--Optional
Termination" herein.
Book-Entry Registration
of the Class A Certificates: The Class A
Certificates will initially be issued
in book-entry form. Persons acquiring
beneficial ownership interests in
such Class A Certificates
("Beneficial Owners") may elect to
hold their interests through The
Depository Trust Seller ("DTC"), in
the United States, or Centrale de
Livraison de Valeurs Mobilieres, S.A.
("CEDEL") or the Euroclear System
("Euroclear"), in Europe. Transfers
within DTC, CEDEL or Euroclear, as
the case may be, will be in
accordance with the usual rules and
operating procedures of the relevant
system. So long as the Class A
Certificates are Book-Entry
Certificates (as defined herein),
such Certificates will be evidenced
by one or more Certificates
registered in the name of Cede & Co.
("Cede"), as the nominee of DTC or
one of the European Depositaries.
Cross-market transfers between
persons holding directly or
indirectly through DTC, on the one
hand, and counterparties holding
directly or indirectly through CEDEL
or Euroclear, on the other, will be
effected in DTC through Citibank N.A.
("Citibank") or Morgan Guaranty Trust
Seller of New York ("Morgan", and
together with Citibank, the "European
Depositaries"), the relevant
depositaries of CEDEL and Euroclear,
respectively, and each a
participating member of DTC. The
Class A Certificates will initially
be registered in the name of Cede.
The interests of the Owners of such
Certificates will be represented by
book-entries on the records of DTC
and participating members thereof. No
Beneficial Owner will be entitled to
receive a definitive certificate
representing such person's interest,
except in the event that Definitive
Certificates (as defined herein) are
issued under the limited
circumstances described herein. All
references in this Prospectus
Supplement to any Class A
Certificates reflect the rights of
Beneficial Owners only as such rights
may be exercised through DTC and its
participating organizations for so
long as such Class A Certificates are
held by DTC. See "Description of the
Class A Certificates -- Book-Entry
Registration of the Class A
Certificates" herein, and Annex I
hereto, and "Description of the
Certificates--Book-Entry
Registration" in the Prospectus.
Ratings: It is a condition of issuance of the
Class A Certificates that the Class A
Certificates receive ratings of "AAA"
by Standard & Poor's Ratings Group, a
division of McGraw Hill ("S&P") and
"Aaa" by Moody's Investors Service
("Moody's"). S&P and Moody's are
referred to herein collectively as
the "Rating Agencies." A security
rating is not a recommendation to
buy, sell or hold securities, and may
be subject to revision or withdrawal
at any time by the assigning entity.
See "Prepayment and Yield
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<PAGE>
Considerations" and "Ratings" herein.
Risk Factors: Credit Considerations.
For information with regard to the
Home Equity Loans and their related
risks, see "The Home Equity Loan
Pool" herein.
Prepayment Considerations. For
information regarding the
consequences of prepayments of the
Home Equity Loans and of the failure
of the Depositor to purchase
Subsequent Home Equity Loans during
the Funding Period in an amount equal
to the Original Pre-Funded Amount,
see "Prepayment and Yield
Considerations" and "Risk
Factors"--"Sensitivity to
Prepayments" and "--The Subsequent
Home Equity Loans and the Pre-Funding
Account" herein.
Other Considerations. For a
discussion of other risk factors that
should be considered by prospective
investors in the Class A
Certificates, see "Risk Factors"
herein and in the Prospectus.
Federal Tax Aspects: An election will be made to treat
the Trust Estate (exclusive of the
Pre-Funding Account and the
Capitalized Interest Account) created
by the Pooling and Servicing
Agreement as a "real estate mortgage
investment conduit" ("REMIC"). The
Certificates (other than the Class R
Certificates) will constitute
"regular interests" in the REMIC. The
Class R Certificates will be
designated as the "residual interest"
in the REMIC.
Owners of the Class A Certificates,
including Owners that generally
report income on the cash method of
accounting, will be required to
include interest on the Class A
Certificates in income in accordance
with the accrual method of
accounting. The Class A Certificates
may be considered to have been issued
with original issue discount or at a
premium. Any such original issue
discount will be includable in the
income of the Owner as it accrues
under a method taking into account
the compounding of interest and using
__% of the Prepayment Assumption. See
"Prepayment and Yield Considerations"
and "Certain Federal Income Tax
Consequences" herein. Premium may be
deductible by the Owner either as it
accrues or when principal is
received. No representation is made
as to whether the Home Equity Loans
will prepay in accordance with __% of
the Prepayment Assumption, or any
other rate. In general, as a result
of the qualification of the Class A
Certificates as regular interests in
a REMIC, the Class A Certificates
will be treated as "regular . . .
interest(s) in a REMIC" under Section
7701(a)(19)(C) of the Internal
Revenue Code of 1986, as amended (the
"Code") and "real estate assets"
under Section 856(c) of the Code in
the same proportion that the assets
in the REMIC consist of qualifying
assets under such sections. In
addition, interest on the Class A
Certificates will be treated as
"interest on obligations secured by
mortgages on real property" under
Section 856(c) of the Code to the
extent that such Certificates are
treated as "real estate assets" under
Section 856(c) of the Code.
ERISA Considerations: As described under "ERISA
Considerations" herein, the Class A
Certificates may be purchased by
employee benefit plans that are
subject to the Employee Retirement
Income Security Act of 1974, as
amended. See "ERISA Considerations"
herein and in the Prospectus. Legal
Investment Considerations: [The Class
[A/A-6] Certificates will constitute
"mortgage related securities" for
purposes of the Secondary Mortgage
Market Enhancement Act of 1984
("SMMEA") for so long as they are
rated in one of the two highest
rating categories by one or more
nationally recognized statistical
rating organizations. As such, such
Classes of Certificates will be legal
investments for certain entities to
the extent provided in SMMEA, subject
to state laws overriding SMMEA. In
addition, institutions whose
investment activities are subject to
review by federal or state regulatory
authorities may be or may become
subject to restrictions, which may be
retroactively imposed by such
regulatory authorities, on the
investment by such institutions in
certain forms of mortgage related
securities. Furthermore, certain
states have enacted legislation
overriding the legal investment
provisions of SMMEA. In addition,
institutions whose activities are
subject to review by federal or state
regulatory authorities may be or may
become subject to restrictions, which
may be retroactively imposed by such
regulatory authorities, on the
investment by such
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<PAGE>
institutions in certain forms of
mortgage related securities.]
[Although the Fixed Rate Certificates
are expected to be rated "AAA" by S&P
and "Aaa" by Moody's, such
Certificates will not constitute
"mortgage related securities" for
purposes of the Secondary Mortgage
Market Enhancement Act of 1984
("SMMEA") because the Home Equity
Loans in the Fixed Rate Group include
second liens. Accordingly, many
institutions with legal authority to
invest in comparably rated securities
based on first mortgage loans may not
be legally authorized to invest in
the Class A Certificates.]
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<PAGE>
RISK FACTORS
Prospective investors in the Class A Certificates should consider the
following risk factors (as well as the risk factors set forth under "Risk
Factors" in the Prospectus) in connection with the purchase of the Class A
Certificates.
Sensitivity to Prepayments. A [majority] of the Home Equity Loans may
be prepaid in whole or in part at any time without penalty. [Describe Prepayment
penalty provisions, if any] In addition, a substantial portion of the Home
Equity Loans contain due-on-sale provisions which, to the extent enforced by the
Servicer, will result in prepayment of such Home Equity Loans. See "Prepayment
and Yield Considerations" herein and "Certain Legal Aspects of Mortgage
Assets--Enforceability of Certain Provisions" in the Prospectus. The rate of
prepayments on fixed-rate mortgage loans, such as the Home Equity Loans, is
sensitive to prevailing interest rates. Generally, if prevailing interest rates
fall significantly below the interest rates on the Home Equity Loans, the Home
Equity Loans are likely to be subject to higher prepayment rates than if
prevailing rates remain at or above the interest rates on the Home Equity Loans.
Conversely, if prevailing interest rates rise significantly above the interest
rates on the Home Equity Loans, the rate of prepayments is likely to decrease.
The average life of the Class A Certificates, and, if purchased at other than
par, the yields realized by Owners of the Class A Certificates will be sensitive
to levels of payment (including prepayments relating to the Home Equity Loans
(the "Prepayments")) on the Home Equity Loans. In general, the yield on a Class
A Certificate that is purchased at a premium from the outstanding principal
amount thereof will be adversely affected by a higher than anticipated level of
Prepayments of the Home Equity Loans and enhanced by a lower than anticipated
level. Conversely, the yield on a Class A Certificate that is purchased at a
discount from the outstanding principal amount thereof will be enhanced by a
higher than anticipated level of Prepayments and adversely affected by a lower
than anticipated level. See "Prepayment and Yield Considerations" herein.
[Nature of Collateral. Because ____ of the Initial Home Equity Loans,
all of which are in the Fixed Rate Group, are secured by second liens
subordinate to the rights of the mortgagee or beneficiary under the related
first mortgage or deed of trust, the proceeds from any liquidation, insurance or
condemnation proceedings with respect to such Home Equity Loans will be
available to satisfy the outstanding balance of a Home Equity Loan only to the
extent that the claims of such first mortgagee or beneficiary have been
satisfied in full, including any related foreclosure costs. In addition, a
second mortgagee may not foreclose on the property securing a second mortgage
unless it forecloses subject to the first mortgage, in which case it must either
pay the entire amount due on the first mortgage to the first mortgagee at or
prior to the foreclosure sale or undertake the obligation to make payments on
the first mortgage. In servicing second mortgages in its portfolio, it is
generally the Servicer's practice to satisfy the first mortgage at or prior to
the foreclosure sale. The Servicer may also advance funds to keep the first
mortgage current until such time as the Servicer satisfies the first mortgage.
The Trust will have no source of funds (and may not be permitted under the REMIC
provisions of the Code) to satisfy the first mortgage or make payments due to
the first mortgagee. See "The Pooling and Servicing Agreement--Servicing and
Sub-Servicing" herein.
An overall decline in the residential real estate market, the general
condition of a Property, or other factors, could adversely affect the value of
the Property such that the outstanding balance of the Home Equity Loans,
together with any senior liens on the Property, equal or exceed the value of the
Property. A decline in the value of a Property would affect the interest of the
Trust in the Property before having any effect on the interest of the related
first mortgagee, and could cause the Trust's interest in the Property to be
extinguished. If such a decline occurs, the actual rates of delinquencies,
foreclosures and losses on the Home Equity Loans could be higher than those
currently experienced in the mortgage lending industry in general. In addition,
adverse economic conditions (which may or may not affect real property values)
may affect the timely payment by borrowers of scheduled payments of principal
and interest on the Home Equity Loans and, accordingly, the actual rates of
delinquencies, foreclosures and losses with respect to the Trust.]
Risk of Home Equity Loan Rates Reducing the Class A-6 Pass-Through
Rate. The calculation of the Class A-6 Pass-Through Rate is based upon (i) the
value of an index (LIBOR) which is different from the value of the index
applicable to the Home Equity Loans as described under "The Home Equity Loan
Pool -- Initial Home Equity Loans -- Adjustable Rate Group" (either as a result
of the use of a different rate determination date or rate adjustment date) and
(ii) the weighted average on the Coupon Rates of the Adjustable Rate Group Home
Equity Loans, which are subject to periodic adjustment caps, maximum rate caps
and minimum rate floors. The Home Equity Loans in the Adjustable Rate Group
adjust semi-annually based upon the London interbank offered rate for six-month
United States dollar deposits ("Six-Month LIBOR"), whereas the Pass-Through Rate
on the Class A-6 Certificates adjusts monthly based upon LIBOR as described
under "Description of the Class A Certificates -- Calculation of LIBOR" herein,
subject to the Available Funds Cap. Consequently, the interest which becomes due
on the Home Equity Loans in the Adjustable Rate Group (net of the Servicing Fee,
the Premium Amount and the Trustee Fee related to the Adjustable Rate Group)
during any Remittance Period may not equal the amount of interest that would
accrue at LIBOR plus the margin on the Class A-6 Certificates during the related
Accrual Period. In particular, the Class A-6 Pass-Through Rate adjusts monthly,
while the interest rates of the Home Equity Loans in the Adjustable Rate Group
adjust less frequently with the result that the Available Funds Cap may limit
increases in the Class A-6 Pass-Through Rate for extended periods in a rising
interest rate environment. In addition, LIBOR and Six-Month LIBOR may respond to
different economic and market factors, and there is not necessarily a
correlation between them. Thus, it is possible, for example, that LIBOR may rise
during periods in which Six-
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<PAGE>
Month LIBOR is stable or is falling or that, even if both LIBOR and Six-Month
LIBOR rise during the same period, LIBOR may rise more rapidly than Six-Month
LIBOR. Furthermore, if the Available Funds Cap determines the Class A-6
Pass-Through Rate for a Payment Date, the value of the Class A-6 Certificates
may be temporarily or permanently reduced.
The Subsequent Home Equity Loans and the Pre-Funding Account. If the
principal amount of eligible Home Equity Loans available during the Funding
Period and sold by the Seller to the Depositor is less than 100% of the Original
Pre-Funded Amount, the Depositor will have insufficient Home Equity Loans to
sell to the Trust for addition to the Fixed Rate Group on the Subsequent
Transfer Dates, thereby resulting in a prepayment of principal to Owners of the
Fixed Rate Certificates as described herein. See "Social, Economic and Other
Factors" below. In addition, any conveyance of Subsequent Home Equity Loans is
subject to the following conditions, among others (i) each such Subsequent Home
Equity Loan must satisfy the representations and warranties specified in the
agreement pursuant to which such Subsequent Home Equity Loans are transferred to
the Trust (each a "Subsequent Transfer Agreement") and in the Pooling and
Servicing Agreement; (ii) the Depositor will not select such Subsequent Home
Equity Loans in a manner that it believes is adverse to the interest of the
Owners of the Fixed Rate Certificates or the Certificate Insurer; (iii) the
Depositor will deliver certain opinions of counsel with respect to the validity
of the conveyance of such Subsequent Home Equity Loans; and (iv) as of each
cut-off date (each, a "Subsequent Cut-Off Date") applicable thereto, the Home
Equity Loans, including the Subsequent Home Equity Loans to be conveyed by the
Depositor as of such Subsequent Cut-Off Date, will satisfy the criteria set
forth in the Pooling and Servicing Agreement, as described herein under "The
Home Equity Loan Pool--Conveyance of Subsequent Home Equity Loans."
To the extent that amounts on deposit in the Pre-Funding Account have
not been fully applied to the purchase of Subsequent Home Equity Loans by the
Trust for inclusion in the Fixed Rate Group by the end of the Funding Period,
the Owners of the Fixed Rate Certificates then entitled to receive payments of
principal will receive a prepayment of principal in an amount equal to the
Pre-Funded Amount remaining in the Pre-Funding Account on the first Payment Date
following the end of the Funding Period (in no event later than the ________
199_ Payment Date). Although no assurances can be given, the Depositor intends
that the principal amount of Subsequent Home Equity Loans sold to the Trust will
require the application of substantially all amounts on deposit in the
Pre-Funding Account and that there will be no material principal prepayment to
the Owners of the Fixed Rate Certificates from the Pre-Funded Amount.
Each Subsequent Home Equity Loan must satisfy the eligibility criteria
referred to above at the time of its addition. However, Subsequent Home Equity
Loans may have been originated or purchased by the Depositor using credit
criteria different from those which were applied to the Initial Home Equity
Loans and may be of a different credit quality. Therefore, following the
transfer of Subsequent Home Equity Loans to the Fixed Rate Group, the aggregate
characteristics of the Home Equity Loans then held in the Fixed Rate Group may
vary from those of the Initial Home Equity Loans in the Fixed Rate Group. See
"The Home Equity Loan Pool--Conveyance of Subsequent Home Equity Loans."
Social, Economic and Other Factors. The ability of the Trust to invest
in Subsequent Home Equity Loans is largely dependent upon the ability of the
Seller to originate or purchase additional mortgage loans. The ability of the
Seller to originate or purchase additional mortgage loans may be affected as a
result of a variety of social and economic factors. Economic factors include
interest rates, unemployment levels, the rate of inflation and consumer
perception of economic conditions generally. However, the Depositor is unable to
determine and has no basis to predict whether or to what extent economic or
social factors will affect the Seller's origination ability and the availability
of Subsequent Home Equity Loans.
Other Legal Considerations. Applicable state laws generally regulate
interest rates and other charges, require certain disclosure, and require
licensing of the Originators. In addition, other state laws, public policy and
general principles of equity relating to the protection of consumers, unfair and
deceptive practices and debt collection practices may apply to the origination,
servicing and collection of the Home Equity Loans. The Seller will be required
to repurchase any Home Equity Loans which, at the time of origination, did not
comply with applicable federal and state laws and regulations. Depending on the
provisions of the applicable law and the specific facts and circumstances
involved, violations of these laws, policies and principles may limit the
ability of the Trust to collect all or part of the principal of or interest on
the Home Equity Loans, may entitle the borrower to a refund of amounts
previously paid and, in addition, could subject the Seller to damages and
administrative enforcement. See "Certain Legal Aspects of Mortgage Assets" in
the Prospectus.
The Home Equity Loans are also subject to federal laws, including:
(i) the Federal Truth in Lending Act and Regulation Z
promulgated thereunder, which require certain disclosures to the
borrowers regarding the terms of the Home Equity Loans;
(ii) the Equal Credit Opportunity Act and Regulation B
promulgated thereunder, which prohibit discrimination on the basis of
age, race, color, sex, religion, marital status, national origin,
receipt of public assistance or the exercise of any right under the
Consumer Credit Protection Act, in the extension of credit; and
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<PAGE>
(iii) the Fair Credit Reporting Act, which regulates the use
and reporting of information related to the borrower's credit
experience.
Violations of certain provisions of these federal laws may limit the ability of
the Seller to collect all or part of the principal of or interest on the Home
Equity Loans and in addition could subject the Seller to damages and
administrative enforcement. The Seller will be required to repurchase any Home
Equity Loans which, at the time of origination, did not comply with such federal
laws or regulations. See "Certain Legal Aspects of the Mortgage Assets" in the
Prospectus.
The federal Soldiers' and Sailors' Civil Relief Act of 1940 may affect
the ability of the Servicer to collect full amounts of interest on certain Home
Equity Loans and could interfere with the ability of the Servicer to foreclose
on certain properties. See "Certain Legal Aspects of the Mortgage
Assets--Soldiers' and Sailors' Civil Relief Act of 1940" in the Prospectus.
[It is possible that some of the Home Equity Loans will be subject to
the Riegle Community Development and Regulatory Improvement Act of 1994 (the
"Riegle Act") which incorporates the Home Ownership and Equity Protection Act of
1994. The Riegle Act adds certain additional provisions to Regulation Z, the
implementing regulation of the Truth-In-Lending Act. These provisions impose
additional disclosure and other requirements on creditors with respect to
non-purchase money mortgage loans with high interest rates or high upfront fees
and charges. In general, mortgage loans within the purview of the Riegle Act
have annual percentage rates over 10% greater than the yield on Treasury
Securities of comparable maturity and/or fees and points which exceed the
greater of 8% of the total loan amount or $400. The provisions of the Riegle Act
apply on a mandatory basis to all mortgage loans originated on or after October
1, 1995. These provisions can impose specific statutory liabilities upon
creditors who fail to comply with their provisions and may affect the
enforceability of the related loans. In addition, any assignee of the creditor
would generally be subject to all claims and defenses that the consumer could
assert against the creditor, including, without limitation, the right to rescind
the mortgage loan.]
[Risk of Higher Default Rates for Home Equity Loans with Balloon
Payments. _____% of the Initial Home Equity Loans in the Fixed Rate Group by
aggregate Loan Balance as of the Cut-Off Date are "balloon loans" that provide
for the payment of the unamortized Loan Balance of such Home Equity Loan in a
single payment at maturity ("Balloon Loans"). None of the Home Equity Loans in
the Adjustable Rate Group are Balloon Loans. Such Balloon Loans provide for
equal monthly payments, consisting of principal and interest, generally based on
a 30-year amortization schedule, and a single payment of the remaining balance
of the Balloon Loan 15 years after origination. Amortization of a Balloon Loan
based on a scheduled period that is longer than the term of the loan results in
a remaining principal balance at maturity that is substantially larger than the
regular scheduled payments. The Depositor does not have any information
regarding the default history or prepayment history of payments on Balloon
Loans. Because borrowers of Balloon Loans are required to make substantial
single payments upon maturity, it is possible that the default risk associated
with the Balloon Loans is greater than that associated with fully-amortizing
Home Equity Loans.]
Risk of Seller Insolvency. The Seller believes that the transfer of the
Home Equity Loans to the Depositor and by the Depositor to the Trust constitutes
a sale by the Seller to the Depositor and by the Depositor to the Trust and,
accordingly, that such Home Equity Loans will not be part of the assets of the
Seller in the event of the insolvency of the Seller and will not be available to
the creditors of the Seller. However, in the event of an insolvency of the
Seller, it is possible that a bankruptcy trustee or a creditor of the Seller may
argue that the transaction between the Seller and the Depositor was a pledge of
such Home Equity Loans in connection with a borrowing by the Seller rather than
a true sale. Such an attempt, even if unsuccessful, could result in delays in
distributions on the Certificates.
On the Closing Date, the Trustee and the Seller will have received an
opinion of Dewey Ballantine LLP, counsel to the Seller, with respect to the true
sale of the Initial Home Equity Loans from the Seller to the Depositor and from
the Depositor to the Trustee, in form and substance satisfactory to the Trustee,
the Certificate Insurer and the Rating Agencies.
[Risk of Higher Default Rates Associated with _______________ Real
Property. Because _____% of the Mortgaged Properties relating to Initial Home
Equity Loans are located in the State of _______________, an overall decline in
the related residential real estate markets could adversely affect the values of
the Mortgaged Properties securing such Home Equity Loans causing the Loan
Balances of the related Home Equity Loans to equal or exceed the value of such
Mortgaged Properties.
The standard hazard insurance policy required to be maintained under
the terms of each Home Equity Loan does not insure against physical damage
arising from earth movement (including earthquakes, landslides and mudflows).
See "Servicing of Home Equity Loans and Contracts--Standard Hazard Insurance" in
the Prospectus.]
Risk Associated with the Certificate Insurer. If the protection
afforded by overcollateralization is insufficient and if, upon the occurrence of
a Subordination Deficit, the Certificate Insurer is unable to meet its
obligations under the Certificate Insurance Policies, then the Owners of the
Class A Certificates could experience a loss on their investment.
S-14
<PAGE>
Risk of Higher Delinquencies Associated with Underwriting Standards.
The Guidelines (as described below under "The Portfolio of Home Equity
Loans--Underwriting Standards") are intended to assess the credit quality of a
borrower and the value of the mortgaged property and to evaluate the adequacy of
such property as collateral for the mortgage loan. The Originators provide loans
primarily to borrowers who do not qualify for loans conforming to FNMA and FHLMC
guidelines but who also have substantial equity in their property.
As a result of the Guidelines, the Home Equity Loans are likely to
experience rates of delinquency, foreclosure and bankruptcy that are higher, and
that may be substantially higher, than those experienced by mortgage loans
underwritten to FNMA and FHLMC conforming guidelines. Furthermore, changes in
the values of Mortgaged Properties may have a greater effect on the delinquency,
foreclosure, bankruptcy and loss experience of the Home Equity Loans than on
mortgage loans originated in a more traditional manner. No assurance can be
given that the values of the Mortgaged Properties have remained or will remain
at the levels in effect on the dates of origination of the related Home Equity
Loans.
In addition, [none of the Originators nor] the Seller has
representative historical delinquency, bankruptcy, foreclosure, default or loss
experience that may be referred to for purposes of estimating the future
delinquency and loss experience of the Home Equity Loans.
The Subsequent Home Equity Loans and the Pre-Funding Account. If the
principal amount of eligible Home Equity Loans available during the Funding
Period and sold by the Seller to the Depositor is less than 100% of the Original
Pre-Funded Amount, the Depositor will have insufficient Home Equity Loans to
sell to the Trust on the Subsequent Transfer Dates, thereby resulting in a
prepayment of principal to Owners of the Class A-1 Certificates as described
herein and a return to the Owners of the Class A-1 Certificates of a
proportionate amount of their purchase price related to the Pre-Funded Amount.
See "Social, Economic and Other Factors" below and "Prepayment and Yield
Considerations--Mandatory Prepayments" herein. In addition, any conveyance of
Subsequent Home Equity Loans is subject to the following conditions, among
others (i) each such Subsequent Home Equity Loan must satisfy the
representations and warranties specified in the agreement pursuant to which such
Subsequent Home Equity Loans are transferred to the Trust (each a "Subsequent
Transfer Agreement") and in the Agreement; (ii) the Depositor will not select
such Subsequent Home Equity Loans in a manner that it believes is adverse to the
interest of the Owners of the Class A Certificates or the Certificate Insurer;
(iii) the Depositor will deliver certain opinions of counsel with respect to the
validity of the conveyance of such Subsequent Home Equity Loans; and (iv) as of
each cut-off date (each, a "Subsequent Cut-Off Date") applicable thereto, the
Home Equity Loans, including the Subsequent Home Equity Loans to be conveyed by
the Depositor as of such Subsequent CutOff Date, will satisfy the criteria set
forth in the Agreement, as described herein under "The Portfolio of Home Equity
Loans--Conveyance of Subsequent Home Equity Loans."
To the extent that amounts on deposit in the Pre-Funding Account have
not been fully applied to the purchase of Subsequent Home Equity Loans by the
Trust by the end of the Funding Period, the Owners of the Class A-1 Certificates
will receive a prepayment of principal in an amount equal to the Pre-Funded
Amount remaining in the Pre-Funding Account no later than the first Distribution
Date following the end of the Funding Period. Although no assurances can be
given, the Depositor intends that the principal amount of Subsequent Home Equity
Loans sold to the Trust will require the application of substantially all
amounts on deposit in the Pre-Funding Account and that there will be no material
principal prepayment to the Owners of the Class A-1 Certificates from the
Pre-Funded Amount.
Each Subsequent Home Equity Loan must satisfy the eligibility criteria
referred to above at the time of its addition. However, Subsequent Home Equity
Loans may have been purchased by the Depositor using credit criteria different
from those which were applied to the Initial Home Equity Loans and may be of a
different credit quality. Therefore, following the transfer of Subsequent Home
Equity Loans to the Home Equity Loan Pool, the aggregate characteristics of the
Home Equity Loans then held in the Home Equity Loan Pool may vary from those of
the Initial Home Equity Loans. See "The Portfolio of Home Equity
Loans--Conveyance of Subsequent Home Equity Loans."
THE PORTFOLIO OF HOME EQUITY LOANS
General
The Home Equity Loan Pool primarily includes newly originated loans
which were purchased by the Depositor from the Seller, which acquired such loans
from the Originators.
[None of the Originators], the Seller [or the Servicer] have
representative historical delinquency, bankruptcy, foreclosure or default
experience that may be referred to for purposes of estimating the future
delinquency and loss experience of the Home Equity Loans.
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<PAGE>
The Originator of a Home Equity Loan has made certain representations
and warranties with respect to such Home Equity Loan, as specified below, and,
upon a breach of such representations and warranties occurring after sale of the
related Home Equity Loan to the Trust, may be required to repurchase such Home
Equity Loan from the Trust.
Underwriting Standards
[To be provided]
The Servicer
[Description of Servicer]
The following tables set forth, as of December 31, 1993 and 1994 and
_______________ 1995 certain information relating to the delinquency experience
(including imminent foreclosures, foreclosures in progress and bankruptcies) of
one- to four-family residential mortgage loans included in the Servicer's
servicing portfolio (which portfolio does not include mortgage loans that are
subserviced by others) at the end of the indicated periods. The indicated
periods of delinquency are based on the number of days past due on a contractual
basis. No mortgage loan is considered delinquent for these purposes until it is
one month past due on a contractual basis.
Delinquencies and Foreclosures
(Dollars in Thousands)
<PAGE>
<TABLE>
<CAPTION>
At December 31, At December 31, At December 31,
1993 1994 1995
------- ------- -------- -------- ------- ------- --------- -------- -------- --------- --------- -----------
Percent Percent Percent Percent Percent Percent
By No. By By No. by By No. By By No. by By No. By By No. by
of Dollar of Dollar of Dollar of Dollar of Dollar of Dollar
Loans Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans Amount
------- ------- -------- -------- ------- ------- --------- -------- -------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total Portfolio..
Period of
Delinquency......
0 - 30
days....
31 - 59
days....
60 - 89
days....
90 days
or more.
Total Delinquent
Loans............
Loans in
Foreclosure*.....
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Real Estate Owned
(Dollars in Thousands)
At December 31, At December 31, At December 31,
1993 1994 1995 (1)
------------------------- -------------------------- --------------------------
By Dollar By Dollar By Dollar
By No. Amount By No. Amount By No. Amount
of Loans of Loans of Loans of Loans of Loans of Loans
------------ ------------ ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Total Portfolio...................
Foreclosed Loans(1)...............
Foreclosed Ratio(2)...............
</TABLE>
- -----------------
(1) For the purposes of these tables, Foreclosed Loans means the principal
balance of mortgage loans secured by mortgaged properties the title to
which has been acquired by the Servicer, by investors or by an insurer
following foreclosure or delivery of a deed in lieu of foreclosure.
(2) The Foreclosure Ratio is equal to the aggregate principal balance or
number of Foreclosed Loans divided by the aggregate principal balance,
or number, as applicable, of mortgage loans in the Total Portfolio at
the end of the indicated period.
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<PAGE>
Loan Loss Experience on the
Servicer's Servicing Portfolio
of Home Equity Loans
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ended
December 31, Year Ending December 31,
1995 1995 1993
<S> <C> <C> <C>
Total Portfolio(1)
Gross Losses(2)
Recoveries(3)
Net Losses (4)
Net Losses as a Percentage of
Total Portfolio(5)
</TABLE>
- ------------------------
(1) "Total Portfolio" on the date stated above is the principal balances of
the mortgage loans outstanding on the last day of the period.
(2) "Gross Losses" are actual losses incurred on liquidated properties for
each respective period. Losses include all principal, foreclosure costs
and accrued interest to the date of liquidation.
(3) "Recoveries" are recoveries from liquidation proceeds and deficiency
judgments.
(4) "Net Losses" means "Gross Losses" minus "Recoveries."
(5) For the six months ending June 30, 1995, "Net Losses as a Percentage of
Total Portfolio" was annualized by multiplying "Net Losses" by 2.0
before calculating the percentage of "Net Losses as a Percentage of
Total Portfolio."
There can be no assurance that the delinquency experience of the Home
Equity Loans comprising the Home Equity Loan Pool will correspond to the
delinquency experience of the Servicer's mortgage portfolio set forth in the
foregoing tables. See "The Portfolio of Home Equity Loans -- General" herein.
The statistics shown above represent the delinquency experience for the
Servicer's residential mortgage servicing portfolios only for the periods
presented, whereas the delinquency experience on the Home Equity Loans
comprising the Home Equity Loan Pool will depend on the results obtained over
the life of the Home Equity Loan Pool. The Servicer's residential mortgage
servicing portfolios include mortgage loans with a variety of payment, credit
and other characteristics (including geographic location) which may not be
representative of the payment, credit and other characteristics of the Home
Equity Loans comprising the Home Equity Loan Pool. It should be noted that if
the residential real estate market should experience an overall decline in
property values, the actual rates of delinquencies and foreclosures could be
higher than those previously experienced by the Servicer. In addition, adverse
economic conditions may affect the timely payment by Mortgagors of scheduled
payments of principal and interest on the Home Equity Loans and accordingly, the
actual rates of delinquencies and foreclosures with respect to the Home Equity
Loan Pool.
USE OF PROCEEDS
The Depositor will sell the Initial Home Equity Loans to the Trust
concurrently with delivery of the Certificates. Net proceeds from the sale of
the Class A Certificates will be applied by the Depositor to the purchase of the
Initial Home Equity Loans from the Seller, to the deposit of the Pre-Funded
Amount in the Pre-Funding Account and to the deposit of certain amounts to the
Capitalized Interest Account. Such net proceeds less the Pre- Funded Amount and
the amount deposited in the Capitalized Interest Account will (together with the
Subordinate Certificates retained by the Depositor or its affiliates) represent
the purchase price to be paid by the Trust to the Depositor for the Initial Home
Equity Loans.
THE DEPOSITOR
The Depositor was incorporated in the State of Delaware on January 31,
1991 and is a wholly-owned subsidiary of ContiFinancial Corporation. The
Depositor maintains its principal offices at 277 Park Avenue, New York, NY
10172. Neither the Depositor, the Seller nor the Servicer nor any of their
affiliates will insure or guarantee distributions on the Certificates.
S-17
<PAGE>
THE HOME EQUITY LOAN POOL
General
The statistical information presented in this Prospectus Supplement
concerning the pool of Home Equity Loans is based on the pool of Initial Home
Equity Loans as of the Cut-Off Date. Subsequent Home Equity Loans are intended
to be purchased by the Trust for inclusion in the Fixed Rate Group from the
Depositor from time to time on or before __________, 199_ from funds on deposit
in the Pre-Funding Account. The Initial Home Equity Loans and the Subsequent
Home Equity Loans are referred to herein collectively as the "Home Equity
Loans." The Subsequent Home Equity Loans, if available, to be purchased by the
Trust will be sold by the Seller to the Depositor and then by the Depositor to
the Trust.
This subsection describes generally certain characteristics of the
Initial Home Equity Loans. Unless otherwise specified herein, references herein
to percentages of Initial Home Equity Loans refer in each case to the
approximate percentage of the aggregate principal balance of the Initial Home
Equity Loans as of the Cut-Off Date, based on the outstanding principal balances
of the Initial Home Equity Loans or the Home Equity Loans in the applicable Home
Equity Loan Group, in each case as of the Cut-Off Date, and giving effect to all
payments received prior to the Cut-Off Date. The Initial Home Equity Loan Pool
consists of fixed-rate and adjustable-rate Home Equity Loans with remaining
terms to maturity of not more than 360 months (including both fully amortizing
Home Equity Loans and Balloon Loans). The Initial Home Equity Loans have the
characteristics set forth below as of the Cut-Off Date. Percentages expressed
herein based on Loan Balances and number of Initial Home Equity Loans have been
rounded, and in the tables set forth herein the sum of the percentages may not
equal the respective totals due to such rounding.
Each Home Equity Loan in the Trust will be assigned to one of two
mortgage loan groups comprised of Home Equity Loans which bear fixed interest
rates only, in the case of the Fixed Rate Group, and Home Equity Loans which
bear adjustable interest rates only, in the case of the Adjustable Rate Group.
The Fixed Rate Certificates represent undivided ownership interests in all Home
Equity Loans contained in the Fixed Rate Group, and distributions on the Fixed
Rate Certificates will be based primarily on amounts available for distribution
in respect of Home Equity Loans in the Fixed Rate Group. The Adjustable Rate
Certificates represent undivided ownership interests in all Home Equity Loans
contained in the Adjustable Rate Group, and distributions on the Adjustable Rate
Certificates will be based primarily on amounts available for distribution in
respect of Home Equity Loans in the Adjustable Rate Group.
The Loan-to-Value Ratios and Combined Loan-to-Value Ratios shown below
were calculated based upon the appraised values of the Properties at the time of
origination (the "Appraised Values"). In a limited number of circumstances, and
within the Seller's underwriting guidelines, the Seller has reduced the
Appraised Value of Properties where the Properties are unique, have a high value
or where the comparables are not within FNMA guidelines. The purpose for making
these reductions is to value the Properties more conservatively than would
otherwise be the case if the appraisal were accepted as written.
No assurance can be given that values of the Properties have remained
or will remain at their levels on the dates of origination of the related Home
Equity Loans. If the residential real estate market has experienced or should
experience an overall decline in property values such that the outstanding
balance of any Home Equity Loan, together with the outstanding balance of any
first mortgage, become equal to or greater than the value of the Property, the
actual rates of delinquencies, foreclosures and losses could be higher than
those now generally experienced in the mortgage lending industry. Initial Home
Equity Loans -- Fixed Rate Group
As of the Cut-Off Date, the average Loan Balance of the Initial Home
Equity Loans in the Fixed Rate Group was $______; the Coupon Rates of the
Initial Home Equity Loans in the Fixed Rate Group ranged from ____% to ____%;
the weighted average Loan-to-Value Ratio of the Initial Home Equity Loans in the
Fixed Rate Group was ____%; the weighted average Combined Loan-to-Value Ratio of
the Initial Home Equity Loans in the Fixed Rate Group was ____%; the weighted
average Coupon Rate of the Initial Home Equity Loans in the Fixed Rate Group was
____%; the weighted average Retained Yield for the Initial Home Equity Loans in
the Fixed Rate Group was ____%; the weighted average remaining term to maturity
was ____ months; the weighted average original term to maturity was ____ months.
The remaining terms to maturity as of the Cut-Off Date of the Initial Home
Equity Loans in the Fixed Rate Group ranged from ____ months to ____ months. The
minimum and maximum Loan Balances of Initial Home Equity Loans in the Fixed Rate
Group as of the Cut-Off Date were $_____ and $_____, respectively. Initial Home
Equity Loans in the Fixed Rate Group containing "balloon" payments represented
not more than _____%; of the Original Aggregate Loan Balance of Initial Home
Equity Loans in the Fixed Rate Group. No Initial Home Equity Loan in the Fixed
Rate Group will mature later than ________, ____.
S-18
<PAGE>
Geographic Distribution of Mortgaged Properties -- Fixed Rate Group
The geographic distribution of Initial Home Equity Loans in the Fixed
Rate Group by state, as of the Cut-Off Date, was as follows:
Number of Initial Aggregate % of Aggregate
State Home Equity Loans Loan Balance Loan Balance
- ----- ----------------- ------------ ------------
Alabama
Alaska
Arizona
Arkansas
California
Colorado
Connecticut
Delaware
District of Columbia
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Washington
Wisconsin
Wyoming
S-19
<PAGE>
Original Loan-to-Value Ratios -- Fixed Rate Group
The original loan-to-value ratios as of the date of origination of the
Initial Mortgage in the Fixed Rate Group Loans (based upon appraisals made at
the time of origination thereof) (the "Loan-to-Value Ratios") as of the Cut-Off
Date were distributed as follows:
<TABLE>
<CAPTION>
Range of Number of Initial Aggregate % of Aggregate
Original LTV's Home Equity Loans Loan Balance Loan Balance
- -------------- ----------------- ------------ ------------
<S> <C> <C> <C>
</TABLE>
Combined Loan-to-Value Ratios -- Fixed Rate Group
The original combined loan-to-value ratios as of the dates of
origination of the Initial Home Equity Loans in the Fixed Rate Group (based upon
appraisals made at the time of origination hereunder) (the "Combined
Loan-to-Value Ratios") as of the Cut-Off Date were distributed as follows:
<TABLE>
<CAPTION>
Range of Number of Initial Aggregate % of Aggregate
Original CLTV's Home Equity Loans Loan Balance Loan Balance
- --------------- ----------------- ------------ ------------
<S> <C> <C> <C>
</TABLE>
Cut-Off Date Coupon Rates -- Fixed Rate Group
The Coupon Rates borne by the Notes relating to the Initial Home Equity
Loans in the Fixed Rate Group were distributed as follows as of the Cut-Off
Date:
<TABLE>
<CAPTION>
Range of Number of Initial Aggregate % of Aggregate
Coupon Rates Home Equity Loans Loan Balance Loan Balance
- ------------ ----------------- ------------ ------------
<S> <C> <C> <C>
</TABLE>
Cut-Off Date Loan Balances -- Fixed Rate Group
The distribution of the outstanding principal amounts of the Initial
Home Equity Loans in the Fixed Rate Group as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
Range of Number of Initial Aggregate % of Aggregate
Loan Balances Home Equity Loans Loan Balance Loan Balance
- ------------- ----------------- ------------ ------------
<S> <C> <C> <C>
</TABLE>
Types of Mortgaged Properties - Fixed Rate Group
The Properties securing the Initial Home Equity Loans in the Fixed Rate
Group as of the Cut-Off Date were of the property types as follows:
<TABLE>
<CAPTION>
Number of Initial Aggregate % of Aggregate
Property Types Home Equity Loans Loan Balance Loan Balance
- -------------- ----------------- ------------ ------------
<S> <C> <C> <C>
</TABLE>
Distribution of Months Since Origination -- Fixed Rate Group
The distribution of the number of months since the date of origination
of the Initial Home Equity Loans in the Fixed Rate Group as of the Cut-Off Date
was as follows:
<TABLE>
<CAPTION>
Months Elapsed Number of Initial Aggregate % of Aggregate
Since Origination Home Equity Loans Loan Balance Loan Balance
- ----------------- ----------------- ------------ ------------
<S> <C> <C> <C>
</TABLE>
S-20
<PAGE>
Distribution of Remaining Term to Maturity -- Fixed Rate Group
The distribution of the number of months remaining to maturity of the
Initial Home Equity Loans in the Fixed Rate Group as of the Cut-Off Date was as
follows:
<TABLE>
<CAPTION>
Months Remaining Number of Initial Aggregate % of Aggregate
to Maturity Home Equity Loans Loan Balance Loan Balance
- ----------- ----------------- ------------ ------------
<S> <C> <C> <C>
</TABLE>
Occupancy Status -- Fixed Rate Group
The occupancy status of the Properties securing the Initial Home Equity
Loans in the Fixed Rate Group as of the CutOff Date was as follows:
<TABLE>
<CAPTION>
Number of Initial Aggregate % of Aggregate
Occupancy Status Home Equity Loans Loan Balance Loan Balance
- ---------------- ----------------- ------------ ------------
<S> <C> <C> <C>
</TABLE>
Initial Home Equity Loans -- Adjustable Rate Group
As of the Cut-Off Date, the average Loan Balance of the Initial Home
Equity Loans in the Adjustable Rate Group was $_________; the Coupon Rates of
the Initial Home Equity Loans in the Adjustable Rate Group ranged from ____% to
_____%; the weighted average Loan-to-Value Ratio of the Initial Home Equity
Loans in the Adjustable Rate Group was _____%; the weighted average Coupon Rate
of the Initial Home Equity Loans in the Adjustable Rate Group was _____%; the
weighted average remaining term to maturity was 353 months; the weighted average
original term to maturity was 355 months. The remaining terms to maturity as of
the Cut-Off Date of the Initial Home Equity Loans in the Adjustable Rate Group
ranged from 119 months to 360 months. The minimum and maximum Loan Balances of
Initial Home Equity Loans in the Adjustable Rate Group as of the CutOff Date
were $______ and $__________, respectively. None of the Initial Home Equity
Loans in the Adjustable Rate Group contained "balloon" payments. No Initial Home
Equity Loan in the Adjustable Rate Group will mature later than ________, ____.
All of the Home Equity Loans in the Adjustable Rate Group have maximum
Coupon Rates. The weighted average maximum Coupon Rate of the Initial Home
Equity Loans in the Adjustable Rate Group was _____%, with maximum Coupon Rates
that range from _____% to _____%. The Initial Home Equity Loans in the
Adjustable Rate Group have a weighted average gross margin as of the Cut-Off
Date of ____%. The gross margin for the Initial Home Equity Loans in the
Adjustable Rate Group ranges from ____% to _____%.
[All] of the Initial Home Equity Loans in the Adjustable Rate Group
bear interest rates that adjust based on Six-Month LIBOR. [Other indices.] All
of the Initial Home Equity Loans in the Adjustable Rate Group have periodic rate
adjustment caps that range from ____% to ____% and a periodic rate adjustment
floor of ____%. _____% of the Initial Home Equity Loans in the Adjustable Rate
Group have a lifetime rate adjustment cap of _% over the initial Coupon Rate of
each respective Home Equity Loan in the Adjustable Rate Group and _____% of the
Initial Home Equity Loans in the Adjustable Rate Group have a lifetime rate
adjustment cap of _% over the initial Coupon Rate of each respective Home Equity
Loan in the Adjustable Rate Group.
S-21
<PAGE>
Geographic Distribution of Mortgaged Properties -- Adjustable Rate Group
The geographic distribution of Initial Home Equity Loans in the
Adjustable Rate Group by state, as of the Cut-Off Date, was as follows:
Number of Initial Aggregate % of Aggregate
State Home Equity Loans Loan Balance Loan Balance
- ----- ----------------- ------------ ---------------
Alabama
Alaska
Arizona
Arkansas
California
Colorado
Connecticut
Delaware
District of Columbia
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Washington
Wisconsin
Wyoming
S-22
<PAGE>
Original Loan-to-Value Ratios - Adjustable Rate Group
The original Loan-to-Value Ratios of the Initial Mortgage in the
Adjustable Rate Group as of the Cut-Off Date were distributed as follows:
<TABLE>
<CAPTION>
Number of Initial Aggregate % of Aggregate
Original LTV's Home Equity Loans Loan Balance Loan Balance
- -------------- ----------------- ------------ ------------
<S> <C> <C> <C>
</TABLE>
Cut-Off Date Coupon Rates - Adjustable Rate Group
The Coupon Rates borne by the Notes relating to the Initial Home Equity
Loans in the Adjustable Rate Group were distributed as follows as of the Cut-Off
Date:
<TABLE>
<CAPTION>
Range of Number of Initial Aggregate % of Aggregate
Coupon Rates Home Equity Loans Loan Balance Loan Balance
- ------------ ----------------- ------------ ------------
<S> <C> <C> <C>
</TABLE>
Cut-Off Date Loan Balances - Adjustable Rate Group
The distribution of the outstanding principal amounts of the Initial
Home Equity Loans in the Adjustable Rate Group as of the Cut-Off Date was as
follows:
<TABLE>
<CAPTION>
Range of Number of Initial Aggregate % of Aggregate
Loan Balances Home Equity Loans Loan Balance Loan Balance
- ------------- ----------------- ------------ ------------
<S> <C> <C> <C>
</TABLE>
Types of Mortgaged Properties -Adjustable Rate Group
The Properties securing the Initial Home Equity Loans in the Adjustable
Rate Group as of the Cut-Off Date were of the property types as follows:
<TABLE>
<CAPTION>
Number of Initial Aggregate % of Aggregate
Property Types Home Equity Loans Loan Balance Loan Balance
- -------------- ----------------- ------------ ------------
<S> <C> <C> <C>
</TABLE>
Distribution of Months Since Origination -- Fixed Rate Group
The distribution of the number of months since the date of origination
of the Initial Home Equity Loans in the Adjustable Rate Group as of the Cut-Off
Date was as follows:
<TABLE>
<CAPTION>
Months Elapsed Number of Initial Aggregate % of Aggregate
Since Origination Home Equity Loans Loan Balance Loan Balance
- ----------------- ----------------- ------------ ------------
<S> <C> <C> <C>
</TABLE>
Distribution of Remaining Term to Maturity - Adjustable Rate Group
The distribution of the number of months remaining to maturity of the
Initial Home Equity Loans in the Adjustable Rate Group as of the Cut-Off Date
was as follows:
<TABLE>
<CAPTION>
Months Remaining Number of Initial Aggregate % of Aggregate
to Maturity Home Equity Loans Loan Balance Loan Balance
- ----------- ----------------- ------------ ------------
<S> <C> <C> <C>
</TABLE>
S-23
<PAGE>
Occupancy Status - Adjustable Rate Group
The occupancy status of the Properties securing the Initial Home Equity
Loans in the Adjustable Rate Group as of the CutOff Date was as follows:
<TABLE>
<CAPTION>
Number of Initial Aggregate % of Aggregate
Occupancy Status Home Equity Loans Loan Balance Loan Balance
- ---------------- ----------------- ------------ ------------
<S> <C> <C> <C>
</TABLE>
Distribution of Margins - Adjustable Rate Group
The margins borne by the Notes relating the Initial Home Equity Loans
in the Adjustable Rate Group as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
Number of Initial Aggregate % of Aggregate
Margins Home Equity Loans Loan Balance Loan Balance
- ------- ----------------- ------------ ------------
<S> <C> <C> <C>
</TABLE>
Distribution of Maximum Coupon Rates - Adjustable Rate Group
The maximum Coupon Rates borne by the Notes relating to the Initial
Home Equity Loans in the Adjustable Rate Group as of the Cut-Off Date was as
follows:
<TABLE>
<CAPTION>
Maximum Number of Initial Aggregate % of Aggregate
Coupon Rates Home Equity Loans Loan Balance Loan Balance
- ------------ ----------------- ------------ ------------
<S> <C> <C> <C>
</TABLE>
Distribution of Coupon Rates Change - Adjustable Rate Group
The number of months until the next Coupon Rate change for each of the
Notes relating to the Initial Home Equity Loans in the Adjustable Rate Group as
of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
Months of Next Number of Initial Aggregate % of Aggregate
Coupon Rate Change Home Equity Loans Loan Balance Loan Balance
- ------------------ ----------------- ------------ ------------
<S> <C> <C> <C>
</TABLE>
Conveyance of Subsequent Home Equity Loans
The Pooling and Servicing Agreement permits the Trust to acquire
approximately $_____________ in aggregate principal balance of Subsequent Home
Equity Loans for addition to the Fixed Rate Group. Accordingly, the statistical
characteristics of the Home Equity Loan Pool and the Fixed Rate Group will vary
as of any Subsequent Cut-Off Date upon the acquisition of Subsequent Home Equity
Loans.
The obligation of the Trust to purchase Subsequent Home Equity Loans
for addition to the Fixed Rate Group on a Subsequent Transfer Date is subject to
the following requirements: (i) such Subsequent Home Equity Loan may not be 30
or more days contractually delinquent as of the related Subsequent Cut-Off Date;
(ii) the remaining term to maturity of such Subsequent Home Equity Loan may not
exceed 30 years; (iii) no Subsequent Home Equity Loan will have a Coupon Rate
less than ____%; and (iv) following the purchase of such Subsequent Home Equity
Loans by the Trust, the Home Equity Loans (including the Subsequent Home Equity
Loans) (a) will have a weighted average Coupon Rate of at least _____%; (b) will
have a weighted average Combined Loan-to- Value Ratio of not more than __%; (c)
will not have Balloon Loans representing more than __% by aggregate principal
balance of the Home Equity Loans; (d) will not have a weighted average remaining
term to stated maturity of more than 210 months; and (e) will have no Home
Equity Loan with a principal balance in excess of $_______.
S-24
<PAGE>
Interest Payments on the Home Equity Loans
There are a number of Home Equity Loans on which interest is charged to
the obligor (the "Mortgagor") at the Coupon Rate on the outstanding principal
balance calculated based on the number of days elapsed between receipt of the
Mortgagor's last payment through receipt of the Mortgagor's most current payment
(such Home Equity Loans, "Date-of-Payment Loans"). Such interest is deducted
from the Mortgagor's payment amount and the remainder, if any, of the payment is
applied as a reduction to the outstanding principal balance of such Note.
Although the Mortgagor is required to remit equal monthly payments on a
specified monthly payment date that would reduce the outstanding principal
balance of such Note to zero at such Note's maturity date, payments that are
made by the Mortgagor after the due date therefor would cause the outstanding
principal balance of such Note not to be reduced to zero on its maturity date.
In such a case, the Mortgagor would be required to make an additional principal
payment at the maturity date for such Note. If it were assumed that all the
Mortgagors on the Date-of-Payment Loans were to pay on the latest date possible
without the Date-of-Payment Loans being in default, the amount of such
additional principal payment would be a de minimis amount of the Maximum
Collateral Amount. On the other hand, if a Mortgagor makes a payment (other than
a Prepayment) before the due date therefor, the reduction in the outstanding
principal balance of such Note would occur over a shorter period of time than
would have occurred had it been based on the schedule of amortization in effect
on the Cut-Off Date. Accordingly, the timing of principal payments to the Owners
of the Class A Certificates may be affected by the fact that actual Mortgagor
payments may not be made on the due date therefor.
The Home Equity Loans which are not Date-of-Payment Loans (the
"Actuarial Loans") provide that interest is charged to the Mortgagors
thereunder, and payments are due from such Mortgagors, as of a scheduled day of
each month which is fixed at the time of origination. Scheduled monthly payments
made by the Mortgagors on the Actuarial Loans either earlier or later than the
scheduled due dates thereof will not affect the amortization schedule or the
relative application of such payments to principal and interest.
PREPAYMENT AND YIELD CONSIDERATIONS
General
The weighted average life of, and, if purchased at other than par
(disregarding, for purposes of this discussion, the effect on an investor's
yield resulting from the timing of the settlement date and those considerations
discussed below under "Payment Lag Feature of Certificates"), the yield to
maturity on the Class A Certificates will relate to the rate of payment of
principal of the Home Equity Loans in the related Home Equity Loan Group,
including for this purpose Prepayments, liquidations due to defaults, casualties
and condemnations, and repurchases by the Seller of Home Equity Loans. The
actual rate of principal prepayments on pools of mortgage loans is influenced by
a variety of economic, tax, geographic, demographic, social, legal and other
factors and has fluctuated considerably in recent years. In addition, the rate
of principal prepayments may differ among pools of mortgage loans at any time
because of specific factors relating to the mortgage loans in the particular
pool, including, among other things, the age of the mortgage loans, the
geographic locations of the properties securing the loans and the extent of the
mortgagors' equity in such properties, and changes in the mortgagors' housing
needs, job transfers and unemployment.
As with fixed rate obligations generally, the rate of prepayment on a
pool of mortgage loans with fixed rates such as the Home Equity Loans in the
Fixed Rate Group is affected by prevailing market rates for mortgage loans of a
comparable term and risk level. When the market interest rate is below the
mortgage coupon, mortgagors may have an increased incentive to refinance their
mortgage loans. Depending on prevailing market rates, the future outlook for
market rates and economic conditions generally, some mortgagors may sell or
refinance mortgaged properties in order to realize their equity in the mortgaged
properties, to meet cash flow needs or to make other investments.
All of the Home Equity Loans in the Adjustable Rate Group are
adjustable-rate mortgage loans. As is the case with conventional fixed-rate
mortgage loans, adjustable-rate mortgage loans may be subject to a greater rate
of principal prepayments in a declining interest rate environment. For example,
if prevailing interest rates fall significantly, adjustable-rate mortgage loans
could be subject to higher prepayment rates than if prevailing interest rates
remain constant because the availability of fixed-rate mortgage loans at
competitive interest rates may encourage mortgagors to refinance their
adjustable-rate mortgage loan to "lock in" a lower fixed interest rate. However,
no assurance can be given as to the level of prepayments that the Home Equity
Loans will experience.
In addition to the foregoing factors affecting the weighted average
life of each Class of the Class A Certificates, the subordination provisions of
the Trust result in a limited acceleration of the Class A Certificates relative
to the amortization of the Home Equity Loans in early months of the transaction.
The accelerated amortization is achieved by the application of certain excess
interest and principal to the payment of the Class A Certificate Principal
Balance. This acceleration feature creates overcollateralization which results
from the excess of the aggregate Loan Balances of the Home Equity Loans over the
Class A
S-25
<PAGE>
Certificate Principal Balance. Once the required level of overcollateralization
is reached, the acceleration feature will cease, unless necessary to maintain
the required level of overcollateralization.
Mandatory Prepayment
In the event that at the end of the Funding Period, not all of the
Original Pre-Funded Amount has been used to acquire Subsequent Home Equity Loans
for inclusion in the Fixed Rate Group, then the Fixed Rate Certificates then
entitled to receive payments of principal will receive a partial prepayment on
the Payment Date in ______ 199_.
Although no assurances can be given, the Depositor intends that the
principal amount of Subsequent Home Equity Loans sold to the Trust for inclusion
in the Fixed Rate Group will require the application of substantially all the
amount on deposit in the Pre-Funding Account and that there should be no
material principal prepaid to the Owners of the Fixed Rate Certificates.
Projected Prepayment and Yield for Class A Certificates
As indicated above, if purchased at other than par, the yield to
maturity on a Class A Certificate will be affected by the rate of the payment of
principal of the Home Equity Loans. If the actual rate of payments on the Home
Equity Loans is slower than the rate anticipated by an investor who purchases a
Class A Certificate at a discount, the actual yield to such investor will be
lower than such investor's anticipated yield. If the actual rate of payments on
the Home Equity Loans is faster than the rate anticipated by an investor who
purchases a Class A Certificate at a premium, the actual yield to such investor
will be lower than such investor's anticipated yield.
The "Final Scheduled Payment Date" for each Class of the Class A
Certificates is as follows: Class A-1, _______, ____, Class A-2, _______, ____,
Class A-3, ____________, ____, Class A-4, ____________, ____, Class A-5,
___________, ____ and Class A-6, ____________, ____. These dates are the dates
on which the "Initial Certificate Principal Balance" set forth in the summary
hereof for the related Class as of the Closing Date less all amounts previously
distributed to the Owners on account of principal (such amount as to any Class
of the Class A Certificates and as of any time, the related "Class A Certificate
Principal Balance" and as to the Class A Certificates collectively, the
"Certificate Principal Balance" or the "Class A Certificate Principal Balance")
would be reduced to zero assuming that no Prepayments are received on the Home
Equity Loans, that scheduled monthly payments of principal of and interest on
each of the Home Equity Loans are timely received and no Net Monthly Excess
Cashflow will be used to make accelerated payments of principal (i.e.,
Subordination Increase Amounts) to the Owners of the Class A Certificates. The
Final Scheduled Payment Date for the Class A-5 Certificates is the thirteenth
Payment Date following the calendar month in which the Loan Balances of all Home
Equity Loans (including Subsequent Home Equity Loans) in the Fixed Rate Group
have been reduced to zero assuming that the Home Equity Loans in such Group pay
in accordance with their terms. The Final Scheduled Payment Date for the Class
A-6 Certificates is the thirteenth Payment Date following the calendar month in
which the Loan Balances of all Home Equity Loans in the Adjustable Rate Group
have been reduced to zero assuming that the Home Equity Loans in such Group pay
in accordance with their terms. The weighted average life of the Class A
Certificates is likely to be shorter than would be the case if payments actually
made on the Home Equity Loans conformed to the foregoing assumptions, and the
final Payment Date with respect to the Class A Certificates could occur
significantly earlier than the related Final Scheduled Payment Date because (i)
Prepayments are likely to occur and (ii) the owners of the Class R Certificates
and, in limited circumstances, the Certificate Insurer may cause a termination
of the Trust when the aggregate outstanding Loan Balance of the Home Equity
Loans is less than __% of the Maximum Collateral Amount thereof.
"Weighted average life" refers to the average amount of time that will
elapse from the date of issuance of a security until each dollar of principal of
such security will be repaid to the investor. The weighted average life of any
Class of the Class A Certificates will be influenced by the rate at which
principal of the Home Equity Loans in the related Home Equity Loan Group is
paid, which may be in the form of scheduled amortization or prepayments (for
this purpose, the term "prepayment" includes Prepayments and liquidations due to
default).
It is very unlikely that the Home Equity Loans will prepay at rates
consistent with the Prepayment Assumption until maturity or that all of the Home
Equity Loans in the related Home Equity Loan Group will prepay at the same rate.
There will be discrepancies between the actual characteristics of the Home
Equity Loans included in the Trust and the assumed characteristics used in
preparing the following tables. Any discrepancy may have an effect upon the
percentages of Initial Certificate Principal Balance outstanding set forth in
the table and weighted average lives of the Class A Certificates.
The model used in this Prospectus Supplement is the prepayment
assumption (the "Prepayment Assumption") which represents an assumed rate of
prepayment each month relative to the then outstanding principal balance of a
pool of mortgage loans for the life of such mortgage loans. With respect to the
Fixed Rate Certificates, a ___% Prepayment Assumption assumes conditional
prepayment rates of _% per annum of the then outstanding principal balance of
the Home Equity Loans in the Fixed
S-26
<PAGE>
Rate Group in the first month of the life of the mortgage loans and an
additional _____% (precisely _____%) per annum in each month thereafter until
the twelfth month. Beginning in the thirteenth month and in each month
thereafter during the life of the mortgage loans, ___% Prepayment Assumption
assumes a conditional prepayment rate of __% per annum each month. With respect
to the Adjustable Rate Certificates, a ___% Prepayment Assumption assumes a
conditional prepayment rate of __% per annum of the then outstanding principal
balance of the Home Equity Loans in the Adjustable Rate Group. As used in the
table below, _% Prepayment Assumption assumes prepayment rates equal to _% of
the Prepayment Assumption i.e., no prepayments. Correspondingly, ___% Prepayment
Assumption assumes prepayment rates equal to ___% of the Prepayment Assumption,
and so forth. The Prepayment Assumption does not purport to be a historical
description of prepayment experience or a prediction of the anticipated rate of
prepayment of any pool of mortgage loans, including the Home Equity Loans. The
Depositor believes that no existing statistics of which it is aware provide a
reliable basis for holders of Class A Certificates to predict the amount or the
timing of receipt of prepayments on the Home Equity Loans.
Since the tables were prepared on the basis of the assumptions in the
following paragraph, there are discrepancies between the characteristics of the
actual Home Equity Loans and the characteristics of the Home Equity Loans
assumed in preparing the tables. Any such discrepancy may have an effect upon
the percentages of the Certificate Principal Balances outstanding and weighted
average lives of the Class A Certificates set forth in the tables. In addition,
since the actual Home Equity Loans in the Trust have characteristics which
differ from those assumed in preparing the tables set forth below, the
distributions of principal on the Class A Certificates may be made earlier or
later than as indicated in the tables.
For the purpose of the tables below, it is assumed that: (i) the Home
Equity Loans of each Home Equity Loan Group which consist of pools of loans with
level-pay and balloon amortization methodologies, Cut-Off Date Loan Balances,
mortgage rates (net of Retained Yield, if any), net mortgage rates, original and
remaining terms to maturity, and original amortization terms as applicable, are
as set forth below, (ii) the Closing Date for the Certificates occurs on
_________, 199_, (iii) distributions on the Certificates are made on the 15th
day of each month regardless of the day on which the Payment Date actually
occurs, commencing in _________ 199_ in accordance with the priorities described
herein, (iv) the difference between the Gross Coupon Rate (net of Retained
Yield, if any) and the Net Coupon Rate is equal to the Servicing Fee and the Net
Coupon Rate is further reduced by the Premium Amount and the Trustee Fee, (v)
the Home Equity Loans' prepayment rates are a multiple of the applicable
Prepayment Assumption, (vi) prepayments include 30 day's interest thereon, (vii)
no optional termination or mandatory termination is exercised, (viii) the
"Specified Subordinated Amount" (as defined under "Credit Enhancement --
Overcollateralization Provisions") for each Home Equity Loan Group is set
initially as specified in the Pooling and Servicing Agreement and thereafter
decreases in accordance with the provisions of the Pooling and Servicing
Agreement, (ix) all of the Pre-Funded Amount is used to acquire Subsequent Home
Equity Loans for inclusion in the Fixed Rate Group on ___________, 199_ and
prior to such date, the Pre-Funded Amount accrued interest at a rate of ____%
per annum for one month, (x) the Coupon Rate for each Home Equity Loan in the
Adjustable Rate Group is adjusted on its next rate adjustment date (and on
subsequent rate adjustment dates, if necessary) to equal the sum of (a) an
assumed level of the applicable index _____% and (b) the respective gross margin
(such sum being subject to the applicable periodic adjustment cap and maximum
interest rate) and (xi) the Class A-6 Pass-Through Rate remains constant at
_____%.
S-27
<PAGE>
FIXED RATE GROUP
----------------
Initial Home Equity Loans
Pool Principal Gross Coupon Net Coupon
Number Balance Rate Rate
- -------------------- ------------------- ------------------- -------------------
Original Remaining Original
Term to Term to Amortization
Maturity Maturity Term Amortization
(in months) (in months) (in months) Method
------------------- ------------------- ------------------- -------------------
Subsequent Home Equity Loans
Pool Principal Gross Coupon Net Coupon
Number Balance Rate Rate
- -------------------- ------------------- ------------------- -------------------
Original Remaining Original
Term to Term to Amortization
Maturity Maturity Term Amortization
(in months) (in months) (in months) Method
- --------------------- ------------------- ------------------- ------------------
ADJUSTABLE RATE GROUP
Gross Months
Pool Principal Coupon Net Coupon to Rate
Number Balance Rate Rate Change Margin
- -------------- ------------ ------------ ------------- ------------ ------------
<TABLE>
<CAPTION>
Original Remaining Original
Term to Term to Amortization
Maximum Maturity Maturity Term Amortization
Interest Rate (in months) (in months) (in months) Method
- --------------- ------------------- ----------------- ----------------------- --------------
<S> <C> <C> <C> <C>
</TABLE>
S-28
<PAGE>
The following tables set forth the percentages of the initial principal
amount of the Class A Certificates that would be outstanding after each of the
dates shown, based on a rate equal to _%, __%, __%, ___%, ___% and ___% of the
Prepayment Assumption (as defined above).
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
Class A-1
Payment Date 0% 50% 75% 100% 125% 150%
-- --- --- ---- ---- ----
Class A-2
Payment Date 0% 50% 75% 100% 125% 150%
-- --- --- ---- ---- ----
Class A-3
Payment Date 0% 50% 75% 100% 125% 150%
-- --- --- ---- ---- ----
Class A-4
Payment Date 0% 50% 75% 100% 125% 150%
-- --- --- ---- ---- ----
Class A-5
Payment Date 0% 50% 75% 100% 125% 150%
-- --- --- ---- ---- ----
Class A-6
Payment Date 0% 50% 75% 100% 125% 150%
-- --- --- ---- ---- ----
- ---------------
(1) The weighted average life of the Class A Certificates is determined by
(i) multiplying the amount of each principal payment by the number of
years from the date of issuance to the related Payment Date, (ii)
adding the results, and (iii) dividing the sum by the initial
respective Certificate Principal Balance for such Class of Class A
Certificate.
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Payment Lag Feature of Class A Certificates
Pursuant to the Pooling and Servicing Agreement, an amount equal to
Mortgagor payments with respect to each Home Equity Loan (net of the Servicing
Fee and Retained Yield) received by the Servicer during each Remittance Period
is to be remitted to the Trustee on or prior to the related Monthly Remittance
Date; the Trustee will not be required to distribute any such amounts to the
Owners until the next succeeding Payment Date. As a result, the monthly
distributions to the Owners generally reflect Mortgagor payments during the
prior calendar month, and the first Payment Date will not occur until
____________, 199_. Thus, the effective yield to the Owners of the Class A
Certificates will be below that otherwise produced by the related Pass-Through
Rate because the distribution of the Class A Distribution Amount in respect of
any given month will not be made until on or about the 25th day of the following
month.
FORMATION OF THE TRUST AND TRUST PROPERTY
_____________ Home Equity Loan Trust 199__-__ (the "Trust") will be
created and established pursuant to the Pooling and Servicing Agreement. The
Depositor will convey without recourse the Home Equity Loans to the Trust and
the Trust will issue the Class A Certificates and the Subordinate Certificates.
The property of the Trust will include (a) the Home Equity Loans (other
than the Retained Yield and payments received on the Home Equity Loans on or
prior to the Cut-off Date) together with the related Home Equity Loan documents
and the Seller's interest in any Property which secures a Home Equity Loan and
all payments thereon and proceeds of the conversion, voluntary or involuntary,
of the foregoing, (b) such amounts as may be held by the Trustee in the
Certificate Account, the Pre-Funding Account, the Capitalized Interest Account
and any other accounts held by the Trustee for the Trust together with
investment earnings on such amounts and such amounts as may be held in the name
of the Trustee in the Principal and Interest Account, if any, exclusive of
investment earnings thereon (except as otherwise provided ) whether in the form
of cash, instruments, securities or other properties, (c) the Certificate
Insurance Policy and (d) proceeds of all the foregoing (including, but not by
way of limitation, all proceeds of any hazard insurance and title insurance
policy relating to the Home Equity Loans, cash proceeds, accounts, accounts
receivable, notes, drafts, acceptances, chattel paper, checks, deposit accounts,
rights to payment of any and every kind, and other forms of obligations and
receivables which at any time constitute all or part of or are included in the
proceeds of any of the foregoing) to pay the Certificates as specified in the
Pooling and Servicing Agreement (collectively, the "Trust Estate").
The Class A Certificates will not represent an interest in or an
obligation of, nor will the Home Equity Loans be guaranteed by, the Depositor,
the Seller, the Servicer or any of their affiliates.
Prior to its formation the Trust will have had no assets or
obligations. Upon formation, the Trust will not engage in any business activity
other than acquiring, holding and collecting payments on the Home Equity Loans,
issuing the Certificates and distributing payments thereon. The Trust will not
acquire any receivables or assets other than the Home Equity Loans and the
rights appurtenant thereto and will not have any need for additional capital
resources. To the extent that borrowers make scheduled payments under the Home
Equity Loans, the Trust will have sufficient liquidity to make distributions on
the Certificates. As the Trust does not have any operating history and will not
engage in any business activity other than issuing the Certificates and making
distributions thereon, there has not been included any historical or pro forma
ratio of earnings to fixed charges with respect to the Trust.
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Initial Home
Equity Loans and the Properties is based upon the pool as constituted at the
close of business on the Cut-Off Date, as adjusted for the scheduled principal
payments due on or before such date. Prior to the issuance of the Class A
Certificates, Initial Home Equity Loans may be removed from the pool as a result
of incomplete documentation or non-compliance with representations and
warranties set forth in the Pooling and Servicing Agreement, if the Depositor
deems such removal necessary or appropriate. A limited number of other Initial
Home Equity Loans may be included in the pool prior to the issuance of the
Certificates.
A current report on Form 8-K will be available to purchasers of the
Class A Certificates and will be filed and incorporated by reference to the
Registration Statement together with the Pooling and Servicing Agreement with
the Securities and Exchange Commission within fifteen days after the initial
issuance of the Class A Certificates.
In the event Initial Home Equity Loans are removed from or added to the
pool as set forth in the preceding paragraph, such removal or addition will be
noted in the current report on Form 8-K.
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DESCRIPTION OF THE CLASS A CERTIFICATES
General
Each Certificate will represent certain undivided, fractional ownership
interests in the Trust Estate created and held pursuant to the Pooling and
Servicing Agreement, subject to the limits and the priority of distribution
described therein.
As described in "The Home Equity Loan Pool" herein, the Home Equity
Loan Pool is divided into two Groups, the Fixed Rate Group, which contains only
fixed rate Home Equity Loans and the Adjustable Rate Group, which contains only
adjustable rate Home Equity Loans. For each Home Equity Loan Group, the related
Class of Class A Certificates will evidence the right to receive on each Payment
Date the Class A Distribution Amount for such Class of Class A Certificates, in
each case until the related Class A Certificate Principal Balance has been
reduced to zero.
Payment Dates
On each Payment Date, the Owners of each Class of the Class A
Certificates will be entitled to receive, from amounts then on deposit in the
certificate account established and maintained by the Trustee in accordance with
the Pooling and Servicing Agreement (the "Certificate Account") and until the
Certificate Principal Balance of such Class of Class A Certificates is reduced
to zero, the aggregate Class A Distribution Amount as of such Payment Date,
allocated among the Classes of the Class A Certificates as described below.
Distributions will be made in immediately available funds to Owners of Class A
Certificates by wire transfer or otherwise, to the account of such Owner at a
domestic bank or other entity having appropriate facilities therefor, if such
Owner has so notified the Trustee, or by check mailed to the address of the
person entitled thereto as it appears on the register (the "Register")
maintained by the Trustee as registrar (the "Registrar"). Beneficial Owners may
experience some delay in the receipt of their payments due to the operations of
DTC. See "Risk Factors--Book Entry Registration" in the Prospectus and
"Description of the Class A Certificates--Book Entry Registration of the Class A
Certificates" herein and "Description of the Certificates--Book Entry
Registration" in the Prospectus.
The Pooling and Servicing Agreement will provide that an Owner, upon
receiving the final distribution on such Owner's Certificate, will be required
to send such Certificate to the Trustee. The Pooling and Servicing Agreement
additionally will provide that, in any event, any Certificate as to which the
final distribution thereon has been made shall be deemed canceled for all
purposes under or pursuant to the Pooling and Servicing Agreement and the
Certificate Insurance Policy.
Each Owner of record of the related Class of the Class A Certificates
will be entitled to receive such Owner's Percentage Interest in the amounts due
such Class on such Payment Date. The "Percentage Interest" of a Class A
Certificate as of any date of determination will be equal to the percentage
obtained by dividing the principal balance of such Certificate as of the Cut-Off
Date by the Certificate Principal Balance for the related Class of the Class A
Certificates as of the Cut-Off Date.
Distributions
Upon receipt, the Trustee will be required to deposit into the
Certificate Account, (i) the total of the principal and interest collections on
the Home Equity Loans, including any Net Liquidation Proceeds, remitted by the
Servicer, together with any Substitution Amount and any Loan Purchase Price
amount, (ii) any Insured Payment, and (iii) the proceeds of any liquidation of
the Trust Estate. The Trustee will also be required to deposit into the
Certificate Account any Pre-Funded Amounts to be distributed as a prepayment at
the end of the Funding Period.
The Pooling and Servicing Agreement establishes a pass-through rate on
each Class of the Class A Certificates (each, a "Pass-Through Rate") as set
forth in the Summary herein under "Certificates Offered"; the Pooling and
Servicing Agreement establishes a pass-through rate on each Class of the Class A
Certificates (each, a "Pass-Through Rate") as set forth in the Summary herein
under "Certificates Offered"; provided, further, the Pass-Through Rate with
respect to the Class A-5 Certificates shall be the lower of ____% and the
weighted average of the Coupon Rates of each Home Equity Loan less ____%
representing the sum of the rates at which the amount distributable with respect
to the Servicing Fee, the Premium Amount and the Trustee Fee are calculated
(except as otherwise provided in the Pooling and Servicing Agreement).
Approximately, ____% of the Initial Home Equity Loans in the Fixed Rate Group by
Loan Balance as of the Cut-Off Date bear interest at Coupon Rates which, after
deduction of ____% representing the sum of the rates at which the amount
distributable with respect to the Servicing Fee, the Premium Amount and the
Trustee Fee are calculated, would be lower than ____%. As a result, it is
unlikely that such weighted average will be less than ____%; provided, further,
that the Pass-Through Rate with respect to the Class A-6 Certificates will equal
the lesser of (i) the London interbank offered rate for one-month United States
dollar deposits (calculated as described under "-- Calculation of LIBOR" below)
as of the second to last business day prior to the immediately preceding Payment
Date (or as of the second to last business day prior to the Closing Date with
respect to the _________ 199_ Payment Date) (the
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"LIBOR Determination Date") plus ____% per annum, and (ii) the weighted average
of the Coupon Rates of the Home Equity Loans in the Adjustable Rate Group less
____% per annum, calculated as of the first day of the related Remittance
Period.
On each Payment Date, the Trustee is required to make the following
disbursements and transfers from moneys then on deposit in the Certificate
Account as specified below in the following order of priority of each such
transfer and disbursement:
(i) first, on each Payment Date out of Total Monthly Excess Spread
for the related Group, the Trustee shall disburse the pro
rated Premium Amount determined by the relative Certificate
Principal Balance of the related Classes of Class A
Certificates for such Payment Date to the Certificate Insurer.
(ii) second, on each Payment Date, the Trustee shall allocate an
amount equal to the sum of (x) the Total Monthly Excess Spread
with respect to such Home Equity Loan Group and Payment Date
plus (y) any Subordination Reduction Amount with respect to
such Home Equity Loan Group and Payment Date (such sum (net of
the Trustee Fees with respect to such Home Equity Loan Group
then payable under clause (iv)(C) below and the amounts
payable to the Certificate Insurer with respect to such Home
Equity Loan Group (the "Premium Amount") as described in
clause (i) above) being the "Total Monthly Excess Cashflow"
with respect to such Home Equity Loan Group and Payment Date)
in the following order of priority
(A) first, such Total Monthly Excess Cashflow shall be
allocated to the payment of the Class A Distribution
Amount pursuant to clauses (iv)(A) and (B) below on
such Payment Date with respect to the related Home
Equity Loan Group in an amount equal to the amount,
if any, by which (x) the Class A Distribution Amount
(determined for this purpose only by reference to
clause (b) of the definition of Principal
Distribution Amount and without any Subordination
Increase Amount) for such Payment Date exceeds (y)
the Available Funds with respect to such Home Equity
Loan Group for such Payment Date (the amount of such
difference with respect to a Home Equity Loan Group
being an "Available Funds Shortfall" for such Home
Equity Loan Group);
(B) second, any portion of the Total Monthly Excess
Cashflow with respect to such Home Equity Loan Group
remaining after the application described in clause
(A) above shall be allocated against any Available
Funds Shortfall with respect to the other Home Equity
Loan Group;
(C) third, any portion of the Total Monthly Excess
Cashflow with respect to such Home Equity Loan Group
remaining after the allocations described in clauses
(A) and (B) above shall be paid to the Certificate
Insurer in respect of amounts owed on account of any
Reimbursement Amount owed to the Certificate Insurer
with respect to the related Home Equity Loan Group;
and
(D) fourth, any portion of the Total Monthly Excess
Cashflow with respect to such Home Equity Loan Group
remaining after the allocations described in clauses
(A), (B) and (C) above shall be paid to the
Certificate Insurer in respect of any Reimbursement
Amount with respect to the other Home Equity Loan
Group.
(iii) third, on each Payment Date the amount, if any, of the Total
Monthly Excess Cashflow with respect to such Home Equity Loan
Group on a Payment Date remaining after the allocations
described in clause (ii) above (the "Net Monthly Excess
Cashflow" with respect to such Home Equity Loan Group for such
Payment Date) is required to be applied in the following order
or priority:
(A) first, such Net Monthly Excess Cashflow shall be used
to reduce to zero, through the allocation of a
Subordination Increase Amount to the payment of the
Class A Distribution Amount pursuant to clause (iv)
below, any Subordination Deficiency Amount (as
defined in the Pooling and Servicing Agreement) with
respect to such Home Equity Loan Group as of such
Payment Date;
(B) second, any Net Monthly Excess Cashflow remaining
after the application described in clause (A) above
shall be used to reduce to zero, through the payment
of a Subordination Increase Amount, the Subordination
Deficiency Amount, if any, with respect to the other
Home Equity Loan Group; and
(C) third, any Net Monthly Excess Cashflow remaining
after the application described in clauses (A) and
(B) above shall be paid to the Servicer to the extent
of any unreimbursed Delinquency Advances and
unreimbursed Servicing Advances.
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(iv) fourth, following the making by the Trustee of all
allocations, transfers and disbursements described above from
amounts then on deposit in the Certificate Account with
respect to the related Home Equity Loan Group, the Trustee
shall distribute:
(A) To the Owners of the Class A Certificates of the
related Group, the related Class A Current Interest,
on a pro rata basis without any priority among such
Class A Certificates;
(B) To the Owners of the related Class of Class A
Certificates, (I) the Principal Distribution Amount
applicable to the Fixed Rate Group shall be
distributed as follows: (a) first, to ----- the
Owners of the Class A-1 Certificates until the Class
A-1 Certificate Principal Balance is reduced to zero;
(b) second, to the Owners of the Class A-2
Certificates, until the ------ Class A-2 Certificate
Principal Balance is reduced to zero; (c) third, to
the Owners of the ----- Class A-3 Certificates, until
the Class A-3 Certificate Principal Balance is
reduced to zero; (d) fourth, to the Owners of the
Class A-4 Certificates, until the Class A-4 ------
Certificate Principal Balance is reduced to zero; and
(e) fifth, to the Owners of the Class ----- A-5
Certificates, until the Class A-5 Certificate
Principal Balance is reduced to zero and (II) the
Principal Distribution Amount applicable to the
Adjustable Rate Group shall be distributed to the
Owners of the Class A-6 Certificates until the Class
A-6 Certificate Principal Balance has been reduced to
zero;
(C) To the Trustee, the Trustee Fees with respect to such
Home Equity Loan Group then due; and
(D) To the Owners of the Subordinate Certificates, all
remaining distributable amounts as specified in the
Pooling and Servicing Agreement.
"Available Funds" as to any Home Equity Loan Group and Payment Date is
the amount on deposit in the Certificate Account on such Payment Date (net of
Total Monthly Excess Cashflow and disregarding the amounts of any Insured
Payments with respect to a Home Equity Loan Group to be made on such Payment
Date).
"Total Available Funds" as to any Home Equity Loan Group and Payment
Date is (x) the amount on deposit in the Certificate Account (net of Total
Monthly Excess Cashflow) on such Payment Date plus (y) any amounts of Total
Monthly Excess Cashflow with respect to a Home Equity Loan Group to be applied
on such Payment Date (disregarding the amount of any Insured Payment with
respect to a Home Equity Loan Group to be made on such Payment Date) plus, in
the case of the Fixed Rate Group, (z) any deposit to the Certificate Account
from the Pre-Funding Account and Capitalized Interest Account expected to be
made in accordance with the Pooling and Servicing Agreement.
The Trustee or Paying Agent shall (i) receive as attorney-in-fact of
each Owner of Class A Certificates any Insured Payment from the Certificate
Insurer and (ii) disburse the same to each Owner of Class A Certificates. The
Pooling and Servicing Agreement will provide that to the extent the Certificate
Insurer makes Insured Payments, either directly or indirectly (as by paying
through the Trustee or Paying Agent), to the Owners of such Class A
Certificates, if any, the Certificate Insurer will be subrogated to the rights
of such Owners of Class A Certificates with respect to such Insured Payments,
and shall receive reimbursement for such Insured Payments as provided in the
Pooling and Servicing Agreement, but only from the sources and in the manner
provided in the Pooling and Servicing Agreement for the payment of the Class A
Distribution Amount to Owners of Class A Certificates, if any; such subrogation
and reimbursement will have no effect on the Certificate Insurer's obligations
under the Certificate Insurance Policy.
The Pooling and Servicing Agreement provides that the term "Available
Funds" does not include Insured Payments and does not include any amounts that
cannot be distributed to the Owners of Class A Certificates, if any, by the
Trustee as a result of proceedings under the United States Bankruptcy Code.
Each Owner of a Class A Certificate will be required promptly to notify
the Trustee in writing upon the receipt of a court order relating to a
Preference Amount and will be required to enclose a copy of such order with such
notice to the Trustee.
Pre-Funding Account
On the Closing Date, the Original Pre-Funded Amount will be deposited
in the Pre-Funding Account, which account shall be in the name of and maintained
by the Trustee and shall be part of the Trust. During the Funding Period, the
Pre-Funded Amount will be maintained in the Pre-Funding Account. The Original
Pre-Funded Amount will be reduced during the Funding Period by the amount
thereof used to purchase Subsequent Home Equity Loans for addition to the Fixed
Rate Group in accordance with the Pooling and Servicing Agreement. Any
Pre-Funded Amount remaining at the end of the Funding Period will be distributed
to the Owners of the Fixed Rate Certificates then entitled to receive principal
in accordance with the terms of the Pooling and Servicing Agreement on the
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<PAGE>
Payment Date that immediately follows the end of the Funding Period in reduction
of the Certificate Principal Balance of such Owner's Certificates, thus
resulting in a principal prepayment of such Class of Fixed Rate Certificates.
Amounts on deposit in the Pre-Funding Account will be invested in
Eligible Investments. All interest and any other investment earnings on amounts
on deposit in the Pre-Funding Account will be deposited in the Capitalized
Interest Account prior to each Payment Date during the Funding Period. The
Pre-Funding Account will not be an asset of the REMIC.
Capitalized Interest Account
On the Closing Date cash will be deposited in the Capitalized Interest
Account, which account shall be in the name of and maintained by the Trustee and
shall be part of the Trust. The amount on deposit in the Capitalized Interest
Account, including reinvestment income thereon and amounts deposited thereto
from the Pre-Funding Account, will be used by the Trustee to fund the excess, if
any, of (i) the sum of the amount of interest accruing at the weighted average
Pass-Through Rate on all Fixed Rate Certificates on the amount by which the
aggregate Certificate Principal Balance of the Fixed Rate Certificates exceeds
the aggregate Loan Balance of the Home Equity Loans in the Fixed Rate Group plus
the Trustee Fees and Premium Amount with respect to the Fixed Rate Group
accruing on such excess balance over (ii) the amount of any reinvestment income
on monies on deposit in the Pre- Funding Account; such amounts on deposit will
be so applied by the Trustee on each Payment Date in the Funding Period to fund
such excess, if any. Any amounts remaining in the Capitalized Interest Account
at the end of the Funding Period and not needed for such purpose will be paid to
the Depositor and will not thereafter be available for distribution to the
Owners of the Fixed Rate Certificates.
Amounts on deposit in the Capitalized Interest Account will be invested
in Eligible Investments. The Capitalized Interest Account will not be an asset
of the REMIC.
Calculation of LIBOR.
On each LIBOR Determination Date (as defined above), the Trustee will
determine LIBOR for the next Accrual Period for the Class A-6 Certificates.
"LIBOR" means, as of any LIBOR Determination Date, the rate for
deposits in United States dollars for a period equal to the relevant Accrual
Period (commencing on the first day of such Accrual Period) which appears in the
Telerate Page 3750 as of 11:00 a.m., London time, on such date. If such rate
does not appear on Telerate Page 3750, the rate for that day will be determined
on the basis of the rates at which deposits in United States dollars are offered
by the Reference Banks at approximately 11:00 a.m., London time, on that day to
prime banks in the London interbank market for a period equal to the relevant
Accrual Period (commencing on the first day of such Accrual Period). The Trustee
will request the principal London office of each of the Reference Banks to
provide a quotation of its rate. If at least two such quotations are provided,
the rate for that day will be the arithmetic mean of the quotations. If fewer
than two quotations are provided as requested, the rate for that day will be the
arithmetic mean of the rates quoted by major banks in New York City, selected by
the Servicer, at approximately 11:00 a.m., New York City time, on that day for
loans in United States dollars to leading European banks for a period equal to
the relevant Accrual Period (commencing on the first day of such Accrual
Period).
"Telerate Page 3750" means the display page currently so designated on
the Dow Jones Telerate Service (or such other page as may replace that page on
that service for the purpose of displaying comparable rates or prices) and
"Reference Banks" means leading banks selected by the Trustee and engaged in
transactions in Eurodollar deposits in the international Eurocurrency market.
Book Entry Registration of the Class A Certificates
The Class A Certificates will be book-entry Certificates (the
"Book-Entry Certificates"). Persons acquiring beneficial ownership interests in
such Book-Entry Certificates ("Beneficial Owners") may elect to hold their Book-
Entry Certificates directly through DTC in the United States, or CEDEL or
Euroclear (in Europe) if they are participants of such systems ("Participants")
, or indirectly through organizations which are Participants. The Book- Entry
Certificates will be issued in one or more certificates per class of Class A
Certificates which in the aggregate equal the principal balance of such Class A
Certificates and will initially be registered in the name of Cede & Co., the
nominee of DTC. CEDEL and Euroclear will hold omnibus positions on behalf of
their Participants through customers' securities accounts in CEDEL's and
Euroclear's names on the books of their respective depositaries which in turn
will hold such positions in customers' securities accounts in the depositaries'
names on the books of DTC. Citibank will act as depositary for CEDEL and Morgan
will act as depositary for Euroclear (in such capacities, individually the
"Relevant Depositary" and collectively the "European Depositaries"). Investors
may hold such beneficial interests in the Book-Entry Certificates in minimum
denominations representing principal amounts of $____ and in integral multiples
in excess thereof. Except as described below, no Beneficial Owner will be
entitled to receive a physical certificate representing such Certificate (a
"Definitive Certificate"). Unless and until definitive Certificates are issued,
it is
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<PAGE>
anticipated that the only "Owner" of such Book-Entry Certificates will be Cede &
Co., as nominee of DTC. Beneficial Owners will not be Owners as that term is
used in the Pooling and Servicing Agreement. Beneficial Owners are only
permitted to exercise their rights indirectly through Participants and DTC.
The Beneficial Owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
Beneficial Owner's account for such purpose. In turn, the Financial
Intermediary's Ownership of such Book-Entry Certificate will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the Beneficial Owner's Financial Intermediary is not a DTC Participant and on
the records of CEDEL or Euroclear, as appropriate).
Beneficial Owners will receive all distributions of principal of, and
interest on, the Book-Entry Certificates from the Trustee through DTC and DTC
Participants. While such Certificates are outstanding (except under the
circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required to
make book-entry transfers among Participants on whose behalf it acts with
respect to such Certificates and is required to receive and transmit
distributions of principal of, and interest on, such Certificates. Participants
and indirect participants with whom Beneficial Owners have accounts with respect
to Book-Entry Certificates are similarly required to make book-entry transfers
and receive and transmit such distributions on behalf of their respective
Beneficial Owners. Accordingly, although Beneficial Owners will not possess
certificates, the Rules provide a mechanism by which Beneficial Owners will
receive distributions and will be able to transfer their interest.
Beneficial Owners will not receive or be entitled to receive
certificates representing their respective interests in the Class A
Certificates, except under the limited circumstances described below. Unless and
until Definitive Certificates are issued, Beneficial Owners who are not
Participants may transfer ownership of Class A Certificates only through
Participants and indirect participants by instructing such Participants and
indirect participants to transfer such Class A Certificates, by book-entry
transfer, through DTC for the account of the purchasers of such Class A
Certificates, which account is maintained with their respective Participants.
Under the Rules and in accordance with DTC's normal procedures, transfers of
ownership of such Class A Certificates will be executed through DTC and the
accounts of the respective Participants at DTC will be debited and credited.
Similarly, the Participants and indirect participants will make debits or
credits, as the case may be, on their records on behalf of the selling and
purchasing Beneficial Owners.
Because of time zone differences, credits of securities received in
CEDEL or Euroclear as a result of a transaction with a Participant will be made
during subsequent securities settlement processing and dated the business day
following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or CEDEL Participants on such business day. Cash received in CEDEL or
Euroclear as a result of sales of securities by or through a CEDEL Participant
(as defined below) or Euroclear Participant (as defined below) to a DTC
Participant will be received with value on the DTC settlement date but will be
available in the relevant CEDEL or Euroclear cash account only as of the
business day following settlements in DTC. For information with respect to tax
documentation procedures relating to the Certificates, see "Certain Federal
Income Tax Consequences -- Taxation of Certain Foreign Investors" and "-- Backup
Withholding" in the Prospectus and "Global Clearance, Settlement and Tax
Documentation Procedures--Certain U.S. Federal Income Tax Documentation
Requirements" in Annex I hereto.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. CEDEL Participants and Euroclear Participants may not deliver instructions
directly to the European Depositaries.
DTC, which is a New York-chartered limited purpose trust company,
performs services for its Participants ("DTC Participants"), some of which
(and/or their representatives) own DTC. In accordance with its normal
procedures, DTC is expected to record the positions held by each DTC Participant
in the Book-Entry Certificates, whether held for its own account or as a nominee
for another person. In general, beneficial ownership of Book- Entry Certificates
will be subject to the rules, regulations and procedures governing DTC and DTC
Participants as in effect from time to time.
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CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participant organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes in
accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to CEDEL is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a CEDEL Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 32 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York (the "Euroclear Operator"), under contract
with Euroclear Clearance Systems S.C., a Belgian cooperative corporation (the
"Cooperative"). All operations are conducted by the Euroclear Operator, and all
Euroclear Securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear Operator, not the Cooperative. The Cooperative establishes
policy for Euroclear on behalf of Euroclear Participants. Euroclear Participants
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries. Indirect access to Euroclear is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions on the Book-Entry Certificates will be made on each
Payment Date by the Trustee to DTC. DTC will be responsible for crediting the
amount of such payments to the accounts of the applicable DTC Participants in
accordance with DTC's normal procedures. Each DTC Participant will be
responsible for disbursing such payment to the Beneficial Owners of the
Book-Entry Certificates that it represents and to each Financial Intermediary
for which it acts as agent. Each such Financial Intermediary will be responsible
for disbursing funds to the Beneficial Owners of the Book-Entry Certificates
that it represents.
Under a book-entry format, Beneficial Owners of the Book-Entry
Certificates may experience some delay in their receipt of payments, since such
payments will be forwarded by the Trustee to Cede. Distributions with respect to
Certificates held through CEDEL or Euroclear will be credited to the cash
accounts of CEDEL Participants or Euroclear Participants in accordance with the
relevant system's rules and procedures, to the extent received by the Relevant
Depositary. Such distributions will be subject to tax reporting in accordance
with relevant United States tax laws and regulations. Because DTC can only act
on behalf of Financial Intermediaries, the ability of a Beneficial Owner to
pledge Book-Entry Certificates to persons or entities that do not participate in
the Depository system, or otherwise take actions in respect of such Book-Entry
Certificates, may be limited due to the lack of physical certificates for such
Book-Entry Certificates. In addition, issuance of the Book-Entry Certificates in
book-entry form may reduce the liquidity of such Certificates in the secondary
market since certain potential investors may be unwilling to purchase
Certificates for which they cannot obtain physical certificates.
Monthly and annual reports on the Trust provided by the Servicer to
Cede, as nominee of DTC, may be made available to Beneficial Owners upon
request, in accordance with the rules, regulations and procedures creating and
affecting the Depository, and to the Financial Intermediaries to whose DTC
accounts the Book-Entry Certificates of such Beneficial Owners are credited.
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DTC has advised the Trustee that, unless and until Definitive
Certificates are issued, DTC will take any action permitted to be taken by the
holders of the Book-Entry Certificates under the Pooling and Servicing Agreement
only at the direction of one or more Financial Intermediaries to whose DTC
accounts the Book-Entry Certificates are credited, to the extent that such
actions are taken on behalf of Financial Intermediaries whose holdings include
such Book-Entry Certificates. CEDEL or the Euroclear Operator, as the case may
be, will take any action permitted to be taken by an Owner under the Pooling and
Servicing Agreement on behalf of a CEDEL Participant or Euroclear Participant
only in accordance with its relevant rules and procedures and subject to the
ability of the Relevant Depositary to effect such actions on its behalf through
DTC. DTC may take actions, at the direction of the related Participants, with
respect to some Class A Certificates which conflict with actions taken with
respect to other Class A Certificates.
Definitive Certificates will be issued to Beneficial Owners of the
Book-Entry Certificates, or their nominees, rather than to DTC, only if (a) DTC
or the Depositor advises the Trustee in writing that DTC is no longer willing,
qualified or able to discharge properly its responsibilities as a nominee and
depository with respect to the Book-Entry Certificates and the Depositor or the
Trustee is unable to locate a qualified successor, (b) the Depositor, at its
sole option, elects to terminate a book-entry system through DTC or (c) DTC, at
the direction of the Beneficial Owners representing a majority of the
outstanding Percentage Interests of the Class A Certificates, advises the
Trustee in writing that the continuation of a book-entry system through DTC (or
a successor thereto) is no longer in the best interests of Beneficial Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all Beneficial
Owners of the occurrence of such event and the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the global certificate or
certificates representing the Book- Entry Certificates and instructions for
re-registration, the Trustee will issue Definitive Certificates, and thereafter
the Trustee will recognize the holders of such Definitive Certificates as Owners
under the Pooling and Servicing Agreement.
Although DTC, CEDEL and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Certificates among Participants
of DTC, CEDEL and Euroclear, they are under no obligation to perform or continue
to perform such procedures and such procedures may be discontinued at any time.
Assignment of Rights
An Owner may pledge, encumber, hypothecate or assign all or any part of
its right to receive distributions under any Certificate, but such pledge,
encumbrance, hypothecation or assignment shall not constitute a transfer of an
ownership interest sufficient to render the transferee an Owner of the Trust
without compliance with the provisions of the Pooling and Servicing Agreement
described above. Notwithstanding the foregoing, the Pooling and Servicing
Agreement provides that the Certificate Insurer may, in connection with a
subrogation of the Certificate Insurer to the rights of the Owners of the Class
A Certificates to an amount equal to Insured Payments for which the Certificate
Insurer has not received reimbursement, be considered to be an "Owner" to the
extent (but only to the extent) of such rights.
THE CERTIFICATE INSURER
The information set forth in this section and in the financial
statements of the Certificate Insurer set forth in Appendix B and Appendix C
hereto have been provided by the Certificate Insurer. No representation is made
by any Underwriter, the Seller, the Servicer, the Depositor or any of their
affiliates as to the accuracy or completeness of any such information.
The Certificate Insurer will issue its Certificate Insurance Policy for
the Class A Certificates. The Certificate Insurance Policy unconditionally
guarantees the payment of principal and scheduled interest on the Class A
Certificates. The Certificate Insurer will make each required Insured Payment to
the Trustee on the later of (i) the Payment Date on which such Insured Payment
is distributable to the Owners of the Class A Certificates pursuant to the
Pooling and Servicing Agreement and (ii) the Business Day next following the day
on which the Certificate Insurer shall have received telephonic or telegraphic
notice, subsequently confirmed in writing, or written notice by registered or
certified mail, from the Trustee, specifying that an Insured Payment is due in
accordance with the terms of the Certificate Insurance Policy.
The Certificate Insurer's obligation under the Certificate Insurance
Policy will be discharged to the extent that funds are received by the Trustee
for distribution to the Owners of the Class A Certificates, whether or not such
funds are properly distributed by the Trustee.
For purposes of the Certificate Insurance Policy, the Owner of a Class
A Certificate as to a particular Certificate, does not and may not include the
Trust, the Servicer, any Subservicer, the Seller or the Depositor.
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The Certificate Insurance Policy does not guarantee to the Owners of
the Class A Certificates any specified rate of prepayments of principal of the
Home Equity Loans or any specified return.
The Certificate Insurance Policy is non-cancelable.
THE CERTIFICATE INSURANCE POLICY IS NOT COVERED BY THE
PROPERTY/CASUALTY INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW
YORK INSURANCE LAW.
The Certificate Insurer is a wholly-owned subsidiary of _______________
(the "Corporation"), a Delaware holding company. The Corporation is a subsidiary
of ______________________________ ("_______________"). Neither the Corporation
nor _______________ is obligated to pay the debts of or the claims of the
Certificate Insurer.
The Certificate Insurer, a New York stock insurance company, is a
monoline financial guaranty insurance company which, since January 1984, has
been a leading insurer of bonds issued by municipal governmental subdivisions
and agencies thereof. The Certificate Insurer also insures a variety of
non-municipal structured debt obligations. The Certificate Insurer is authorized
to write insurance in 50 states and the District of Columbia and is also
authorized to carry on general insurance business in the United Kingdom and to
write credit and guaranty insurance in France. The Certificate Insurer is
subject to regulation by the State of New York Insurance Department.
The Certificate Insurer and the Corporation, are subject to regulation
by each jurisdiction in which the Certificate Insurer is licensed to write
insurance. These regulations vary from jurisdiction to jurisdiction, but
generally require insurance holding companies and their insurance subsidiaries
to register and file certain reports, including information concerning their
capital structure, ownership and financial condition and require prior approval
by the insurance department of their states of domicile, of changes in control,
of certain dividends and other intercorporate transfer of assets and of
transactions between insurance companies, their parents and other affiliates.
The Certificate Insurer is required to file quarterly and annual statutory
financial statements and is subject to statutory restrictions concerning the
types and quality of investments, the use of policy forms, premium rates and the
size of risk that it may insure, subject to reinsurance. Additionally, the
Certificate Insurer is subject to triennial audits by the State of New York
Insurance Department.
The Certificate Insurer considers its role in providing insurance to be
credit enhancement rather than credit substitution. The Certificate Insurer only
insures securities that the Certificate Insurer considers to be of investment
grade quality. With respect to each category of obligations considered for
insurance, the Certificate Insurer has established and maintains its own
underwriting standards that are based on those aspects of credit quality that
the Certificate Insurer deems important for the category and that take into
account criteria established for the category typically used by rating agencies.
Credit criteria for evaluating securities include economic and social trends,
debt management, financial management and legal and administrative factors, the
adequacy of anticipated cash flow, including the historical and expected
performance of assets pledged for payment of securities under varying economic
scenarios, underlying levels of protection such as insurance or
overcollateralization, and, particularly in the case of long-term municipal
securities, the importance of the project being financed.
The Certificate Insurer also reviews the security features and reserves
created by the financing documentation, as well as the financial and other
covenants imposed upon the credit backing the issue. In connection with the
underwriting of new issues, the Certificate Insurer sometimes requires, as a
condition to insuring an issue, that collateral be pledged or, in some
instances, that a third-party guarantee be provided for a term of the insured
obligation by a party of acceptable credit quality obligated to make payment
prior to any payment by the Certificate Insurer.
Insurance written by the Certificate Insurer insures the full and
timely payment of principal and interest on insured debt securities and
scheduled payments due in respect of pass-through securities such as the Class A
Certificates. If the issuer of a security insured by the Certificate Insurer
defaults on its obligations to pay the insured amounts, or, in the case of a
pass-through security, available funds are insufficient to pay the insured
amounts, the Certificate Insurer will make the scheduled insured payments,
without regard to any acceleration of the securities which may have occurred,
and will be subrogated to the rights of security holders to the extent of its
payments. Securities insured to maturity by the Certificate Insurer are rated
"AAA" or "AAAr" by S&P and Aaa by Moody's.
In consideration for issuing its insurance, the Certificate Insurer
receives a premium which is generally paid in full upon issuance of the policy
or on an annual, semiannual or monthly basis. The premium rates charged depend
principally on the credit strength of the securities as judged by the
Certificate Insurer according to its internal credit rating system and the type
of issue.
Committees of senior officers of the Certificate Insurer must approve
all issues for insurance with the exception of certain small exposures, which
may be approved by the Director of Public Finance. These committees review
reports prepared by credit analysts on the staff of the Certificate Insurer
assigned to review such issues. Prior to its presentation to a committee,
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the recommendation for insurance in such report must be reviewed by the director
of the group responsible for the underwriting of the type of security under
consideration.
As of ________, 199_ and ___________, 199_ the Certificate Insurer had
written directly, or assumed through reinsurance, guaranties of approximately
$_____ billion and $_____ billion par value of securities, respectively (of
which approximately __ percent constituted guaranties of municipal bonds), for
which it had collected gross premiums of approximately $____ billion and $____
billion, respectively. As of ________, 199_, the Certificate Insurer had
reinsured approximately __ percent of the risks it had written, __ percent
through quota share reinsurance and __ percent through facultative arrangements.
The following table sets forth capitalization of the Certificate
Insurer as of ___________, 199_, ___________, 199_ and ________, 199_
respectively, on the basis of generally accepted accounting principles. No
material adverse change in the capitalization of the Certificate Insurer has
occurred since ________, 199_.
<TABLE>
<CAPTION>
(unaudited)
------------, ------------, ------------,
199 (2) 199 199
------- ---- ---
(in millions) (in millions) (in millions)
<S> <C> <C> <C>
Unearned Premiums..........................
Other Liabilities(1).......................
Stockholder's Equity
Common Stock..........................
Additional Paid-in Capital............
Unrealized Gains (Losses).............
Foreign currency translation
adjustment..........................
Retained Earnings.....................
Total Stockholder's Equity.................
Total Liabilities and Stockholder's Equity.
</TABLE>
- ------------------
(1) Including any short-term liabilities.
(2) The financial information presented has been adjusted to reflect the
effect of Statement of Financial Accounting Standards No. 113
"Accounting and Reporting for Reinsurance of Short-Duration and Long-
Duration Contracts", which the Certificate Insurer adopted during 199_.
(3) Effective ______, 199_, the common stock par value was changed from
$___ per share to $_____ per share.
(4) Effective ___________, 199_, the Certificate Insurer adopted the
provisions of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
(5) In 199_, the Certificate Insurer changed its method of accounting for
retrospectively rated reinsurance contracts.
For further financial information concerning the Certificate Insurer,
see the audited financial statements of the Certificate Insurer included as
Appendix B of this Prospectus Supplement and the unaudited interim financial
statements of the Certificate Insurer included in Appendix C of this Prospectus
Supplement.
Copies of the Certificate Insurer's quarterly and annual statutory
statements filed by the Certificate Insurer with the New York Insurance
Department are available upon request to __________________________,
_______________, New York, New York 10006, Attention: Corporate Communications
Department. The Certificate Insurer's telephone number is (_____)
_______________.
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The Certificate Insurer does not accept any responsibility for the
accuracy or completeness of this Prospectus Supplement or the Prospectus or any
information or disclosure contained herein, or omitted herefrom, other than with
respect to the accuracy of information in this Prospectus Supplement regarding
the Certificate Insurer and the Certificate Insurance Policy set forth under the
heading "The Certificate Insurer" and in Appendix B and Appendix C.
CREDIT ENHANCEMENT
Certificate Insurance Policy
The Certificate Insurer in consideration of the payment of the premium
and subject to the terms of the Certificate Insurance Policy thereby
unconditionally and irrevocably guarantees to any Owner that an amount equal to
each full and complete Insured Payment will be received by the Trustee, as
trustee for the Owners, on behalf of the Owners, for distribution by the Trustee
to each Owner of each Owner's proportionate share of the Insured Payment. The
Certificate Insurer's obligations under the Certificate Insurance Policy with
respect to a particular Insured Payment shall be discharged to the extent funds
equal to the applicable Insured Payment are received by the Trustee, whether or
not such funds are properly applied by the Trustee. Insured Payments shall be
made only at the time set forth in the Certificate Insurance Policy, and no
accelerated Insured Payments shall be made regardless of any acceleration of the
Class A Certificates, unless such acceleration is at the sole option of the
Certificate Insurer.
Notwithstanding the foregoing paragraph, the Certificate Insurance
Policy does not cover shortfalls, if any, attributable to the liability of the
Trust, the REMIC or the Trustee for withholding taxes, if any (including
interest and penalties in respect of any such liability).
Overcollateralization Provisions
Overcollateralization Resulting from Cash Flow Structure. The Pooling
and Servicing Agreement requires that, on each Payment Date, Net Monthly Excess
Cashflow with respect to a Home Equity Loan Group be applied on such Payment
Date as an accelerated payment of principal on the related Classes of Class A
Certificates, but only to the limited extent hereafter described. Net Monthly
Excess Cashflow equals the excess of (i) the excess, if any of (x) the interest
which is collected on the Home Equity Loans in such Home Equity Loan Group
during a Remittance Period (net of the Servicing Fee, the Trustee Fee, the
Premium Amount and Retained Yield with respect to such Home Equity Loan Group)
plus any Delinquency Advances and Compensating Interest paid by the Servicer
with respect to such Remittance Period over (y) the sum of the interest which
accrues on the related Class of Class A Certificates during the related Accrual
Period (such difference, the "Total Monthly Excess Spread" with respect to such
Home Equity Loan Group), over (ii) the portion of the Total Monthly Excess
Cashflow that is used to cover shortfalls in Available Funds on such Payment
Date in the related Home Equity Loan Group.
This has the effect of accelerating the amortization of the related
Class A Certificates relative to the amortization of the Home Equity Loans in
the related Home Equity Loan Group. To the extent that any Net Monthly Excess
Cashflow is not so used (and is not required to satisfy requirements with
respect to the other Home Equity Loan Group), the Pooling and Servicing
Agreement provides that it will be used to reimburse the Servicer with respect
to any amounts owing to it, or paid to the Owners of the Subordinate
Certificates.
Pursuant to the Pooling and Servicing Agreement, each Home Equity Loan
Group's Net Monthly Excess Cashflow will be applied as an accelerated payment of
principal on the related Classes of Class A Certificates until the Subordinated
Amount has increased to the level required. "Subordinated Amount" means, with
respect to each Home Equity Loan Group and Payment Date, the excess, if any, of
(x) the sum of (i) the aggregate principal balances of the Home Equity Loans in
such Home Equity Loan Group as of the close of business on the last day of the
preceding Remittance Period and (ii) with respect to the Fixed Rate Group only,
any amount on deposit in the Pre-Funding Account at such time over (y) the
related Class A Certificate Principal Balance as of such Payment Date after
taking into account the payment of the Class A Distribution Amount (except for
any Subordination Deficit or Subordination Increase Amount with respect to such
Group on such Payment Date). With respect to each Home Equity Loan Group, any
amount of Net Monthly Excess Cashflow actually applied as an accelerated payment
of principal is a "Subordination Increase Amount." The required level of the
Subordinated Amount for each Home
Equity Loan Group with respect to a Payment Date is the "Specified
Subordinated Amount." The Pooling and Servicing Agreement generally provides
that the Specified Subordinated Amount may, over time, decrease, or increase,
subject to certain floors, caps and triggers.
In the event that the required level of the Specified Subordinated
Amount with respect to a Home Equity Loan Group is permitted to decrease or
"step down" on a Payment Date in the future, the Pooling and Servicing Agreement
provides that a portion of the principal which would otherwise be distributed to
the Owners of the related Class A Certificates on such Payment Date may be
distributed to the Owners of the Subordinate Certificates on such Payment Date.
This has the effect of decelerating
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the amortization of Class A Certificates relative to the amortization of the
Home Equity Loans and of reducing the related Subordinated Amount. With respect
to any Home Equity Loan Group and Payment Date, the excess, if any, of (x) the
Subordinated Amount on such Payment Date after taking into account all
distributions to be made on such Payment Date (except for any distributions of
Subordination Reduction Amounts as described in this paragraph) over (y) the
Specified Subordinated Amount is the "Excess Subordinated Amount" for such Home
Equity Loan Group and Payment Date. If, on any Payment Date, the Excess
Subordinated Amount is, or, after taking into account all other distributions to
be made on such Payment Date would be, greater than zero (i.e., the Subordinated
Amount is or would be greater than the related Specified Subordinated Amount),
then any amounts relating to principal which would otherwise be distributed to
the Owners of the related Class A Certificates on such Payment Date shall
instead be distributed to the Owners of the Subordinate Certificates in an
amount equal to the lesser of (x) the Excess Subordinated Amount and (y) the
amount available for distribution on account of principal with respect to the
Class A Certificates on such Payment Date; such amount being the "Subordination
Reduction Amount" with respect to the related Home Equity Loan Group for such
Payment Date. As a result of the cash flow structure of the Trust, Subordination
Reduction Amounts may result even prior to the occurrence of any decrease or
"step down" in the Specified Subordinated Amount. That is because the Owners of
the Class A Certificates will, except for the provisions relating to the
Subordination Amount, be entitled to receive ___% of collected principal with
respect to the related Home Equity Loan Group even though the Class A
Certificate Principal Balance, following the accelerated amortization resulting
from the application of the Net Monthly Excess Cashflow, will be less than ___%
of the related Home Equity Loan Group's aggregate Loan Balance. Accordingly, in
the absence of the provisions relating to Subordination Reduction Amounts the
Subordinated Amount would increase above the Specified Subordinated Amount
requirements even without the further application of any Net Monthly Excess
Cashflow.
The Pooling and Servicing Agreement provides generally that, on any
Payment Date, all amounts collected on account of principal (other than any such
amount applied to the payment of a Subordination Reduction Amount) with respect
to a Home Equity Loan Group during the prior Remittance Period will be
distributed to the Owners of the related Class A Certificates on such Payment
Date. If any Home Equity Loan became a Liquidated Loan during such prior
Remittance Period, the Net Liquidation Proceeds related thereto and allocated to
principal may be less than the principal balance of the related Home Equity
Loan; the amount of any such insufficiency is a "Realized Loss." In addition,
the Pooling and Servicing Agreement provides that the principal balance of any
Home Equity Loan which becomes a Liquidated Loan shall thenceforth equal zero.
The Pooling and Servicing Agreement does not contain any provisions which
requires that the amount of any Realized Loss be distributed to the Owners of
the Class A Certificates on the Payment Date which immediately follows the event
of loss; i.e., the Pooling and Servicing Agreement does not require the current
recovery of losses. However, the occurrence of a Realized Loss will reduce the
Subordinated Amount with respect to the related Home Equity Loan Group, which,
to the extent that such reduction causes the Subordinated Amount to be less than
the Specified Subordinated Amount applicable to the related Payment Date, will
require the payment of a Subordination Increase Amount on such Payment Date (or,
if insufficient funds are available on such Payment Date, on subsequent Payment
Dates, until the Subordinated Amount equals the related Specified Subordinated
Amount). The effect of the foregoing is to allocate losses to the Owners of the
Subordinate Certificates by reducing, or eliminating entirely, payments of
Monthly Excess Spread and of Subordination Reduction Amounts which such Owners
would otherwise receive.
Overcollateralization and the Certificate Insurance Policy. The Pooling
and Servicing Agreement defines a "Subordination Deficit" with respect to a Home
Equity Loan Group and Payment Date to be the amount, if any, by which (x) the
aggregate of the related Class A Certificate Principal Balances, after taking
into account all distributions to be made on such Payment Date (except for the
amount of any Subordination Deficit), exceeds (y) the sum of (a) the aggregate
principal balances of the Home Equity Loans in the related Home Equity Loan
Group as of the close of business on the last day of the related Remittance
Period and (b) with respect to the Fixed Rate Group only, the amount, if any, on
deposit in the Pre-Funding Account on the last day of the related Remittance
Period. The Pooling and Servicing Agreement requires the Trustee to make a claim
for an Insured Payment under the Certificate Insurance Policy not later than the
third Business Day prior to any Payment Date as to which the Trustee has
determined that a Subordination Deficit will occur for the purpose of applying
the proceeds of such Insured Payment as a payment of principal to the Owners of
the Class A Certificates entitled to such Insured Payment on such Payment Date.
The Certificate Insurance Policy is similar to the overcollateralization
provisions described above insofar as the Certificate Insurance Policy
guarantees ultimate, rather than current, payment of the amounts of any Realized
Losses to the Owners of the Class A Certificates. Investors in the Class A
Certificates should realize that, under extreme loss or delinquency scenarios
applicable to the Home Equity Loans, they may temporarily receive no
distributions of principal when they would otherwise be entitled thereto under
the principal allocation provisions described herein. Nevertheless, the exposure
to risk of loss of principal of the Owners of the Class A Certificates depends
in part on the ability of the Certificate Insurer to satisfy its obligations
under the Certificate Insurance Policy. In that respect and to the extent that
the Certificate Insurer satisfies such obligations, the Owners of the Class A
Certificates are insulated from shortfalls in Available Funds that may arise.
Crosscollateralization Provisions
In addition to the use of Total Monthly Excess Spread and Net Monthly
Excess Cashflow with respect to a Home Equity Loan Group to cover related
Subordination Increase Amounts, Available Funds Shortfalls and Subordination
Deficits,
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such Total Monthly Excess Spread and Net Monthly Excess Cashflow will be
available to cover such requirements for the other Home Equity Loan Group as
described under the caption "Description of the Class A Certificates --
Distributions" herein.
THE POOLING AND SERVICING AGREEMENT
In addition to the provisions of the Pooling and Servicing Agreement
summarized elsewhere in the Prospectus and this Prospectus Supplement, there is
set forth below a summary of certain other provisions of the Pooling and
Servicing Agreement. Covenant of the Seller to Take Certain Actions with Respect
to the Home Equity Loans in Certain Situations
Pursuant to the Pooling and Servicing Agreement, upon the discovery by
the Depositor, Seller, the Servicer, the Certificate Insurer, any Sub-Servicer,
any Owner or the Trustee that any representations and warranties with respect to
the Home Equity Loans were untrue in any material respect as of the Closing Date
with the result that the interests of the Owners or of the Certificate Insurer
are materially and adversely affected, the party discovering such breach is
required to give prompt written notice to the other parties.
Upon the earliest to occur of the Seller's discovery, its receipt of
notice of breach from any of the other parties or such time as a situation
resulting from an existing statement which is untrue materially and adversely
affects the interests of the Owners or the Certificate Insurer, the Seller will
be required promptly to cure such breach in all material respects or, on the
second Monthly Remittance Date next succeeding such discovery, receipt of notice
or such time, the Seller shall (i) substitute in lieu of each Home Equity Loan
which has given rise to the requirement for action by the Seller a Qualified
Replacement Mortgage (as such term is defined in the Pooling and Servicing
Agreement) and deliver the Substitution Amount to the Trustee on behalf of the
Trust as part of the Monthly Remittance remitted by the Servicer on such Monthly
Remittance Date or (ii) purchase such Home Equity Loan from the Trust at a
purchase price equal to the Loan Purchase Price (as defined below) thereof.
Notwithstanding any provision of the Pooling and Servicing Agreement to the
contrary, with respect to any Home Equity Loan which is not in default or as to
which no default is imminent, no such repurchase or substitution will be made
unless the Seller obtains for the Trustee and the Certificate Insurer an opinion
of counsel experienced in federal income tax matters and acceptable to the
Certificate Insurer to the effect that such a repurchase or substitution would
not constitute a Prohibited Transaction for the Trust or otherwise subject the
Trust to tax and would not jeopardize the status of the REMIC Pool as a REMIC (a
"REMIC Opinion") addressed to the Trustee and the Certificate Insurer and
acceptable to the Trustee and the Certificate Insurer. Any Home Equity Loan as
to which repurchase or substitution was delayed pursuant to the Pooling and
Servicing Agreement shall be repurchased or substituted for (subject to
compliance with the provisions of the Pooling and Servicing Agreement) upon the
earlier of (a) the occurrence of a default or imminent default with respect to
such Home Equity Loan and (b) receipt by the Trustee and the Certificate Insurer
of a REMIC Opinion. In connection with any breach of a representation, warranty
or covenant or defect in documentation giving rise to such repurchase or
substitution obligation, the Seller agrees that it shall, at its expense,
furnish the Trustee and the Certificate Insurer with a REMIC Opinion as a result
of any such repurchase or substitution. The obligation of the Seller so to
substitute or purchase any Home Equity Loan as to which such a statement set
forth below is untrue in any material respect and S-52 has not been remedied
constitutes the sole remedy respecting a discovery of any such statement which
is untrue in any material respect available to the Owners, the Trustee and the
Certificate Insurer.
"Loan Purchase Price" means the outstanding principal balance of the
related Home Equity Loan on the Cut-Off Date (assuming that all scheduled
principal payments due prior to the Cut-Off Date have been made), less any
principal amounts previously distributed to the Owners relating to such Home
Equity Loan (such amount, the "Loan Balance" of such Home Equity Loan) as of the
date of purchase (assuming that the Monthly Remittance remitted by the Servicer
on such Monthly Remittance Date has already been remitted), plus one month's
interest at the Coupon Rate less the Retained Yield together with the aggregate
amount of all unreimbursed Delinquency Advances and Servicing Advances
theretofore made with respect to such Home Equity Loan, all Delinquency Advances
and Servicing Advances which the Servicer has theretofore failed to remit with
respect to such Home Equity Loan and all reimbursed Delinquency Advances to the
extent that reimbursement is not made from the Mortgagor or from Liquidation
Proceeds from the respective Home Equity Loan.
Assignment of Home Equity Loans
Pursuant to the Pooling and Servicing Agreement, the Seller on the
Closing Date will transfer, assign, set over and otherwise convey without
recourse to the Depositor and the Depositor will transfer, assign, set over and
otherwise convey without recourse to the Trustee in trust all of its respective
right, title and interest in and to each Home Equity Loan (other than any
Retained Yield) and all its respective right, title and interest in and to
principal and interest due (other than any Retained Yield) on each such Home
Equity Loan after the Cut-Off Date; provided, however, that the Seller will
reserve and retain all its right, title and interest in and to principal
(including Prepayments) and interest due on each Home Equity Loan on or prior to
the Cut-Off Date. Purely as a protective measure and not to be construed as
contrary to the parties' intent that the transfer on the Closing Date is a sale,
the Seller has also been deemed to have granted to the Depositor and the
Depositor has also been deemed to have granted to the Trustee a security
interest in the Trust Estate in the event that the transfer of the Trust Estate
is deemed to be a loan and not a sale.
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In connection with the transfer and assignment of the Initial Home
Equity Loans on the Closing Date and the Subsequent Home Equity Loans on each
Subsequent Transfer Date, the Seller will be required to:
(i) deliver without recourse to the Trustee on the Closing
Date with respect to each Initial Home Equity Loan or on each
Subsequent Transfer Date with respect to each Subsequent Home Equity
Loan identified in the related schedule of Home Equity Loans (A) the
original Notes or certified copies thereof, endorsed in blank or to the
order of the Trustee, (B) the original title insurance policy or a copy
certified by the issuer of the title insurance policy, or the
attorney's opinion of title, (C) originals or certified copies of all
intervening assignments, showing a complete chain of title from
origination to the Trustee, if any, including warehousing assignments,
with evidence of recording thereon, (D) originals of all assumption and
modification agreements, if any and (E) either: (1) the original
Mortgage, with evidence of recording thereon (if such original Mortgage
has been returned to Seller from the applicable recording office) or
(2) a copy of the Mortgage certified by the public recording office in
those instances where the original recorded Mortgage has been lost;
(ii) cause, within 60 days following the Closing Date with
respect to the Initial Home Equity Loans, or Subsequent Transfer Date
with respect to the Subsequent Home Equity Loans, assignments of the
Mortgages to "___________________________, as Trustee of
_______________ Home Equity Loan Trust 199__-__ under the Pooling and
Servicing Agreement dated as of ________, 199_" to be submitted for
recording in the appropriate jurisdictions; provided, however, that the
Seller shall not be required to prepare any assignment of Mortgage for
a Mortgage with respect to which the original recording information is
lacking or to record an assignment of a Mortgage if the Seller
furnishes to the Trustee and the Certificate Insurer, on or before the
Closing Date, with respect to the Initial Home Equity Loans, or
Subsequent Transfer Date with respect to the Subsequent Home Equity
Loans at the Seller's expense an opinion of counsel with respect to the
relevant jurisdiction that such recording is not required to perfect
the Trustee's interests in the related Mortgages Loans (in form
satisfactory to the Certificate Insurer and the Rating Agencies);
(iii) deliver the title insurance policy, the original
Mortgages and such recorded assignments, together with originals or
duly certified copies of any and all prior assignments, to the Trustee
within 15 days of receipt thereof by the Seller (but in any event, with
respect to any Mortgage as to which original recording information has
been made available to the Seller within one year after the Closing
Date with respect to the Initial Home Equity Loans, or Subsequent
Transfer Date with respect to the Subsequent Home Equity Loans); and
(iv) furnish to the Trustee and the Certificate Insurer, at
the Seller's expense, an opinion of counsel with respect to the sale
and perfection of all Subsequent Home Equity Loans delivered to the
Trust in form and substance satisfactory to the Trustee and the
Certificate Insurer.
The Trustee will agree, for the benefit of the Owners, to review each
File within 45 days after the Closing Date or Subsequent Transfer Date (or the
date of receipt of any documents delivered to the Trustee after such date) to
ascertain that all required documents (or certified copies of documents) have
been executed and received.
If the Trustee during such 45-day period finds any document
constituting a part of a File which is not properly executed, has not been
received, is unrelated to the Home Equity Loans or that any Home Equity Loan
does not conform in a material respect to the description thereof as set forth
in the Schedule of Home Equity Loans, the Trustee will be required to promptly
notify the Depositor, the Seller and the Certificate Insurer. The Seller will
agree in the Pooling and Servicing Agreement to use reasonable efforts to remedy
a material defect in a document constituting part of a File of which it is so
notified by the Trustee. If, however, within 60 days after the Trustee's notice
to it respecting such defect the Seller shall not have remedied the defect and
the defect materially and adversely affects the interest in the related Home
Equity Loan of the Owners or of the Certificate Insurer, the Seller will be
required on the next succeeding Monthly Remittance Date to (or will cause an
affiliate of the Seller to) (i) substitute in lieu of such Home Equity Loan
another Home Equity Loan of like kind (a "Qualified Replacement Mortgage," as
such term is defined in the Pooling and Servicing Agreement) and deliver any
"Substitution Amount" (the excess, if any, of the Loan Balance of a Home Equity
Loan being replaced over the outstanding principal balance of a replacement Home
Equity Loan plus accrued and unpaid interest) to the Trustee on behalf of the
Trust as part of the Monthly Remittance remitted by the Servicer on such Monthly
Remittance Date or (ii) purchase such Home Equity Loan at a purchase price equal
to the Loan Purchase Price thereof, which purchase price shall be delivered to
the Trust along with the Monthly Remittance remitted by the Servicer on such
Monthly Remittance Date.
In addition to the foregoing, the Trustee has agreed to make a review
during the 18th month after the Closing Date indicating the current status of
the exceptions previously noted by the Trustee (the "Final Certification").
After delivery of the Final Certification, the Trustee and the Servicer shall
provide to Certificate Insurer no less frequently than monthly updated
certifications indicating the then current status of exceptions, until all such
exceptions have been eliminated.
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Servicing and Sub-Servicing
The Servicer is required to service the Home Equity Loans in accordance
with the Pooling and Servicing Agreement and the servicing standards set forth
in FNMA's Servicing Guide (the "FNMA Guide"); provided, however, that to the
extent such standards, such obligations or the FNMA Guide is amended by FNMA
after the date of the Pooling and Servicing Agreement and the effect of such
amendment would be to impose upon the Servicer any material additional costs or
other burdens relating to such servicing obligations, the Servicer may, at its
option, determine not to comply with such amendment.
The Servicer is entitled to the Servicing Fee to the extent received.
In addition, the Servicer will be entitled to retain additional servicing
compensation in the form of prepayment charges, release fees, bad check charges,
assumption fees, late payment charges, or any other servicing-related fees, Net
Liquidation Proceeds not required to be deposited in the Principal and Interest
Account pursuant to the Pooling and Servicing Agreement, and similar items.
The Servicer is required to create, or cause to be created, in the name
of the Trustee at one or more depository institutions a principal and interest
account maintained as a trust account in the trust department of such
institution (the "Principal and Interest Account"). All funds in the Principal
and Interest Account are required to be held (i) uninvested or (ii) invested in
Eligible Investments (as defined in the Pooling and Servicing Agreement). Any
investment of funds in the Principal and Interest Account must mature or be
withdrawable at par on or prior to the immediately succeeding Monthly Remittance
Date. Any investment earnings on funds held in the Principal and Interest
Account are for the account of, and any losses therein are also for the account
of and must be promptly replenished by, the Servicer.
The Servicer is required to deposit to the Principal and Interest
Account, within one business day following receipt, all principal collections on
the Home Equity Loans received, and interest collections on the Home Equity
Loans accrued after the Cut-Off Date, including any Prepayments, the proceeds of
any liquidation of a Home Equity Loan net of expenses and unreimbursed
Delinquency Advances ("Net Liquidation Proceeds"), any income from REO
Properties and Delinquency Advances, but net of (i) the Servicing Fee with
respect to each Home Equity Loan and other servicing compensation, (ii)
principal collected and interest accrued on any Home Equity Loan prior to the
Cut-Off Date, (iii) Net Liquidation Proceeds to the extent that such Net
Liquidation Proceeds exceed the sum of (I) the Loan Balance of the related Home
Equity Loan, plus (II) accrued and unpaid interest on such Home Equity Loan (net
of the Servicing Fee) to the date of such liquidation, (iv) the Retained Yield
on any Home Equity Loan actually received by the Servicer, (v) reimbursements
for Delinquency Advances, and (vi) reimbursement for amounts deposited in the
Principal and Interest Account representing payments of principal and/or
interest on a Note by a Mortgagor which are subsequently returned by a
depository institution as unpaid (all such net amounts being referred to herein
as the "Daily Collections").
The Servicer may make withdrawals for its own account from the amounts
on deposit in the Principal and Interest Account with respect to each Home
Equity Loan Group, in the following order and only for the following purposes:
(i) to withdraw interest paid with respect to any Home Equity
Loans that had accrued for periods on or prior to the Cut-Off Date;
(ii) to withdraw investment earnings on amounts on deposit in
the Principal and Interest Account;
(iii) to reimburse itself for unrecovered Delinquency Advances
and Servicing Advances;
(iv) to withdraw amounts that have been deposited to the
Principal and Interest Account in error; and
(v) to clear and terminate the Principal and Interest Account
following the termination of the Trust.
The Servicer will remit to the Trustee for deposit in the Certificate
Account the Daily Collections allocable to a Remittance Period not later than
the related Monthly Remittance Date, and Loan Purchase Prices and Substitution
Amounts two Business Days following the related purchase or substitution, as the
case may be.
If the amount on deposit in the Certificate Account as of any Monthly
Remittance Date is less than the sum of (I) the Interest Remittance Amount (as
defined in the Pooling and Servicing Agreement) and (II) the Principal
Remittance Amount (as defined in the Pooling and Servicing Agreement) on such
Monthly Remittance Date, the Servicer is required to remit to the Trustee for
deposit to the Certificate Account a sufficient amount of its own funds to make
the total amount remitted to the Trustee equal to such sum. Such amounts of the
Servicer's own funds so deposited are "Delinquency Advances", including but not
limited to any amount advanced due to the invocation by a Mortgagor of the
relief provisions provided by the Soldiers' and Sailors' Civil Relief Act of
1940. The Servicer may reimburse itself, for any Delinquency Advances paid from
the Servicer's own
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funds, from collections on the Home Equity Loans with respect to the related
Home Equity Loan Group or from Net Monthly Excess Cashflow with respect to the
related Home Equity Loan Group as specified in the Pooling and Servicing
Agreement.
Notwithstanding the foregoing, if the Servicer determines that the
aggregate unreimbursed Delinquency Advances exceed the aggregate remaining
scheduled payments due from the Mortgagor on the Home Equity Loans, the Servicer
shall not be required to make any future Delinquency Advances and shall be
entitled to reimbursement for such aggregate unreimbursed Delinquency Advances
as provided in the immediately prior sentence. The Servicer shall give written
notice of such determination to the Trustee and the Certificate Insurer; the
Trustee shall promptly furnish a copy of such notice to the Owners of the
Subordinate Certificates; provided, further, that the Servicer shall be entitled
to recover any unreimbursed Delinquency Advances from the Liquidation Proceeds
for the related Home Equity Loans.
The Servicer will be required to pay all "out of pocket" costs and
expenses incurred in the performance of its servicing obligations, including,
but not limited to, (i) expenditures in connection with a foreclosed Home Equity
Loan prior to the liquidation thereof, including, without limitation,
expenditures for real estate property taxes, hazard insurance premiums, property
restoration or preservation ("Preservation Expenses"), (ii) the cost of any
enforcement or judicial proceedings, including foreclosures and (iii) the cost
of the management and liquidation of Property acquired in satisfaction of the
related Mortgage. Such costs will constitute "Servicing Advances." The Servicer
may recover a Servicing Advance (x) to the extent permitted by the Home Equity
Loans or, if not theretofore recovered from the Mortgagor on whose behalf such
Servicing Advance was made, from Liquidation Proceeds realized upon the
liquidation of the related Home Equity Loan or (y) from Net Monthly Excess
Cashflow as specified in the Pooling and Servicing Agreement. Except as provided
above, in no case may the Servicer recover Servicing Advances from the principal
and interest payments on any other Home Equity Loan.
A full month's interest at the related Coupon Rate less the Retained
Yield, if any, and the Servicing Fee will be due to the Trust on the outstanding
Loan Balance of each Home Equity Loan as of the beginning of each Remittance
Period. If a Prepayment of a Home Equity Loan occurs during any calendar month,
any difference between the interest collected from the Mortgagor in connection
with such prepayment and the full month's interest at the Coupon Rate less the
Retained Yield that is due and the Servicing Fee ("Compensating Interest") plus
any Date-of-Payment interest shortfalls (but not in excess of the aggregate
Servicing Fee for the related Accrual Period), will be required to be deposited
to the Principal and Interest Account on the Monthly Remittance Date by the
Servicer and shall be included in the Monthly Remittance to be made available to
the Trustee on the next succeeding Monthly Remittance Date.
The Servicer, and in the absence of the exercise thereof by the
Servicer, the Certificate Insurer, will have the right and the option, but not
the obligation, to purchase for its own account any Home Equity Loan which
becomes delinquent, in whole or in part, as to four consecutive monthly
installments or any Home Equity Loan as to which enforcement proceedings have
been brought by the Servicer. The purchase price for any such Home Equity Loan
is equal to the Loan Purchase Price thereof, which purchase price shall be
delivered to the Trustee.
The Servicer is required to cause to be liquidated any Home Equity Loan
relating to a Property as to which ownership has been effected in the name of
the Servicer on behalf of the Trust and which has not been liquidated within 23
months of such effecting of ownership at such price as the Servicer deems
necessary to comply with this requirement, or within such period of time as may,
in the opinion of counsel nationally recognized in federal income tax matters,
be permitted under the Code.
If so required by the terms of any Home Equity Loan, the Servicer will
be required to cause hazard insurance to be maintained with respect to the
related Property and to advance sums on account of the premiums therefor if not
paid by the Mortgagor if permitted by the terms of such Home Equity Loan.
The Servicer will have the right under the Pooling and Servicing
Agreement to accept applications of Mortgagors for consent to (i) partial
releases of Mortgages, (ii) alterations and (iii) removal, demolition or
division of Properties. No application for approval may be considered by the
Servicer unless: (i) the provisions of the related Note and Mortgage have been
complied with; (ii) the loan-to-value ratio and debt-to-income ratio after any
release does not exceed the maximum loan-to-value ratio and debt-to-income ratio
established in accordance with the underwriting standards set forth under the
caption "The Seller and Servicer--Credit and Underwriting Guidelines" herein to
be applicable to such Home Equity Loan; and (iii) the lien priority of the
related Mortgage is not affected.
The Servicer will be permitted under the Pooling and Servicing
Agreement to enter into Sub-Servicing Agreements for any servicing and
administration of Home Equity Loans with any institution which (i) is a FHLMC or
FNMA approved Seller-Servicer for second mortgage loans and has equity of at
least $_________ or (ii) is an affiliate of the Servicer.
Notwithstanding any Sub-Servicing Agreement, the Servicer will not be
relieved of its obligations under the Pooling and Servicing Agreement and the
Servicer will be obligated to the same extent and under the same terms and
conditions as if it alone were servicing and administering the Home Equity
Loans. The Servicer shall be entitled to enter into any agreement with a
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Sub-Servicer for indemnification of the Servicer by such Sub-Servicer and
nothing contained in such Sub-Servicing Agreement shall be deemed to limit or
modify the Pooling and Servicing Agreement.
The Servicer (except _______________________________ if it is required
to succeed the Servicer under the Pooling and Servicing Agreement) agrees to
indemnify and hold the Trustee, the Certificate Insurer, and each Owner harmless
against any and all claims, losses, penalties, fines, forfeitures, legal fees
and related costs, judgments, and any other costs, fees and expenses that the
Trustee, the Certificate Insurer, and any Owner may sustain in any way related
to the failure of the Servicer to perform its duties and service the Home Equity
Loans in compliance with the terms of the Pooling and Servicing Agreement. The
Servicer shall immediately notify the Trustee, the Certificate Insurer, and each
Owner if a claim is made by a third party with respect to the Pooling and
Servicing Agreement, and the Servicer shall assume (with the consent of the
Trustee) the defense of any such claim and pay all expenses in connection
therewith, including reasonable counsel fees, and promptly pay, discharge and
satisfy any judgment or decree which may be entered against the Servicer, the
Trustee, the Certificate Insurer and/or Owner in respect of such claim. The
Trustee may, if necessary, reimburse the Servicer from amounts otherwise
distributable on the Subordinate Certificates for all amounts advanced by it
pursuant to the preceding sentence except when the claim relates directly to the
failure of the Servicer to service and administer the Home Equity Loans in
compliance with the Pooling and Servicing Agreement.
The Servicer will be required to deliver to the Trustee, the
Certificate Insurer, and the Rating Agencies: (1) on or before March 31 of each
year, commencing in 199_, an officers' certificate stating, as to each signer
thereof, that (i) a review of the activities of the Servicer during such
preceding calendar year and of performance under the Pooling and Servicing
Agreement has been made under such officers' supervision, and (ii) to the best
of such officers' knowledge, based on such review, the Servicer has fulfilled
all its obligations under the Pooling and Servicing Agreement for such year, or,
if there has been a default in the fulfillment of all such obligation,
specifying each such default known to such officers and the nature and status
thereof including the steps being taken by the Servicer to remedy such default;
and (2) on or before ________, 199_ and on or before _______ of any year
commencing in 199_, a letter or letters of a firm of independent, nationally
recognized certified public accountants reasonably acceptable to the Certificate
Insurer dated as of ___________, 199_ in the case of the 199_ letter and as of
the date of the Servicer's fiscal audit for each subsequent letter stating that
such firm has examined the Servicer's overall servicing operations in accordance
with the requirements of the Uniform Single Audit Program for Mortgage Bankers,
and stating such firm's conclusions relating thereto.
Removal and Resignation of Servicer
The Certificate Insurer or the Owners, with the consent of the
Certificate Insurer, will have the right pursuant to the Pooling and Servicing
Agreement, to remove the Servicer upon the occurrence of: (a) certain acts of
bankruptcy or insolvency on the part of the Servicer; (b) certain failures on
the part of the Servicer to perform its obligations under the Pooling and
Servicing Agreement; or (c) the failure to cure material breaches of the
Servicer's representations in the Pooling and Servicing Agreement.
The Pooling and Servicing Agreement also provides that the Certificate
Insurer may remove the Servicer upon the occurrence of certain additional
events.
The Servicer is not permitted to resign from the obligations and duties
imposed on it under the Pooling and Servicing Agreement except upon
determination that its duties thereunder are no longer permissible under
applicable law or are in material conflict by reason of applicable law with any
other activities carried on by it, the other activities of the Servicer so
causing such conflict being of a type and nature carried on by the Servicer on
the date of the Pooling and Servicing Agreement. Any such determination
permitting the resignation of the Servicer is required to be evidenced by an
opinion of counsel to such effect which shall be delivered to the Trustee and
the Certificate Insurer.
Upon removal or resignation of the Servicer, the Trustee (x) may
solicit bids for a successor servicer and (y) pending the appointment of a
successor Servicer as a result of soliciting such bids, shall serve as Servicer.
The Trustee, if it is unable to obtain a qualifying bid and is prevented by law
from acting as servicer, will be required to appoint, or petition a court of
competent jurisdiction to appoint, any housing and home finance institution,
bank or mortgage servicing institution designated as an approved seller-servicer
by the Federal Home Loan Mortgage Corporation ("FHLMC") or the Federal National
Mortgage Association ("FNMA") having equity of not less than $_________, and
acceptable to the Certificate Insurer and the Owners of the Class R Certificates
(provided that if the Certificate Insurer and such Owners cannot agree as to the
acceptability of such successor Servicer, the decision of the Certificate
Insurer shall control) as the successor to the Servicer in the assumption of all
or any part of the responsibilities, duties or liabilities of the Servicer.
No removal or resignation of the Servicer will become effective until
the Trustee or a successor servicer shall have assumed the Servicer's
responsibilities and obligations in accordance with the Pooling and Servicing
Agreement.
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The Trustee _______________________________, a _______________ banking
corporation, having its principal corporate trust office at
___________________________ will be named as Trustee under the Pooling and
Servicing Agreement. Reporting Requirements
On each Payment Date the Trustee is required to report in writing to
each Owner and the Certificate Insurer:
(i) the amount of the distribution with respect to the related
Class of the Class A Certificates and the Subordinate Certificates
(based on a Certificate in the original principal amount of $_____);
(ii) the amount of such distribution allocable to principal on
the Home Equity Loans in each Group, separately identifying the
aggregate amount of any Prepayments or other recoveries of principal
included therein, with respect to the Fixed Rate Group, any Pre-Funded
Amounts distributed as a Prepayment at the end of the Funding Period
(based on a Certificate in the original principal amount of $_____) and
any Subordination Increase Amount with respect to each such Group;
(iii) the amount of such distribution allocable to interest on
the related Home Equity Loans in each Group (based on a Certificate in
the original principal amount of $_____);
(iv) if the distribution (net of any Insured Payment) to the
Owners of any Class of the Class A Certificates on such Payment Date
was less than the related Class A Distribution Amount on such Payment
Date, the Carry-Forward Amount and the allocation thereof to the
related Classes of the Class A Certificates resulting therefrom;
(v) the amount of any Insured Payment included in the amounts
distributed to the Owners of each Class of the Class A Certificates on
such Payment Date;
(vi) the principal amount of each Class of the Class A
Certificate (based on a Certificate in the original principal amount of
$_____) which will be outstanding after giving effect to any payment of
principal on such Payment Date;
(vii) the aggregate Loan Balance of all Home Equity Loans, the
aggregate Loan Balance of the Home Equity Loans in each Group and, in
the case of the Fixed Rate Group only, the aggregate Loan Balance of
the Initial Home Equity Loans and the Subsequent Home Equity Loans, in
each case after giving effect to any payment of principal on such
Payment Date;
(viii) the Subordinated Amount and Subordination Deficit for
each Group, if any, remaining after giving effect to all distributions
and transfers on such Payment Date;
(ix) based upon information furnished by the Seller such
information as may be required by Section 6049(d)(7)(C) of the Code and
the regulations promulgated thereunder to assist the Owners in
computing their market discount;
(x) the total of any Substitution Amounts or Loan Purchase
Price amounts included in such distribution with respect to each Group;
(xi) the weighted average Coupon Rate of the Home Equity Loans
with respect to each Group;
(xii) such other information as the Certificate Insurer may
reasonably request with respect to delinquent Home Equity Loans;
(xiii) the largest Home Equity Loan balance outstanding; and
(xiv) for Payment Dates during the Funding Period, the
remaining Pre-Funded Amount.
Certain obligations of the Trustee to provide information to the Owners
are conditioned upon such information being received from the Servicer.
In addition, on each Payment Date the Trustee will be required to
distribute to each Owner and the Certificate Insurer, together with the
information described above, the following information prepared by the Servicer
and furnished to the Trustee for such purpose and with respect to each Home
Equity Loan Group;
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(a) the number and aggregate principal balances of Home Equity
Loans (i) 30-59 days delinquent, (ii) 60-89 days delinquent and (ii) 90
or more days delinquent, as of the close of business on the last
business day of the calendar month next preceding the Payment Date and
the Class A Certificate Principal Balance as of such Payment Date and
the number and aggregate Loan Balances of all Home Equity Loans and
related data;
(b) the status and the number and dollar amounts of all Home
Equity Loans in foreclosure proceedings as of the close of business on
the last business day of the calendar month next preceding such Payment
Date;
(c) the number of Mortgagors and the Loan Balances of the
related Mortgages involved in bankruptcy proceedings as of the close of
business on the last business day of the calendar month next preceding
such Payment Date;
(d) the existence and status of any Properties as to which
title has been taken in the name of, or on behalf of the Trustee, as of
the close of business of the last business day of the month next
preceding the Payment Date;
(e) the book value of any real estate acquired through
foreclosure or grant of a deed in lieu of foreclosure as of the close
of business on the last business day of the calendar month next
preceding the Payment Date; and
(f) the amount of cumulative Realized Losses.
Removal of Trustee for Cause
The Trustee may be removed upon the occurrence of any one of the
following events (whatever the reason for such event and whether it shall be
voluntary or involuntary or be effected by operation of law or pursuant to any
judgment, decree or order of any court or any order, rule or regulation of any
administrative or governmental body) on the part of the Trustee: (1) failure to
make distributions of available amounts; (2) certain breaches of covenants and
representations by the Trustee; (3) certain acts of bankruptcy or insolvency on
the part of the Trustee; and (4) failure to meet the standards of Trustee
eligibility as set forth in the Pooling and Servicing Agreement.
If any such event occurs and is continuing, then and in every such case
(i) the Certificate Insurer or (ii) with the prior written consent of the
Certificate Insurer (which is required not to be unreasonably withheld) (x) the
Seller or (y) the Owners of a majority of the Percentage Interests represented
by the Class A Certificates or, if there are no Class A Certificates then
Outstanding, by a majority of the Percentage Interests represented by the Class
R Certificates, may appoint a successor trustee.
Governing Law
The Pooling and Servicing Agreement and each Certificate will be
construed in accordance with and governed by the laws of the State of
_______________ applicable to agreements made and to be performed therein.
Amendments
The Trustee, the Depositor, the Seller and the Servicer with the
consent of the Certificate Insurer may, at any time and from time to time and
without notice to or the consent of the Owners, amend the Pooling and Servicing
Agreement, and the Trustee will be required to consent to such amendment, for
the purposes of (i) if accompanied by an approving opinion of counsel
experienced in federal income tax matters, removing the restriction against the
transfer of a Class R Certificate to a Disqualified Organization (as such term
is defined in the Code), (ii) complying with the requirements of the Code
including any amendments necessary to maintain REMIC status, (iii) curing any
ambiguity and (iv) correcting or supplementing any provisions therein which are
inconsistent with any other provisions therein.
The Pooling and Servicing Agreement may also be amended by the Trustee,
the Depositor, the Seller and the Servicer at any time and from time to time,
with the prior written approval of the Certificate Insurer and not less than a
majority of the Percentage Interest represented by each affected Class of
Certificates then outstanding, for the purpose of adding any provisions or
changing in any manner or eliminating any of the provisions of the Pooling and
Servicing Agreement or of modifying in any manner the rights of the Owners
thereunder; provided, however, that no such amendment shall (a) change in any
manner the amount of, or delay the timing of, payments which are required to be
distributed to any Owner without the consent of the Owner of such Certificate,
(b) change the percentages of Percentage Interest which are required to consent
to any such amendments, without the consent of the Owners of all Certificates of
the Class or Classes affected then outstanding or (c) which affects in any
manner the terms or provisions of the Certificate Insurance Policy.
S-48
<PAGE>
The Trustee will be required to furnish written notification of the
substance of any such amendment to each Owner in the manner set forth in the
Pooling and Servicing Agreement.
Termination of the Trust
The Pooling and Servicing Agreement provides that the Trust will
terminate upon the payment to the Owners of all Certificates from amounts other
than those available under the Certificate Insurance Policy of all amounts
required to be paid to such Owners upon the last to occur of (a) the final
payment or other liquidation (or any advance made with respect thereto) of the
last Home Equity Loan, (b) the disposition of all property acquired in respect
of any Home Equity Loan remaining in the Trust Estate and (c) at any time when a
Qualified Liquidation of the Trust Estate is effected as described below. To
effect a termination pursuant to clause (c) above, the Owners of all
Certificates then outstanding will be required (i) unanimously to direct the
Trustee on behalf of the REMIC to adopt a plan of complete liquidation, as
contemplated by Section 860F(a)(4) of the Code and (ii) to furnish to the
Trustee an opinion of counsel experienced in federal income tax matters
acceptable to the Certificate Insurer and the Trustee to the effect that such
liquidation constitutes a Qualified Liquidation.
Optional Termination
By Owners of Class R Certificates. At their option, the Owners of a
majority of the Percentage Interest represented by the Class R Certificates then
outstanding or in certain limited circumstances the Certificate Insurer may, on
any Payment Date when the aggregate outstanding Loan Balances of the Home Equity
Loans is less than __% of the Maximum Collateral Amount, purchase from the Trust
all (but not fewer than all) remaining Home Equity Loans, in whole only, and
other property acquired by foreclosure, deed in lieu of foreclosure, or
otherwise then constituting the Trust Estate (i) on terms agreed upon between
the Certificate Insurer and such Class R Certificate Owners, or (ii) in the
absence of such agreement at a price equal to ___% of the aggregate Loan Balance
of the related Home Equity Loans as of the day of purchase minus amounts
remitted from the Principal and Interest Account to the Certificate Account
representing collections of principal on the Home Equity Loans during the
current Remittance Period, plus one month's interest on such amount computed at
the Adjusted Pass-Through Rate (as defined in the Pooling and Servicing
Agreement), plus all accrued and unpaid Servicing Fees plus the aggregate amount
of any unreimbursed Delinquency Advances and Servicing Advances and Delinquency
Advances which the Servicer has theretofore failed to remit.
Termination Upon Loss of REMIC Status. Following a final determination
by the Internal Revenue Service or by a court of competent jurisdiction, in
either case from which no appeal is taken within the permitted time for such
appeal, or if any appeal is taken, following a final determination of such
appeal from which no further appeal can be taken, to the effect that the REMIC
does not and will no longer qualify as a "REMIC" pursuant to Section 860D of the
Code (the "Final Determination"), at any time on or after the date which is 30
calendar days following such Final Determination the Certificate Insurer or the
Owners of a majority in Percentage Interests represented by the Class A
Certificates then Outstanding with the consent of the Certificate Insurer may
direct the Trustee on behalf of the Trust to adopt a plan of complete
liquidation, as contemplated by Section 860F(a)(4) of the Code.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is the opinion of Dewey Ballantine LLP, special counsel
to the Depositor as to certain of the material federal income tax consequences
of the purchase, ownership and disposition of the Class A Certificates and is to
be considered only in connection with "Certain Federal Income Tax Consequences"
in the Prospectus. The discussion herein and in the Prospectus is based upon
laws, regulations, rulings and decisions now in effect, all of which are subject
to change. The discussion below and in the Prospectus does not purport to deal
with all federal tax consequences applicable to all categories of investors,
some of which may be subject to special rules. Investors should consult their
own tax advisors in determining the federal, state, local and any other tax
consequences to them of the purchase, ownership and disposition of the Class A
Certificates.
REMIC Election
Pursuant to the Pooling and Servicing Agreement, the Trustee will elect
to treat the Trust Estate (other than the Pre-Funding Account and the
Capitalized Interest Account) as a REMIC for federal income tax purposes. The
REMIC will issue the Class A Certificates and the Subordinate Certificates
(other than the Class R Certificates) which will be designated as regular
interests in the REMIC and the Class R Certificates which will be designated as
the residual interest in the REMIC. See "Formation of the Trust and Trust
Property" herein.
The Fixed Rate Certificates are expected to be sold at a discount. See
"Certain Federal Income Tax Consequences -- Taxation of Regular Certificates --
Original Issue Discount" in the Prospectus.
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<PAGE>
Qualification as a REMIC requires ongoing compliance with certain
conditions. Dewey Ballantine LLP, special tax counsel to the Depositor, is of
the opinion that, for federal income tax purposes, assuming (i) the REMIC
election is made and (ii) compliance with the Pooling and Servicing Agreement,
the REMIC will be treated as a REMIC, the Class A Certificates will be treated
as "regular interests" in the REMIC and the Class R Certificates will be the
sole "residual interest" in the REMIC. Except as indicated below and in the
Prospectus, for federal income tax purposes, regular interests in a REMIC are
treated as debt instruments issued by the REMIC on the date on which those
interests are created, and not as ownership interests in the REMIC or its
assets. Owners of the Class A Certificates that otherwise report income under a
cash method of accounting will be required to report income with respect to such
Class A Certificates under an accrual method.
The prepayment assumption for each Class of the Class A Certificates
for calculating original issue discount is ___% of the applicable Prepayment
Assumption. See "Prepayment and Yield Considerations -- Projected Prepayment and
Yield for Class A Certificates" herein.
As a result of the qualification of certain specified assets of the
Trust as a REMIC, the Trust will not be subject to federal income tax except
with respect to (i) income from prohibited transactions, (ii) "net income from
foreclosure property" and (iii) certain contributions to the Trust after the
Closing Date (see "Certain Federal Income Tax Consequences" in the Prospectus).
Under the laws of New York State and New York City, an entity that is
treated for federal income tax purposes as a REMIC generally is exempt from
entity level taxes imposed by those jurisdictions. This exemption does not
apply, however, to the income on the Class A Certificates.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), imposes certain restrictions on employee benefit plans subject to
ERISA ("Plans") and on persons who are parties in interest or disqualified
persons ("parties in interest") with respect to such Plans. Certain employee
benefit plans, such as governmental plans and church plans (if no election has
been made under section 410(d) of the Code), are not subject to the restrictions
of ERISA, and assets of such plans may be invested in the Certificates without
regard to the ERISA considerations described below, subject to other applicable
federal and state law. However, any such governmental or church plan which is
qualified under section 401(a) of the Code and exempt from taxation under
section 501(a) of the Code is subject to the prohibited transaction rules set
forth in section 503 of the Code.
Investments by Plans are subject to ERISA's general fiduciary
requirements, including the requirement of investment prudence and
diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan.
Section 406 of ERISA prohibits parties in interest with respect to a
Plan from engaging in certain transactions ("prohibited transactions") involving
a Plan and its assets unless a statutory or administrative exemption applies to
the transaction. Section 4975 of the Code imposes certain excise taxes (or, in
some cases, a civil penalty may be assessed pursuant to section 502(i) of ERISA)
on parties in interest which engage in non-exempt prohibited transactions.
The United States Department of Labor ("DOL") has issued a final
regulation (29 C.F.R. Section 2510.3- 101) containing rules for determining what
constitutes the assets of a Plan. This regulation provides that, as a general
rule, the underlying assets and properties of corporations, partnerships, trusts
and certain other entities in which a Plan makes an "equity investment" will be
deemed for purposes of ERISA to be assets of the Plan unless certain exceptions
apply.
Under the terms of the regulation, the Trust may be deemed to hold plan
assets by reason of a Plan's investment in a Certificate; such plan assets would
include an undivided interest in the Home Equity Loans and any other assets held
by the Trust. In such an event, persons providing services with respect to the
assets of the Trust, may be parties in interest, subject to the fiduciary
responsibility provisions of Title I of ERISA, including the prohibited
transaction provisions of Section 406 of ERISA (and of Section 4975 of the
Code), with respect to transactions involving such assets unless such
transactions are subject to a statutory or administrative exemption.
One such exception applies if the class of equity interests in question
is (i) "widely held", (ii) freely transferable, and (iii) sold as part of an
offering pursuant to (A) an effective registration statement under the
Securities Act of 1933, and then subsequently registered under the Securities
Exchange Act of 1934 or (B) an effective registration statement under Section
12(b) or 12(g) of the Securities Exchange Act of 1934 ("Publicly Offered
Securities"). In addition the regulation provides that if at all times more than
__% of the value of classes of equity interests in the Trust are held by
investors other than benefit plan investors (which is defined as including plans
subject to ERISA, government plans and individual retirement accounts), the
investing Plan's assets will not include any of the underlying assets of the
Trust.
S-50
<PAGE>
An additional exemption may also be available. The DOL has granted an
administrative exemption to [Underwriters] (PTE 91-14, Exemption Application No.
D-7958, 56 Fed. Reg. 7414) (the "Exemption") which exempts from the application
of certain of the Prohibited Transaction rules of ERISA transactions relating to
(i) the initial purchase, the holding and the subsequent resale by Plans of
certificates representing interests in certain asset- backed pass-through trusts
with respect to which such Underwriter or any of its affiliates is the sole
underwriter or the manager or co-manager of the underwriting syndicate; and (ii)
the servicing, operation and management of such asset-backed pass-through
trusts, provided that the general conditions and certain other conditions set
forth in the Exemption are satisfied.
The general conditions which must be satisfied for the Exemption by a
Plan of the Class A Certificates are the following:
(i) the acquisition of the Class A Certificates by a Plan is
on terms (including the price for the Class A Certificates) that are at
least as favorable to the Plan as they would be in an arm's length
transaction with an unrelated party;
(ii) the rights and interests evidenced by the Class A
Certificates acquired by the Plan are not subordinated to the rights
and interests evidenced by other certificates of the Trust;
(iii) the Class A Certificates acquired by the Plan have
received a rating at the time of such acquisition that is in one of the
three highest generic rating categories from any of S&P, Moody's, Fitch
Investors Service, Inc. or Duff & Phelps Credit Rating Co.;
(iv) the Trustee is not an affiliate of [Underwriters], the
Depositor, the Seller, the Servicer, the Certificate Insurer, any
borrower whose obligations under one or more Home Equity Loans
constitute more than _% of the aggregate unamortized principal balance
of the assets in the Trust, or any of their respective affiliates (the
"Restricted Group");
(v) the sum of all payments made to, and retained by,
[Underwriters] in connection with the distribution of the Class A
Certificates represents not more than reasonable compensation for
underwriting the Class A Certificates; the sum of all payments made to
and retained by the Depositor pursuant to the sale of the Home Equity
Loans to the Trust represents not more than the fair market value of
such Home Equity Loans; and the sum of all payments made to and
retained by the Servicer represents not more than reasonable
compensation for the Servicer's services under the Pooling and
Servicing Agreement and reimbursement of the Servicer's reasonable
expenses in connection therewith; and
(vi) the Plan investing in the Class A Certificates is an
"accredited investor" as defined in Rule 501(a)(1) of Regulation D of
the Securities and Exchange Commission under the Securities Act of
1933, as amended. A fiduciary of a Plan considering whether to purchase
any Class A Certificates should individually determine that the Plan
satisfied the conditions described in clauses (i) and (vi) above. The
Depositor believes that the Trust will satisfy the conditions described
in the other clauses above.
Section I.A of the Exemption would provide an exemption from the
restrictions of sections 406(a) and 407(a) of ERISA as well as the excise taxes
imposed by sections 4975(a) and (b) of the Code by reason of sections
4975(c)(1)(A) through (D) of the Code with respect to a Plan's investment in the
Class A Certificates upon their initial offering or in the secondary market
therefor and the Plan's continued holding of such Certificates if the
above-described general conditions of the Exemptions are satisfied.
Section I.B of the Exemption would provide an exemption from the
restrictions of sections 406(b)(1) and 406(b)(2) of ERISA as well as the excise
taxes imposed by sections 4975(a) and (b) of the Code by reason of section
4975(c)(1)(E) of the Code with respect to a Plan's investment in the Class A
Certificates upon their initial offering or in the secondary market therefor and
the Plan's continued holding of such Certificates if, in addition to the
above-described general conditions of the Exemption, the following conditions
are satisfied: (i) such Plan is not sponsored by a member of the Restricted
Group; (ii) at least __% of the Class A Certificates is acquired by persons
independent of the Restricted Group and at least __% of the aggregate interest
in the Trust is acquired by persons independent of the Restricted Group; (iii)
the total investment of such Plan in the Class A Certificates does not exceed
__% of all the Class A Certificates outstanding at the time of the acquisition;
and (iv) immediately after such investment, no more than __% of the assets of
such Plan are invested in certificates representing an interest in a trust
containing assets sold or serviced by the same entity. A fiduciary intending to
cause a Plan to purchase any Class A Certificates to which the exemption
described in this paragraph is applicable should individually ascertain
satisfaction of the conditions described in clauses (i) and (iv) above.
S-51
<PAGE>
Section I.C of the Exemption would provide an exemption from the
restrictions of sections 406(a), 406(b) and 407(a) of ERISA as well as the
excise taxes imposed by sections 4975(a) and (b) of the Code by reason of
section 4975(c) of the Code with respect to the servicing, management and
operation of the Trust if, in addition to the above-described general conditions
of the Exemption, the following conditions are satisfied: (i) such transactions
are carried out in accordance with the terms of the Pooling and Servicing
Agreement, and (ii) the Pooling and Servicing Agreement is made available to
investors prior to their investment in the Trust. The Depositor intends to
comply with the foregoing conditions.
Section I.D of the Exemption would provide an exemption from the
restrictions of sections 406(a) and 407(a) of ERISA as well as the excise taxes
imposed by sections 4975(a) and (b) of the Code by reason of sections
4975(c)(1)(A) through (D) of the Code with respect to transactions to which
those restrictions or taxes would otherwise apply merely because a person is
deemed to be a party in interest or a disqualified person (including a
fiduciary) with respect to a Plan by virtue of providing services to the Plan
(or by virtue of having a relationship to such service provider described in
section 3(14)(F), (G), (H) or (I) of ERISA or section 4975(e)(2)(F), (G), (H),
or (I) of the Code), solely because of the Plan's ownership of the Certificates.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code and the potential consequences to
their specific circumstances, prior to making an investment in the Certificates.
Moreover, each Plan fiduciary should determine whether under the general
fiduciary standards of investment procedure and diversification an investment in
the Certificate is appropriate for the Plan, taking into account the overall
investment of the Plan and the composition of the Plan's investment portfolio.
RATINGS
It is a condition of the issuance of the Class A Certificates that the
Class A Certificates receive ratings of "AAA" by S&P and "Aaa" by Moody's. The
ratings assigned to the Class A Certificates will be based primarily on the
claims-paying ability of the Certificate Insurer. Explanations of the
significance of such ratings may be obtained from Moody's, 99 Church Street, New
York, New York 10007 and S&P, 25 Broadway, New York, New York 10004. Such
ratings will be the views only of such rating agencies. There is no assurance
that any such ratings will continue for any period of time or that such ratings
will not be revised or withdrawn. Any such revision or withdrawal of such
ratings may have an adverse effect on the market price of the Class A
Certificates. A security rating is not a recommendation to buy, sell or hold
securities.
Ratings which are assigned to securities such as the Class A-7IO
Certificates generally evaluate the ability of the seller (i.e., the Trust) and
any guarantor (i.e., the Certificate Insurer) to make payments, as required by
such securities. The amounts distributable on the Class A-7IO Certificates
consist only of interest. In general, the ratings address credit risk and not
prepayment risk. If all of the Home Equity Loans were to prepay in the initial
month, with the result that investors in the Class A-7IO Certificates receive
only a single month's interest and thus suffer a nearly complete loss of their
investment, all amounts "due" to such Owners will nevertheless have been paid,
and such result is consistent with the "AAAr/Aaa" ratings received on the Class
A-7IO Certificates.
The "r" symbol is appended to the rating by Standard & Poor's of the
Class A-7IO Certificates because they are interest-only Certificates that
Standard & Poor's believes may experience high volatility or high variability in
expected returns due to non-credit risks created by the terms of such
Certificates. The absence of an "r" symbol in the rating of the other Classes of
Class A Certificates should not be taken as an indication that such Certificates
will experience no volatility or variability in total return.
LEGAL INVESTMENT CONSIDERATIONS
[Although the Fixed Rate Certificates are expected to be rated "AAA" by
S&P and "Aaa" by Moody's, such Certificates will not constitute "mortgage
related securities" for purposes of SMMEA because the Home Equity Loans in the
Fixed Rate Group include second liens. Accordingly, many institutions with legal
authority to invest in comparably rated securities based on first mortgage loans
may not be legally authorized to invest in the Class A Certificates.]
The Class [A/A-6] Certificates will constitute "mortgage related
securities" for purposes of SMMEA for so long as they are rated in one of the
two highest rating categories by one or more nationally recognized statistical
rating organizations. As such, such Classes of Certificates will be legal
investments for certain entities to the extent provided in SMMEA, subject to
state laws overriding SMMEA. In addition, institutions whose investment
activities are subject to review by federal or state regulatory authorities may
be or may become subject to restrictions, which may be retroactively imposed by
such regulatory authorities, on the investment by such institutions in certain
forms of mortgage related securities. Furthermore, certain states have enacted
legislation overriding the legal investment provisions of SMMEA. In addition,
institutions whose activities are subject to review by federal or state
regulatory authorities may be or may become subject to restrictions, which may
be retroactively imposed by such regulatory authorities, on the investment by
such institutions in certain forms of mortgage related securities.]
S-52
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UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement relating to the Certificates (the "Underwriting Agreement"), the
Depositor has agreed to cause the Trust to sell to each of the Underwriters
named below (the "Underwriters"), and each of the Underwriters has severally
agreed to purchase, the principal amount or Percentage Interest of the Class A
Certificates set forth opposite its name below:
Class A-1 Certificates
Underwriters Principal Amount
------------- ----------------
[Underwriters] $
---------------
Class A-2 Certificates
Underwriters Principal Amount
------------- ----------------
[Underwriters] $
---------------
Class A-3 Certificates
Underwriters Principal Amount
------------- ----------------
[Underwriters] $
---------------
Class A-4 Certificates
Underwriters Principal Amount
------------- ----------------
[Underwriters] $
---------------
Class A-5 Certificates
Underwriters Principal Amount
------------- ----------------
[Underwriters] $
---------------
Class A-6 Certificates
Underwriters Principal Amount
------------- ----------------
[Underwriters] $
---------------
The Depositor has agreed to indemnify the Underwriters against certain
liabilities, including civil liabilities under the Securities Act, or contribute
to payments which the Underwriters may be required to make in respect thereof.
REPORT OF EXPERTS
The financial statements of __________________________, for the year
ended ___________, 199_, appearing in Appendix B of this Prospectus Supplement,
have been audited by _______________, independent auditors, as set forth in
their report thereon appearing in Appendix B, and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
The financial statements of __________________________ included in this
Prospectus Supplement in Appendix B, as of ___________, 199_ and 199_ and for
each of the years in the two year period then ended, have been included in
reliance upon the report of ________________________, independent certified
public accountants, appearing in Appendix B, upon the authority of such firm as
experts in accounting and auditing.
The report of ________________________ covering the ___________, 199_
and 199_ financial statements refers to changes, in 199_, in accounting methods
for multiple-year retrospectively rated reinsurance contracts, and for the
adoption of the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 113, "Accounting and Reporting
for Reinsurance of Short-Duration and Long-Duration Contracts" and No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
S-53
<PAGE>
CERTAIN LEGAL MATTERS
Certain legal matters relating to the validity of the issuance of the
Certificates will be passed upon for the Seller by Dewey Ballantine LLP, New
York, New York and by Alan L. Langus, Esquire, Chief Counsel for the Depositor.
Certain legal matters relating to insolvency issues and certain federal income
tax matters concerning the Certificates will be passed upon for the Depositor by
Dewey Ballantine LLP.
S-54
<PAGE>
ANNEX I
TO PROSPECTUS SUPPLEMENT
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered
_______________ Home Equity Loan Trust 199__-__ Home Equity Loan Pass-Through
Certificates, Class A (the "Global Securities") will be available only in
book-entry form. Investors in the Global Securities may hold such Global
Securities through any of DTC, CEDEL or Euroclear. The Global Securities will be
tradeable as home market instruments in both the European and U.S. domestic
markets. Initial settlement and all secondary trades will settle in same-day
funds.
Secondary market trading between investors through CEDEL and Euroclear
will be conducted in the ordinary way in accordance with the normal rules and
operating procedures of CEDEL and Euroclear and in accordance with conventional
eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors through DTC will be
conducted according to DTC's rules and procedures applicable to U.S. corporate
debt obligations.
Secondary cross-market trading between CEDEL or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of CEDEL and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless such holders meet certain requirements
and deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
Initial Settlement
All Global Securities will be held in book-entry form by DTC in the
name of Cede & Co. as nominee of DTC. Investors' interests in the Global
Securities will be represented through financial institutions acting on their
behalf as direct and indirect Participants in DTC. As a result, CEDEL and
Euroclear will hold positions on behalf of their participants through their
Relevant Depositary which in turn will hold such positions in their accounts as
DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow DTC settlement practices. Investor securities custody accounts will be
credited with their holdings against payment in same-day funds on the settlement
date.
Investors electing to hold their Global Securities through CEDEL or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
Secondary Market Trading
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior mortgage
loan asset-backed certificates issues in same-day funds.
Trading between CEDEL and/or Euroclear Participants. Secondary market
trading between CEDEL Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
Trading between DTC, Seller and CEDEL or Euroclear Participants. When
Global Securities are to be transferred from the account of a DTC Participant to
the account of a CEDEL Participant or a Euroclear Participant, the purchaser
will send instructions to CEDEL or Euroclear through a CEDEL Participant or
Euroclear Participant at least one business day prior to settlement. CEDEL or
Euroclear will instruct the Relevant Depositary, as the case may be, to receive
the Global Securities against payment. Payment will include interest accrued on
the Global Securities from and including the last coupon payment
I-1
<PAGE>
date to and excluding the settlement date, on the basis of the actual number of
days in such accrual period and a year assumed to consist of 360 days. For
transactions settling on the 31st of the month, payment will include interest
accrued to and excluding the first day of the following month. Payment will then
be made by the Relevant Depositary to the DTC Participant's account against
delivery of the Global Securities. After settlement has been completed, the
Global Securities will be credited to the respective clearing system and by the
clearing system, in accordance with its usual procedures, to the CEDEL
Participant's or Euroclear Participant's account. The securities credit will
appear the next day (European time) and the cash debt will be back-valued to,
and the interest on the Global Securities will accrue from, the value date
(which would be the preceding day when settlement occurred in New York). If
settlement is not completed on the intended value date (i.e., the trade fails),
the CEDEL or Euroclear cash debt will be valued instead as of the actual
settlement date.
CEDEL Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within CEDEL or Euroclear. Under this
approach, they may take on credit exposure to CEDEL or Euroclear until the
Global Securities are credited to their account one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit
to them, CEDEL Participants or Euroclear Participants can elect not to
preposition funds and allow that credit line to be drawn upon to finance
settlement. Under this procedure, CEDEL Participants or Euroclear Participants
purchasing Global Securities would incur overdraft charges for one day, assuming
they cleared the overdraft when the Global Securities were credited to their
accounts. However, interest on the Global Securities would accrue from the value
date. Therefore, in many cases the investment income on the Global Securities
earned during that one-day period may substantially reduce or offset the amount
of such overdraft charges, although the result will depend on each CEDEL
Participant's or Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours,
DTC Participants can employ their usual procedures for crediting Global
Securities to the respective European Depositary for the benefit of CEDEL
Participants or Euroclear Participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC Participants a
cross-market transaction will settle no differently than a trade between two DTC
Participants.
Trading between CEDEL or Euroclear Seller and DTC Purchaser. Due to
time zone differences in their favor, CEDEL Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the respective Depositary, to a DTC Participant. The seller will send
instructions to CEDEL or Euroclear through a CEDEL Participant or Euroclear
Participant at least one business day prior to settlement. In these cases CEDEL
or Euroclear will instruct the respective Depositary, as appropriate, to credit
the Global Securities to the DTC Participant's account against payment. Payment
will include interest accrued on the Global Securities from and including the
last coupon payment to and excluding the settlement date on the basis of the
actual number of days in such accrual period and a year assumed to consist to
360 days. For transactions settling on the 31st of the month, payment will
include interest accrued to and excluding the first day of the following month.
The payment will then be reflected in the account of CEDEL Participant or
Euroclear Participant the following day, and receipt of the cash proceeds in the
CEDEL Participant's or Euroclear Participant's account would be back-valued to
the value date (which would be the preceding day, when settlement occurred in
New York). Should the CEDEL Participant or Euroclear Participant have a line of
credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the back-valuation
will extinguish any overdraft incurred over that one-day period. If settlement
is not completed on the intended value date (i.e., the trade fails), receipt of
the cash proceeds in the CEDEL Participant's or Euroclear Participant's account
would instead be valued as of the actual settlement date.
Finally, day traders that use CEDEL or Euroclear and that purchase
Global Securities from DTC Participants for delivery to CEDEL Participants or
Euroclear Participants should note that these trades would automatically fail on
the sale side unless affirmative action is taken. At least three techniques
should be readily available to eliminate this potential problem:
(g) borrowing through CEDEL or Euroclear for one day (until the
purchase side of the trade is reflected in their CEDEL or Euroclear accounts) in
accordance with the clearing system's customary procedures;
(h) borrowing the Global Securities in the U.S. from a DTC Participant
no later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their CEDEL or Euroclear account
in order to settle the sale side of the trade; or
(i) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at least one
day prior to the value date for the sale to the CEDEL Participant or Euroclear
Participant. Certain U.S. Federal Income Tax Documentation Requirements
I-2
<PAGE>
A beneficial owner of Global Securities holding securities through
CEDEL or Euroclear (or through DTC if the holder has an address outside the
U.S.) will be subject to the __% U.S. withholding tax that generally applies to
payments of interest (including original issue discount) on registered debt
issued by U.S. Persons (as defined below), unless (i) each clearing system, bank
or other financial institution that holds customers' securities in the ordinary
course of its trade or business in the chain of intermediaries between such
beneficial owner and the U.S. entity required to withhold tax complies with
applicable certification requirements and (ii) such beneficial owner takes one
of the following steps to obtain an exemption or reduced tax rate:
Exemption for Non-U.S. Persons (Form W-8). Beneficial Owners of Global
Securities that are Non-U.S. Persons (as defined below) can obtain a complete
exemption from the withholding tax by filing a signed Form W-8 (Certificate of
Foreign Status). If the information shown on Form W-8 changes, a new Form W-8
must be filed within 30 days of such change.
Exemption for Non-U.S. Persons with effectively connected income (Form
4224). A Non-U.S. Person (as defined below), including a non-U.S. corporation or
bank with a U.S. branch, for which the interest income is effectively connected
with its conduct of a trade or business in the United States, can obtain an
exemption from the withholding tax by filing Form 4224 (Exemption from
Withholding of Tax on Income Effectively Connected with the Conduct of a Trade
or Business in the United States).
Exemption or reduced rate for Non-U.S. Persons resident in treaty
countries (Form 1001). Non-U.S. Persons residing in a country that has a tax
treaty with the United States can obtain an exemption or reduced tax rate
(depending on the treaty terms) by filing Form 1001 (Ownership, Exemption or
Reduced Rate Certificate). If the treaty provides only for a reduced rate,
withholding tax will be imposed at that rate unless the filer alternatively
files Form W-8. Form 1001 may be filed by Certificate Owners or their agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's Request
for Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Owner of a Global
Security or, in the case of a Form 1001 or a Form 4224 filer, his agent, files
by submitting the appropriate form to the person through whom it holds the
security (the clearing agency, in the case of persons holding directly on the
books of the clearing agency). Form W-8 and Form 1001 are effective for three
calendar years and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation, partnership or other entity organized in or under
the laws of the United States or any political subdivision thereof or (iii) an
estate or trust that is subject to U.S. federal income tax regardless of the
source of its income. The term "Non-U.S. Person" means any person who is not a
U.S. Person. This summary does not deal with all aspects of U.S. Federal income
tax withholding that may be relevant to foreign holders of the Global
Securities. Investors are advised to consult their own tax advisors for specific
tax advice concerning their holding and disposing of the Global Securities.
I-3
<PAGE>
FORM OF PROSPECTUS SUPPLEMENT
VERSION 2
(HOME IMPROVEMENT LOANS)
<PAGE>
SUBJECT TO COMPLETION DATED __________ ___, 199_ VERSION 2
PROSPECTUS SUPPLEMENT
(To Prospectus Dated _________ __, 199_,
CTS TITLE I HOME IMPROVEMENT LOAN TRUST
$_______________ Class A Certificates
$_______________ Class S-A Interest Only
Certificates
Pass-Through Certificates
Series 199__-__
CONTISECURITIES ASSET FUNDING CORP.
Depositor
The CTS Title I Home Improvement Loan Pass-Through Certificates, Series
199__-__ (the "Certificates") will consist of the Class A Certificates and the
Class S-A Certificates (collectively, the "Offered Certificates") and the Class
R Certificates. Only the Offered Certificates are offered hereby.
[Guarantor Logo]
On or before the issuance of the Certificates, ContiSecurities Asset
Funding Corp. (the "Depositor") will obtain from _________________________ (the
"Certificate Insurer") a certificate guaranty insurance policy, relating to the
Offered Certificates (the "Policy") in favor of the Trustee. The Certificate
Insurance Policy will provide for 100% coverage of the principal amount of, and
scheduled interest due on, the Offered Certificates.
As more fully described herein, interest distributions on the Offered
Certificates will be based on the Certificate Principal Balance of the related
Class A Certificates or the aggregate outstanding principal amount of the
Mortgage loans (the "Notional Principal Balance") and the then applicable
Pass-Through Rate.
For a discussion of significant matters affecting investment in the
Certificates, see "Risk Factors" beginning on page S-14 herein, and beginning on
page 6 in the Prospectus.
(cover continued on next page)
THE OFFERED CERTIFICATES REPRESENT BENEFICIAL INTERESTS IN THE TRUST ONLY AND DO
NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF CONTISECURITIES ASSET FUNDING
CORP., ANY ORIGINATORS OR ANY OF THEIR AFFILIATES. NEITHER THE OFFERED
CERTIFICATES NOR THE MORTGAGE LOANS ARE INSURED OR
GUARANTEED BY ANY GOVERNMENTAL AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
[THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON
OR ENDORSED THE MERITS OF THIS OFFERING. ANY
REPRESENTATION TO THE CONTRARY
IS UNLAWFUL.]
The Offered Certificates will be purchased by the Underwriters from the
Depositor and will be offered by the Underwriters from time to time to the
public in negotiated transactions or otherwise at varying prices to be
determined at the time of sale.
Proceeds to the Depositor will be approximately $____________ from the
sale of the Offered Certificates, before deducting expenses payable by the
Depositor estimated to be approximately $_______ in the aggregate.
The Offered Certificates are offered subject to prior sale, when, as,
and if accepted by the Underwriters and subject to the approval of certain legal
matters. It is expected that delivery of the Offered Certificates in book-entry
form will be made on or about ____________ ___, 199___ only through the Same Day
Funds Settlement System of The Depository Trust Company.
[UNDERWRITERS]
The date of this Prospectus Supplement is __________, 199__.
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
[Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This preliminary prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of any
such State.]
<PAGE>
(Cover continued from previous page)
The Certificates represent undivided ownership interests in a pool of
fixed-rate residential first and junior lien home improvement mortgage loans
(the "Mortgage Loans") partially insured by the Federal Housing Administration
(the "FHA") of the United States Department of Housing and Urban Development
under Title I of the National Housing Act of 1934, all monies due thereunder
after ____________ __, 199__ (the "Cut-Off Date"), security interests in the
properties which secure the Mortgage Loans (the "Mortgaged Properties"), a
certificate guaranty insurance policy and certain other property. The Mortgage
Loans will be held in the CTS Title I Home Improvement Loan Trust 199___-___
(the "Trust"). The Trust will be created pursuant to a Pooling and Servicing
Agreement dated as of ______________ __, 199__ (the "Agreement") among the
Depositor in its capacity as sponsor of the Trust, ContiTrade Services
Corporation (the "Company"), ___________________, in its capacity as the master
servicer and claims administrator of the Mortgage Loans (the "Master Servicer"
and "Claims Administrator"), and _______________________________, in its
capacity as Trustee (the "Trustee"). On or prior to the Closing Date, the
Company will cause the Mortgage Loans to be acquired from Originators, as
described herein. The obligations of the Depositor with respect to the
Certificates will be limited to its respective contractual obligations under the
Agreement.
Distributions of interest will be made to holders (the "Owners") of the
Certificates on the ___the day of each month, (or, if such day is not a business
day, the next following business day) beginning __________ __, 199__. Interest
will be passed through on each Distribution Date to the Owners of the Class A
Certificates based on the Class A Certificate Principal Balance (as defined
herein) at the pass-through rate thereon (the "Class A Pass-Through Rate") and
to the Owners of the Class S-A Certificates based on the Notional Principal
Balance (as defined herein) at the pass-through rate thereon (the "Class S-A
Pass-Through Rate") and principal will also be passed through to the Owners of
the Class A Certificates on each Distribution Date as described herein. The
final scheduled Distribution Date of the Offered Certificates will be __________
20, _____. The Class S-A Certificates are interest only Certificates. The yield
to investors on the Class S-A Certificates will be extremely sensitive to the
rate and timing of principal payments (including prepayments, repurchases,
defaults and liquidations) on the Mortgage Loans, which may vary over time. A
rapid rate of principal payments (including prepayments, repurchases, defaults
and liquidations) on the Mortgage Loans could result in the failure of investors
in the Class S-A Certificates to recover their initial investments. See "Summary
- - - Nature of Class S-A Certificates," "Certain Yield, Prepayment and Weighted
Average Life Considerations" herein and "Risk Factors" and "Yield, Prepayment
and Maturity Considerations" in the Prospectus.
It is a condition to issuance of the Offered Certificates that the
Offered Certificates be rated "Aaa" by Moody's Investor Service and "AAA" by
Standard & Poors.
An election will be made to treat the Trust as a real estate mortgage
investment conduit (a "REMIC") for federal income tax purposes. As described
more fully herein, each Class of Offered Certificates will constitute "regular
interests" in the REMIC. See "Certain Federal Income Tax Consequences" in the
Prospectus.
Prior to their issuance there has been no market for the Offered
Certificates nor can there be any assurance that one will develop, or if it does
develop, that it will provide the Owners of the Offered Certificates with
liquidity or will continue for the life of the Offered Certificates. The
Underwriters intend, but are not obligated, to make a market in the Offered
Certificates.
[IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE OFFERED
CERTIFICATES AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.]
UNTIL __________, 199___, ALL DEALERS EFFECTING TRANSACTIONS IN THE
OFFERED CERTIFICATES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND THE PROSPECTUS TO WHICH IT
RELATES. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH
RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. --------------------
S-1
<PAGE>
The Certificates offered by this Prospectus Supplement will be part of
a separate series of Certificates being offered by the Company pursuant to its
Prospectus dated ____________ __, 199__ of which this Prospectus Supplement is a
part and which accompanies this Prospectus Supplement. The Prospectus contains
important information regarding this offering which is not contained herein, and
prospective investors are urged to read the Prospectus and this Prospectus
Supplement in full.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission a
Registration Statement under the Securities Act of 1933 with respect to the
Certificates. This Prospectus Supplement and the related Prospectus, which form
a part of the Registration Statement, omit certain information contained in such
Registration Statement pursuant to the Rules and Regulations of the Commission.
The Registration Statement can be inspected and copied at the Public Reference
Room of the Commission at 450 Fifth Street, N.W., Washington, D.C., and the
Commission's regional offices at Seven World Trade Center, 13th Floor, New York,
New York, 10048, and Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such materials can be obtained at
prescribed rates from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549.
REPORTS TO CERTIFICATEHOLDERS
The Trustee will mail monthly reports concerning the Offered
Certificates to all registered Owners.
S-2
<PAGE>
TABLE OF CONTENTS
AVAILABLE INFORMATION......................................................2
REPORTS TO CERTIFICATEHOLDERS..............................................2
SUMMARY....................................................................4
RISK FACTORS............................................................. 20
USE OF PROCEEDS...........................................................22
THE DEPOSITOR.............................................................22
THE TITLE I LOAN PROGRAM AND THE CONTRACT OF INSURANCE....................22
THE ORIGINATORS...........................................................22
THE MASTER SERVICER AND CLAIMS ADMINISTRATOR..............................23
THE TRUSTEE AND CONTRACT OF INSURANCE HOLDER..............................23
THE MORTGAGE LOAN POOL....................................................24
PREPAYMENT AND YIELD CONSIDERATIONS.......................................26
ADDITIONAL INFORMATION....................................................31
DESCRIPTION OF THE OFFERED CERTIFICATES...................................31
THE POLICY................................................................37
THE CERTIFICATE INSURER...................................................39
OVERCOLLATERALIZATION PROVISIONS..........................................41
THE POOLING AND SERVICING AGREEMENT.......................................42
CERTAIN FEDERAL INCOME TAX CONSEQUENCES...................................54
ERISA CONSIDERATIONS......................................................55
RATINGS...................................................................57
LEGAL INVESTMENT CONSIDERATIONS...........................................58
UNDERWRITING..............................................................58
REPORT OF EXPERTS.........................................................58
CERTAIN LEGAL MATTERS.....................................................59
S-3
<PAGE>
SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and the
accompanying Prospectus. Reference is made to the Index of Principal Defined
Terms for the location of the definitions of certain capitalized terms.
Issuer................................... CTS Title I Home Improvement Loan
Trust, Series 199__-__ (the
"Trust").
Certificates Offered..................... CTS Title I Home Improvement Loan
Certificates, Series 199__-__, Class
A Certificates (the "Class A
Certificates") and Class S-A
Interest-Only Certificates (the
"Class S-A Certificates" and
collectively with the
Class A Certificates the "Offered
Certificates").
Depositor................................ ContiSecurities Asset Funding Corp.
(the" Depositor"), a Delaware
corporation having its principal
executive offices at 277 Park
Avenue, 38th Floor, New York, New
York 10172.
Trustee.................................. ____________________, a __________
banking corporation having its
principal corporate trust offices at
____________________.
Master Servicer and
Claims Administrator..................... ______________, a _______________
corporation having its principal
executive offices at
______________________________.
The Originators.......................... Each of the Mortgage Loans to be
acquired by the Trust from the
Depositor were acquired directly or
indirectly by the Depositor from
ContiTrade Services L.L.C. (the
"Company") which previously acquired
the Mortgage Loans from the entity
that either originated or acquired
such Mortgage Loans (each such
entity an "Originator"). Each
Mortgage Loan has been
re-underwritten by the Depositor or
an entity engaged by the Depositor
for the purpose of determining
whether each such Mortgage Loan was
originated in accordance with the
FHA Title I home improvement loan
program by an Originator approved
for such program by the United
States Department of Housing and
Urban Development ("HUD") and
holding a valid Title I contract of
insurance.
Cut-Off Date............................. _______________ __, 199__.
S-4
<PAGE>
Closing Date............................. _______________ __, 199___.
Description of the Certificates.......... The Pass-Through Certificates
consist of the Offered Certificates
and the Class R Certificates. The
Certificates will be issued pursuant
to a pooling and servicing agreement
to be dated __________, 199__ (the
"Agreement"), among the Depositor,
the Company, the Master Servicer and
Claims Administrator and the
Trustee. Only the Offered
Certificates are offered hereby.
The Offered Certificates represent
fractional undivided ownership
interests in the Trust, having the
rights described in the Agreement.
The Trust assets will include a pool
of fixed rate residential first and
junior lien home improvement
mortgage loans (the "Mortgage
Loans") partially insured by the
Federal Housing Administration (the
"FHA") of the Department of Housing
and Urban Development ("HUD") under
Title I of the National Housing Act
of 1934 (the "Title I Program"), all
monies due thereunder after the
Cut-Off Date, security interests in
the properties which secure the
Mortgage Loans (the "Mortgage
Properties"), the Policy and certain
other property.
The final scheduled Distribution
Date on the Offered Certificates is
_________ __, ____, although it is
expected that the actual final
Distribution Date for the Offered
Certificates will occur
significantly earlier than the final
scheduled Distribution Date. See
"Prepayment and Yield
Considerations" herein.
Original Class A Certificate
Principal Balance........................ $____________.
Original Class S-A Notional
Principal Balance........................ $____________.
Class A Pass-Through Rate:............... ___% per annum.
Class S-A Pass-Through Rate:............. ___% per annum.
Denominations:........................... The Class A Certificates are
issuable in denominations of
original principal amounts of
$__________ and integral multiples
thereof. The Class S-A Certificates
will be issued in [book entry fully
registered, definitive form in
S-5
<PAGE>
percentage interests of ownership of
such class of not less than ___%.
The Mortgage Loans....................... Unless otherwise noted, all
references to the dollar amount of
the Mortgage Loans and the related
statistical percentages in this
Prospectus Supplement are based on
the principal balances of the
Mortgage Loans as of the close of
business on the Cut-Off Date.
The Mortgage Loans to be conveyed to
the Trust consist of ________
mortgages or deeds of trust (the
"Mortgages") and the related notes
and retail installment sales
contracts (the "Notes") on
residences (which may be
condominiums, townhouses, homes in
one-to-four-family and multi-family
residences or manufactured homes
which have permanent foundations and
qualify as real property), including
investment properties, located in
____ states, and having an original
Aggregate Principal Balance of
$______________. The Mortgage Loans
are not insured by primary mortgage
insurance policies, nor does any
pool insurance insure the Mortgage
Loans; however, the Mortgage Loans
are partially insured under the FHA
Title I Program. See "The Title I
Loan Program and the Contract of
Insurance" herein. The Mortgage
Loans are not guaranteed by the
Depositor, the Company or any
affiliate thereof. The Agreement
requires the Master Servicer to
service the Mortgage Loans in
accordance with the standards and
procedures required by the FHA under
the Title I Program. [Each
Originator may act as sub-servicer
of the Mortgage Loans that they
originate.] The FHA Title I
insurance claims administration will
be performed by the Claims
Administrator.
Class A Distributions.................... On the ___the day of each month, or
if such a day is not a Business Day,
then the next succeeding Business
Day, commencing______________ __,
199__ (each such day being a
"Distribution Date"), the Trustee
will be required to distribute out
of the Amount Available (as defined
below), pro rata to the Owners of
the Class A Certificates of record
as of the last day of the calendar
month immediately preceding the
calendar month in which such
Distribution Date occurs (the
"Record Date"), the sum of (a) the
Class A Interest Distribution (as
defined below) and (b) the Class A
Guaranteed Principal Distribution
Amount (as defined below), and (c)
to the extent of the Distribution
Amount (as defined below), the Class
A Monthly Principal
S-6
<PAGE>
Distributable Amount (as defined
below) in excess of any amounts
described in clause (b) above.
Interest................................. "Class A Interest Distribution"
means, with respect to any
Distribution Date, the sum of (a)
the "Class A Monthly Interest
Distributable Amount" (i.e., 30 days
interest at the Pass-Through Rate on
the Class A Certificate Balance as
of the close of business on the
preceding Distribution Date (or, in
the case of the first Distribution
Date, on the Closing Date)) and (b)
any Class A Interest Carryover
Shortfall (i.e., the excess of the
Class A Monthly Interest
Distributable Amount for the
preceding Distribution Date and any
outstanding Class A Interest
Carryover Shortfall on such
preceding Distribution Date, over
the amount in respect of interest
that was actually distributed to the
Class A Certificateholders on such
preceding Distribution Date, plus
interest on such excess, to the
extent permitted by law, at the
Pass-Through Rate from such
preceding Distribution Date through
the current Distribution Date).
Principal................................ "Class A Guaranteed Principal
Distribution Amount" means, with
respect to any Distribution Date,
the positive excess, if any, of (i)
the aggregate of the Outstanding
Class A Certificate Balances of all
Outstanding Class A Certificates as
of such Distribution Date (taking
into account distributions of the
Class A Principal Distribution on
such Distribution Date) over (ii)
the aggregate of the Class A
Guaranteed Certificate Balance (as
defined below) as of such
Distribution Date. "Class A Monthly
Principal Distributable Amount"
means, with respect to any
Distribution Date, the amount equal
to the sum of the following amounts
(without duplication) with respect
to the immediately preceding Due
Period (as defined below): (i) that
portion of all Mortgage Payments
allocable to principal, including
all full and partial principal
prepayments (excluding such amounts
in respect of Mortgage Loans
included in clause (ii) for a prior
Distribution Date), (ii) the
Principal Balance of all Mortgage
Loans that became Defaulted Mortgage
Loans during the related Due Period,
(iii) the portion of the Purchase
Amount allocable to principal of all
Mortgage Loans that became Purchased
Mortgage Loans as of the immediately
preceding Monthly Cut-Off Date
excluding such amounts in respect of
Mortgage Loans included in clause
(ii) for a prior Distribution Date
and, in the sole discretion of the
Certificate Insurer, the Principal
Balance
S-7
<PAGE>
as of the immediately preceding
Monthly Cut-Off Date of all Mortgage
Loans that were required to be
purchased or repurchased as of the
immediately preceding Monthly
Cut-Off Date pursuant to the
Servicing Agreement but were not so
purchased, (iv) the aggregate amount
of Cram Down Losses (as defined
herein) that shall have occurred
during the related Due Period (v)
the amount of Distributable Excess
Spread (as defined below) in respect
of such Distribution Date and (vi)
amounts, if any, delivered by the
Certificate Insurer to the Trustee
for deposit in the Certificate
Account and distribution in respect
of the Class A Certificates in
accordance with the Insurance
Agreement; provided, however, that
if with respect to any Distribution
Date, Distributable Excess Spread is
zero, the Class A Monthly Principal
Distributable Amount shall equal
such portion of the sum of the
amounts included in clauses (i)
through (iv) above such that
following distribution in reduction
of the Aggregate Class A Certificate
Balance the Required OC Test (as
defined herein) would be satisfied.
"Class A Guaranteed Certificate
Balance" means, with respect to any
outstanding Class A Certificate as
of any date of determination, the
hypothetical Class A Certificate
Balance equal to the initial Class A
Certificate Balance of such Class
Certificate set forth on the face
thereof, reduced by the pro rata
portion allocable to such Class A
Certificate of the aggregate of the
Class A Minimum Principal
Distributable Amounts with respect
to all Distribution Dates on or
prior to such date of determination.
Distributions to the Class A
Certificateholders of Distributable
Excess Spread will result in
acceleration of principal payments
to the Owners of the Class A
Certificates and reduce the weighted
average life of the Class A
Certificates to a lesser number than
would be the case if such
Distributable Excess Spread were
instead distributed to the Class R
Certificateholders. See
"Overcollateralization Provisions"
and "Prepayment and Yield
Considerations" herein.
"Class A Minimum Principal
Distributable Amount" means, with
respect to any Distribution Date,
the amount set forth on the schedule
to the Agreement for such
Distribution Date.
S-8
<PAGE>
"Due Period" means, with respect to
any Distribution Date, the calendar
month immediately preceding such
Distribution Date.
"Excess Spread" means, with respect
to any Distribution Date, the
positive excess, if any, of (x) the
aggregate amount of the Mortgage
Payments (or amounts deposited by
Depositor if it elects to acquire
the Mortgage Loans at the time the
outstanding balance of the Mortgage
Loans is less than 10% of the
Initial Principal Balance with
respect to the related Due Period)
over (y) the sum of (A) the amount
required to be distributed pursuant
to priorities (i) through (vii) set
forth under the heading "Description
of Offered Certificates -
Distributions" herein on such
Distribution Date plus (B) the sum
of any outstanding Class A Principal
Carryover Shortfall as of the close
of the preceding Distribution Date
plus (C) the sum of the amounts
described in clauses (i) through
(iv) of the definition of Class A
Monthly Principal Distributable
Amount (as set forth above) for such
Distribution Date.
"Distributable Excess Spread" means
with respect to any Distribution
Date, such portion (not greater than
100%) of Excess Spread with respect
to such Distribution Date, which, if
distributed in accordance with
clause (v) of the definition of
Class A Monthly Principal Amount,
would cause Required OC Test (as
defined under the
"Overcollateralization Provisions")
to be satisfied with respect to such
Distribution Date, after giving
effect to all distributions on such
Distribution Date, provided,
however, that if the Required OC
Multiple (as defined herein) is
unlimited, Distributable Excess
Spread shall equal 100% of Excess
Spread; provided, further, that so
long as an Insurer Default (as
defined in the Agreement) shall not
have occurred and be continuing,
Distributable Excess Spread may, in
the discretion of the Certificate
Insurer with respect to any
Distribution Date with respect to
which the Required OC Multiple is
greater than 100%, be a portion of
Excess Spread which is less than
would otherwise be determinable
pursuant to this definition but
which is not less than the portion
of Excess Spread that would be
determinable pursuant to this
definition if the Required OC
Multiple were equal to 100%.
"Cram Down Loss" means with respect
to a Mortgage Loan, if a court of
appropriate jurisdiction in an
insolvency
S-9
<PAGE>
proceeding shall have issued an
order reducing the Principal Balance
of such Mortgage Loan, the amount of
such reduction. A "Cram Down Loss"
shall be deemed to have occurred on
the date of issuance of such order.
Class S-A Distributions.................. The Class S-A Certificates are
interest-only certificates which
will not be entitled to any
distribution of principal, but will
be entitled to interest on the
"Notional Principal Balance," which
is equal to the aggregate
outstanding principal balance, from
time to time, of the Mortgage Loans.
The interest due with respect to the
Class S-A Certificate will be the
interest which has accrued thereon
at the Class S-A Pass-Through Rate
during the calendar month in which
such Distribution Date occurs (the
"Class S-A Interest Distribution").
See "Description of the Offered
Certificates - The Class S-A
Distributions" and "Prepayment and
Yield Considerations - Yield
Sensitivity of the Class S-A
Certificates."
The Certificate Insurer does not
directly or indirectly guarantee any
specified rate of prepayments, nor
does it guarantee a Certificate
holders investment in the Class S-A
Certificates that might be adversely
affected by such prepayments. All
calculations of interest on the
Offered Certificates will be made on
the basis of a 360-day year assumed
to consist of twelve 30-day months.
Credit Enhancement....................... The Credit Enhancement provided for
the benefit of the Owners of the
Offered Certificates consists of (x)
FHA Title I insurance, (y) the
overcollateralization mechanics
which utilize the internal cash
flows of the Trust and
(z) the Policy.
FHA Insurance Program and Contract
of Insurance: The insurance provided
by the FHA pursuant to the Title I
Program (the "FHA Insurance")
available to the Claims
Administrator is limited to an
amount (the "FHA Insurance Amount")
currently equal to ___% of the
outstanding principal balance as of
the Cut-Off Date of all Title I
loans originated or purchased and
currently reported for FHA Insurance
by the Contract of Insurance Holder,
less the sum of (i) annual
reductions (the "Annual Reductions")
of 10% of the then outstanding FHA
Insurance amount available to the
Contract of Insurance Holder,
commencing October 1, _____ (the
October following the fifth year in
which the Contract of Insurance
S-10
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Holder's contract of insurance has
been in effect); provided, however,
that in no case shall the amount of
FHA Insurance be reduced below
$50,000, and (ii) insurance claims
previously paid to the Contract of
Insurance Holder by the FHA,
including payments in respect of
loans other than the Mortgage Loans;
and increased by an amount equal to
10% of the lesser of the original
principal balance of or the purchase
price paid for Title I loans
subsequently originated or purchased
and owned of record by the Contract
of Insurance Holder. Such amount of
insurance is reflected in an
insurance reserve account maintained
by FHA in the name of the Contract
of Insurance Holder. See "The Title
I Loan Program - FHA Insurance" in
the Prospectus.
The Contract of Insurance Holder
will be the Trustee for the benefit
of the Trust and for the benefit of
all past and subsequent series of
trusts to which loans are sold by
the Seller (the "Related Series
Trusts"). The Secretary of HUD will
not earmark the insurance reserves
held for the Trustee for the benefit
of any particular trust held by the
Trustee, although the Trustee has
agreed not to hold other Title I
Mortgage Loans that would be
qualified for Title I insurance
coverage other than mortgage loans
included in Related Series Trusts
(the "Related Series Mortgage
Loans").
Subject to the then remaining FHA
Insurance Amount each Mortgage Loan
will be insured by the FHA in an
amount currently equal to 90% of the
sum of the following: (i) the unpaid
principal and uncollected interest
earned to the date of default,
calculated on the actuarial method,
reduced by certain amounts received
by the Contract of Insurance Holder
in connection with enforcing a lien
on the Mortgaged Property prior to
the lien of the related Mortgage
Loan; (ii) the unpaid amount of
interest on the unpaid principal
from the date of default submission
to the FHA for payment plus 15
calendar days, but not for any
period greater than nine months from
the date of default, calculated at
7% per annum; and (iii) the amount
of certain uncollected court costs,
attorneys' fees, and expenses for
recording the assignment of the
related Mortgage Loan to the United
States of America. See "The Title I
Loan Program - General" in the
Prospectus. Since the adequacy of
the FHA Insurance Amount is
dependent upon future events,
including Annual Reductions and
reductions for the
S-11
<PAGE>
payment of claims, no assurance can
be given that the FHA Insurance
Amount is or will be adequate to
cover 90% of all potential losses on
the Mortgage Loans.
On the Closing Date, the Trustee
will hold for the benefit of the
Trust the FHA Contract of Insurance
relating to some of but not all the
Mortgage Loans. With respect to
those Mortgage Loans that are not
covered by the Trustee's Contract of
Insurance on the Closing Date, each
of the related Originators will be
required to cause the related
reserve accounts maintained by FHA
to be transferred on the FHA's books
from the related Originator's
contract of insurance to the
Trustee's Contract of Insurance. To
accomplish this transfer, on or
after the date on which the
Originators receive the FHA Title I
Case Numbers for the Mortgage Loans,
the Originators will be required to
submit a sale report to the FHA
regarding the conveyance of the
Mortgage Loans to the Trustee. If
the Insurance Reserves relating to
any Mortgage Loans have not be
transferred to the Contract of
Insurance on or before 120 days
following the Closing Date, the
Depositor will be required to
repurchase such Mortgage Loans.
If a Mortgage Loan is assigned to
the Claims Administrator for
submission to the FHA, the Claims
Administrator will be required to
submit a claim with respect to such
Mortgage Loan to the FHA. The Owners
of the Certificates will not have
any direct right to receive the FHA
Insurance proceeds from the FHA. All
FHA Insurance Proceeds received in
respect of such FHA Claims shall be
deposited into the Collection
Account.
FHA Insurance Premium Account: A
separate account (the "FHA Premium
Account") shall be established by
the Trustee into which an initial
deposit of $_______ (the "Initial
FHA Premium Account Deposit") shall
be made on the Closing Date. No
later than the Business Day
following each Determination Date,
the Trustee will deposit into the
FHA Premium Account FHA insurance
premiums received from Mortgagors on
Invoiced Mortgage Loans. The Trustee
will also deposit into the FHA
Premium Account, to the extent of
the Distribution Amount Available,
an amount equal to the greater of
(i) ___% of the aggregate principal
balance of each outstanding Mortgage
Loan, other than Invoiced Mortgage
Loans (as defined below), divided by
12 and (ii) the positive excess, if
any, of
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<PAGE>
(A) the amount of premium and other
charges due under the Contract of
Insurance for the next succeeding
Due Period and (B) the balance in
the FHA Premium Account as of the
related Determination Date (the "FHA
Premium Account Deposit"). "Invoiced
Mortgage Loans" are Mortgage Loans
with respect to which the related
Mortgagee is required to pay the
premium on FHA Insurance with
respect to such Mortgage Loan.
Overcollateralization: Distributions
to the Class A Certificateholders of
Distributable Excess Spread will
result in a limited acceleration of
the payment of the Class A
Certificates relative to the
amortization of the principal of the
related Mortgage Loans in the early
months of the transaction and
overcollateralization of the Class A
Certificates. Once the required
level of overcollateralization is
reached, and subject to the
provisions described in the next
paragraph, the acceleration feature
will cease, unless necessary to
maintain the required level of
overcollateralization.
The Agreement provides that, subject
to certain floors, caps and
triggers, the required level of
overcollateralization (the "Required
OC Test," as defined herein) may
increase or decrease over time. An
increase would cause a temporary
period of accelerated amortization
of the Class A Certificates until
the actual level of
overcollateralization reached its
required level; whereas, a decrease
would cause a temporary period of
decelerated amortization to reduce
the actual level of
overcollateralization to its
required level. See
"Overcollateralization Provisions"
herein.
The Policy............................... _______________________ (the
"Certificate Insurer") will issue a
certificate guaranty insurance
policy (the "Policy") pursuant to
which it will irrevocably and
unconditionally guarantee payment on
each Distribution Date to the
Trustee for the benefit of the
Owners of the Offered Certificates
of the Class A Interest Distribution
and the Class S-A Interest
Distribution for such Distribution
Date and the Class A Guaranteed
Principal Distribution Amount for
such Distribution Date. So long as
(i) there does not exist a
continuing failure by the
Certificate Insurer to make a
required payment under the Policy
and (ii) certain bankruptcy related
events specified in the Agreement
have not occurred in respect of the
Certificate Insurer (any of the
events described in these clauses
(i) and (ii), a "Certificate
S-13
<PAGE>
Insurer Default"), the Certificate
Insurer shall have the exclusive
right to exercise certain rights
under the Agreement, such as the
right to remove the Master Servicer
upon the occurrence of certain
Servicer Termination Events
specified in the Agreement and to
appoint a successor thereto. In
addition, to the extent of
unreimbursed payments under the
Policy ("Insurance Payments"), the
Certificate Insurer will be
subrogated to the rights of the
holders of the Offered Certificates
with respect to which such Insurance
Payments were made. In connection
with each Insurance Payment on an
Offered Certificate, the Trustee as
attorney-in-fact for the holder
thereof will be required to assign
to the Certificate Insurer the
rights of such holders with respect
to the Offered Certificates, to the
extent of such Insurance Payment,
including, without limitation, in
respect of any amounts due to such
holders as a result of any
securities law violation arising
from the offer and sale of such
Offered certificate. Payments to the
Certificate Insurer in respect of
such assignment shall be subject to
and subordinate to the rights of the
Holders to receive Guaranteed
Distributions with respect to the
Certificate. See "The Policy"
herein.
The Certificate Insurer.................. The Certificate Insurer is a New
York monoline insurance company
engaged exclusively in the business
of writing financial guaranty
insurance, principally in respect of
securities offered in domestic and
foreign markets. The Certificate
Insurer's claims paying ability is
rated Aaa by Moody's Investors
Service, Inc. ("Moody's") and "AAA"
by Standard and Poor's Rating Group,
a division of McGraw Hill ("S&P").
See "The Certificate Insurer"
herein.
Nature of Class S-A Certificates......... General Character as an
Interest-Only Security. The Owners
of the Class S-A Certificateholders
will be entitled to receive monthly
distributions equal to one-month's
interest at the Class S-A
Pass-Through Rate on the Notional
Principal Amount then outstanding.
The Owners of the Class S-A
Certificates will not be entitled to
receive any distributions of
principal collected on the Mortgage
Loans. Because they will not receive
any distributions of principal, the
Owners of the Class S-A Certificates
will be affected by prepayments,
liquidations and other dispositions
of the Mortgage Loans to a greater
degree than will the Owners of the
Class A Certificates. As an extreme
illustration, in the event that the
entire Mortgage Pool
S-14
<PAGE>
prepays in full during the first
month, then on the initial
Distribution Date the Owners of the
Class A Certificates will receive
the full par value of their
Certificates while the Owners of the
Class S-A Certificates will suffer
nearly a complete loss (except for
one month's interest) on their
investment. Because, however, the
Mortgage Pool contains approximately
_____ Mortgage Loans, the prepayment
experience of any one Mortgage Loan
is not expected to be material to an
investor's overall return.
In general, liquidations due to
losses, repurchases by the Company
and other dispositions of Mortgage
Loans from the Trust will have the
same effect on the Owners of the
Class S-A Certificates as do
prepayments of principal, and are
collectively referred to as
"Prepayments."
Because the yield to the Class S-A
Certificateholders is sensitive to
certain constant rates of
prepayment, it is advisable for
potential investors in the Class S-A
Certificates to consider carefully,
and to make their own evaluation of,
the effect of any particular
assumption regarding the rates and
the timing of prepayments. In
general, when interest rates
decline, prepayments in a pool of
receivables such as the Mortgage
Loans will increase as borrowers
seek to refinance at lower rates.
This will have the effect of
reducing the future stream of
payments on an interest-only
security based on such receivables
pool, thus adversely affecting
yield. Conversely, when interest
rates increase prepayments will tend
to decrease (because attractive
refinancing opportunities are not
available) and the future stream of
payments available to such an owner
of an interest-only security may not
decline as rapidly as originally
anticipated thus positively
affecting yield. See "Risk Factors -
Prepayment Consideration" in the
Prospectus for other factors which
may also influence prepayment rates.
Applicability of Credit Enhancement
to the Class S-A Certificates. The
overcollateralization/subordination
feature of the Trust includes
provisions which subordinate the
Class R Certificates for each
Distribution Date for the purpose,
inter alia, of funding the full
amounts due on each Class of Offered
Certificates, including the Class
S-A Certificates, on each
Distribution Date. The Policy will
provide for the funding of an amount
equal to the Insured Distribution
Amount due on the Offered
Certificates.
S-15
<PAGE>
In general, the protection afforded
by the
overcollateralization/subordination
feature and by the Policy is for
credit risk and not for prepayment
risk. The
overcollateralization/subordination
feature does not, nor may a claim be
made under the Policy to, guarantee
or insure that any particular rate
of prepayment is experienced by the
Trust. If the entire pool were to
prepay in the initial month, with
the result that the Owners of the
Class S-A Certificates receive only
a single month's interest and thus
suffer a nearly complete loss on
their investments, no amounts would
be available from the
overcollateralization/subordination
feature or from the Policy to
mitigate such loss.
Accrual of "Original Issue
Discount." The Class S-A
Certificates may be issued with
"original issue discount" within the
meaning of the Code. As a result, in
certain rapid prepayment
environments the effect of the rules
governing the accrual of original
issue discount may require Owners of
the Class S-A Certificates to accrue
original issue discount at a rate in
excess of the rate at which
distributions are received by such
Certificateholders. See "Certain
Federal Income Tax Consequences"
herein and in the Prospectus.
Monthly Servicing Fees................... The Master Servicer will retain a
fee equal to ___% per annum for
Master Servicer and Claims
Administration duties (the "Master
Servicing Fee") and each subservicer
will retain a fee equal to _____%
per annum (the "Servicing Fees"), in
each case payable monthly at
one-twelfth the annual rate, of the
principal amount of each Mortgage
Loan outstanding as of the close of
business on the last day of the
second preceding month serviced
pursuant to the related servicing
agreement as of the first day of
each calendar month.
Advances................................. The Master Servicer will be
obligated to make advances
("Delinquency Advances") with
respect to delinquent payments of
interest (at the related Coupon Rate
less the Servicing Fee Rate, as
defined below) and scheduled
principal due on each Mortgage Loan
to the extent that such Delinquency
Advances are recoverable from (i)
future collections on the Mortgage
Loan which gave rise to the
Delinquency Advance, (ii)
Liquidation Proceeds for such
Mortgage Loans, and (iii) from
certain excess moneys
S-16
<PAGE>
which would otherwise be paid to the
Owners of the Class R Certificates.
The Master Servicer will also be
required to advance certain amounts
in respect of foreclosure expenses
that the Master Servicer determines
in its good faith judgment are
recoverable from liquidation
proceeds. Foreclosure Advances are
recoverable from all related
Mortgage Payments.
Book-Entry Registration of the
Offered Certificates..................... The Offered Certificates initially
will be represented by physical
certificates registered in the name
of Cede & Co. ("Cede"), as the
nominee of The Depository Trust
Company ("DTC"). No person acquiring
an interest in the Offered
Certificates (a "Beneficial Owner")
will be entitled to receive a
definitive certificate representing
such person's interest in the Trust,
except in the event that Physical
Certificates are issued under
certain limited circumstances. For
each Offered Certificate held by
DTC, DTC will effect payments to,
and transfers of such Offered
Certificates among, Beneficial
Owners by means of its electronic
record keeping services, acting
through organizations that
participate in DTC. This arrangement
may result in certain delays in
receipt of distributions by
Beneficial Owners and may restrict a
Beneficial Owner's ability to pledge
the Offered Certificates
beneficially owned by it. All
references herein to the Owners of
Offered Certificates shall mean and
include the rights of Beneficial
Owners, as such rights may be
exercised through DTC and its
participating organizations. See
"Description of the Offered
Certificates - Book Entry
Registration of the Class A
Certificates" herein and
"Description of the Certificates -
Book Entry Registration" in the
Prospectus.
Optional Termination..................... On any Distribution Date on or after
the date on which the aggregate
Principal Balance of the Mortgage
Loans remaining in the Trust is less
than 10% of the aggregate Principal
Balance of the Mortgage Loans as of
the Cut-Off Date, the Depositor will
have the option, subject to certain
conditions set forth in the
Agreement, to purchase all, but not
less than all, the remaining
Mortgage Loans at the purchase price
described herein. The payment of
such purchase price will result in
the retirement of the then
outstanding Certificates.
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<PAGE>
Ratings.................................. It is a condition of the original
issuance of the Offered Certificates
that the Offered Certificates
receive ratings of AAA by S&P, and
Aaa by Moody's. A security rating is
not a recommendation to buy, sell or
hold securities, and may be subject
to revision or withdrawal at any
time by the assigning entity. See
"Ratings" herein.
Ratings of the Class S-A
Certificates. The Class S-A
Certificates will, upon initial
issuance, receive ratings of "AAA"
by S&P and of "Aaa" by Moody's.
Ratings which are assigned to
securities such as the Class S-A
Certificates generally evaluate the
ability of the issuer (i.e., the
Trust) and any guarantor (i.e., the
Certificate Insurer) to make timely
payments when such payments are due,
as required by such securities. As
described above, such amounts with
respect to the Class S-A
Certificates consist only of
interest. In general, the ratings
thus address credit risk and not
prepayment risk. See "Ratings"
herein.
Federal Tax Aspects...................... For Federal income tax purposes an
election will be made to treat the
Trust as a "real estate mortgage
investment conduit" (a "REMIC").
Each Class of Offered Certificates
will be designated as "regular
interests" in the related REMIC and
generally will be treated as debt
instruments of the Trust for federal
income tax purposes. The REMIC will
issue the Class R Certificates,
which will be designated as the sole
class of "residual interests" in the
REMIC. See "Certain Federal Income
Tax Consequences" herein and in the
Prospectus.
[ERISA Considerations.................... As described under "ERISA
Considerations" herein, the Class A
Certificates may be purchased by
employee benefit plans that are
subject to the Employee Retirement
Income Security Act of 1974, as
amended. See "ERISA Considerations"
herein and in the Prospectus.]
Risk Factors............................. Credit Considerations. For
information with regard to the
Mortgage Loans and their related
risks, see "The Mortgage Loan Pool"
herein.
Prepayment Considerations. For
information regarding the
consequences of prepayments,
particularly for Owners of the Class
S-A Certificates, see "Prepayment
and Yield Considerations" herein.
S-18
<PAGE>
Other. For a discussion of certain
risk factors that should be
considered by prospective investors
in the Offered Certificates, see
"Risk Factors" herein and in the
Prospectus.
Legal Investment Considerations.......... Although the Offered Certificates
are expected to be rated "AAA" by
S&P and "Aaa" by Moody's, the
Offered Certificates will not
constitute "mortgage related
securities" for purposes of the
Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA")
because the Mortgage Loans include
junior liens. Accordingly, many
institutions with legal authority to
invest in comparably rated
securities based on first mortgage
loans may not be legally authorized
to invest in the Offered
Certificates.
Certain Legal Matters.................... Certain legal matters relating to
the validity of the issuance of the
Certificates will be passed upon for
the Depositor by Dewey Ballantine
LLP, New York, New York. Certain
legal matters relating to insolvency
issues and certain federal income
tax matters concerning the
Certificates will be passed upon for
the Depositor Dewey Ballantine LLP.
Certain legal matters relating to
the validity of the issuance of the
Certificates will be passed upon for
the Underwriters by
____________________,
_______________. Certain legal
matters relating to the Certificate
Insurer and the Policy will be
passed upon for the Insurer by
____________________.
S-19
<PAGE>
RISK FACTORS
Prospective investors in the Offered Certificates should consider the
following risk factors (as well as the risk factors set forth under "Risk
Factors" in the Prospectus) in connection with the purchase of the Offered
Certificates.
Nature of Collateral. Because a substantial amount of the Mortgage
Loans are secured by junior liens subordinate to the rights of the mortgagee(s)
or beneficiary under the related senior mortgages or deeds of trust, the
proceeds from any liquidation, insurance or condemnation proceedings with
respect to such Mortgage Loans will be available to satisfy the outstanding
balance of a Mortgage Loan only to the extent that the claims of such senior
mortgagees or beneficiary(ies) have been satisfied in full, including any
related foreclosure costs. Furthermore, Title I loans generally are not required
to be written with any equity in the Mortgaged Property above the aggregate
amount of the mortgage liens (including the amount of the related Title I lien
on the Mortgage Property). In addition, a junior mortgagee may not foreclose on
the property securing a junior mortgage unless it forecloses subject to the
senior mortgage(s), in which case it must either pay the entire amount due on
the senior mortgage(s) to the senior mortgagee at or prior to the foreclosure
sale or undertake the obligation to make payments on the senior mortgage(s) in
the event the mortgagor is in default thereunder. In servicing Title I mortgages
in their portfolios, it is not the Master Servicer's or the related Servicers'
practices to satisfy the senior mortgage(s) at or prior to the foreclosure sale,
nor to advance funds to keep the senior mortgage(s) current. The Trust will have
no source of funds (and may not be permitted under the REMIC provisions of the
Code) to satisfy the senior mortgage(s) or make payments due to the senior
mortgagee(s), and therefore, investors in the Class A Certificates should not
expect that any senior mortgage(s) will be kept current by the Trust for the
purpose of protecting the Trust's junior lien. See "The Pooling and Servicing
Agreement - Master Servicer and Subservicers" herein.
An overall decline in the residential real estate market, the general
condition of a Mortgaged Property, or other factors, could adversely affect the
values of the Mortgaged Properties such that the outstanding balances of the
Mortgage Loans, together with any senior liens on the Mortgaged Properties,
equal or exceed the value of the Mortgaged Properties. A decline in the value of
a Mortgaged Property would affect the interest of the Trust in the Mortgaged
Property before having any effect on the interest of the related first
mortgagee, and could cause the Trust's interest in the Mortgaged Property to be
extinguished. If such a decline occurs, the actual rates of delinquencies,
foreclosures and losses on the Mortgage Loans could be higher than those
currently experienced in the mortgage lending industry in general. In addition,
adverse economic conditions (which may or may not affect real property values)
may affect the timely payment by borrowers of scheduled payments of principal
and interest on the Mortgage Loans and, accordingly, the actual rates of
delinquencies, foreclosures and losses with respect to the Trust.
[Risk of Higher Default Rates Associated with __________ or __________
Real Property. Since a substantial portion of the Mortgaged Properties are
located in __________ or __________, an overall decline in the __________ or
__________ residential real estate markets could adversely affect the values of
the Mortgaged Properties securing such Mortgage Loans such that the Principal
Balances of the related Mortgage Loans, together with any primary
S-20
<PAGE>
financing on such Mortgaged Properties, equal or exceed the value of such
Mortgaged Properties. As the residential real estate market is influenced by
many factors, including the general condition of the economy and interest rates,
no assurances may be given that the __________ or __________ real estate market
will not weaken further. If the __________ or __________ residential real estate
market should experience an overall decline in property values after the dates
of origination of the Mortgage Loans, the rates of losses on the Mortgage Loans
may be expected to increase, and may increase substantially. [To be modified if
the Mortgage Loans for a Series includes a concentration within regions,
counties or other subdivisions of a state whose adverse economic conditions are
greater than those of the state as a whole.]
Limitations on FHA Insurance. The availability of FHA Insurance
following a default on a Mortgage Loan is subject to a number of conditions,
including strict compliance by the Trustee, the Claims Administrator, the Master
Servicer, any subservicers, and the Originators with FHA Regulations in
originating and servicing the Mortgage Loan and limits on the aggregate
insurance coverage available with respect to all FHA Title I loans then owned
and reported for FHA Insurance by the Trustee, as Contract of Insurance Holder.
Although the Trustee and the Depositor have obtained representations from the
Originators that they have complied with all FHA Regulations, such regulations
are susceptible to substantial interpretation. The Trustee, as Contract of
Insurance Holder, is not required to obtain, and has not obtained, approval from
FHA of the origination and servicing practices of the Originators. Failure to
comply with all FHA Regulations may result in a denial of FHA Insurance claims,
and there can be no assurance that FHA's enforcement of its regulations will not
become stricter in the future. In addition, any claim paid by FHA will cover
only 90% of the sum of the unpaid principal on the Mortgage Loan, a portion of
the unpaid interest and certain other liquidation costs. The Depositor has
agreed in the Agreement to purchase from the Trust any Mortgage Loan that is
rejected by the FHA for insurance benefits under the Contract of Insurance.
The FHA Insurance available to the Trustee, as Contract of Insurance
Holder, is limited to an amount, currently equal to ____% of the principal
balance of all Title I loans originated or purchased and currently reported for
FHA Insurance by the Trustee, as Contract of Insurance Holder, less amounts for
annual reductions as described below and for insurance claims previously paid to
the Trustee, as Contract of Insurance Holder, by the FHA, Mortgage Loans, and
increased by an amount equal to 10% of the lesser of the outstanding principal
balance as of the Cut-Off Date and the purchase price paid for Title I loans
subsequently originated or purchased of record by the Trustee, as Contract of
Insurance Holder. On each October 1, commencing five years after an entity's FHA
contract of insurance has been in effect, such entity's available FHA Insurance
is reduced by 10% of the then outstanding FHA Insurance amount available to the
Trustee, as Contract of Insurance Holder, as of each such October 1. The
Trustee, as Contract of Insurance Holder, has had an FHA contract of insurance
since __________. Accordingly, on each October 1, commencing October 1, 199___,
the FHA Insurance available to the Claims Administrator will be reduced by 10%
of the then outstanding FHA Insurance amount; provided, however, that in no case
shall such amount be reduced below $50,000.
S-21
<PAGE>
The Contract of Insurance will be held by the Trustee for the benefit
of the Trust and for the benefit of Related Series Trusts. The Secretary of HUD
will not earmark the insurance reserves held for the Trustee for the benefit of
any particular Related Series Trust held by the Trustee, although the Trustee
has agreed not to hold Related Series Mortgage Loans.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Class A
Certificates will be used to purchase the Mortgage Loans from the Seller.
THE DEPOSITOR
The Depositor was incorporated in the State of Delaware on January 31,
1991 and is a wholly-owned subsidiary of the ContiFinancial Corporation. The
Depositor maintains its principal offices at 277 Park Avenue, New York, New York
10172. Neither the Depositor, the Company nor any of their affiliates will
insure or guarantee distribution on the Certificates.
THE TITLE I LOAN PROGRAM AND THE CONTRACT OF INSURANCE
On the Closing Date, the Trustee will hold for the benefit of the Trust
and all Related Series Trusts the FHA Contract of Insurance in an amount equal
to ____% of the outstanding Principal Balance of all Mortgage Loans held by the
Trust and the Related Series Trusts as of the Cut-Off Date acknowledged by the
FHA as having been transferred to the Trustee (the "Initial FHA Insurance
Amount"). With respect to those Mortgage Loans that are not covered by the
Trustee's Contract of Insurance on the Closing Date, each of the related
Originators will be required to cause the related reserve accounts maintained by
the Secretary of HUD to be transferred on the FHA's books from the related
Originator's Contract of Insurance to the Trustee's Contract of Insurance. To
accomplish this transfer, on or after the date on which the Originators receive
the FHA Title I Case Numbers for the Mortgage Loans, the Originators will be
required to submit a sale report to the Secretary of HUD regarding the
conveyance of the Mortgage Loans to the Trustee. The "FHA Insurance Amount"
shall mean the Initial FHA Insurance Amount less (i) the aggregate amount of all
Annual Reductions applicable to the Contract of Insurance plus all reserves
subsequently transferred by the Secretary of HUD and (ii) the amount of FHA
Insurance proceeds previously received with respect to the Mortgage Loans and
any Related Series Mortgage Loans (as described below) since the related
Transfer Date. The Claims Administrator shall not submit any claim to the FHA if
the amount of such claim would exceed the FHA Insurance Amount applicable to the
Contract of Insurance. All FHA Insurance Proceeds received in respect of such
FHA Claims shall be deposited into the Collection Account.
THE ORIGINATORS
[To Be Provided]
S-22
<PAGE>
THE MASTER SERVICER AND CLAIMS ADMINISTRATOR
The Master Servicer and Claims Administrator is _____________________,
a _________________ corporation. ____________ is principally engaged in the
business of servicing, on behalf of third party investors, residential single
family mortgages secured by properties located in
______________________________. As of _____________ __, 199___, the Master
Servicer was master servicing more than ___________ mortgage loans representing
an aggregate outstanding principal balance of approximately $____ billion. No
specific delinquency or foreclosure data relating to ________'s servicing
portfolio is provided because ___________'s servicing experience with FHA Title
I Mortgage Loans is not sufficient to be indicative of the delinquency and
foreclosure that might be expected with respect to the Mortgage Loans.
The following tables set forth information relating to the delinquency,
loan loss and foreclosure experience of the Master Servicer for its servicing
portfolio of Mortgage Loans for the past three years.
THE TRUSTEE AND CONTRACT OF INSURANCE HOLDER
_________________________________, a __________ banking corporation
located in ____________________, will be named as Trustee and Contract of
Insurance Holder under the Agreement.
The Trustee will at all times be required to be a corporation or
national banking association organized and doing business under the laws of the
United States of America or of any state authorized under such laws to exercise
corporate trust powers, subject to supervision or examination by federal or
state authority and either (i) having a combined capital and surplus of at least
$50,000,000 or (ii) being a wholly-owned subsidiary of a bank holding company
having such a capital and surplus. If at any time the Trustee shall cease to be
eligible in accordance with the provisions described in this paragraph, it will
be required to resign immediately.
No resignation or removal of the Trustee or the Contract of Insurance
Holder, as the case may be, and no appointment of a successor thereto shall
become effective until the acceptance of appointment by a successor trustee.
The Trustee or the Contract of Insurance Holder, as the case may be, or
any trustees or contract of insurance holders, respectively, hereafter
appointed, may resign at any time in the manner set forth in the Agreement. Upon
receiving notice of resignation, the Master Servicer with the prior written
consent of the Certificate Insurer is required promptly to appoint a successor
trustee or Contract of Insurance Holder, as the case may be, acceptable to the
Certificate Insurer by written instrument meeting the eligibility requirements
in the manner set forth in the Agreement. If no successor trustee or Contract of
Insurance Holder, as the case may be, shall have been appointed and have
accepted appointment within 30 days after the giving of such notice of
resignation, the resigning Trustee or Contract of Insurance Holder, as the case
may be, may petition any court of competent jurisdiction for the appointment of
a successor trustee.
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<PAGE>
If at any time the Trustee or the Contract of Insurance Holder, as the
case may be, shall cease to meet the eligibility requirements, or if, as
determined by a court of competent jurisdiction in a proceeding in which the
Trustee has been given an opportunity to be heard, the Trustee has failed to
perform any obligation under the Agreement and such failure materially and
adversely affects the Owners of the Certificates, and, in either such case, the
Trustee shall fail to resign after written request therefor by the Master
Servicer, or if at any time the Trustee shall become incapable of acting, or
shall be adjusted as bankrupt or insolvent, or a receiver of the Trustee or of
its property shall be appointed, or any public officer shall take charge or
control of the Trustee or of its property or affairs for the purpose of
rehabilitation, conservation or liquidation, then, in any such case the Master
Servicer may with the prior written consent of the Certificate Insurer or at the
written request of the Certificate Insurer shall remove the Trustee and appoint
a successor trustee acceptable to the Certificate Insurer by written instrument,
in duplicate, one copy of which instrument shall be delivered to the Trustee so
removed and one copy to the successor trustee.
The Depositor will be required to give notice of any removal of the
Trustee to the Owners, which notice will be required to include the name of the
successor trustee and the address of its corporate trust office. The Depositor
also will be required to give notice to the Owners of the acceptance by a
successor of its appointment.
THE MORTGAGE LOAN POOL
General
The Mortgage Loans to be transferred to the Trust on the Closing Date
will consist of _____ fixed-rate FHA home improvement loans evidenced by
promissory notes or retail installment sales contracts (the "Notes") secured by
first and junior lien deeds of trust, security deeds or mortgages, which are
located in ___ states. The Properties securing the Mortgage Loans consist of
residences (which may be detached, part of a two-to-four family dwelling, a
condominium unit, a unit in a planned unit development, multi-unit properties or
manufactured homes (to the extent such homes are considered real estate under
applicable state law)). All the Mortgage Loans are partially insured by the FHA
under Title I. The Properties may be owner-occupied (which includes second and
vacation homes) and non-owner occupied investment properties. All Mortgage Loans
were originated on or after _____________ __, 199___.
As of the Cut-Off Date, the average Principal Balance of the Mortgage
Loans was $___________; the Coupon Rates of the Mortgage Loans ranged from
_____% to _____%; the weighted average Coupon Rate of the Mortgage Loans was
_____%; the weighted average remaining term to maturity of the Mortgage Loans
was _____ months. The remaining terms to maturity as of the Cut-Off Date of the
Mortgage Loans ranged from 8 months to ____ months. The maximum Principal
Balance as of the Cut-Off Date was $________. No Mortgage Loan will mature later
than _____________ __, 199__. The Mortgage Loans relate to properties in ___
states.
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<PAGE>
Geographic Distribution of Mortgaged Properties
The geographic distribution of Mortgage Loans by State was as follows:
Original Aggregate
State No. Percent Principal Balance Percent
----- --- ------- ----------------- -------
Total
Cut-Off Date Loan Rates
The Coupon Rates borne by the Notes relating to the Mortgage Loans were
distributed as follows as of the Cut-Off Date:
Original Aggregate
Coupon Rate (%) No. Percent Principal Balance Percent
--------------- --- ------- ------------------ -------
Total
Cut-Off Date Loan Balances
The distribution of the outstanding principal amounts of the Mortgage
Loans as of the Cut-Off Date was as follows: Principal Amount
Principal Amount Original Aggregate
Cut-Off Date No. Percent Principal Balance Percent
------------ --- ------- ----------------- -------
Total
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<PAGE>
Distribution of Months Since Origination
The distribution of the number of months since origination of the
Mortgage Loans as of the Cut-Off Date was as follows:
Original Aggregate
Months No. Percent Principal Balance Percent
------ --- ------- ----------------- -------
Total
Distribution of Remaining Term to Maturity
The distribution of the number of months remaining to maturity of the
Mortgage Loans as of the Cut-Off Date was as follows:
Original Aggregate
Months No. Percent Principal Balance Percent
------ --- ------- ----------------- -------
Total
Interest Payments on the Mortgage Loans
The Mortgage Loans are actuarial loans which provide that interest is
charged to the Mortgagors thereunder, and payments are due from such Mortgagors,
as of a scheduled day of each month which is fixed at the time of origination.
Each payment made by the Mortgagor is, therefore, treated as containing
predetermined amount of interest and principal. Scheduled monthly payments made
by the Mortgagors on the Mortgage Loans either earlier or later than the
scheduled due dates thereof will not affect the amortization schedule or the
relative application of such payments to principal and interest.
PREPAYMENT AND YIELD CONSIDERATIONS
General
The weighted average life of, and, if purchased at other than par
(disregarding, for purposes of this discussion, the effects on an investor's
yield resulting from the timing of the
S-26
<PAGE>
settlement date and those considerations discussed below under "Payment Lag
Feature of Class A Certificates"), the yield to maturity on a Offered
Certificate will be directly related to the rate of payment of principal of the
Mortgage Loans including for this purpose Prepayments, liquidations due to
defaults, casualties and condemnations, and repurchases of Mortgage Loans by the
Company. The actual rate of principal prepayments on pools of mortgage loans is
influenced by a variety of economic, tax, geographic, demographic, social, legal
and other factors and has fluctuated considerably in recent years. In addition,
the rate of principal prepayments may differ among pools of mortgage loans at
any time because of specific factors relating to the mortgage loans in the
particular pool, including, among other things, the age of the mortgage loans,
the geographic locations of the properties securing the loans and the extent of
the mortgagors' equity in such properties, and changes in the mortgagors'
housing needs, job transfers and unemployment.
The timing of changes in the rate of prepayments may significantly
affect the actual yield to investors, even if the average rate of principal
prepayments is consistent with the expectations of investors. In general, the
earlier the payment of principal of the Mortgage Loans the greater the effect on
an investor's yield to maturity. As a result, the effect on an investor's yield
of principal prepayments occurring at a rate higher (or lower) than the rate
anticipated by the investor during the period immediately following the issuance
of the Offered Certificates will not be offset by a subsequent like reduction
(or increase) in the rate of principal prepayments. Investors must make their
own decisions as to the appropriate prepayment assumptions to be used in
deciding whether to purchase any of the Offered Certificates. The Company makes
no representations or warranties as to the rate of prepayment or the factors to
be considered in connection with such determination.
Certain Yield, Prepayment and Weighted Average Life Considerations
If purchased at other than par, the yield to maturity on an Offered
Certificate will be affected by the rate of the payment of principal of the
Mortgage Loans. If the actual rate of payments on the Mortgage Loans is slower
than the rate anticipated by an investor who purchases an Offered Certificate at
a discount, the actual yield to such investor will be lower than such investor's
anticipated yield. If the actual rate of payments on the Mortgage Loans is
faster than the rate anticipated by an investor who purchases an Offered
Certificate at a premium, the actual yield to such investor will be lower than
such investor's anticipated yield.
The rate of prepayments with respect to conventional fixed rate
mortgage loans has fluctuated significantly in recent years. In general, if
prevailing interest rates fall significantly below the interest rates on fixed
rate mortgage loans, such mortgage loans are likely to be subject to higher
prepayment rates than if prevailing rates remain at or above the interest rate
on such mortgage loans. However, the monthly payment on a home improvement loan
is often smaller than the monthly payment on a purchase money first mortgage
loan. Consequently, a decrease in the interest rate payable results in a smaller
reduction in the amount of the monthly payment on the smaller balance loan.
Conversely if prevailing interest rates rise appreciably above the interest
rates on fixed rate mortgage loans, such mortgage loans are likely to experience
a lower
S-27
<PAGE>
prepayment rate than if prevailing rates remain at or below the interest rates
on such mortgage loans.
The final scheduled Distribution Date for the Class A Certificates is
_____________ __, 20__, which is the date on which the original principal amount
of the Class A Certificates as of the Closing Date less all amounts previously
distributed to the Owners on account of principal (such amount as of any time,
the "Class A Principal Balance") would be reduced to zero, assuming that no
Prepayments are received on the Mortgage Loans and that payments of principal of
and interest on each of the Mortgage Loans are timely received. The weighted
average life of the Class A Certificates is likely to be shorter than would be
the case if payments actually made on the Mortgage Loans conformed to the
foregoing assumptions, and the final Distribution Date with respect to the Class
A Certificates could occur significantly earlier than the final scheduled
Distribution Date because (i) Distributable Excess Spread will be used to make
accelerated payments of principal to the Owners of the Class A Certificates,
which payments will have the effect of shortening the weighted average lives of
the Class A Certificates, (ii) Prepayments are likely to occur, and (iii) the
Depositor and, in limited circumstances, the Certificate Insurer, may cause a
termination of the Trust when the aggregate outstanding principal balance of the
Mortgage Loans is 10% or less of the aggregate principal balance of the Mortgage
Loans in the Trust as of the Cut-Off Date.
Weighted Average Life of the Class A Certificates
"Weighted average life" refers to the average amount of time that will
elapse from the date of issuance of a security until each dollar of principal of
such security will be repaid to the investor. The weighted average life of the
Class A Certificates will be influenced by the rate at which principal of the
Mortgage Loans is paid, which may be in the form of scheduled amortization or
prepayments (for this purpose, the term "prepayment" includes Prepayments and
liquidations due to default). Prepayments on mortgage loans are commonly
measured relative to a prepayment standard or model. In the model used in this
Prospectus Supplement, the constant prepayment rate ("CPR") represents an
assumed annualized rate of payment relative to the then outstanding principal
balance of a pool of new mortgage loans.
Based upon the foregoing assumptions, the following table indicates the
projected weighted average life of the Class A Certificates, at various CPR
assumptions.
Class A Certificates
Weighted Average Earliest Retirement at
CPR Life (years)* Class R Owner's Option**
--- ------------- ------------------------
- -------------
* The weighted average life of a Certificate is determined by (i)
multiplying the amount of each distribution in reduction of the
outstanding principal amount of such Certificate by
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<PAGE>
the number of years from the date of issuance of the Certificates to
the related Distribution Date, (ii) adding the results and (iii)
dividing the sum by the initial principal amount of the Certificate.
** Assuming early retirement of the Class A Certificates upon termination
of the Trust on the second Distribution Date following the Remittance
Date on which the aggregate unpaid Principal Balance of the Mortgage
Loans declines to a level less than 10% of the aggregate principal
balance of the Mortgage Loans in the Trust as of the Cut-Off Date.
There is no assurance that Prepayments will occur, or, if they do
occur, that they will occur at any constant percentage of CPR.
Payment Lag Feature of Class A Certificates
An amount equal to Mortgagor payments with respect to each Mortgage
Loan (net of the Servicing Fee and Master Servicer Fee) received during each Due
Period is to be remitted to the Trustee within two Business Days of receipt
thereof; however, the Trustee will be required to distribute such amounts to the
Owners on the Distribution Date following such Due Period. The first
Distribution Date will not occur until _____________ __, 199__, and will include
Mortgagor payments for the Due Period ending on _____________ __, 199__. Thus,
the effective yield to the Owners will be below that otherwise produced by the
Pass-Through Rate because the distributions to the Class A Owners in respect of
any given month will not be made until on or about the 20th day of the following
month.
Yield Sensitivity of the Class S-A Certificates
Because amounts distributable to Owners of the Class S-A Certificates
consist entirely of interest, the yield to maturity of the Class S-A
Certificates will be extremely sensitive to the repurchase, prepayment and
default experience of the Mortgage Loans, and prospective investors should fully
consider the associated risks, including the risk that such investors may not
fully recover their initial investment. In particular, investors in the Class
S-A Certificates should be aware that Depositor may cause a termination of the
Trust when the aggregate outstanding principal balance of the Mortgage Loans has
declined to ___% or less of the aggregate pool balance of the Mortgage Loans as
of the Cut-Off Date.
The following table indicates certain relationships between the assumed
purchase price and the yield to maturity on the Class S-A Certificates, stated
on a corporate bond equivalent basis. Such table also indicates such
relationships on the assumption that (a) the Trust is not terminated by the
Depositor pursuant to its __% "clean-up call", and (b) the Trust is so
terminated.
S-29
<PAGE>
Sensitivity of the Class S-A Certificates to Prepayments
<TABLE>
<CAPTION>
Prepayment Scenario 0% CPR % CPR % CPR % CPR % CPR
------------------- ------ -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
I
II
III
IV
V
</TABLE>
On the basis of approximately __% CPR, and a purchase price of ____%,
no termination of the Trust by the Company pursuant to its __% "clean-up call"
and the other assumptions described above, the pre-tax yield to maturity of the
Class S-A Certificates would be approximately __%. If the actual prepayment rate
were to exceed approximately __% CPR, based on such assumptions, an investor in
the Class S-A Certificates as to which such percentage of CPR was exceeded would
not fully recover the initial purchase price thereof.
On the basis of approximately ___% CPR, a purchase price of _______%,
termination of the Trust by the Company pursuant to its __% "clean-up call" and
the other assumptions described above, the pre-tax yield to maturity of the
Class S-A Certificates would be approximately __%. If the actual prepayment rate
were to exceed approximately __% CPR based on such assumptions, an investor in
the Class S-A Certificates as to which such percentage of CPR was exceeded would
not fully recover the initial purchase price thereof.
It is highly unlikely that the Mortgage Loans will prepay at a constant
rate until maturity or that all of the Mortgage Loans will prepay at the same
rate. In fact, Mortgage Loans will prepay at different rates.
The yields set forth in the preceding tables were calculated by
determining the monthly discount rates which, when applied to the assumed stream
of cash flow to be paid on the Class S-A Certificates, would cause the
discounted present value of such assumed cash flows to equal the assumed
purchase price of such Class S-A Certificates and by converting such monthly
rates to corporate bond equivalent rates. Such calculations do not take into
account variations that may occur in the interest rates at which investors may
be able to reinvest funds received by them as distributions on the Class S-A
Certificates and consequently do not purport to reflect the return on any
investment in the Class S-A Certificates when such reinvestment rates are
considered.
The Mortgage Loans will not necessarily have the characteristics
assumed above, and there can be no assurance the (i) the Mortgage Loans will
prepay at any of the rates shown in the table or at any other particular rate or
will prepay proportionately, (ii) the pre-tax yield on the Class S-A
Certificates will correspond to any of the pre-tax yields shown above or (iii)
the aggregate purchase price of the Class S-A Certificates will be equal to the
purchase price assumed.
Scheduled Final Distribution Date. The scheduled final Distribution
Date for the Class S-A Certificates is ___________ __, ____.
S-30
<PAGE>
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Mortgage Loans and
the Mortgaged Properties is based upon the pool as constituted at the close of
business on the Cut-Off Date, as adjusted for the scheduled principal payments
due on or before such date. Prior to the issuance of the Offered Certificates,
Mortgage Loans may be removed from the pool as a result of incomplete
documentation or non-compliance with representations and warranties set forth in
the Agreement, if the Depositor deems such removal necessary or appropriate. A
limited number of other Mortgage Loans may be included in the pool prior to the
issuance of the Offered Certificates.
A current report on Form 8-K will be available to purchasers of the
Offered Certificates and will be filed and incorporated by reference to the
Registration Statement together with the Agreement with the Securities and
Exchange Commission within fifteen days after the initial issuance of the
Offered Certificates. In the event Mortgage Loans are removed from or added to
the mortgage pool as set forth in the preceding paragraph, such removal or
addition will be noted in the current report on Form 8-K.
DESCRIPTION OF THE OFFERED CERTIFICATES
General
The Class A Certificates will be available in minimum denominations of
$________________ and integral multiples of $1,000 in excess thereof, except
that one Class A Certificate may be issued in any amount. The Class S-A
Certificate will be issuable in minimum Percentage Interests of 10% and integral
multiples of 1% in excess thereof.
As described in "The Mortgage Loan Pool" herein, the Mortgage Loans
include first and junior lien Mortgage Loans. Each Class A Certificate will
evidence the right to receive on each Distribution Date the Class A Interest
Distribution and the Class A Principal Distribution until the Class A
Certificate Balance has been reduced to zero and each Class S-A Certificate,
which is an interest-only Certificate, will evidence the right to receive on
each Distribution Date the Class S-A Interest Distribution.
One-hundred percent of the Class A Distribution Amount and the Class
S-A Interest Distribution due to the related Owners of the Offered Certificates
on each Distribution Date is insured by the Certificate Insurer pursuant to the
Policy. See "The Policy" herein.
Distribution Dates
On each Distribution Date each Owner of Class A Certificates will be
entitled to receive, from amounts then on deposit in the Certificate Account and
until the Class A Certificate Balance is reduced to zero, to the extent of the
Amount Available on such Distribution
S-31
<PAGE>
Date, the Class A Interest Distribution and, to the extent of the Distribution
Amount on such Distribution Date, the Class A Monthly Principal Distributable
Amount as of such Distribution Date and each Owner of a Class S-A Certificate
will be entitled to receive, from amounts then on deposit in the Certificate
Account, to the extent of the Amount Available on such Distribution Date, the
Class S-A Interest Distribution as of such Distribution Date. Distributions will
be made in immediately available funds to Owners of Offered Certificates by wire
transfer or otherwise, to the account of such Owner at a domestic bank or other
entity having appropriate facilities therefor, if such Owner has so notified the
Trustee, or by check mailed to the address of the person entitled thereto as it
appears on the register (the "Certificate Register") maintained by the Trustee
as registrar (the "Certificate Registrar").
Distributions
Upon receipt, the Trustee will be required to deposit into the
Certificate Account (i) the total of the principal and interest collections on
the Mortgage Loans required to be remitted by the Master Servicer or the related
subservicers on each Business Day, together with any Purchase Price Amount, (ii)
any Insurance Payment and (iii) the proceeds of any liquidation of Mortgage
Loans.
On each Distribution Date, the Trustee is required to make the
following disbursements and transfers from moneys then on deposit in the
Certificate Account in the following order of priority:
(i) from the Distribution Amount, for deposit in the FHA
Premium Account, the FHA Premium Account Deposit for such Distribution
Date;
(ii) from the Distribution Amount, to the Master Servicer,
the Master Servicer Fee for such Distribution Date;
(iii) from the Distribution Amount, to the Master Servicer,
any amount in respect of reimbursement of Delinquency Advances or
Foreclosure Advances to which the Master Servicer is entitled with
respect to such Distribution Date;
(iv) from the Distribution Amount, to the Trustee, the
Trustee Fee for such Distribution Date;
(v) from the Distribution Amount, Priority Expenses to the
Persons entitled thereto on such Distribution Date;
(vi) from the Amount Available, to the Owners of the Class A
Certificates, an amount equal to the Class A Interest Distribution for
such Distribution Date and to the Owners of the Class S-A Certificates,
an amount equal to the Class S-A Interest Distribution for such
Distribution Date;
(vii) from the Distribution Amount, to the Certificate
Insurer, any amounts owing to the Certificate Insurer under the
Insurance Agreement and not paid, whether or not any other Person is
obligated to pay such amounts;
S-32
<PAGE>
(viii) from the Distribution Amount, to the Owners of the
Class A Certificates, the Class A Principal Distribution for such
Distribution Date;
(ix) from the Amount Available, to the Owners of the Class A
Certificates, an amount equal to the Class A Guaranteed Principal
Distribution Amount, if any, for such Distribution Date;
(x) from the Distribution Amount, to any successor Master
Servicer, such fee, if any, for such Distribution Date payable in
accordance with the Pooling and Servicing Agreement in addition to the
Master Servicer Fee; and
(xi) the balance of any Distribution Amount, to the Owners of
the Class R Certificates.
The Trustee's Fee as of each Distribution Date will be one-twelfth of
the product of ___% and the aggregate Class A Certificate Balance as of the
close of business on the last day of the second month before such Distribution
Date, and prior to the distribution of the Class A Principal Distribution on
such Distribution Date.
The Class A Distributions
On each Distribution Date, the Class A Certificateholders will be
entitled to receive the sum of (a) the Class A Interest Distribution and (b) the
Class A Guaranteed Principal Distribution Amount, and (c) to the extent of the
Distribution Amount available after the distribution pursuant to clauses (i)
through (viii) above, the Class A Monthly Principal Distributable Amount in
excess of any amounts described in clause (b) above.
"Class A Interest Distribution" means, with respect to any Distribution
Date, the sum of (a) the "Class A Monthly Interest Distributable Amount" (i.e.,
30 days interest at the Pass-Through Rate on the Class A Certificate Balance as
of the close of business on the preceding Distribution Date (or, in the case of
the first Distribution Date, on the Closing Date)) and (b) any Class A Interest
Carryover Shortfall (i.e., the excess of the Class A Monthly Interest
Distributable Amount for the preceding Distribution Date and any outstanding
Class A Interest Carryover Shortfall on such preceding Distribution Date over
the amount in respect of interest that is actually distributed to the Class A
Certificateholders on such preceding Distribution Date, plus interest on such
excess, to the extent permitted by law, at the Pass-Through Rate from such
preceding Distribution Date through the current Distribution Date).
"Class A Guaranteed Principal Distribution Amount" means, with respect
to any Distribution Date, the positive excess, if any, of (i) the aggregate of
the Outstanding Class A Certificate Balances of all Outstanding Class A
Certificates as of such Distribution Date (taking into account distributions on
such Distribution Date pursuant to clause (viii) above) over (ii) the aggregate
of the Class A Guaranteed Certificate Balances as of such Distribution Date.
"Class A Monthly Principal Distributable Amount" means, with respect to
any Distribution Date, the amount equal to the sum of the collateral amounts
(without duplication)
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<PAGE>
with respect to the immediately preceding Due Period: (i) that portion of all
Mortgage Payments allocable to principal, including all full and partial
principal prepayments (excluding such amounts in respect of Mortgage Loans
included in clause (ii) for a prior Distribution Date), (ii) the Principal
Balance of all Mortgage Loans that became Defaulted Mortgage Loans during the
related Due Period, (iii) the portion of the Purchase Amount allocable to
principal of all Mortgage Loans that became Purchased Mortgage Loans as of the
immediately preceding Monthly Cut-Off Date excluding such amounts in respect of
Mortgage Loans included in clause (ii) for a prior Distribution Date and, in the
sole discretion of the Certificate Insurer, the Principal Balance as of the
immediately preceding Monthly Cut-Off Date of all Mortgage Loans that were
required to be purchased or repurchased as of the immediately preceding Monthly
Cut-Off Date pursuant to the Agreement but were not so purchased, (iv) the
aggregate amount of Cram Down Losses that shall have occurred during the related
Due Period, (v) the amount of Distributable Excess Spread in respect of such
Distribution Date and (vi) amounts, if any, delivered by the Certificate Insurer
to the Trustee for deposit in the Certificate Account and distribution in
respect of the Class A Certificates in accordance with the Insurance Agreement;
provided, however, that, if with respect to any Distribution Date, Distributable
Excess Spread is zero, the Class A Monthly Principal Distributable Amount shall
equal such portion of the sum of the amounts included in clauses (i) through
(iv) above such that following distribution in reduction of the Aggregate Class
A Certificate balance the Required OC Test would be satisfied.
"Class A Guaranteed Certificate Balance" means with respect to any
outstanding Class A Certificate as of any date of determination, the
hypothetical Class A Certificate Balance equal to the initial Class A
Certificate Balance of such Class A Certificate set forth on the face thereof,
reduced by the pro rata portion allocable to such Class A Certificate of the
aggregate of the Class A Minimum Principal Distributable Amounts with respect to
all Distribution Dates on or prior to such date of determination.
"Class A Minimum Principal Distributable Amount" means with respect to
any Distribution Date, the amount set forth on the schedule to the Agreement for
such Distribution Date
"Due Period" means with respect to any Distribution Date, the calendar
month immediately preceding such Distribution Date.
"Excess Spread" means with respect to any Distribution Date, the
positive excess, if any, of (x) the aggregate amount of the Mortgage Payments or
amounts deposited by the Depositor if it elects to acquire the Mortgage Loans at
the time the outstanding balance of the Mortgage Loans is less than 10% of the
Initial Principal Balance with respect to the related Due Period over (y) the
sum of (A) the amount required to be distributed pursuant to priorities (i)
through (vii) under "Distributions" above on such Distribution Date plus (B) the
sum of any outstanding Class A Principal Carryover Shortfall as of the close of
the preceding Distribution Date plus (C) the sum of the amounts described in
clauses (i) through (iv) of the definition of Class A Monthly Principal
Distributable Amount (set forth above) for such Distribution Date.
"Distributable Excess Spread" means with respect to any Distribution
Date, such portion (not greater than 100%) of Excess Spread with respect to such
Distribution Date, which if distributed in accordance with clause (v) of the
definition of Class A Monthly Principal Amount
S-34
<PAGE>
would cause the Required OC Test to be satisfied with respect to such
Distribution Date, after giving effect to all distributions on such Distribution
Date, provided, however, that if the Required OC Multiple is unlimited,
Distributable Excess Spread shall equal 100% of Excess Spread; provided,
further, however, that so long as an Insurer Default (as defined in the
Agreement) shall not have occurred and be continuing, Distributable Excess
Spread may, in the discretion of the Certificate Insurer with respect to any
Distribution Date with respect to which the Required OC Multiple is greater than
100%, be a portion of Excess Spread which is less than would otherwise be
determinable pursuant to this definition but which is not less than the portion
of Excess Spread that would be determinable pursuant to this definition if the
Required OC Multiple were equal to 100%.
The Class S-A Distributions
The Class S-A Certificates are interest-only certificates which will
not be entitled to any distribution of principal, but will be entitled to
interest on the Notional Principal Balance. The interest due with respect to the
Class S-A Certificate will be the interest which has accrued thereon at the
Class S-A Pass-Through Rate during the calendar month in which such Distribution
Date occurs (the "Class S-A Interest Distribution").
The Agreement will provide that, to the extent the Certificate Insurer
makes Guaranteed Distributions, either directly or indirectly (as by paying
through the Trustee or Paying Agent), to the Owners of such Offered
Certificates, if any, the Certificate Insurer will be subrogated to the rights
of such Owners of Offered Certificates with respect to such Guaranteed
Distributions. The Certificate Insurer shall receive reimbursement for such
Guaranteed Distribution as provided in the Agreement, but only from the same
sources and in the same manner provided in the Agreement for the payment of the
Class A Distribution Amount to Owners of Class A Certificates and the Class S-A
Interest Distribution, if any. The subrogation and reimbursement will have no
effect on the Certificate Insurer's obligations under the Policy.
Book Entry Registration of the Offered Certificates
The Offered Certificates will be represented by a single certificate registered
in the name of the nominee of The Depository Trust Company (the "Clearing
Agency"). The Clearing Agency will maintain book entry records of ownership,
transfers and pledges of such Certificates only in the names of its participants
and indirect participants (the "Clearing Agency Participants"), which include
securities brokers and dealers, banks and trust companies and clearing
corporations and may include certain other organizations. Prior to Book Entry
Termination (as defined below), Beneficial Owners who are not Clearing Agency
Participants may transfer and pledge their interests in the Offered
Certificates, and exercise any other rights and remedies of Certificateholders,
only through Clearing Agency Participants or other entities that maintain
relationships with Clearing Agency Participants. The Clearing Agency may charge
its customary fee to Clearing Agency Participants in connection with any such
transfers and pledges. In addition, prior to Book Entry Termination,
distributions on the Offered Certificates will be made to Beneficial Owners only
through the Clearing Agency and its Clearing Agency
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Participants. Consequently, Beneficial Owners may experience some delay in the
receipt of their payments. See "Risk Factors - Book Entry Registration" and
"Description of the Certificates - Book Entry Registration" in the Prospectus.
The Offered Certificates will be issued in definitive, registered form
to Beneficial Owners or their nominees, and thereupon such Beneficial Owners
will become Owners of the Certificates, if, and only if, one of the following
events shall occur (any such event being referred to as "Book Entry
Termination"): (i) the Clearing Agency or the Depositor advises the Trustee in
writing that the Clearing Agency is no longer willing or able properly to
discharge its responsibilities as a clearing corporation with respect to the
Offered Certificates and the Depositor and the Trustee are unable to engage a
qualified successor to serve as the Clearing Agency, or (ii) the Clearing
Agency, at the direction of Beneficial Owners representing a majority of the
outstanding principal amount of the Offered Certificates, advise the Trustee in
writing that the continuation of a book entry system is no longer in the best
interests of Beneficial Owners, or (iii) the Depositor, at its option, advises
the Trustee that it elects to terminate the book entry system. Upon Book Entry
Termination, Beneficial Owners will become registered Certificateholders and
will deal directly with the Trustee with respect to transfers, notices and
payments.
The Clearing Agency has advised the Depositor and the Trustee that,
prior to Book Entry Termination, the Clearing Agency will take any action
permitted to be taken by a Certificate holders under the Agreement only at the
direction of one or more Clearing Agency Participants to whom the Offered
Certificates are credited in an account maintained by the Clearing Agency. The
Clearing Agency has advised that it will take such action with respect to any
principal amount of the Offered Certificates only at the direction of and on
behalf of Clearing Agency Participants with respect to those principal amounts
of such Offered Certificates.
Issuance of the Offered Certificates in book entry form rather than as
physical Certificates may adversely affect the liquidity of such Offered
Certificates in the secondary market and the ability of Offered
Certificateholders to pledge them. In addition, since distributions on the
Offered Certificates will be made by the Trustee to the Clearing Agency and the
Clearing Agency will credit such distributions to the accounts of its
Participants, which will further credit them to the accounts of indirect
participants of the Offered Certificateholders such Offered Certificateholders
may experience delays in the receipt of such distributions.
Certain Activities
The Trust has not and will not: (i) issue securities (except for the
Certificates); (ii) borrow money; (iii) make loans; (iv) invest in securities
for the purpose of exercising control; (v) underwrite securities; (vi) except as
provided in the Pooling and Servicing Agreement, engage in the purchase and sale
(or turnover) of investments; (vii) offer securities in exchange for property
(except Certificates for the Mortgage Loans); or (viii) repurchase or otherwise
reacquire its securities. See "Pooling and Administration -- Reports to
Certificateholders" in the Prospectus for information regarding reports to the
Owners.
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THE POLICY
The following summary of the terms of the Policy does not purport to be
complete and is qualified in its entirety by reference to the Policy.
Simultaneously with the issuance of the Offered Certificates, the
Certificate Insurer will deliver the Policy to the Trustee for the benefit of
each Offered Certificate holders. Under the Policy, the Certificate Insurer
unconditionally and irrevocably guarantees to the Trustee for the benefit of
each Certificate holders the full and complete payment of (i) Guaranteed
Distributions (as defined below) with respect to the Offered Certificates; and
(ii) the amount of any Guaranteed Distribution which subsequently is avoided in
whole or in part as a preference payment under applicable law.
"Guaranteed Distributions" means, with respect to each Distribution
Date, the distribution to be made to Certificateholders in an aggregate amount
equal to the Class A Interest Distributable Amount due and payable on such
Distribution Date, the Class A Guaranteed Principal Distribution Amount, if any,
and the Class S-A Interest Distribution, if any, due and payable on such
Distribution Date, in each case in accordance with the original terms of the
Certificates when issued and without regard to any amendment or modification of
the Certificates or the Agreement which has not been consented to by the
Certificate Insurer.
Payment of Claims on the Policy made in respect of Guaranteed
Distributions will be made by the Certificate Insurer following Receipt by the
Certificate Insurer of the appropriate notice for payment on the later to occur
of (a) 12:00 noon, New York time, on the third Business Day following Receipt of
such notice for payment, and (b) 12:00 noon, New York City time, on the
Distribution Date such payment was due on the Certificates.
If payment of any amount avoided as a preference under applicable
bankruptcy, insolvency, receivership or similar law is required to be made under
the Policy, the Certificate Insurer shall cause such payment to be made no
earlier than the first to occur of (a) the fourth Business Day following Receipt
by the Certificate Insurer from the Trustee of (i) a certified copy of the order
(the "Order") of the court or other governmental body which exercised
jurisdiction to the effect that the Certificate holders is required to return
principal or interest distributed with respect to the Certificates during the
term of the Policy because such distributions were avoidable as preference
payments under applicable bankruptcy law, (ii) a certificate of the Certificate
holders that the Order has been entered and is not subject to any stay, and
(iii) an assignment duly executed and delivered by the Certificate holders, in
such form as is reasonably required by the Certificate Insurer and provided to
the Certificate holders by the Certificate Insurer, irrevocably assigning to the
Certificate Insurer all rights and claims of the Certificate holders relating to
or arising under the Certificates against the debtor which made such preference
payment or otherwise with respect to such preference payment, or (b) the date of
Receipt by the Certificate Insurer from the Trustee of the items referred to in
clauses (i), (ii) and (iii) above if, at least four Business Days prior to such
date of Receipt, the Certificate Insurer shall have Received written notice from
the Trustee that such items were to be delivered on such date and such date was
specified in such notice. Such payment shall be disbursed to the receiver,
conservator, debtor-in- possession or trustee in bankruptcy named in the Order
and not to the
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Trustee or any Certificate holders directly (unless a Certificate holders has
previously paid such amount to the receiver, conservator, debtor-in-possession
or trustee in bankruptcy names in the Order, in which case such payment shall be
disbursed to the Trustee for distribution to such Certificate holders upon proof
of such payment reasonably satisfactory to the Certificate Insurer).
The terms "Receipt" and "Received," with respect to the Policy, shall
mean actual delivery to the Certificate Insurer, prior to 12:00 noon, New York
City time, on a Business Day; delivery either on a day that is not a Business
Day or after 12:00 noon, New York City time, shall be deemed to be Receipt on
the next succeeding Business Day. If any notice or certificate given under the
Policy by the Trustee is not in proper form or is not properly completed,
executed or delivered, it shall be deemed not to have been Received, and the
Certificate Insurer shall promptly so advise the Trustee and the Trustee may
submit an amended notice.
Under the Policy, "Business Day" means any day other than (i) a
Saturday or Sunday or (ii) a day on which banking institutions in the City of
New York are authorized or obligated by law or executive order to be closed.
The Certificate Insurer's obligations under the Policy in respect of
Guaranteed Distributions shall be discharged to the extent funds are transferred
to the Trustee as provided in the Policy whether or not such funds are properly
applied by the Trustee.
The Certificate Insurer shall be subrogated to the rights of each
Certificate holders to receive payments of principal and interest with respect
to the Guaranteed Distributions to the extent of any payment by the Certificate
Insurer under the Policy.
Claims under the Policy constitute direct, unsecured and unsubordinated
obligations of the Certificate Insurer ranking not less than pari passu with
other unsecured and unsubordinated indebtedness of the Certificate Insurer for
borrowed money. Claims against the Certificate Insurer under each other
financial guaranty insurance policy issued thereby constitutes pari passu claims
against the general assets of the Certificate Insurer. The terms of the Policy
cannot be modified or altered by any other agreement or instrument, or by the
merger, consolidation or dissolution of the Depositor. The Policy may not be
canceled or revoked prior to distribution in full of all Guaranteed
Distributions with respect to the Certificates. The Policy is not covered by the
property/casualty insurance security fund specified in Article 76 of the New
York Insurance Law. The Policy is governed by the laws of the State of New York.
[Insurance and Indemnity Agreement
The Depositor and the Certificate Insurer will enter into an Insurance
and Indemnity Agreement (the "Insurance Agreement") pursuant to which the
Depositor will agree to reimburse, with interest, the Certificate Insurer for
certain amounts paid pursuant to claims under the Policy. The Depositor will
further agree to pay the Certificate Insurer all reasonable charges and expenses
which the Certificate Insurer may pay or incur relative to any amounts paid
under the Policy or otherwise in connection with the transaction and to
indemnify the Certificate Insurer against certain liabilities.]
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THE CERTIFICATE INSURER
The following information has been furnished by the Certificate Insurer
for use herein. Reference is made to Appendix for a specimen of the Policy.
General
[The Certificate Insurer is a monoline insurance company incorporated
on ___________ __, ____ under the laws of the State of New York. The Certificate
Insurer received its New York State insurance license and commenced operations
on __________ __, _____. The Certificate Insurer and its two wholly owned
subsidiaries are licensed to engage in financial guaranty insurance business in
all 50 states, the District of Columbia and Puerto Rico.]
The Certificate Insurer and its subsidiaries are engaged exclusively in
the business of writing financial guaranty insurance, principally in respect of
securities offered in domestic and foreign markets. In general, financial
guaranty insurance consists of the issuance of a guaranty of scheduled payments
of an issuer's securities, thereby enhancing the credit rating of those
securities, in consideration for the payment of a premium to the insurer. The
Certificate Insurer and its subsidiaries principally insure asset-backed,
collateralized and municipal securities. Asset- backed securities are generally
supported by residential mortgage loans, consumer or trade receivables,
securities or other assets having an ascertainable cash flow or market value.
Collateralized securities include public utility first mortgage bonds and
sale/leaseback obligation bonds. Municipal securities consist largely of general
obligation bonds, special revenue bonds and other special obligations of state
and local governments. The Certificate Insurer insures both newly issued
securities sold in the primary market and outstanding securities sold in the
secondary market that satisfy the Certificate Insurer's underwriting criteria.
The principal executive offices of the Certificate Insurer are located
at ______________________, and its telephone number at that location is
________________. At _________________, the Certificate Insurer and its
subsidiaries had ____ employees.
Reinsurance
Pursuant to an intercompany agreement, liabilities on financial
guaranty insurance written by the Certificate Insurer or either of its
subsidiaries are reinsured among such companies on an agreed-upon percentage
substantially proportional to their respective capital, surplus and reserves,
subject to applicable statutory risk limitations. In addition, the Certificate
Insurer reinsures a portion of its liabilities under certain of its financial
guaranty insurance policies with other reinsurers under various quota share
treaties and on a transaction-by-transaction basis. Such reinsurance is utilized
by the Certificate Insurer as a risk management device and to comply with
certain statutory and rating agency requirements; it does not alter or limit the
Certificate Insurer's obligations under any financial guaranty insurance policy.
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Ratings of Claims-Paying Ability
The Certificate Insurer's claims-paying ability is rated "Aaa" by
Moody's and "AAA" by S&P. Such ratings reflect only the views of the respective
rating agencies, are not recommendations to buy, sell or hold securities and are
subject to revision or withdrawal at any time by such rating agencies. See
"Ratings."
Capitalization
The following table sets forth the capitalization of the Certificate
Insurer and its wholly owned subsidiaries on the basis of generally accepted
accounting principles as of __________ __, 199__ (in thousands):
(Unaudited)
Unearned Premium Reserve (net of prepaid reinsurance
premiums) $
Shareholder's Equity:
Common Stock
Additional Paid-In Capital
Retained Earnings
Total Shareholder's Equity
Total Unearned Premium Reserve and Shareholder's Equity $
For further information concerning the Certificate Insurer, see the
Consolidated Financial Statements of the Certificate Insurer and Subsidiaries,
and the notes thereto, included as Appendices C and D in this Prospectus
Supplement. Copies of the statutory quarterly and annual statements filed with
the State of New York Insurance Department by the Certificate Insurer are
available upon request to the State of New York Insurance Department.
Insurance Regulation
The Certificate Insurer and its insurance subsidiaries are licensed and
subject to regulation as insurance corporations under the laws of the State of
New York, the jurisdiction of organization of the Certificate Insurer. In
addition, the Certificate Insurer and its insurance subsidiaries are subject to
regulation by insurance laws of the various other jurisdictions in which they
are licensed to do business. As a financial guaranty insurance corporation
licensed to do business in the State of New York, the Certificate Insurer is
subject to Article 69 of the New York Insurance Law which, among other things,
limits the business of each such insurer to financial guaranty insurance and
related lines requires that each such insurer maintain a minimum surplus to
policyholders, establishes contingency, loss and unearned premium reserve
requirements for each such insurer, and limits the size of individual
transactions ("single risks") and the volume of transactions ("aggregate risks")
that may be underwritten by each such insurer.
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Other provisions of the New York Insurance Law, applicable to non-life insurance
companies such as the Certificate Insurer, regulate, among other things,
permitted investments, payment of dividends, transactions with affiliates,
mergers, consolidations, acquisitions or sales of assets and incurrence of
liability for borrowings.
OVERCOLLATERALIZATION PROVISIONS
On each Distribution Date, Distributable Excess Spread will be applied
on such Distribution Date as an accelerated payment of principal on the Class A
Certificates. This has the effect of accelerating the amortization of the Class
A Certificates relative to the amortization of the Mortgage Loans. To the extent
that any Excess Spread is not so used, it will be paid to the Owners of the
Class R Certificates.
Excess Spread will be applied as an accelerated payment of principal on
the Class A Certificates until the Required OC Test is satisfied. The "Required
OC Test" is met (i) if on the Closing Date the aggregate of the Principal
Balances of the Mortgage Loans as of the Cut-Off Date is _______% of the
aggregate Class A Certificate Balance as of the Closing Date and (ii) on a
subsequent Distribution Date, the Aggregate Principal Balance with respect to
such Distribution Date, exceeds the aggregate Class A Principal Balance by an
amount which is equal to the greater of (i) $_______ and (ii) the Required OC
Multiple with respect to such Distribution Date, times:
(x) in the case of a Distribution Date on or prior to the
Midpoint Date, the amount which is equal to ___% of the Aggregate Class
A Certificate Balance as of the Closing Date;
(y) in the case of a Distribution Date after the Midpoint
Date, in the event that the Required OC Multiple is greater than 100%
on the Midpoint Date, the amount which is equal to ___% of the Original
Aggregate Class A Certificate Balance as of the Closing Date; and
(z) in the case of a Distribution Date after the Midpoint
Date, in the event that the Required OC Multiple is equal to 100% on
the Midpoint Date, the amount equal to ___% of the Aggregate Class A
Certificate Balance as of the Closing Date plus ___% of the Aggregate
Class A Certificate Balance on such Distribution Date (prior to giving
effect to any distributions on such date).
"Midpoint Date" means the Determination Date next succeeding the end of
the ____the full calendar month following the Closing Date. A "Determination
Date" is the fifth Business Day preceding the related Distribution Date.
"Required OC Multiple" means with respect to any Distribution Date, the
percentage set forth in the Collateral Performance Matrix which corresponds to
the data with respect to the applicable Collateral Performance Tests set forth
in the Master Servicer Certificate with respect
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to the related Determination Date. The "Collateral Performance Matrix" in the
Agreement sets forth various levels for the Required OC Multiple which are a
function of certain delinquency and default characteristics of the Mortgage
Loans existing on each Determination Date.
In the event that the required level of overcollateralization is
permitted to decrease or "step down" on any Distribution Date, the Agreement
provides that a portion of the principal of the Mortgage Loans which would
otherwise be distributed to the Owners of the Class A Certificates on such
Distribution Date shall be distributed to the Owners of the Class R Certificates
on such Distribution Date. This has the effect of decelerating the amortization
of Class A Certificates relative to the amortization of the Mortgage Loans and
of reducing the amount of overcollateralization.
THE POOLING AND SERVICING AGREEMENT
In addition to the provisions of the Agreement summarized elsewhere in
this Prospectus Supplement, there is set forth below a summary of certain other
provisions of the Agreement.
Formation of the Trust
Pursuant to the Agreement, the Trust will be created and established,
the Trust will acquire the Mortgage Loans without recourse to the Depositor and
the Trust will issue the Offered Certificates.
The property of the Trust shall include all (a) the Mortgage Loans
together with the related Mortgage Loan documents and the Depositor's interest
in any Mortgaged Property which secures a Mortgage Loan and all payments thereon
and proceeds of the conversion, voluntary or involuntary, of the foregoing, (b)
the FHA Insurance reserves attributable to the Mortgage Loans as of the Cut-Off
Date, (c) such amounts as may be held by the Trustee in the Certificate Account
together with investment earnings on such amounts and such amounts may be held
by the Trustee in the Certificate Account, if any, whether in the form of cash,
instruments, securities or other properties, (d) the Policy, and (e) proceeds of
all the foregoing (including, but not by way of limitation, all proceeds of any
mortgage insurance, hazard insurance and title insurance policy relating to the
Mortgage Loans, cash proceeds, accounts, accounts receivable, notes, drafts,
acceptances, chattel paper, checks, deposit accounts, rights to payment of any
and every kind, and other forms of obligations and receivables which at any time
constitute all or part of or are included in the proceeds of any of the
foregoing) to pay the Certificates as specified in the Agreement (collectively,
the "Trust Property").
The Certificates do not represent an interest in or obligation of the
Depositor, Trustee, Master Servicer, or any of their respective affiliates. The
Certificates will not be savings accounts or deposits and neither the
Certificates nor the underlying mortgage loans will be insured or guaranteed by
any governmental agency, except that the Mortgage Loans are partially insured by
the FHA. The obligations of the FHA with respect to insurance concerning the
Mortgage Loans are not unlimited or unconditional obligations of the FHA, but
are limited contractually to the amount of insurance coverage described herein.
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Covenant of Company to Take Certain Actions with Respect to the Mortgage Loans
in Certain Situations
Pursuant to the Agreement, upon the discovery by the Depositor, the
Company, the Master Servicer, the Certificate Insurer or the Trustee that any
representatives and warranty with respect to the Mortgage Loans (including the
related Mortgages and Notes) were materially and adversely untrue as of the
Closing Date with the result that the interests of the Owners in the related
Mortgage Loan or the interests of the Certificate Insurer are materially and
adversely affected, or any required document constituting a part of any Mortgage
File was not delivered to the Trustee by the time required to be so delivered or
was defective in any material respect when so delivered, the party discovering
such breach is required to give prompt written notice to the other parties and
the Certificate Insurer.
If any such omission of or defect in any document constituting part of
the Mortgage File or any such breach of any representation or warranty made by
the Company is not cured, in the opinion of the Certificate Insurer, for any
reason, within 60 days of the receipt of notice thereof, the Company shall be
obligated, if so requested by the Certificate Insurer in its discretion, on the
Monthly Cut-Off Date next succeeding the expiration of such 60 day period, to
repurchase the affected Mortgage Loan. The Certificate Insurer and the Trustee
on behalf of the Owners of the Certificates agree that, if a Mortgage Loan is a
Defective Mortgage Loan because a document as specified in the Agreement is not
included in the Mortgage File, such defect shall be deemed to be cured if the
Trustee shall have received during such sixty day period, a written statement
addressed to it from the Director of HUD Title I Insurance Division that such
document would not be required in connection with a claim for FHA Insurance with
respect to such Mortgage Loan. If the FHA has not assigned a case number under
the Contract of Insurance to a Mortgage Loan to indicate that such Mortgage Loan
is eligible for Title I Insurance coverage under the Contract of Insurance, on
or before the 90th day after the Closing Date, the Company shall be obligated,
on the Monthly Cut Off Date next succeeding such 90th day, to repurchase such
Mortgage Loan. If the FHA reserve amount with respect to a Mortgage Loan has not
been transferred to the FHA Insurance Coverage Reserve Account on or before the
120th day after the Closing Date, the Company shall be obligated, on the Monthly
Cut-Off Date next succeeding such 120th day, to repurchase such Mortgage Loan.
If the Company is required to repurchase any Mortgage Loan on a Monthly Cut-Off
Date that is not a Business Day, such repurchase shall be made on the last
Business Day preceding such Monthly Cut-Off Date. Any Mortgage Loan that is
required to be purchased or repurchased as described above is referred to as a
"Defective Mortgage Loan."
Within two years after the Closing Date, the Company may elect in lieu
of the purchase or repurchase of a Defective Mortgage Loan, to substitute a
Substitute Mortgage Loan for the Defective Mortgage Loan. A "Substitute Mortgage
Loan" is a Mortgage Loan: (i) having such characteristics such that the
representations relating to Mortgage Loans as set out in the Agreement would
have been true and correct had such Mortgage Loan originally been a Mortgage
Loan, (ii) each scheduled Mortgage Payment with respect to such Mortgage Loan
shall be greater than or equal to the scheduled Mortgage Payment due in the same
Due Period on the Mortgage Loan for which Substitute Mortgage Loan is being
substituted; (iii) the Maturity Date
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with respect to such Mortgage Loan shall be no later than the Maturity Date for
the Mortgage Loan for which such Maturity Date is being substituted,(iv) as of
the date of substitution, the Principal Balance of such Mortgage Loan is greater
than or equal to the Principal Balance of the Mortgage Loan for which such
Substitute Mortgage Loan is being substituted, (v) the Coupon Rate with respect
to such Mortgage Loan is not less by an amount greater than ___% than the Coupon
Rate of the Mortgage Loan for which such Substitute Mortgage Loan is being
substituted, and (vi) if in excess of $__________ in Principal Balance (at the
time of substitution) of Mortgage Loans has previously been substituted pursuant
to the Agreement, the substitution of such Mortgage Loan has been approved in
advance in writing by the Certificate Insurer.
Sale of Mortgage Loans
Pursuant to the Agreement, the Depositor will transfer, assign, set
over and otherwise convey without recourse to the Trustee in trust all right,
title and interest of the Depositor in and to each Mortgage Loan and all the
right, title and interest in and to principal and interest due to the trust on
each such Mortgage Loan after the Cut-Off Date; provided, however, that the
Depositor will reserve and retain all its right, title and interest in and to
principal (including Prepayments) and interest due on each Mortgage Loan on or
prior to the Cut-Off Date. Purely as a protective measure and not to be
construed as contrary to the parties intent that the transfer on the Closing
Date is a sale, the Depositor has also been deemed to have granted to the
Trustee a security interest in the Trust Property in the event that the transfer
of the Trust Property is deemed to be a loan and not a sale.
In connection with the transfer and assignment of the Mortgage Loans on
the Closing Date, the following documents will be delivered to the Trustee (the
"Mortgage File"):
(i) The Mortgage Note, showing a complete chain of
endorsements or assignments from the named payee to the Depositor and
endorsed without recourse to the order of the Trustee which latter
endorsement may be executed with a facsimile signature of an officer of
the Depositor;
(ii) The original Mortgage with evidence of recording
indicated thereon (except that a true copy thereof certified by an
appropriate public official may be substituted);
(iii) The original assignment of Mortgage to the Trustee, in
recordable form;
(iv) All intermediate assignments of the Mortgage, with
evidence of recording thereon (or true copies thereof certified by
appropriate public officials may be substituted);
(v) An original of each assumption or modification agreement,
if any, relating to such Mortgage Loan; and
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(vi) (A) An original notice signed by the Mortgagor
acknowledging HUD insurance, (B) an original or copy of (1)
truth-in-lending disclosure, (2) credit application, (3) consumer
credit report, (4) verification of employment and income or
verification of self-employment income, (5) evidence of the Mortgagor's
interest in the Mortgaged Property, (6) contract of work or written
description with cost estimates, (7) completion certificate, if in
existence on the Closing Date, (8) report on inspection of improvements
to the Mortgaged Property, if in existence on the Closing Date, (9)
notice of non-compliance, if applicable, (10) to the extent not
included in (2), a written verification that the Mortgagor at the time
of origination was not more than 30 days delinquent on any senior
mortgage or deed of trust on the Mortgaged Property (11) with respect
to each Mortgage Loan with an initial principal balance in excess of
$15,000, an appraisal of the Mortgaged Property as of the time of
origination of the Mortgage Loan, (12) a title search as of the time of
origination with respect to the Mortgaged Property, and (C) any other
documents required for the submission of a claim with respect to the
Mortgage Loan to the FHA.
If the Trustee has not received (i) the original assignment of Mortgage
or (ii) any intermediate assignments of Mortgage (in each case of (i) and (ii),
with evidence of recording thereon (or true copies thereof certified by
appropriate public officials) the Depositor covenants and agrees to take any and
all actions necessary to effect the proper execution, filing and recordation of
the such assignment of the Mortgage and all intermediate assignments of
Mortgage, in the appropriate jurisdiction.
Acceptance by Trustee
The Trustee will acknowledge conveyance of the Trust Property and will
hold all assets included in the Trust Property from time to time in trust for
the use and benefit of all present and future Owners of the Certificates.
The Trustee will also agree for the benefit of the Certificateholders
and the Certificate Insurer to review each Mortgage File within 30 days of the
Closing Date to confirm that all the documents and instruments required to be
included in each Mortgage File are so included and have been executed (and that
documents which are required to be originals bear original signatures) and that
such documents and instruments relate to the Mortgage Loans identified in the
Mortgage Loan Schedule and are what they purport to be on their face. Promptly
upon completion of such review, the Trustee will also prepare and deliver a list
of any such missing documents to the Master Servicer and the Certificate
Insurer. The Trustee also agrees to review each Mortgage File within 90 days of
the Closing Date to confirm that all documents and instruments required to be
included in each Mortgage File are so included and have been executed where
required.
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Master Servicer and Subservicers
The Master Servicer will agree to manage, service, administer and make
collections on the Mortgage Loans, and perform the other actions required by the
Master Servicer under the Agreement. In performing such obligations, the Master
Servicer will be required to act in good faith in a commercially reasonable
manner in accordance with all requirements of the FHA applicable to the
servicing of the Mortgage Loans, and to service and administer the Mortgage
Loans in accordance with Title I, the terms of the Agreement and the respective
Mortgage Loans. The Master Servicer will have full power and authority, acting
alone and/or through subservicers, if any, subject only to the specific
requirements and prohibitions of Title I, the Agreement and the respective
Mortgage Loans, to do any and all things in connection with such servicing and
administration which are consistent with the manner in which it services FHA
Title I home improvement mortgage loans owned by the Master Servicer or any of
its affiliates or serviced by the Master Servicer for others and which are
consistent with the ordinary practices of prudent mortgage lending institutions.
Servicing Record. The Master Servicer will be required to establish and
maintain books and records (the "Servicing Record") in which the Master Servicer
will record all Mortgage Payments received or collected by or on behalf of the
Master Servicer or received by the Trustee, the Company or the Depositor in
respect of each Mortgage Loan and each foreclosed property and all amounts owing
to the Master Servicer and subservicers in compensation for services rendered or
in reimbursement of certain costs and expenses incurred. In addition, the Master
Servicer will be required to establish and maintain records for the Insurance
Record (which shall be part of such Servicing Record) in which the Master
Servicer shall record all claims made under the Contract of Insurance, all
payments received from the FHA for each such claim and the amount of insurance
coverage remaining.
The Master Servicer must separately record various amounts as of the
related Determination Date (i.e., the fifth Business Day preceding the related
Distribution Date) or Distribution Date, as applicable, in the Servicing Record
generally including the following:
(i) the unpaid Master Servicing Fee due the Master Servicer
on the next Distribution Date;
(ii) all subservicing fees which are entitled to be retained
by the subservicers, if any, with respect to the preceding Due Period;
all fees retained during the preceding Due Period by any Independent
Contractor hired by the Master Servicer to operate and manage a
Foreclosed Property; and amounts retained by subservicers in respect of
Mortgage Payments representing less than a Monthly Payment if the
related Mortgage Loan is not a Defaulted Mortgage Loan;
(iii) all amounts due as of the preceding Monthly Cut-Off
Date in reimbursement of Delinquency Advances in respect of prior
Distribution Dates;
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(iv) all amounts due as of the preceding Monthly Cut-Off Date
in reimbursement of Foreclosure Advances previously advanced by the
Master Servicer (separately identifying the amount of each then due);
(v) all Priority Expenses required to be distributed on the
next succeeding Distribution Date;
(vi) the aggregate amount of the Master Servicer Fee paid to
Master Servicer on such Distribution Date in respect of each Mortgage
Loan;
(vii) the aggregate amount of Delinquency Advances and
Foreclosure Advances reimbursed to the Master Servicer on such
Distribution Date;
(viii) all unpaid Trustee Fees due the Trustee as of the
preceding Monthly Cut-Off Date;
(ix) on or prior to each Determination Date, the Principal
Balance of Mortgage Loans that became Defaulted Mortgage Loans during
the prior Due Period;
(x) on or before each Determination Date, the 30+ Delinquency
Percentage and the 60+ Delinquency Percentage; the Annual Default
Percentage and such other data as is required by the Trustee to
determine the Required OC Multiple; and
(xi) on or before each Determination Date, any other
information with respect to the Mortgage Loans required by the Trustee
to determine the Class A Principal Distribution with respect to the
next succeeding Distribution Date or otherwise to determine the amount
of required distributions pursuant to the Agreement.
Review of Master Servicer Activities. The Master Servicer will be
required to deliver to the Trustee and the Certificate Insurer on or before
__________ of each year, beginning on __________ of the calendar year following
the calendar year in which the Closing Date occurs, an officer's certificate
signed by a responsible officer of the Master Servicer generally to the effect
that based upon a review of the Master Servicer's activities during the
preceding calendar year, the Master Servicer has fulfilled its obligations under
the Agreement, or there has been a default in the fulfillment of such obligation
and specifying each such default, the nature and status thereof and the action
the Master Servicer proposes to take with respect thereto.
The Master Servicer will cause a firm of nationally recognized
independent certified public accountants, who may also render other services to
the Master Servicer, to deliver to the Trustee and the Certificate Insurer on or
before __________ (or 90 days after the end of the Master Servicer's fiscal year
of each year), beginning ____________ __, 19__ with respect to the twelve months
ended the immediately preceding __________ (or other applicable date) (i) an
opinion by a firm of independent certified public accountants as to the
financial position of the Master Servicer in accordance with generally accepted
accounting standards; and (ii) a statement from the firm of independent
certified public accountants to the effect that, based on an examination of
certain specified documents and records relating to the servicing of the Master
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Servicer's mortgage loan portfolio conducted in compliance with certain
Applicable Accounting Standards (as defined in the Agreement), such firm is of
the opinion that such servicing has been conducted in compliance with such
Applicable Account Standards.
Access to Records. The Master Servicer must provide to representatives
of the Trustee and the Certificate Insurer and holders of a majority in
principal amount of the Certificates reasonable access to the documentation
regarding the Mortgage Loans. The Master Servicer must provide such access to
any other Certificate holders only in such cases where the Master Servicer is
required by applicable statutes or regulations (whether applicable to the Master
Servicer or to such Certificate holders) to permit such Certificate holders to
review such documentation. Any Certificate holders, by its acceptance of a
Certificate (or by acquisition of its beneficial interest therein), will be
deemed to have agreed to keep confidential and not to use for its own benefit
any information obtained by it, except as may be required by applicable law.
Master Servicer Advances. With respect to each Mortgage Loan (other
than a Defaulted Mortgage Loan) and each Distribution Date, the Master Servicer
must advance from its own funds and deposit into the Certificate Account no
later than the related Determination Date, the positive excess, if any, of (i)
the portion of the Monthly Payment due (net of any subservicing fee and Master
Servicing Fee) with respect to such Mortgage Loan in the related Due Period
allocable to interest calculated at the related Net Coupon Rate over (ii) the
amount deposited into the Certificate Account with respect to such Mortgage Loan
and such Due Period. A "Defaulted Mortgage Loan" is any Mortgage Loan with
respect to which: (i) a claim has been submitted pursuant to the Contract of
Insurance, (ii) foreclosure proceedings have been commenced, (iii) any portion
of a Monthly Payment is more than 120 days past due (without giving effect to
any grace period) or (iv) the Master Servicer has determined in good faith in
accordance with customary mortgage loan servicing practices that all amounts
which it expects to receive with respect to the Mortgage Loan have been
received.
The Master Servicer will be entitled to be reimbursed for previously
unreimbursed Delinquency Advances with respect to a Mortgage Loan on
Distribution Dates subsequent to the Distribution Date in respect of which such
Delinquency Advance was made from Mortgage Payments with respect to such
Mortgage Loan. If a Mortgage Loan shall become a Defaulted Loan and the Master
Servicer shall not have been fully reimbursed for any Delinquency Advances with
respect to such Mortgage Loan, the Master Servicer shall be entitled to be
reimbursed for the outstanding amount of such Delinquency Advances from
unrelated Mortgage Loans. No interest shall be due to the Master Servicer in
respect of any Delinquency Advance for any period prior to the reimbursement
thereof.
The Master Servicer must advance from its own funds the following
amounts in respect of any Mortgage Loan on foreclosed property (collectively,
"Foreclosure Advances"):
(i) all third party costs and expenses (including legal fees
and costs and expenses relating to bankruptcy or insolvency proceedings
in respect of any Mortgagor) associated with the institution of
foreclosure proceedings in respect of any Mortgage Loan;
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(ii) all insurance premiums due and payable in respect of
each Foreclosed Property, prior to the date on which the related
insurance policy would otherwise be terminated;
(iii) all real estate taxes and assessments in respect of
each Foreclosed Property that have resulted in the imposition of a lien
thereon, other than amounts that are due but not yet delinquent;
(iv) all costs and expenses necessary to maintain each
Foreclosed Property;
(v) all fees and expenses payable to any independent
contractor hired to operate and manage a Foreclosed Property, other
than fees and expenses retained by such independent contractor from the
proceeds of the operation of such Foreclosed Property;
(vi) all third party costs to prepare and file FHA claims;
and
(vii) all fees and expenses of any independent appraiser or
other real estate expert retained by the Trustee.
The Master Servicer shall be entitled to be reimbursed from related
Mortgage Payments for Foreclosure Advances advanced on or prior to the related
Monthly Cut-Off Date.
The Master Servicer must advance the Foreclosure Advances described in
clauses (i) through (v) above if, but only if, the Master Servicer would make
such an advance if it or an affiliate held the affected Mortgage Loan or
Foreclosed Property for its own account and, in the Master Servicer's good faith
judgment, such amounts will be recoverable from related Mortgage Payments.
Modifications, Waivers and Amendments. The Master Servicer may not
agree to any modification, waiver or amendment of any provision of any Mortgage
Loan unless, in the Master Servicer's good faith opinion, such modification,
waiver or amendment (i) would minimize the loss that might otherwise be
experienced with respect to such Mortgage Loan and complies with the
requirements of Title I or (ii) is required by Title I. Notwithstanding the
foregoing, so long as an Insurer Default shall not have occurred and be
continuing, the Master Servicer may not agree, without the prior written consent
of the Certificate Insurer, during any period of twelve consecutive Due Periods
to modifications, waivers or amendments of the provisions of Mortgage Loans
having (at the time of such modification, waiver or amendment) an aggregate
Principal Balance greater than one percent (1%) of the Aggregate Principal
Balance as of the Determination Date in the first of such Due Periods.
Enforcement of "Due-On-Sale" and "Due on Encumbrance." If any Mortgage
Loan contains a provision, in the nature of a "due-on-sale" clause, the Master
Servicer, on behalf of the Trustee will exercise any right the Trustee may have
as the mortgagee of record with respect to such Mortgage Loan (x) to accelerate
the payments thereon or (y) to withhold its consent to any such sale or to the
transfer, in a manner consistent with the servicing standard set forth in the
Agreement.
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If any Mortgage Loan contains a provision, in the nature of a
"due-on-encumbrance" clause, the Master Servicer, on behalf of the Trustee, will
exercise any right the Trustee may have as the Mortgagee of record with respect
to such Mortgage Loan (x) to accelerate the payments thereon or (y) to withhold
its consent to the creation of any such lien or other encumbrance, in a manner
consistent with the servicing standard.
FHA Insurance Claims; Foreclosures. If any Monthly Payment due under
any Mortgage Loan is not paid when the same becomes due and payable, or if the
Mortgagor fails to perform any other covenant or obligation under the Mortgage
Loan and such failure continues beyond any applicable grace period, the Master
Servicer must take such action (consistent with Title I, including efforts to
cure the default of such Mortgage Loan) as it shall deem to be in the best
interest of the Trust. If the maturity of the related Mortgage Note has been
accelerated pursuant to the requirements under Title I following the Master
Servicer's efforts to cure the default of the Mortgage Loan (and such Mortgage
Loan is not required to be purchased pursuant to the Agreement) and (i) if an
FHA Insurance Coverage Insufficiency does not exist at the time, the Master
Servicer must initiate, on behalf of the Trust, a claim under the Contract of
Insurance for reimbursement for loss on such Mortgage Loan pursuant to Title I
or (ii) if an FHA Insurance Coverage Insufficiency exists at the time, the
Master Servicer may proceed against the Mortgaged Property securing the Mortgage
Loan pursuant to the Agreement, and if thereafter an FHA Insurance Coverage
Insufficiency does not exist, may submit a claim under the Contract of Insurance
with respect to such Mortgage Loan if it has obtained the prior approval of the
Secretary of HUD.
If the FHA rejects or refuses to pay any claim made under the Contract
of Insurance (including a rejection of a previously paid claim and a demand by
the FHA of a return of the FHA Insurance Payment Amount for such Mortgage Loan)
for a Mortgage Loan (other than a refusal or rejection for clerical error in
computing the claim amount), upon receipt of the FHA's rejection notice and
determination by the Master Servicer that the rejection was not due to clerical
error, then (i) the Master Servicer must promptly notify the Trustee (if the
Trustee shall not initially have received such notice), the Depositor and the
Certificate Insurer of such fact, and (ii) if the FHA indicates rejection due to
other than a failure to service such Mortgage Loan in accordance with Title I,
the Depositor shall be liable on or before the Monthly Cut-Off Date next
following the date of such notice from the Master Servicer to repurchase such
Mortgage. If the FHA shall have indicated in writing in connection with its
rejection or refusal to pay a claim that such rejection or refusal is due in
whole to a failure to service such Mortgage Loan in accordance with Title I, the
Master Servicer shall notify the Depositor and the Certificate Insurer of such
determination, and the Master Servicer must on or before the next succeeding
Monthly Cut-Off Date repurchase such Mortgage Loan for the Purchase Price.
If the Master Servicer, on behalf of the Trustee, may, at any time,
institute foreclosure proceedings, exercise any power of sale to the extent
permitted by law, obtain a deed in lieu of foreclosure, or otherwise acquire
possession of or title to any Mortgaged Property, by operation of law or
otherwise; the Master Servicer shall comply with the requirements under Title I,
the REMIC regulations and the Agreement, shall follow such practices and
procedures in a manner which is consistent with the Master Servicer's procedure
for foreclosure and operation of the foreclosed property with respect to FHA
Title I property improvement mortgage loans held in the
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Master Servicer's portfolio for its own account or, if there are no such loans,
FHA Title I property improvement mortgage loans serviced by the Master Servicer
for others, giving due consideration to accepted mortgage servicing practices of
prudent lending institutions, and shall sell or liquidate the Mortgage Loan or
Mortgaged Property.
The Trustee must deposit in the Certificate Account on the day of
receipt all amounts received from the FHA (to the extent FHA Insurance Payment
Amounts are not sent by the FHA directly to the Master Servicer), or any other
Person with respect to the Mortgage Loans or any other assets of the Trust.
If prior to the Termination Date, the FHA rejects an insurance claim,
in whole or part, under the Contract of Insurance after previously paying such
insurance claim and the FHA demands that the Trustee repurchase such Mortgage
Loan, the Master Servicer must pursue such appeals with the FHA as are
reasonable. If the FHA continues to demand that the Trustee repurchase such
Mortgage Loan after the Master Servicer exhausts such administrative appeals as
are reasonable, then notwithstanding that the Depositor, the Master Servicer or
any other person is required to repurchase such Mortgage Loan the Master
Servicer must notify the Trustee of such fact and the Trustee shall cause the
Trust to repurchase such Mortgage Loan from funds available in the Certificate
Account.
The Depositor will reimburse the Trustee for any amounts paid by the
Trustee to the FHA in order to repurchase Mortgage Loans for which the FHA has
rejected an insurance claim for any reason other than a failure to comply with
FHA servicing requirements. The Master Servicer will reimburse the Trustee for
any amounts paid by the Trustee to FHA in order to repurchase Mortgage Loans for
which the FHA has rejected an insurance claim as a result of a failure to
service such Mortgage Loan in accordance with Title I.
Any sale of a Foreclosed Property shall be without recourse to the
Trustee, the Master Servicer or the Trust, and neither the Master Servicer nor
the Trustee shall have any liability to any Certificate holders with respect to
the purchase price therefor accepted by the Master Servicer or the Trustee.
Maintenance of Insurance. The Master Servicer must maintain or cause to
be maintained with respect to each Mortgaged Property at least such insurance as
is required with respect thereto by Title I. The Master Servicer will be
required to maintain or cause to be maintained such other insurance (including
title insurance) as shall be required by the Certificate Insurer or that the
Master Servicer shall deem reasonable.
The Master Servicer must maintain a fidelity bond in such form and
amount as is customary for entities acting as custodian of funds and documents
in respect of mortgage loans on behalf of institutional investors.
Removal and Resignation of Master Servicer
The Master Servicer has covenanted and agreed to act as such for an
initial term, commencing on the Closing Date and ending on ______________ ___,
19__, which term shall be extendible by the Certificate Insurer (unless a
Servicer Termination Event shall have
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occurred) for successive quarterly terms (or, pursuant to revocable written
standing instructions from time to time to the Master Servicer and the Trustee,
for any specified number of terms greater than one), until the termination of
the Trust.
The Certificate Insurer or the Owners, with the consent of the
Certificate Insurer, will have the right to remove the Master Servicer upon the
occurrence of any of the following events (each, a "Servicer Termination
Event"):
(a) (i) except with respect to Mortgage Payments representing less than
a Monthly Payment if the related Mortgage Loan is not a Defaulted Mortgage Loan,
failure by the Master Servicer to deposit or cause the related subservicer to
deposit all Mortgage Payments in the related Collection Account no later than
the Business Day following receipt thereof by the Master Servicer or
subservicer, which failure continues unremedied for three Business Days or (ii)
failure by the Master Servicer to deposit or cause the related subservicer to
deposit amounts with respect to Mortgage Payments representing less than a
Monthly Payment if the related Mortgage Loan is not a Defaulted Mortgage Loan
within two Business Days of the date of required deposit therefor; or
(b) failure on the part of the Master Servicer duly to observe or
perform in any material respect any of its other covenants or agreements
contained in the Agreement that continues unremedied for a period of thirty days
after the date on which written notice of such failure, requiring the same to be
remedied, shall be given to the Master Servicer and the Trustee pursuant to a
Certificate Class Vote as provided in the Agreement; provided, however, that if
such failure shall be of a nature that it cannot be cured within 30 days, such
failure shall not constitute a Servicer Termination Event if within such 30-day
period the Master Servicer shall have given notice to the Certificate Insurer of
corrective action it proposes to take, which corrective action is agreed to in
writing by the Certificate Insurer in its sole discretion to be satisfactory,
and the Master Servicer shall thereafter pursue such corrective action
diligently until such default is cured; or
(c) failure by the Master Servicer to deliver to the Trustee and (so
long as an Insurer Default shall not have occurred and be continuing) the
Certificate Insurer the Master Servicer Certificate by the fourth Business Day
prior to each Distribution Date, or failure on the part of the Master Servicer
to comply with or service the Mortgage Loans in accordance with Title I; or
(d) the entry of a decree or order for relief by a court or regulatory
authority having jurisdiction in respect of the Master Servicer in an
involuntary case under the federal bankruptcy laws, as now or hereafter in
effect, or another present or future federal or state, bankruptcy, insolvency or
similar law, or appointing a receiver, liquidator, assignee, trustee, custodian,
sequestrator or other similar official of the Master Servicer or of any
substantial part of their respective properties or ordering the winding up or
liquidation of the affairs of the Master Servicer and the continuance of any
such decree or order unstayed and in effect for a period of 60 consecutive days
or the commencement of an involuntary case under the federal bankruptcy laws, as
now or hereinafter in effect, or another present or future federal or state
bankruptcy, insolvency or similar law and such case is not dismissed within 60
days; or
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(e) the commencement by the Master Servicer of a voluntary case under
the federal bankruptcy laws, as now or hereinafter in effect, or any other
present or future, federal or state bankruptcy, insolvency or similar law, or
the consent by the Master Servicer to the appointment of or taking possession by
a receiver, liquidator, assignee, trustee, custodian, sequestrator or other
similar official of the Master Servicer or of any substantial part of its
property or the making by the Master Servicer of an assignment for the benefit
of creditors or the failure by the Master Servicer generally to pay its debts as
such debts become due or the taking of corporate action by the Master Servicer
in furtherance of any of the foregoing; or
(f) any representation, warranty or statement of the Master Servicer
made in the Agreement or any certificate, report or other writing delivered
pursuant hereto shall prove to be incorrect in any material respect as of the
time when the same shall have been made, and the incorrectness of such
representation, warranty or statement has a material adverse effect on the Trust
and, within 30 days after written notice thereof shall have been given to the
Master Servicer by the Trustee or the Certificate Insurer (or, if an Insurer
Default shall have occurred and be continuing, an Owner of a Certificate), the
circumstances or condition in respect of which such representation, warranty or
statement was incorrect shall not have been eliminated or otherwise cured; or
(g) so long as an Insurer Default shall not have occurred and be
continuing, the Certificate Insurer shall not have delivered a servicer
extension notice; or
(h) a claim is made under the Policy.
Consequences of a Servicer Termination Event
If a Servicer Termination Event shall occur and be continuing, the
Certificate Insurer (or, if an Insurer Default shall have occurred and be
continuing, either the Trustee or the Owners of Certificates evidencing not less
than a majority of the Certificates outstanding), by notice given in writing to
the Master Servicer (and to the Trustee if given by the Certificate Insurer or
the Owners of the Certificates) may terminate all the rights and obligations of
the Master Servicer under the Agreement. On or after the receipt by the Master
Servicer of such written notice, and the appointment of and acceptance by a
successor Master Servicer, all authority, power, obligations and
responsibilities of the Master Servicer under the Agreement, whether with
respect to the Certificates or the Trust or otherwise, shall pass to, be vested
in and become obligations and responsibilities of the successor Master Servicer.
The successor Master Servicer shall have no liability with respect to any
obligation which was required to be performed by the Master Servicer prior to
the date that the successor Master Servicer becomes the Master Servicer or any
claim of a third party based on any alleged action or inaction of the prior
Master Servicer. The prior Master Servicer is required to cooperate with the
successor Master Servicer in effecting the termination of the responsibilities
and rights of the prior Master Servicer.
After the Master Servicer receives a notice of termination or upon the
resignation of the Master Servicer the Certificate Insurer must appoint a
successor Master Servicer by written instrument. The Certificate Insurer
(without limiting its obligations under the Policy) will have no liability to
the Trustee, the Depositor, the person then serving as Master Servicer, any
Owner
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of a Certificate or any other person related to such appointment. Any
resignation or removal of the Master Servicer will become effective only upon
acceptance of appointment by the successor Master Servicer.
Any successor Master Servicer shall be entitled to such compensation
(whether payable out of the Distribution Amount or otherwise) as the Master
Servicer would have been entitled to if the Master Servicer had not resigned or
been terminated. The Certificate Insurer and a successor Master Servicer may
agree on additional compensation to be paid to such successor Master Servicer as
described under "Description of the Offered Certificates - Distributions." In
addition, any successor Master Servicer shall be entitled to reasonable
transition expenses incurred in acting as successor Master Servicer.
Upon any termination of the Master Servicer or appointment of a
successor to the Master Servicer, the Trustee must give prompt written notice
thereof to Owners of the Certificates at their respective addresses appearing in
the Certificate Register.
Waiver of Past Defaults
The Certificate Insurer (or, if an Insurer Default shall have occurred
and be continuing the Owners of the Certificates pursuant to a certificate class
vote) may, on behalf of all Certificateholders, waive any default by the Master
Servicer in the performance of its obligations and its consequences. Upon any
such waiver of a past default, such default shall cease to exist, and any
Servicer Termination Event arising therefrom shall be deemed to have been
remedied.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is the opinion of DeweyBallantine LLP, special counsel to
the Depositor as to certain of the material federal income tax consequences of
the purchase, ownership and disposition of the Offered Certificates and is to be
considered only in connection with "Certain Federal Income Tax Consequences" in
the Prospectus. The discussion herein and in the Prospectus is based upon laws,
regulations, rulings and decisions now in effect, all of which are subject to
change. The discussion below and in the Prospectus does not purport to deal with
all federal tax consequences applicable to all categories of investors, some of
which may be subject to special rules. Investors should consult their own tax
advisors in determining the federal, state, local and any other tax consequences
to them of the purchase, ownership and disposition of the Offered Certificates.
REMIC Election
The Trustee will cause an election to be made to treat the Trust as a
"real estate mortgage investment conduit" ("REMIC") for federal income tax
purposes. Dewey Ballantine LLP, special tax counsel, is of the opinion that, for
federal income tax purposes, assuming (i) the REMIC election is made and (ii)
compliance with the Agreement, the Trust will be treated as a REMIC, the Offered
Certificates will be treated as "regular interests" in the REMIC and the Class R
Certificates will be treated as the sole class of "residual interests" in the
REMIC. For
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federal income tax purposes, regular interests in a REMIC generally are treated
as debt instruments issued by the REMIC on the date on which those interests are
created, and not as ownership interests in the REMIC or its assets. Owners of
Offered Certificates that otherwise report income under a cash method of
accounting will be required to report income with respect to such Offered
Certificates under an accrual method. The Offered Certificates may be issued
with "original issue discount" for federal income tax purposes. The prepayment
assumption to be used in determining whether Class A Certificates are issued
with original issue discount and the rate of accrual of original issue discount
is ___% of the CPR. No representation is made that any of the Mortgage Loans
will prepay at this rate or any other rate. See "Certain Federal Income Tax
Consequences - Federal Income Taxation for REMIC Certificates" and "Taxation of
Regular Certificates" in the Prospectus.
Although not free from doubt, it is anticipated that the Class S-A
Certificates will be treated as issued with original issue discount in an amount
equal to the excess of all payments thereon over their issue price (including
accrued interest), and the Trustee intends to report income in respect of such
Class of Certificates in this manner. Under this method, any "negative" amounts
of original issue discount attributable to rapid prepayments would not be
deductible currently, but would be offset against future positive accruals of
original issue discount, if any. A Class S-A Certificate holders may be entitled
to a loss deduction, which may be a capital loss, to the extent it becomes
certain that such holder will not recover a portion of its remaining basis in
the Class S-A Certificate, assuming no further prepayments.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), imposes certain requirements on those employee benefit plans and
individual retirement arrangements to which it applies ("Plan") and on those
persons who are fiduciaries with respect to such Plans. Any Plan fiduciary which
proposes to cause a Plan to acquire any of the Offered Certificates should
consult with counsel with respect to the consequences under ERISA and the Code
of the Plan's acquisition and ownership of such Certificates. See "ERISA
Considerations" in the Prospectus.
[The DOL has issued to ____________________ an individual prohibited
transaction exemption, Prohibited Transaction Exemption ___________________ (the
"Exemption"), which generally exempts from the application of the prohibited
transaction provision of Section 406(a), Section 406(b)(1) and Section 406(b)(2)
of ERISA and the excise taxes imposed pursuant to Sections 4975(a) and (b) of
the Code, with respect to the initial purchase, the holding and the subsequent
resale by Plans of certificates in pass-through trusts that consist of certain
receivables, loans and other obligations that meet the conditions and
requirements of the Exemption. The loans covered by the Exemption include
mortgage loans such as the Mortgage Loans.
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Among the conditions that must be satisfied for the Exemption to apply
are the following:
(1) the acquisition of the certificates by a Plan is on terms
(including the price for the certificates) that are at least as
favorable to the Plan as they would be in an arms-length transaction
with an unrelated party:
(2) the rights and interests evidenced by the certificates
acquired by the Plan are not subordinated to the rights and interests
evidenced by other certificates of the trust:
(3) the certificates acquired by the Plan have received a
rating at the time of such acquisition that is one of the three highest
generic rating categories from either S&P, Moody's, Duff & Phelps
Credit Rating Co. ("D&P") or Fitch Investors Service, Inc. ("Fitch");
(4) the Trustee must not be an affiliate of any other member
of the Restricted Group (as defined below);
(5) the sum of all payments made to and retained by the
Underwriter in connection with the distribution of the certificates
represents not more than reasonable compensation for underwriting the
certificates; the sum of all payments made to and retained by the
Depositor pursuant to the assignment of the loans to the Trust Estate
represents not more than the fair market value of such loans; the sum
of all payments made to and retained by the Master Servicer and any
subservicer represents not more than reasonable compensation for such
person's services under the Agreement and reimbursement of such
person's reasonable expenses in connection therewith; and
(6) the Plan investing in the certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission under the Securities Act of 1933.
The Trust Estate must also meet the following requirements:
(i) the corpus of the Trust Estate must consist solely of
assets of the type that have been included in other investment pools;
(ii) certificates in such other investment pools must have
been rated in one of the three highest rating categories of S&P,
Moody's, Fitch or D&P for at least one year prior to the Plan's
acquisition of certificates; and
(iii) certificates evidencing interests in such other
investment pools must have been purchased by investors other than Plans
for at least one year prior to the Plan's acquisition of certificates.
Moreover, the Exemption provides relief from certain
self-dealing/conflict of interest prohibited transactions that may occur when
the Plan fiduciary causes a Plan to acquire certificates in a trust in which the
fiduciary (or its affiliate) is an obligor on the receivables held
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in the trust; provided that, among other requirements, (i) in the case of an
acquisition in connection with the initial issuance of certificates, at least
fifty percent of each class of certificates in which Plans have invested is
acquired by persons independent of the Restricted Group and at least fifty
percent of the aggregate interest in the trust is acquired by persons
independent of the Restricted Group; (ii) such fiduciary (or its affiliate) is
an obligor with respect to five percent or less of the fair market value of the
obligations contained in the trust; (iii) the Plan's investment in certificates
of any class does not exceed twenty-five percent of all of the certificates of
that class outstanding at the time of the acquisition; and (iv) immediately
after the acquisition, no more than twenty-five percent of the assets of the
Plan with respect to which such person is a fiduciary are invested in
certificates representing an interest in one or more trusts containing assets
sold or serviced by the same entity. The Exemption does not apply to Plans
sponsored by the Company, the Depositor, the Certificate Insurer, the
Underwriter, the Trustee, the Master Servicer, any obligor with respect to
Mortgage Loans included in the Trust Estate constituting more than five percent
of the aggregate unamortized principal balance of the assets in the Trust
Estate, or any affiliate of such parties (the "Restricted Group").
The Depositor believes that the Exemption will apply to the acquisition
and holding of Offered Certificates by Plans and that all conditions of the
Exemption other than those within the control of the investors will be met. In
addition, as of the date hereof, there is no single Mortgage Loan included in
the Trust Estate that constitutes more than five percent of the aggregate
unamortized principal balance of the assets of the Trust Estate.]
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code[, the applicability of PTCE
_________ and the Exemption,] and the potential consequences in their specific
circumstances, prior to making an investment in the Offered Certificates.
Moreover, each Plan fiduciary should determine whether under the general
fiduciary standards of investment procedure and diversification an investment in
the Offered Certificates is appropriate for the Plan, taking into account the
overall investment policy of the Plan and the composition of the Plan's
investment portfolio.
RATINGS
It is a condition of the issuance of the Offered Certificates that the
Offered Certificates receive ratings of AAA by S&P and Aaa by Moody's. The
ratings assigned to the Offered Certificates will be based primarily on the
claims-paying ability of the Certificate Insurer. Explanations of the
significance of such ratings may be obtained from Moody's Investors Service, 99
Church Street, New York, New York and Standard & Poor's Ratings Group, a
division of McGraw Hill, 25 Broadway, New York, New York 10004. Such ratings
will be the views only of such rating agencies. There is no assurance that any
such ratings will continue for any period of time or that such ratings will not
be revised or withdrawn. Any such revision or withdrawal of such ratings may
have an adverse effect on the market price of the Offered Certificates. A
security rating is not a recommendation to buy, sell or hold securities.
S-57
<PAGE>
LEGAL INVESTMENT CONSIDERATIONS
Although the Offered Certificates are expected to be rated "AAA" by
S&P, and "Aaa" by Moody's, the Offered Certificates will not constitute
"mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA") because some of the Mortgage Loans may be
secured by junior liens. Accordingly, many institutions with legal authority to
invest in comparably rated securities based on first mortgage loans may not be
legally authorized to invest in the Offered Certificates.
UNDERWRITING
Under the terms and subject to the conditions set forth in the
Underwriting Agreement for the sale of the Offered Certificates, the Depositor
has agreed to cause the Trust to sell and ___________________ (the
"Underwriters") has agreed to purchase the Offered Certificates.
The Underwriters have advised the Depositor that they propose to offer
the Offered Certificates for sale from time to time in one or more registered
transactions or otherwise, at market prices prevailing at the time of sale, at
prices related to such market prices or at negotiated prices. The Underwriters
may effect such transactions by selling such Certificates to or through dealers,
and such dealers may receive compensation in the form of underwriting discounts,
concessions or commissions from the Underwriters or purchasers of the Offered
Certificates for whom they may act as agent. Any dealers that participate with
the Underwriters in the distribution of the Offered Certificates purchased by
the Underwriters may be deemed to be underwriters, and any discounts or
commissions received by them or the Underwriters and any profit on the resale of
Class A Certificates by them or the Underwriters may be deemed to be
underwriting discounts or commissions under the Securities Act.
The Company has agreed to indemnify the Underwriters against certain
liabilities including liabilities under the Securities Act of 1933, as amended.
The Company has been advised by the Underwriters that the Underwriters
currently intend to make a market in the Offered Certificates, as permitted by
applicable laws and regulations. The Underwriter is not obligated, however, to
make a market in the Offered Certificates and such market-making may be
discontinued at any time at the sole discretion of the Underwriter. Accordingly,
no assurance can be given as to the liquidity of, or trading markets for, the
Offered Certificates.
REPORT OF EXPERTS
The financial statements of the Certificate Insurer,
______________________________, for each of the two years in the periods ending
, 199 and 199 , appearing in Appendix B of this Prospectus Supplement have been
audited by _____________________, independent accountants, as indicated in their
report thereonappearing elsewhere herein and in the Registration Statement, and
are included in reliance upon such report and upon the authority of such firm as
experts in accounting and auditing.
S-58
<PAGE>
CERTAIN 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, New York and by Alan L. Langus, Chief Counsel for the Company. Certain
legal matters relating to insolvency issues and certain federal income tax
matters concerning the Certificates will be passed upon for the Depositor by
Dewey Ballantine LLP. Certain legal matters relating to the validity of the
issuance of the Certificates will be passed upon for the Underwriters by
____________________, __________. Certain legal matters relating to the
Certificate Insurer and the Certificate Insurance Policies will be passed upon
for the Certificate Insurer by ____________________, __________.
S-59
<PAGE>
APPENDIX A
INDEX OF LOCATION OF PRINCIPAL DEFINED TERMS
Agreement...............................................................1
Beneficial Owner.......................................................17
Book Entry Termination.................................................36
Business Day...........................................................38
Certificate Insurer....................................................13
Certificate Insurer Default............................................14
Certificate Register...................................................32
Certificate Registrar..................................................32
Claims Administrator....................................................1
Class A Certificates....................................................4
Class A Guaranteed Certificate Balance..................................8
Class A Guaranteed Principal Distribution Amount........................7
Class A Interest Carryover Shortfall....................................7
Class A Interest Distribution...........................................7
Class A Minimum Principal Distributable Amount..........................8
Class A Monthly Interest Distributable Amount..........................33
Class A Monthly Principal Distributable Amount..........................7
Class S-A Certificates..................................................4
Class S-A Interest Distribution........................................10
Clearing Agency........................................................35
Clearing Agency Participants...........................................35
Closing Date............................................................1
Company.................................................................1
Contract of Insurance Holder...........................................10
CPR....................................................................28
Cram Down Loss..........................................................9
Cut-Off Date............................................................1
Defaulted Mortgage Loan................................................48
Defective Mortgage Loan................................................43
Delinquency Advances...................................................16
Depositor...............................................................2
Determination Date.....................................................41
Distributable Excess Spread.............................................9
Distribution Date.......................................................6
Due Period..............................................................9
ERISA..................................................................55
Excess Spread...........................................................9
FHA.....................................................................1
FHA Insurance..........................................................10
FHA Insurance Amount...................................................10
FHA Premium Account....................................................12
Foreclosure Advances...................................................48
S-60
<PAGE>
HUD.....................................................................4
Initial FHA Insurance Amount...........................................22
Initial FHA Premium Account Deposit....................................12
Insurance Agreement....................................................38
Insurance Payments.....................................................14
Invoiced Mortgage Loans................................................13
Master Servicer.........................................................1
Master Servicing Fee...................................................16
Midpoint Date..........................................................41
Moody's................................................................14
Mortgage File..........................................................44
Mortgage Loans..........................................................1
Mortgaged Properties....................................................1
Mortgages...............................................................6
Notes...................................................................6
Notional Principal Balance..........................................2, 10
Offered Certificates....................................................2
Originator..............................................................4
Plan...................................................................55
Policy..................................................................2
Prepayments............................................................15
Receipt................................................................38
Received...............................................................38
Record Date.............................................................6
regular interests......................................................18
Related Series Mortgage Loans..........................................11
Related Series Trusts..................................................11
REMIC..................................................................18
Required OC Multiple...................................................41
Required OC Test.......................................................13
residual interests.....................................................18
S&P....................................................................14
Servicing Fees.........................................................16
Servicing Record.......................................................46
SMMEA..................................................................19
Substitute Mortgage Loan...............................................43
Termination Event......................................................52
Title I Program.........................................................5
Trust Property.........................................................42
Trustee.................................................................1
Trustee's Fee..........................................................33
Underwriters...........................................................58
Weighted average life..................................................28
S-61
<PAGE>
APPENDIX B
AUDITED FINANCIAL STATEMENTS OF CERTIFICATE INSURER
S-1
<PAGE>
APPENDIX C
SPECIMEN OF THE INSURANCE POLICY
S-1
<PAGE>
FORM OF PROSPECTUS SUPPLEMENT
-----------------------------
VERSION 3
(Multi-Family Loans)
<PAGE>
SUBJECT TO COMPLETION, DATED __________ ___, 199_ VERSION 3
PROSPECTUS SUPPLEMENT
(To Prospectus Dated ______________ __, 199___)
CTS Multifamily Mortgage Loan Trust 199__-__
$__________________ Class A-1 Certificates
$__________________ Class S-A Interest-only Certificates
$___________ Class B Certificates
Multifamily Mortgage Pass-Through Certificates
SERIES 199__-__
CONTISECURITIES ASSET FUNDING CORP.
Depositor
---------------------
Servicer
The CTS Multifamily Mortgage Pass-Through Certificates, Series
199__-__ (the "Certificates") will consist of the Class A-1 senior certificates
(the "Class A-1 Certificates"), the Class S-A senior certificates (the "Class
S-A Certificates" and, together with the Class A-1 Certificates (the "Senior
Certificates"), the Class B subordinate certificates (the "Class B
Certificates"), the Class C subordinate Certificates (the "Class C
Certificates") and the Class R residual certificates (the "Class R
Certificates"); (together with the Class B Certificates, and the Class C
Certificates, the "Subordinate Certificates"). Only the Senior Certificates and
Class B Certificates (collectively, the "Offered Certificates") are being
offered hereby.
As more fully described herein, interest distributions on the
Offered Certificates will be based on the Certificate Principal Balance of the
related Class or the aggregate principal balance of the Mortgage Loans or
another specified Class of Certificates (the "Notional Principal Balance") and
the then applicable Pass-Through Rate.
The Pass-Through Rate for the Class A-1 Certificates will be
_____% per annum, for the Class B Certificates will be ___% per annum and for
the S-A Certificates will be ___% per annum. The Class S-A Certificates are
interest-only Certificates. The yield to investors on the Class S-A Certificates
will be extremely sensitive to the rate and timing of principal payments
(including prepayments, repurchases, defaults and liquidations) on the Mortgage
Loans, which may vary over time. A rapid rate of such principal payments on the
Mortgage Loans could result in the failure of investors in the Class S-A
Certificates to recover their initial investments.
For a discussion of significant matters affecting investment
in the Certificates, see "Risk Factors" beginning on page S-10 herein and on
page 6 in the Prospectus.
(Cover continued on next page)
THE OFFERED CERTIFICATES REPRESENT BENEFICIAL INTERESTS IN THE TRUST ONLY
AND DO NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF CONTISECURITIES
ASSET FUNDING CORP., ANY ORIGINATORS OR ANY OF THEIR AFFILIATES.
NEITHER THE OFFERED CERTIFICATES NOR THE MORTGAGE LOANS ARE
INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.[THE ATTORNEY
GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON
OR ENDORSED THE MERITS OF THIS OFFERING. ANY
REPRESENTATION TO THE CONTRARY
IS UNLAWFUL.]
---------------------
The Offered Certificates will be purchased by the Underwriters
from the Depositor and will be offered by the Underwriters from time to time to
the public in negotiated transactions or otherwise at varying prices to be
determined at the time of sale. Proceeds to the Depositor from the sale of the
Offered Certificates will be approximately $____________, before deducting
expenses payable by the Depositor estimated to be approximately $_______ in the
aggregate. See "Plan of Distribution" in this Prospectus Supplement.
The Offered Certificates are offered subject to prior sale,
when, as, and if accepted by the Underwriters and subject to the approval of
certain legal matters. It is expected that delivery of the Senior Certificates
in book-entry form will be made on or about ____________, 199___ only through
the Same Day Funds Settlement System of The Depository Trust Company and that
delivery of the Class B Certificates will be made at the offices of
____________, on or about __, 199_ against payment therefor in immediately
available funds.
[UNDERWRITERS]
The date of this Prospectus Supplement is __________, 199__.
<PAGE>
The Certificates will evidence, in the aggregate, 100% of the
beneficial ownership interest in one of two trust funds established pursuant to
a Pooling and Servicing Agreement dated as of _____________, 199_ (the
"Agreement"), among the Depositor, in its capacity as sponsor of the Trust (the
"Depositor"), ContiTrade Services L.L.C., (the "Company"), ____________ as the
servicer (the "Servicer"), and __________, as trustee (the "Trustee"). One trust
fund (the "Trust Fund") will consist of the "regular interests" (and all the
proceeds thereof) in a separate trust fund (the "Mortgage Trust" and, together
with the Trust Fund, the "Trusts") that will consist primarily of a pool of
mortgage loans (the "Mortgage Loans") secured by first [and junior] liens on
multi-family residential (including multi-family/retail mixed-use) properties
located in ___ states (the "Mortgaged Properties"). Each of the Mortgage Loans
bear [fixed/adjustable] rates of interest and contain level pay amortization
schedules extending beyond such Mortgage Loans, scheduled maturity date, with a
"balloon" payment on the maturity date equal to the remaining principal balance
of such Mortgage Loans and any accrued and unpaid interest thereon ending no
later than the Final Scheduled Distribution Date.
The Class A-1 and Class S-A Certificates represent the senior
interests in the Trust Fund. As described herein, the rights of the holders of
the Class B Certificates and Class C Certificates to receive distributions from
the Trust Fund will be subordinate to the rights of the holders of the Class A
Certificates and the rights of the holders of the Class C Certificates will also
be subordinated to the rights of the holders of the Class B Certificates,
respectively, to receive distributions from the Trust Fund.
Principal of and interest on the Offered Certificates are
payable on the ___th day of each month or, if such day is not a business day, on
the next succeeding business day (each, a "Distribution Date"), commencing in
The last scheduled Distribution Date for the Class A-1 Certificates is
_____________ ___, ____. It is expected that the actual last Distribution Date
for each Class of Certificates will occur significantly earlier than such
scheduled Distribution Dates. The yield to maturity on the Offered Certificates
will depend on, among other things, the price at which the Certificates are
acquired and the rate and timing of principal payments (including prepayments,
repurchases, defaults and liquidations) on the Mortgage Loans, which rate may
vary significantly over time. See "Yield, Prepayment and Maturity
Considerations" in this Prospectus Supplement.
It is a condition to the issuance of the Offered Certificates
that the Senior Certificates be rated "___" and "___," and the Class B
Certificates be rated "___" and "___," by Moody's Investor Service and Standard
& Poor's.
<PAGE>
(Cover continued from previous page)
As described herein, the Trustee will cause elections to be
made to treat the Mortgage Trust and Trust Fund as "real estate mortgage
investment conduits" ("REMICs" or, in the alternative, the "Lower Tier REMIC"
and the "Upper Tier REMIC," respectively) for federal income tax purposes. Each
class of the Offered Certificates will be designated as a "regular interest" in
the Upper Tier REMIC and the Class R Certificates and the Class RL Certificates
will be designated as the sole class of "residual interest" in the Upper Tier
REMIC and the Lower Tier REMIC, respectively. See "Certain Federal Income Tax
Considerations" herein and in the Prospectus.
Prior to their issuance there has been no market for the
Offered Certificates nor can there be any assurance that one will develop, or if
it does develop, that it will provide the Owners of the Offered Certificates
with liquidity or will continue for the life of the Offered Certificates. The
Underwriters intend, but are not obligated, to make a market in the Offered
Certificates.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY
OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE
OF THE OFFERED CERTIFICATES AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL
IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY
TIME.
UNTIL _________, 199_ ALL DEALERS EFFECTING TRANSACTIONS IN
THE OFFERED CERTIFICATES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY
BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND THE PROSPECTUS TO WHICH IT
RELATES. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH
RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
-----------------
The Certificates offered by this Prospectus Supplement will be
part of a separate series of Certificates being offered by the Depositor
pursuant to its Prospectus dated ____________, 199__ of which this Prospectus
Supplement is a part and which accompanies this Prospectus Supplement. The
Prospectus contains important information regarding this offering which is not
contained herein, and prospective investors are urged to read the Prospectus and
this Prospectus Supplement in full.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange
Commission a Registration Statement under the Securities Act of 1933, as
amended, with respect to the Certificates. This Prospectus Supplement and the
related Prospectus, which form a part of the Registration Statement, omit
certain information contained in such Registration Statement pursuant to the
Rules and Regulations of the Commission. The Registration Statement can be
inspected and copied at the Public Reference Room of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, and the Commission's regional offices at
Seven World Trade Center, 13th Floor, New York, New York 10048, and Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such materials can be obtained at prescribed rates from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549.
REPORTS TO CERTIFICATEHOLDERS
The Trustee will mail monthly reports concerning the Offered
Certificates to all registered Owners.
<PAGE>
TABLE OF CONTENTS
AVAILABLE INFORMATION........................................................4
REPORTS TO CERTIFICATEHOLDERS................................................4
SUMMARY......................................................................1
RISK FACTORS................................................................12
THE MORTGAGE TRUST..........................................................17
DISTRIBUTION OF LTV'S.......................................................20
DISTRIBUTION OF MORTGAGE RATES..............................................21
DISTRIBUTION OF REMAINING TERMS TO MATURITY.................................21
DISTRIBUTION OF PRINCIPAL BALANCES..........................................21
DEBT SERVICE COVERAGE RATIOS................................................22
GEOGRAPHIC DISTRIBUTION.....................................................22
ADDITIONAL INFORMATION......................................................25
THE DEPOSITOR...............................................................25
THE COMPANY.................................................................26
THE SERVICER................................................................26
MASTER SERVICER.............................................................26
SPECIAL SERVICER............................................................26
DESCRIPTION OF THE OFFERED CERTIFICATES.....................................26
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS...............................34
DESCRIPTION OF THE POOLING AND SERVICING AGREEMENT..........................39
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.....................................49
ERISA CONSIDERATIONS........................................................50
LEGAL INVESTMENT CONSIDERATIONS.............................................53
RATINGS.....................................................................53
UNDERWRITING................................................................54
LEGAL MATTERS...............................................................54
APPENDIX A - INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS
EXHIBIT A - MORTGAGE LOAN SCHEDULE
<PAGE>
SUMMARY
This summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and the
accompanying Prospectus. Reference is made to the Index of Principal Defined
Terms for the location in the Prospectus of the definitions of certain
capitalized terms.
Issuer CTS Multifamily Mortgage Loan Trust,
199__- (the "Trust").
Certificates Offered The Class A-1 Certificates and the
Class S-A Certificates (collectively,
the "Senior Certificates") and the
Class B Certificates (collectively
with the Senior Certificates, the
"Offered Certificates") evidence
undivided beneficial ownership
interests in the Trust Fund. The
Class A-1 Certificates have an
original aggregate principal balance
(the "Original Class A-1 Principal
Balance") of $_________. The Class
S-A Certificates are interest-only
Certificates and have no principal
balance. The Class S-A Certificates
will accrue interest on the Notional
Principal Balance, as described
herein. The Class B Certificates have
an original aggregate principal
balance of $________.
Depositor ContiSecurities Asset Funding Corp.,
a Delaware corporation, having its
principal executive office at 277
Park Avenue, New York, New York 10172
(the "Depositor").
Servicer _________________, a _________
corporation (the "Servicer"). The
Servicer's principal executive
offices are located at ________.
Trustee ____________________, a __________
banking association, the ("Trustee").
The Trustee's principal executive
offices are located at ___________.
Master Servicer corporation (the
"Master Servicer"). The Master
Servicer's principal executive
offices are located at
______________________.
[Special Servicer ___________________ a ___________
corporation (the "Special Servicer").
The Special Servicer's principal
executives offices are located at
__________]
Cut-Off Date _____________, 199___.
Closing Date ________________, 199__.
Description of the
Certificates The CTS Multifamily Mortgage Pass-
Through Certificates, Series 199__-__
(the "Certificates") will consist of
the Offered
S-1
<PAGE>
Certificates, the Class C
Certificates, which have an original
aggregate principal balance of
$________, the Class R residual
certificates (the "Class R
Certificates"), which represent the
residual interest in the Trust Fund,
the Class RL residual certificates
(the "Class RL Certificates") which
represent the residual interest in
the Mortgage Trust (the "Class R
Certificates" and the "Class RL
Certificates" are referred to
collectively as the "Residual
Certificates"). The Class C
Certificates and the Residual
Certificates are not offered hereby,
and may be offered for sale in
privately negotiated transactions.
The Certificates represent in the
aggregate the entire beneficial
ownership interest in two trust funds
established pursuant to the
Agreement. One trust fund (the "Trust
Fund") will consist of all the
"regular interests" (and all proceeds
thereof) in a separate trust fund
(the "Mortgage Trust" and, together
with the Trust Fund, the "Trusts")
that will consist primarily of a pool
of loans (the "Mortgage Loans")
secured by [first] liens on
multi-family residential (including
family/retail mixed-use) properties
located in ___states (the "Mortgaged
Properties").
Denominations The Class A-1 Certificates will be
issued in book-entry form in
denominations of original principal
amounts of $_____ and integral
multiples of $_____ in excess
thereof. The Class S-A Certificates
will be issued in [book entry/fully
registered, definitive form] in
percentage interests of ownership of
such class of not less than ___%. The
Class B Certificates will be issuable
in fully registered, certificated
form in denominations of $_______ and
integral multiples in excess thereof
and one Class B Certificate
evidencing an additional amount equal
to the remainder of the Original
Certificate Principal Balance of such
Class. See "Description of the
Offered Certificates-- General" and
"Description of the Offered
Certificates-- Book-Entry
Registration of the Senior
Certificates" herein.
The Mortgage Loans The Mortgage Loans will have a
Cut-Off Date aggregate principal
balance outstanding, after the
deduction of payments of principal
due on such date, of approximately $
______. The Mortgage Loans were
originated by in accordance with the
Company's Underwriting Guidelines, as
described herein. See "The Mortgage
Trust-Underwriting Standards" herein.
As of the date of origination, the
weighted average Mortgage Rate of the
Mortgage Loans (weighted by the
aggregate principal balance thereof)
was approximately ___%. All the
Mortgage Loans were originated on or
after __________, 199__. As of the
Cut-Off Date, the Mortgage Loans had
an average remaining term to maturity
(weighted by aggregate principal
balance thereof) of approximately
_______.
S-2
<PAGE>
As of their date of origination, the
Mortgage Loans had an average
principal balance of approximately
$_________.
Each Mortgage Loan is secured by a
mortgage creating a [first/junior]
lien on the related Mortgaged
Property. The Mortgaged Properties
will consist of a total of ___
multi-family (including ___
multi-family/retail mixed-use)
apartment complexes. Each of the
Mortgage Loans bears interest at a
[fixed/adjustable] rate of interest
and had an original term to maturity
of 3, 5 or 7 years, and all of the
Mortgage Loans require monthly
payments of principal based on a ___-
year amortization schedule. The
Maturity Dates of the Mortgage Loans
will fall between ___________ and
__________, inclusive. None of the
Mortgage Loans are insured or
guaranteed by any governmental entity
or private insurer. [All of the
Mortgage Loans are non-recourse
loans.] See "The Mortgage Trust --
Mortgage Loan Characteristics"
herein.
Originators Each of the Mortgage Loans to be
acquired by the Trust from the
Depositor were acquired by the
Depositor from ContiTrade Services
L.L.C. (the "Company"), which
previously originated or acquired the
Mortgage Loans from the related
originator (each an "Originator").
Class A-1
Pass-Through Rate ____% per annum.
Class S-A
Pass-Through Rate. ___% per annum on the Notional
Principal Balance.
Class B
Pass-Through Rate ___% per annum.
Distributions on the
Certificates Distributions of interest and
principal, if any, on the Class A-1,
Class S-A Certificates and the Class
B Certificates will be made by the
Trustee on each Distribution Date
(i.e., the __th day of each month or
if such __th day is not a business
day, then the business day next
following such __th day), commencing
in 199__, to the Owners of
Certificates of record as of the
close of business on the last
business day of the month preceding
such Distribution Date (each, a
"Record Date").
Amount of Distributions On each Distribution Date, the
Trustee will apply the aggregate of
amounts distributed [in respect of
the Lower Tier Interest] on such
Distribution Date in the following
order of priority:
S-3
<PAGE>
(i) first, concurrently, to
the Owners of the Class A-1
Certificates, the Class A-1
Monthly Interest (as defined
below); and to the Owners of
the Class S-A Certificates,
Class S-A Monthly Interest,
any shortfall being allocated
among the Class A-1
Certificates and the Class S-A
Certificates in proportion to
their respective amounts of
Class A-1 Monthly Interest and
Class S-A Monthly Interest;
(ii) second, to the Owners of
the Class A-1 Certificates,
the Class A-1 Principal
Distribution Amount (as
defined below) until the Class
A-1 Principal Balance has been
reduced to zero;
(iii) third, to the Owners of
the Class B Certificates, the
Class B Monthly Interest;
(iv) fourth, to the Owners of
the Class A-1 Certificates,
any Unpaid Delinquent Maturity
Amount (as defined below)
until the Class A-1 Principal
Balance has been reduced to
zero;
(v) fifth, to the Owners of
the Class B Certificates, the
Class B Principal Distribution
Amount until the Class
Principal Balance has been
reduced to zero;
(vi) sixth, to the Owners of
the Class C Certificates, the
Class C Monthly Interest;
(vii) seventh, to the Owners
of the Class C Certificates,
the Class C Principal
Distribution Amount until the
Class C Principal Balance has
been reduced to zero; and
(viii) eighth, to the Owners
of the Class R Certificates,
all remaining Available Funds,
if any.
The "Class A-1 Principal Distribution
Amount," as to any Distribution Date,
will equal the sum of the items set
forth below and, if Available Funds
should be less than such sum, any
partial distribution shall be with
respect to such items in the order of
priority set forth below:
(i) the product of (x) the
Class A Percentage and (y-1)
prior to the Subordination
Termination Date, the sum of
(A) the aggregate of the
Unpaid Principal Balance of
all Mortgage Loans which
ceased to be Outstanding
Mortgage Loans as of such
Distribution Date other than
Mortgage Loans that were
subject to a Principal
Prepayment In Full prior to
the end of the preceding
calendar month and (B) all
scheduled principal payments
on the Mortgage Loans due on
the related Due Date;
S-4
<PAGE>
or (y-2) on and after the
Subordination Termination
Date, the sum of the amounts
described in (y-1)(A) and
(y-1)(B) above, but only to
the extent such amounts are
actually received by the
Trustee prior to the
Distribution Date;
(ii) all Principal Prepayments
made on or before the related
Determination Date; and
(iii) any Unpaid Principal
Shortfall allocable to the
Class A-1 Certificates.
The "Class B Principal Distribution
Amount" as to any Distribution Date,
will equal the sum of the items set
forth below and, if Available Funds
should be less than such sum, any
partial distribution shall be with
respect to such items in the order of
priority set forth below:
(i) the product of (x) the
Class B Percentage and the sum
of (A) the aggregate of the
Unpaid Principal Balance of
all Mortgage Loans which
ceased to be Outstanding
Mortgage Loans as of such
Distribution Date other than
Mortgage Loans that were
subject to a Principal
Prepayment In Full prior to
the end of the preceding
calendar month and (B) all
scheduled principal payments
on the Mortgage Loans due on
the related Due Date;
(ii) after the Class A-1
Termination Date, all
Principal Prepayments made on
or before the related
Determination Date; and
(iii) any Unpaid Principal
Shortfall allocable to the
Class B Certificates.
[In addition, on each Distribution
Date, the Trustee will withdraw from
the Prepayment Premium Account (as
defined herein) an amount equal to
the aggregate of all Prepayment
Premiums deposited therein during the
previous calendar month and will
distribute such amount (i) on each
Distribution Date prior to the Class
A Termination Date, (a) if prior to
__________, to the Owners of Class A
Certificates, allocated ___% to the
Class A-1 Certificates and ___% to
the Class S-A Certificates, and (b)
if after __________, solely to the
Owners of Class A-1 Certificates,
(ii) on the Class A-1 Termination
Date, to the Owners of Class A
Certificates (in accordance with the
allocations described in subclauses
(a) and (b) (as the case may be) of
clause (i) above, only if the Class
A-1 Termination Date is prior to
__________) and Class B Certificates
in proportion to the distributions of
principal made in respect of the
Class A-1 and Class B Certificates,
S-5
<PAGE>
respectively, (iii) on each
Distribution Date thereafter, to the
Owners of Class B Certificates.]
Interest for the Class A and Class B
Certificates for any given
Distribution Date is equal to one
month's interest accrued at the
applicable Pass-Through Rate, on the
Class A-1 or Class B Principal
Balance, as the case may be,
immediately prior to such
Distribution Date. See "Description
of the Offered Certificates-- Amounts
of Distribution" herein.
Monthly Advances In the event that a monthly payment
on a Mortgage Loan has not been
received by the Servicer as of the
close of business on the
Determination Date immediately
preceding the related Distribution
Date, the Servicer will be obligated
to advance, for deposit in the
Certificate Account, the aggregate of
payments of principal (other than any
Balloon Payment) and interest on the
Mortgage Loans that were due on the
related Due Date and that is
allocable to the Class A
Certificates, less the aggregate
amount of any such delinquent
payments that the Servicer has
determined in its sole, reasonable
judgment would constitute a
nonrecoverable advance if made (a
"Monthly Advance"). The Servicer will
be entitled to be reimbursed from the
Certificate Account for all such
Monthly Advances.
The obligation to make Monthly
Advances with respect to any Mortgage
Loan shall continue until the
earliest to occur of (i) payment
thereof in full, (ii) liquidation of
the related Mortgaged Property and
(iii) the purchase or repurchase
thereof from the Mortgage Trust
pursuant to any applicable provision
of the Agreement. If the rights and
obligations of the Servicer under the
Agreement are terminated upon the
occurrence of an event of default
that remains uncured, the
[Trustee/Master Servicer] will be the
successor in all respects (with
certain exceptions relating to the
repurchase of Mortgage Loans under
certain circumstances)to the Servicer
in its capacity as servicer under the
Agreement, including the obligation
to make all required Monthly
Advances.
Subordination of the
Subordinate Certificates The rights of the Owners of the
Class B Certificates and the Class C
Certificates to receive distributions
with respect to the Mortgage Loans
will be subordinated to such rights
of the holders of the Class A
Certificates to the extent described
below. The subordination provided to
the Class A Certificates by the Class
B Certificates and the Class C
Certificates is intended to enhance
the likelihood of timely receipt by
the Owners of the Class A
Certificates of the full amount of
their scheduled monthly
S-6
<PAGE>
payments and to afford such Owners
protection against losses resulting
form Liquidated Mortgage Loans.
The rights of the Owners of the Class
C Certificates to receive
distributions with respect to the
Loans will be subordinated to such
rights of the Owners of the Class B
Certificates to the extent described
below. The subordination provided to
the Class B Certificates by the Class
C Certificates is intended to enhance
the likelihood of timely receipt by
the Owners of the Class B
Certificates of the full amount of
their scheduled monthly payments and
to afford such Owners protection
against losses resulting form
Liquidated Mortgage Loans.
The protection afforded to the Owners
of Class A Certificates by means of
the subordination of the Class B
Certificates and the Class C
Certificates will be accomplished by
the preferential right of such Owners
to receive, prior to any distribution
being made on a Distribution Date in
respect of the Class B Certificates
and the Class C Certificates, the
Class A-1 Monthly Interest and the
Class S-A Monthly Interest,
respectively, and to the Owners ofthe
Class A Certificates the Class A-1
Principal Distribution Amount. The
Class B Certificates will, however,
receive the Class B Monthly Interest
before the Owners of the Class A
Certificates receive any Unpaid
Delinquent Maturity Amount. There
will be no other form of Credit
Enhancement available for the benefit
of the Offered Certificates. See
"Description of the Offered
Certificates -- Subordination of the
Subordinate Certificates" herein.
Allocation of Losses Subject to the limitations described
herein, losses of principal and
interest realized on the Mortgage
Loans ("Realized Losses") will be
allocated, first, to the Class R
Certificates and, then to the Class C
Certificates and, then to the Class B
Certificates, as described herein,
prior to allocation thereof to the
Senior Certificates. See "Description
Of The Offered
Certificates--Subordination of
Subordinate Certificates" herein.
Servicing Fee With respect to each Distribution
Date, the Servicer shall be entitled
to withhold from deposit into the
Certificate Account, with respect to
each Mortgage Loan (for which a
Monthly Payment was received) that
was an Outstanding Mortgage Loan as
of such Distribution Date, an amount
equal to one-twelfth of the product
of (i) the rate set forth in the
Mortgage Loan Schedule (the
"Servicing Fee Rate") and (ii) the
Unpaid Principal Balance of such
Mortgage Loan as of such Distribution
Date. The Servicer will be entitled
to retain additional servicing
compensation in the form of
assumption fees, late payment charges
or extension and other administrative
charges to the extent collected.
S-7
<PAGE>
Optional Termination At its option the Depositor may
repurchase all the Mortgage Loans at
any time when the Pool Principal
Balance is less than 10% of the
Cut-Off Date Pool Principal Balance.
The payment of such purchase price
will be applied to the early
retirement of the Class A-1, Class
S-A, Class B and Class C
Certificates. See "Description of the
Pooling and Servicing Agreement --
Termination; Retirement of the
Certificates" herein.
Final Scheduled
Distribution Date Scheduled Payments on the Mortgage
Loans will be sufficient to
distribute interest on the Offered
Certificates at the applicable
Pass-Through Rate and to reduce the
principal amount of the Offered
Certificates to zero not later than
the "Final Scheduled Distribution
Date" set forth on the cover page
hereof, determined as described
herein. the rate of distributions of
principal on the Offered Certificates
will depend on the rate of payment
(including prepayments) of the
principal of the Mortgage Loans and
on the timing of receipt of
Liquidation Proceeds and Insurance
Proceeds with respect to the Mortgage
Loans, the actual final Distribution
Date for each Class of the Offered
Certificates may be earlier, and
could be substantially earlier, or
may be later, than the Final
Scheduled Distribution Date. See
"Description Of The Offered
Certificates -- Final Scheduled
Distribution Date" and "Yield,
Prepayment and Maturity
Considerations" herein.
Nature of Class S-A
Certificates General Character as an Interest-
Only Security. The owners of the
Class S-A Certificates will be
entitled to receive monthly
distributions equal to one-month's
interest at the Class S-A
Pass-Through Rate on the Notional
Principal Balance then outstanding.
The Class S-A Certificateholders will
not be entitled to receive any
distributions of principal collected
on the Mortgage Loans. Because they
will not receive any distributions of
principal, the Class S-A
Certificateholders will be affected
by prepayments, liquidations and
other dispositions of the Mortgage
Loans to a greater degree than will
the Class A Certificateholders. As an
extreme illustration, in the event
that the entire Mortgage Pool prepays
in full during the first month, then
on the initial Distribution Date the
Owners of the Class A Certificates
will receive the full par value of
their Certificates while the Owners
of the Class S-A Certificates will
suffer nearly a complete loss (except
for one month's interest) on their
investment.
In general, liquidations due to
losses, repurchases by the Company
and other dispositions of Mortgage
Loans from the Trust Fund will have
the same effect on Class S-A
Certificateholders as do
S-8
<PAGE>
prepayments of principal,
liquidations due to losses,
repurchases by the Company and other
dispositions of Mortgage Loans from
the Trust, and are collectively
referred to as "Prepayments."
Because the yield to the Class S-A
Certificateholders is sensitive to
certain constant rates of prepayment,
it is advisable for potential
investors in the Class S-A
Certificates to consider carefully,
and to make their own evaluation of,
the effect of any particular
assumption regarding the rates and
the timing of prepayments. In
general, when interest rates decline,
prepayments in a pool of receivables
such as the Mortgage Loans will
increase as borrowers seek to
refinance at lower rates. This will
have the effect of reducing the
future stream of payments available
to an owner of an interest-only
security based on such receivables
pool, thus adversely affecting such
investor's yield. Conversely, when
interest rates increase prepayments
will tend to decrease (since
attractive refinancing opportunities
are not available) and the future
stream of payments available to such
an owner of an interest-only security
may increase, thus positively
affecting such investor's yield.
Accrual of "Original
Issue Discount." The Class S-A Certificates may be
issued with "original issue discount"
within the meaning of the Code. As a
result, in certain rapid prepayment
environments the effect of the rules
governing the accrual of original
issue discount may require such
Certificateholders to accrue original
issue discount at a rate in excess of
the rate at which distributions are
received by such Certificateholders
or not to be able to accrue
economically realized Issues. See
"Certain Federal Income Tax
Consequences" herein and in the
Prospectus.
Ratings. It is a condition to the issuance of
the Offered Certificates that the
Class A-1 and Class S-A Certificates
each be rated no lower than "AAA" and
that the Class B Certificates be
rated no lower than "___" by Standard
and Poor's Ratings Group, a division
of McGraw Hill ("S&P") and Moody's
Investors Service, Inc. ("Moody's")
(collectively, the "Rating
Agencies"). The Class C Certificates
will not be rated. A security rating
is not a recommendation to buy, sell
or hold securities and may be subject
to revision or withdrawal at any time
by the assigning rating agency. See
"Ratings" herein.
Ratings of the
Class S-A Certificates. The Class S-A Certificates will,
upon initial issuance, receive
ratings of "___" by ___ and of "___"
by __________. Ratings which are
assigned to securities such as the
Class S-A Certificates
S-9
<PAGE>
generally evaluate the ability of the
issuer (i.e., the Trust) to make
timely payments when such payments
are due, as required by such
securities. As described above, such
amounts with respect to the Class S-A
Certificates consist only of
interest. In general, the ratings
thus address credit risk and not
prepayment risk. See "Ratings"
herein.
Certain Federal Income
Tax Consequences. The Trustee will cause elections to
be made to treat the Mortgage Trust
(also referred to herein as "Lower
Tier REMIC") and the Trust Fund as
"real estate mortgage investment
conduits" (each, a "REMIC") for
federal income tax purposes. The
Lower Tier A Interest and the Lower
Tier B Interest will be the "regular
interests" in the Lower Tier REMIC
and the Class RL Certificates will
constitute the sole class of
"residual interests" in the Lower
Tier REMIC. The Class A-1, Class S-A
and Class B Certificates will be
"regular interests" in the Trust Fund
and the Class R Certificates will be
the sole class of "residual
interests" in the Trust Fund. See
"Certain Federal Income Tax
Consequences" herein and in the
Prospectus.
ERISA Considerations Any fiduciary of any employee
benefit plan (a "Plan") subject to
the Employee Retirement Income
Security Act of 1974, as amended
("ERISA"), who proposes to cause a
Plan to acquire any of the Offered
Certificates should consult with its
own counsel with respect to the
applicability of ERISA and the
Internal Revenue Code of 1986, as
amended (the "Code"), to such
investment.
Under current law the purchase and
holding of the Class B Certificates
by or on behalf of any Plan subject
to the fiduciary responsibility
provisions of ERISA may result in
"prohibited transactions" within the
meaning of ERISA and the Code. [No
transfer of a Class B Certificate or
any interest therein may be made to
any Plan or other retirement
arrangement, including individual
retirement accounts and annuities,
Keogh plans and collective investment
and separate accounts in which such
plans, accounts or arrangements are
invested that is subject to ERISA or
the Code unless the prospective
transferee of the Class B Certificate
provides the Trustee with a
representation letter and an opinion
of counsel, each in the form required
under the Agreement. See "ERISA
Considerations" herein and in the
Prospectus.]
Risk Factors Credit Considerations. For
information with regard to the
Mortgage Loans and their related
risks, see "The Portfolio of Mortgage
Loans" herein.
S-10
<PAGE>
Prepayment
Considerations. For information regarding the
consequences of prepayments of the
Mortgage Loans, particularly Owners
of Class S-A Certificates, see
"Prepayment and Yield Considerations"
herein.
Other For a discussion of other risk
factors that should be considered by
prospective investors in the Offered
Certificates, see "Risk Factors"
herein and in the Prospectus.
Legal Investment
Considerations The Senior Certificates will [not]
constitute "mortgage related
securities" for purposes of the
Secondary Mortgage Market Enhancement
Act of 1984 ("SMMEA") [for so long as
they are rated in one of the two
highest rating categories by one or
more nationally recognized
statistical rating organizations. As
such, the Senior Certificates will be
legal investments for certain
entities to the extent provided in
SMMEA, subject to state laws
overriding SMMEA. In addition,
institutions whose investment
activities are subject to review by
federal or state regulatory
authorities may be or may become
subject to restrictions, which may be
retroactively imposed by such
regulatory authorities, on the
investment by such institutions in
certain forms of mortgage related
securities. Furthermore, certain
states have enacted legislation
overriding the legal investment
provisions of SMMEA.]
The Class B Certificates will not
constitute "mortgage related
securities" for purposes of SMMEA. As
a result, the appropriate
characterization of the Class B
Certificates under various legal
investment restrictions, and thus the
ability of investors subject to these
restrictions to purchase the Class B
Certificates, maybe subject to
significant interpretative
uncertainties.
Prospective investors are advised to
consult their counsel as to
qualification of the Offered
Certificates as legal investments
under any such laws, regulations,
rules and orders. See "Legal
Investment Consideration" herein and
in the Prospectus.
S-11
<PAGE>
RISK FACTORS
Prospective investors in the Offered Certificates should
consider the following risk factors (as well as the risk factors set forth under
"Risk Factors" in the Prospectus) in connection with the purchase of the Offered
Certificates.
The Mortgage Loans
General. The Mortgage Loans were originated by the between
_____ and _______, inclusive. The Mortgage Loans are all secured by multi-family
(or, in some cases, multi-family/retail mixed-use) apartment buildings, each
containing five or more residential units. Owners of multi-family apartment
buildings rely on monthly lease payments from tenants to pay for maintenance and
other operating expenses of the building, to fund capital improvements and to
service the related Mortgage Loan and any other debt that may be secured by such
property. Various factors, many of which are beyond the control of the owner or
operator of an apartment building, may affect the economic viability of the
building.
Adverse economic conditions, either local or national, may
limit the amount of rent that can be charged and may result in a reduction in
timely lease payments or a reduction in occupancy levels. Occupancy and rent
levels may also be affected by construction of additional housing units and
local politics, including rent stabilization or rent control laws and policies.
In addition, a low level of mortgage rates may encourage tenants to purchase
single-family housing.
Changes in payment patterns by tenants may result from a
variety of social, legal and economic factors. Economic factors including the
rate of inflation, unemployment levels and relative rents offered for various
types of housing may be reflected in changes in payment patterns, including
increased risks of defaults by tenants and higher vacancy rates. The Depositor
is unable to determine and has no basis to predict whether, or to what extent,
economic, legal or social factors will affect future rental or payment patterns.
Environmental Risks. Under the laws of certain states where
Mortgaged Properties are located, violation of applicable environmental laws may
give may rise to a "superlien" on the Mortgaged Property (i.e., a lien prior to
the lien of the related mortgage) to assure the payment of the costs of cleanup.
In addition, under the laws of several states and under the federal
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA")
a lender may be liable, as an "owner" or "operator", for cleanup costs on
mortgaged property containing hazardous wastes if agents or employees of the
lender have become involved in the operations of the borrower, regardless of
whether a previous owner caused the environmental damage. If the lender actually
takes possession of the property, it may, more clearly, be liable for cleanup
costs pursuant to CERCLA. Under certain recent court decisions, even very little
involvement by the lender has led to liability for cleanup costs and efforts by
the Federal Environmental Protection Agency to clarify questions relating to
lender liability through rulemaking have been rejected. The Depositor will
generally require the preparation of environmental assessments; however, there
can be no assurance as to the ultimate level of protection, if any, afforded by
any such assessment. Although the lender can bring an action for contribution
against the owner who created the environmental hazard, any amounts
S-12
<PAGE>
awarded to the lender under such an action may not be collectible if the owner
is bankrupt or otherwise judgment-proof. See "Risk Factors -- Certain Legal
Aspects of the Mortgage Loans--Environmental Risks" in the Prospectus.
The Agreement provides that the Servicer may not, on behalf of
the Trustee, obtain title to (as a result of foreclosure or in lieu of
foreclosure or otherwise), or take possession of or other actions with respect
to, a Mortgaged Property unless the Servicer has previously determined, based on
a report prepared by a person who regularly conducts environmental audits, that
(i) the Mortgaged Property is in compliance with applicable environmental laws
or, if it is not, that it would be in the best economic interest of the holders
of the Certificates to take the actions necessary to bring the Mortgaged
Property into compliance with such laws and (ii) circumstances relating to the
use, management or disposal of certain hazardous materials either are not
present at the Mortgaged Property or should be addressed if to do so would be in
the best economic interest of the holders of the Certificates. See "Description
of the Pooling and Servicing Agreement -- Realization upon Defaulted Mortgage
Loans" herein.
Environmental studies were commissioned by the Company or its
correspondent originators prior to the origination of each Mortgage Loan. The
reports indicated that no material environmental conditions existed with respect
to any of the Mortgaged Properties. [Identified environmental conditions which
may result in liability to the issuer will be disclosed in a separate risk
factor.]
Mortgagor Default. The Mortgage Loans are not insured or
guaranteed against Mortgagor default by any governmental entity or by any
private mortgage insurer.
The amount recoverable upon the occurrence of a default may be
affected by, among other things, a decline in real estate values or a change in
mortgage market interest rates. If the multifamily residential real estate
market should experience an overall decline in property values such that the
outstanding balances of the Mortgage Loans exceed the value of the related
Mortgaged Properties, the actual rates of delinquencies, foreclosures and losses
could be higher than those anticipated by investors.
The Agreement also contains limitations on the ability of the
Servicer to foreclose on a Mortgaged Property, to modify the terms of the
related Mortgage Loan as an alternative to foreclosure, and to rehabilitate a
Mortgaged Property acquired by the Mortgage Trust upon foreclosure. These
limitations may delay or otherwise adversely affect recoveries in respect of a
defaulted Mortgage Loan. See "Description of the Pooling and Servicing
Agreement--Realization Upon Defaulted Mortgage Loans".
Nonrecourse Mortgage Loans. All the Mortgage Loans are
nonrecourse loans, as to which, in the event of a Mortgagor default, recourse
will be available solely against the related Mortgaged Property, and not against
any other assets of the Mortgagor, to pay amounts due under the related Mortgage
Loan. In the case of a nonrecourse Mortgage Loan, a decrease in the value of the
related Mortgaged Property will directly reduce the amount of gross liquidation
proceeds that may be realized in respect thereof and, after the deduction of
liquidation expenses, applied to payment of such Mortgage Loan. [In addition,
the laws of some states prohibit
S-13
<PAGE>
obtaining a personal judgment against a mortgagor for any deficiency in the net
liquidation proceeds following a foreclosure of a defaulted mortgage loan.]
Liquidation Risks. Even assuming that the Mortgaged Properties
provide adequate security for the Mortgage Loans, substantial delay could be
encountered in connection with the liquidation of defaulted Mortgage Loans and
corresponding delays in the receipt of related proceeds by Owners of the Offered
Certificates could occur. Further, liquidation expenses (such as legal fees,
real estate taxes, and maintenance and preservation expenses) will reduce the
proceeds payable to holders of the Offered Certificates and thereby reduce the
security for the Mortgage Loans. In the event any Mortgaged Properties fail to
provide adequate security for the related Mortgage Loans and the protection
provided by the subordination described herein is exhausted or unavailable,
holders of Offered Certificates could experience a loss on their investment.
Other Risks of Multifamily Residential Lending. Multifamily
residential lending is generally viewed as exposing the lender to a greater risk
of loss than one-to-four-family residential lending. Multifamily residential
lending typically involves a larger loan to a single obligor than a residential
one- to four- family mortgage loan. Furthermore, the repayment of loans secured
by income producing properties is typically dependent upon the successful
operation of the related real estate project. If the net operating income from
the project is reduced (for example, if tenant leases are not obtained or
renewed), the obligor's ability to repay the loan may be impaired. Multifamily
residential real estate can be affected significantly by supply and demand in
the market for the type of property securing the loan and, therefore, may be
subject to adverse economic conditions. Market values may vary as a result of
economic events or governmental regulations outside the control of the borrower
or lender, such as the imposition of rent control or changes in the laws which
impact the future cash flow of the property. Market values may also be
influenced by the relative affordability of single-family housing in the area in
which the multifamily residential housing is located.
The successful operation of a multifamily project is also
dependent upon the management of such project.
The project manager, in conjunction with the owner of the
project, is responsible for responding to changes in the local rental market,
planning and implementing the rental market, planning and implementing the
rental structure, including establishing levels of rental rates, and insuring
that maintenance and capital improvements are carried out in a timely fashion.
Management errors may adversely affect the long-term viability of a project.
There can be no assurance that such errors by the property manager will not
ultimately cause a default on the related Mortgage Loan. See "Security for the
Certificates -- The Mortgage Loans" herein.
Mortgage Loan Concentration. The ______ largest Mortgage
Loans, with an aggregate Scheduled Principal Balance as of the Cut-Off Date of
approximately $__________, comprise approximately ___% of the aggregate
Scheduled Principal Balance of the Mortgage Loans on such date. The largest of
such Mortgage Loans has a Scheduled Principal Balance of approximately
$__________, or approximately ___% of the aggregate Scheduled Principal Balance
of the Mortgage Loans as of the Cut-Off Date. As a result of this relative
concentration of the Mortgage Loans, Losses, prepayments or modifications
(including an extension of the
S-14
<PAGE>
final Due Date) on any such Mortgage Loans are likely to have a greater effect
on the yield to Holders of the Offered Certificates or the anticipated weighted
average lives of the Offered Certificates than if such concentration had not
existed. In addition (i) approximately ___% of the Mortgage Loans by aggregate
Scheduled Principal Balance are secured by Mortgaged Premises located in
________, (ii) approximately __% by Mortgaged Premises located in _____, (iii)
approximately ___% by Mortgaged Premises located in _____ and (iv) approximately
___% by Mortgage Premises located in ---------.
As a result of this relative geographic concentration of the
Mortgage Loans, the performance of the Offered Certificates may be more
dependent upon the economic conditions in the noted states.
The Mortgage Loans are all secured by Mortgaged Premises that
are either newly constructed or have been recently substantially rehabilitated.
As such, each Mortgaged Premises has limited operating history on which the
calculation of the Debt Service Coverage Ratio was based. There can be no
assurance that the future operating history will be consistent with the limited
recent operating history. To the extent future Net Operating Income is less than
the Net Operating Income used in underwriting a Mortgage Loan, the likelihood of
a default on such Mortgage Loan increases, which may result in a Realized Loss.
Balloon Mortgage Loans and Extension Risk. Because all the
Mortgage Loans have amortization schedules extending significantly beyond their
original terms to maturity, substantial payments (that is "Balloon Payments")
will be due on the Mortgage Loans at their respective stated maturity dates.
Such loans involve a greater risk to lenders because a Mortgagor's ability to
make a Balloon Payment typically will depend upon its ability either to
refinance such Mortgage Loan or to sell the related Mortgaged Property. A
mortgagor's ability to accomplish either of these goals will be affected by the
factors described above under "The Mortgage Loans--General" and by other factors
including the level of available mortgage rates at the time of sale or
refinancing, the Mortgagor's equity in the Mortgaged Property, the financial
condition of the Mortgagor, the operating history and physical condition of the
Mortgaged Property, tax laws and prevailing general economic conditions. A high
interest rate environment may make it more difficult for the Mortgagor to
accomplish a refinancing or sale and may result in delinquencies or defaults
which, in turn, could cause delays in distributions to holders of Offered
Certificates.
There is no assurance that the values of the Mortgaged
Properties at maturity of the Mortgage Loans will be equal to or will exceed
their values at the date of origination of the Mortgage Loans. Since the
Mortgage Loans require Balloon Payments at maturity, holders of Offered
Certificates will be assuming the risk that the Mortgage Loans may not be paid
off when the Balloon Payments are due.
In addition, if certain conditions are satisfied, such as the
absence of any deferred maintenance, the satisfaction of a minimum debt service
coverage ratio, the absence of delinquencies and the good faith effort to secure
refinancing, the Servicer may extend a Mortgagor's Balloon Payment due date by
as much as ____ months if the Mortgagor needs more time to refinance. Such
extension of the scheduled maturity date of the loan may cause the
S-15
<PAGE>
weighted average lives of the Offered Certificates to be longer than if the loan
had been paid under its original terms. See "Yield, Maturity and Prepayment
Considerations" herein.
Credit Risk of Subordinate Certificates
As described herein, the rights of the Subordinate
Certificateholders to receive payments of interest and principal will be
subordinated to those of the Holders of the Senior Certificates, and the rights
of the Class C Certificateholders to receive payments of interest and principal
will be subordinated to those of the Holders of the Class B Certificates.
Losses on the Mortgage Loans will first be charged to the
Class C Certificates. If as a consequence of such Losses the Class C Certificate
Principal Balance has been reduced to zero, any additional Losses will be
allocated first to reduce the principal balance of the Class B Certificates to
zero. Further, if as a consequence of such Losses the aggregate outstanding
principal balance of the Class B Certificates and Class C Certificates has been
reduced to zero, any additional Losses will reduce the outstanding principal
balance of the Class A-1 Certificates. See "Description of the Offered
Certificates -- Subordination of Subordinate Certificates" herein.
Certain Bankruptcy Issues
Each Borrower is a limited partnership, which limited
partnership is a special purpose entity with limited liability and limited
capitalization. Under certain circumstances, the bankruptcy of a general partner
of a limited partnership may result in the dissolution of such limited
partnership. The dissolution of a limited partnership, the winding-up of its
affairs and the distribution of its assets could result in an acceleration of
its payment obligations under the related Mortgage Loan, reducing the yield to
the Certificateholders in the same manner as a principal prepayment.
In addition, in the event of the bankruptcy of the general
partner of a Borrower, a trustee in bankruptcy for such general partner, such
general partner as a debtor-in-possession, or a creditor of such general partner
could attempt to seek an order from a court consolidating the assets and
liabilities of the related Borrower with those of the general partner. [Counsel
for each Borrower has delivered an opinion in respect of each Borrower
concluding that a court applying state partnership law should not issue an
order, in some cases on the basis of a reasoned analysis and subject to certain
facts, assumptions and qualifications specified therein. However,
notwithstanding such opinion, if such consolidation were to be permitted, the
respective Mortgage, for example, would likely become property of the estate of
such bankrupt general partner. In such a case, not only would the Mortgaged
Property be available to satisfy the claims of creditors of such general
partner, but an automatic stay would apply to any attempt by the Servicer on
behalf of the Trustee to exercise remedies with respect to such Mortgage.
However, such an occurrence should not affect a properly perfected security
interest in the Mortgaged Property or the Trustee's status as the holder of such
security interest.]
[Certain limited liability general partners are affiliated
with two or more Borrowers. The two largest groups of affiliated general partner
of the Borrowers each represent between ___% and ___% of the aggregate principal
balance of the Mortgage Loans. In the event that one of such general partners or
any of its affiliates becomes the subject of a bankruptcy
S-16
<PAGE>
proceeding, the trustee in bankruptcy for such entity, such entity as
debtor-in-possession or a creditor of such entity, could attempt to seek an
order from a court consolidating the assets and liabilities of one or more of
those affiliated parties that are not part of the bankruptcy proceeding with the
assets and liabilities of such entity. If successful, the number of Borrowers
potentially affected by the concerns addressed in the preceding two paragraphs
could be increased significantly. See also "Certain Legal Aspects of The
Mortgage Loans" in the Prospectus.
THE MORTGAGE TRUST
General
The mortgage assets in the Mortgage Trust will consist
primarily of Mortgage Loans with a Cut-Off Date aggregate principal balance
outstanding, after the deduction of payments of principal due on such date, of
approximately $_______. Each Mortgage Loan is secured by a mortgage creating a
[first/junior] lien on the related Mortgaged Property. The Mortgaged Properties
consist of a total of ___ multifamily (including ___ multifamily/retail
mixed-use) apartment complexes. The Mortgage Loans had an original term to
maturity of ____, ____ or ____ years, but all the Mortgage Loans require monthly
payments of principal based on a ___ or ___ year amortization schedule. Thus,
Balloon Payments will be due on each Mortgage Loan at its stated maturity date.
The Maturity Dates of the Mortgage Loans will fall between ________ and
_________ inclusive. None of the Mortgage Loans are insured or guaranteed by any
governmental entity or private insurer. All the Mortgage Loans are non-recourse
loans. The Mortgage Loans to be included in the Mortgage Trust will be acquired
by the Trust from Depositor, which will have acquired the Mortgage Loans from
the Company. [All the Mortgage Loans were underwritten in accordance with the
Company's Underwriting standards, as described under "Underwriting Standards"
below.]
[The Mortgage Loans permit voluntary prepayment prior to
maturity only upon the payment by the Mortgagor of a prepayment penalty based on
a [yield maintenance formula/predetermined schedule reducing over time]. See
"Certain Yield, Prepayment and Maturity Considerations" herein.]
The Mortgaged Properties
The Mortgaged Properties consist of __ multifamily (including
____ multifamily/retail mixed-use) apartment complexes comprising a total of
approximately ___ rental units. The mortgage amount, name of Mortgagor, property
type and property address for each Mortgaged Property are set forth in the
schedule (the "Mortgage Loan Schedule") attached hereto as Exhibit A.
The Mortgage Loan Schedule also sets forth the appraised
values for each of the Mortgaged Properties and the resultant loan-to-value
ratios based on the principal balance of the Mortgage Loans attributable to each
such Mortgaged Property as of the Cut-Off Date.
The original loan-to-value ratio of a Mortgage Loan is the
ratio of the original principal balance of such Mortgage Loan (assuming
disbursement of all funds required or conditionally required to be disbursed
thereunder) to the appraised value of the related
S-17
<PAGE>
Mortgaged Property. The Mortgage Loans had a weighted average original
loan-to-value ratio of approximately _____%, with a range from _____% of _____%.
Delinquencies
Owned and Managed Servicing Portfolio. The following tables
set forth information relating to the delinquency, loan loss and foreclosure
experience of the Servicer for its servicing portfolio of fixed rate multifamily
mortgage loans for , 199 , , 199 and for each of the three prior years.
Delinquency and Foreclosure Experience of the Servicer's Owned
and Managed Servicing Portfolio of Multifamily Mortgage Loans.
<TABLE>
<CAPTION>
As of [ ] Year End [ ],
199 199 199 199 198
Number Dollar Number Dollar Number Dollar Number Dollar Number Dollar
of Amount of Amount of Amount of Amount of Amount
Loans (000) Loans (000) Loans (000) Loans (000) Loans (000)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
Portfolio...........
Delinquent Loans(1).
31-60 (2).........
61-90.............
91 days or more...
Total......
Total Delinquency
Percentage........
REO Properties (3)..
- ----------------------
(1) The period of delinquency is based on the number of days payments are
contractually past due and includes all loans in foreclosure.
(2) Generally all Mortgage Loans 31 to 60 days or more delinquent are in
foreclosure.
(3) REO Properties (i.e., "real estate owned" properties--properties
relating to mortgages foreclosed or for which deeds in lieu of
foreclosure have been accepted and held by the Servicer pending
disposition).
S-18
<PAGE>
Loan Loss Experience of the Servicer's Owned and Managed
Servicing Portfolio of Multifamily Mortgage Loans
<TABLE>
<CAPTION>
[ ] Months Year
Ending End
[ ]
199 199 199 199 198
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Average Portfolio Balance (1)
Net Losses (2)(3) . . . . . . . . . . .
.
As a percentage of Average
Portfolio Balance . . . . . . . . . .
- -------------------------------
</TABLE>
(1) Average Portfolio Balance equals the average of the portfolio balance
of the current period and the portfolio balance of the prior period.
(2) "Net Losses" means actual net profits realized with respect to the
disposition of REO property less net losses incurred with respect to
the liquidation or charge-off of mortgage loans. Net Losses are
presented only if a net loss has occurred or, as $0 if net profit has
occurred.
(3) Annualized for , 199 information.
Mortgage Loan Characteristics
The Mortgage Loans had the following characteristics:
The weighted average Mortgage Rate of the Mortgage Loans was
approximately per annum at origination. _____ of the Mortgage Loans have
Mortgage Rates of ___ per annum (the lowest such rate). The highest Mortgage
Rate of the other Mortgage Loans is ____ per annum.
The weighted average remaining term to maturity of the
Mortgage Loans was approximately four years and two months as of the Cut-Off
Date. All of the Mortgage Loans were originated on or after _______ and before
_________. All of the Mortgage Loans had original terms to maturity of five,
seven or ten years. The Mortgage Loans had principal balances ranging from
$______ to $________ at origination and from $_____ to $______ as of the Cut-Off
Date. The average principal balance of the Mortgage Loans was $______ at
origination and approximately $ ______ as of the Cut-Off Date.
The original amortization of all the Mortgage Loans was either
20 or either 30 years, with a weighted average remaining amortization term of
____.
The debt service coverage ratios of the Mortgage Loans at
origination ranged from ___% to ___% (after the enhancements described in the
next sentence), with a weighted
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<PAGE>
average of ___. Mortgage Loans with debt service coverage ratios ranging from
___ to ___ (prior to any enhancement) have posted letters of credit or cash
reserve deposits in amounts sufficient to raise such ratios to a range of ___ to
___.
The Mortgaged Properties contain between ___ and ___ units,
the average being ___. The Mortgage Loan balance per unit at origination was ___
on average, with a range from $ ____ to _______.
The Mortgage Loan Schedule sets forth a description of certain
other characteristics of the Mortgage Loans as of the dates of origination of
the Mortgage Loans or as of the Cut-Off Date, as indicated.
DISTRIBUTION OF LTV'S
<TABLE>
<CAPTION>
Aggregate Unpaid Number of Unpaid % of Aggregate
Range of LTV's Mortgage Loans Principal Balance Principal Balance
- -------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Total
</TABLE>
The LTV's shown above were calculated based upon the appraised
values of the Mortgaged Properties at the time of origination (the "Appraised
Values"). No assurance can be given that such appraised values of the Mortgaged
Properties have remained or will remain at their levels on the dates of
origination of the related Mortgage Loans. If property values decline such that
the outstanding balances of the Mortgage Loans, [together with the outstanding
balances of any Senior Mortgage Loans,] become equal to or greater than the
value of the Mortgaged Properties, the actual rates of delinquencies,
foreclosures and losses could be higher than those heretofore experienced by the
Servicer, as set forth above under "The Portfolio of Mortgage Loans," and by the
mortgage lending industry in general.
S-20
<PAGE>
DISTRIBUTION OF MORTGAGE RATES
<TABLE>
<CAPTION>
Range of Aggregate Number of Aggregate Unpaid % of Aggregate
Mortgage rates Mortgage Loans Principal Balance Principal Balance
- -------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Total
</TABLE>
DISTRIBUTION OF REMAINING TERMS TO MATURITY
<TABLE>
<CAPTION>
Number of Aggregate Unpaid % of Aggregate Unpaid
Range of Months Mortgage Loans Principal Balance Principal Balance
- --------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Total
</TABLE>
DISTRIBUTION OF PRINCIPAL BALANCES
<TABLE>
<CAPTION>
Range of Number of Aggregate Unpaid % of Aggregate
Principal Balances Mortgage Loans Principal Balance Principal Balance
- ------------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
Total
</TABLE>
S-21
<PAGE>
DEBT SERVICE COVERAGE RATIOS
<TABLE>
<CAPTION>
Range of Debt Service Number of Aggregate Unpaid % of Aggregate
Coverage Ratios Mortgage Loans Principal Balance Principal Balance
- --------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Total
</TABLE>
GEOGRAPHIC DISTRIBUTION
<TABLE>
<CAPTION>
Number of Aggregate Unpaid % of Aggregate
State Mortgage Loans Principal Balance Principal Balance
- ----- -------------- ----------------- -----------------
<S> <C> <C> <C>
Total
</TABLE>
[If the Mortgage Assets securing the Certificates of a Series
include a multifamily Mortgage Loan or Mortgage-Backed Security or a group of
Mortgage Loans or Mortgage-Backed Securities of a single obligor or affiliated
obligors representing: (a) 20% or more of the principal amount of such
Certificates, the financial statements of such obligor(s) will be included in
accordance with Rule 3-14(a) of Regulation S-X; and (b) 10% or more but less
than 20% of the principal amount of such Certificates, information, including
financial information, sufficient for investors to assess the credit quality of
the obligor(s) will be included.
If the Mortgage Assets securing the Certificates of a Series
include a concentration of properties within regions, counties, or other
subdivisions of a state whose adverse economic conditions are greater than those
of the state as a whole, address such concentration in the prospectus
supplement.
If the Mortgage Assets securing the Certificates of a Series
include a concentration of multifamily residential properties with brief or
financially troubled operating histories, such concentration will be discussed
in the prospectus supplement.]
Underwriting Standards
[The Company originates multifamily mortgage loans through a
network of approved correspondents; each correspondent is responsible for
applying the Company's standard loan underwriting guidelines and forwarding loan
applications to
S-22
<PAGE>
___________________ only when guideline requirements concerning
the borrower and property are met. ___________________ verifies all data
gathered by the correspondent to ensure that guidelines are being applied in a
consistent manner.
The Company's underwriting guidelines (which were in effect at
the time of origination of the Mortgage Loans and were applied with respect to
each of them) are presented in detail in the ___________________ Approved
Correspondent Manual. In addition to listing the various documents that must be
submitted to ___________________ by the correspondent, the guidelines focus on
four major components of the underwriting process:
1. Net Operating Income/Debt Service
Coverage: ___________________ requires that each property's
net operating income exceed its debt service by a factor of
not less than _____. Net operating income is equal to gross
income (calculated using a current rent roll) less: (i) a
vacancy factor of not less than, generally, __%--or greater if
the actual vacancy is greater or if the appraisal (see below)
uses a larger factor; and (ii) operating expenses, including
___% management fee and a replacement reserve (____% of
adjusted gross income).
2. Appraisal/Loan-to-Value:
___________________ requires an appraisal performed by an
appraiser with a designation of the Society of Real Estate
Appraisers ("SREA"), Senior Real Property Appraiser ("SRPA")
or Member of Appraisal Institute ("MAI"); the appraiser must
be independent and approved by ___________________. The
appraisal must use the three traditional approaches to value
and establish a current value for the property such that the
loan-to-value ratio does not exceed ____%. The appraisal must
also contain the following: location maps for the subject and
for the comparables, photographs of the subject and
comparables, area and neighborhood analysis, market analysis,
site description and information on current zoning and tax
assessments.
3. Property Condition: The correspondent
must inspect each property to ensure that it is in acceptable
physical condition. The inspection focuses on: ongoing
maintenance programs, common area upkeep, laundry facility
condition, mechanical systems and grounds maintenance.
4. Borrower Credit: ___________________
requires that a credit investigation be completed for all
prospective borrowers; the file must include a credit report
not more than 60 days old, three years of Federal income tax
returns and current financial statements.
Other important aspects of the Company's underwriting
guidelines include: (i) a requirement for a complete Phase I environmental
report for each property, (ii) a general prohibition against subordinate
financing and (iii) a review of the property's occupancy history.] [Describe any
bulk acquisitions of Mortgage Loans not underwritten in connection with the
Company's program.]
S-23
<PAGE>
Prepayment Provisions
The principal balance of any Mortgage Loan may be prepaid in
whole or in part upon the payment by the Mortgagor of: (a) interest accrued and
unpaid on the outstanding principal balance of the related note (the "Mortgage
Note"); (b) all other sums due under the Mortgage Note and the Mortgage Loan;
and (c) a prepayment consideration [describe yield maintenance or prepayment
charges].
In addition, if following the occurrence of any Event of
Default (as hereinafter defined) the Mortgagor shall tender payment of an amount
sufficient to satisfy the remaining sums due on the Mortgage Loan in whole or in
part prior to a foreclosure sale of the Mortgaged Property, such tender shall be
deemed to be a voluntary prepayment of the principal balance of the Mortgage
Notes and the Mortgagor shall, in addition to all sums due on the Mortgage Loan,
be required to pay the prepayment consideration.
Default Provisions
Each of the Mortgage Loans provides for certain events of
default by the Mortgagor ("Events of Default"). Upon the occurrence of any Event
of Default the remaining sums under the Mortgage Loan shall immediately become
due and payable and the Mortgagor will pay, from the date of such Event of
Default, interest on the unpaid principal balance of the Mortgage Note at the
rate of interest (the "Default Rate") equal to the greater of (i) __ above the
applicable interest rate on the Mortgage Note, or (ii) __% above the prime rate
charged on corporate loans or large U.S. money center banks and (b) the
mortgagee shall have the right to exercise any and all rights and remedies
available at law and in equity. If the Default Rate as calculated above is
greater than the maximum rate permitted by applicable law, then the Default Rate
shall then be deemed to equal to the maximum rate permitted by such applicable
law.
Due-on-Sale and Due-on-Encumbrance Provisions
All the Mortgage Loans contain clauses requiring the consent
of the mortgagee to any sale or other transfer of the related Mortgaged Property
with the criteria for granting consent set forth in the related Mortgage Loan
documents and due-on-sale clauses entitling the mortgagee to accelerate payment
of a Mortgage upon any sale or other transfer of the related Mortgaged Property
without the consent of the Mortgagor. Furthermore, the Mortgage Loans contain
certain restrictions regarding further encumbrances on the Mortgaged Properties,
requiring the consent of the mortgagee to the creation of any other lien or
encumbrance on such Mortgaged Property and entitling the mortgagee to accelerate
payment of a Mortgage upon the imposition of any such additional lien or
encumbrance on such Mortgaged Property.
The Servicer, on behalf of the Owners of the Certificates,
will be required to exercise any right the Trustee may have as mortgagee of
record of any such Mortgage Loan to withhold its consent to any transfer or
further encumbrance in accordance with the general servicing standards described
in the Agreement.
S-24
<PAGE>
Hazard, Liability and Other Insurance
Each Mortgage requires the Mortgagor to keep the Mortgaged
Property insured against loss or damage by fire, flood and such other hazards,
risks and matters, including, without limitation, business interruption and/or
rental loss, public habituating and boiler damage and liability, as the
mortgagee may from time to time require in amounts required by the mortgagee,
and shall pay the premiums for such insurance as they become due and payable.
All policies of insurance (the "Policies") shall be issued by an insurer
acceptable to the mortgagee and be rated [A:V] by Best's Key Rating Guide and
shall contain the standard New York mortgagee non-contribution clause naming the
mortgagee as the person to which all payments made by such insurance company
shall be paid. The Mortgagor will assign and deliver the Policies to the
mortgagee. Not later than thirty (30) days prior to the expiration date of each
of the Policies, the Mortgagor will deliver evidence satisfactory to the
mortgagee of the renewal of each of the Policies.
The Servicer will be obligated to cause to be maintained for
each Mortgage Loan fire insurance with extended coverage (and, if applicable,
federal flood insurance) in an amount at least equal to the lesser of the
current principal balance of such Mortgage Loan and the replacement cost of the
improvements which are part of such property or, in lieu thereof, to maintain a
blanket policy insuring against hazard losses on the Mortgaged Properties, with
a deductible clause not in excess of a customary amount.
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the mortgage
pool and the Mortgaged Properties is based upon the mortgage pool as constituted
at the close of business on the Cut-Off Date, as adjusted for the scheduled
principal payments due on or before such date. Prior to the issuance of the
Offered Certificates, Mortgage Loans may be removed from the mortgage pool as a
result of incomplete documentation or non-compliance with representations and
warranties set forth in the Agreement, if the Depositor deems such removal
necessary or appropriate. A limited number of other mortgage loans may be
included in the mortgage pool prior to the issuance of the Offered Certificates.
A current report on Form 8-K will be available to purchasers
of the Offered Certificates and will be filed and incorporated by reference to
the Registration Statement together with the Agreement with the Securities and
Exchange Commission within fifteen days after the initial issuance of the
Offered Certificates. In the event Mortgage Loans are removed from or added to
the mortgage pool as set forth in the preceding paragraph, such removal or
addition will be noted in the current report on Form 8-K.
THE DEPOSITOR
The Depositor was incorporated in the State of Delaware on
January 31, 1991 and is a wholly-owned subsidiary of ContiFinancial Corporation.
The Depositor maintains its principal executive offices at 277 Park Avenue, New
York, New York 10172. Neither the
S-25
<PAGE>
Depositor, the Company nor any of their affiliates will insure or guarantee
distributions on the Certificates.
THE COMPANY
The Company, a Delaware limited liability company, is an
affiliate of the Depositor. The Company maintains its principal executive office
at 277 Park Avenue, New York, New York 10172.
THE SERVICER
[To be provided]
MASTER SERVICER
[To be provided]
SPECIAL SERVICER
[To be provided]
DESCRIPTION OF THE OFFERED CERTIFICATES
General
The Class A-1 will be available in minimum denominations of
$___________ and integral multiples of $1,000 in excess thereof, except that one
Certificate of each class may be issued in any amount. The Class S-A
Certificates will not have a stated principal balance. The Class S-A
Certificates will be issuable in minimum Percentage Interests of ___% and
integral multiples of ___% in excess thereof. The Senior Certificates will be
issued, maintained and transferred on the book-entry records of DTC and its
Participants as described below. The Class B Certificates will be issuable in
fully registered, certificated form in denominations of $__________ and integral
multiples in excess thereof and one Class B Certificate evidencing an additional
amount equal to the remainder of the Original Certificate Principal Balance of
such Class.
[Until Definitive Senior Certificates are issued, interest in
such Classes will be transferred on the book-entry records of DTC and its
Participants. The Class B Certificates may be transferred or exchanged, subject
to certain restrictions on the transfer of such Certificates to Plans (see
"ERISA Considerations" herein), at the offices of __________________ located at
_________________________________, without the payment of any service charges,
other than any tax or other governmental charge payable in connection therewith.
________________ will initially serve as registrar (in such capacity, the
"Certificate Registrar") for purposes of recording
S-26
<PAGE>
and otherwise providing for the registration of the Offered Certificates and of
transfers and exchanges of the Class B and, if issued, the Definitive Senior
Certificates.
Distributions on the Certificates
Distributions on the Certificates will be made on the ___ day
of each calendar month, or if such day is not a business day, the next
succeeding business day (each, a "Payment Date") commencing in __________ __,
199__, to holders of record of the Certificates (the "Owners") as of the last
day of the calendar month immediately preceding the calendar month in which such
Payment Date occurs, whether or not such day is a business day (each, a "Record
Date") in an amount equal to the product of such Owner's Percentage Interest and
the amount distributed in respect of such Certificateholder's Class of such
Certificates on such Payment Date. The "Percentage Interest" represented by any
Offered Certificate will be equal to the percentage obtained by dividing the
Original Certificate Principal Balance of such Offered Certificate by the
Original Certificate Principal Balance of all Certificates of the same Class.
Book Entry Registration of the Senior Certificates
Each Class of the Senior Certificates will be represented by a
single certificate registered in the name of the nominee of The Depository Trust
Company (the "Clearing Agency"), [except that one Certificate of each Class of
the Class A Certificates may be issued in an amount of less than $1,000 and held
in fully registered definitive form directly by the applicable investor]. The
Clearing Agency will maintain book entry records of ownership, transfers and
pledges of such Certificates only in the names of its participants and indirect
participants (the "Clearing Agency Participants"), which include securities
brokers and dealers, banks and trust companies and clearing corporations and may
include certain other organizations. Prior to Book Entry Termination (as defined
below), Beneficial Owners who are not Clearing Agency Participants may transfer
and pledge their interests in the Offered Certificates, and exercise any other
rights and remedies of Certificateholders, only through Clearing Agency
Participants or other entities that maintain relationships with Clearing Agency
Participants. The Clearing Agency may charge its customary fee to Clearing
Agency Participants in connection with any such transfers and pledges. In
addition, prior to Book Entry Termination, distributions on the Offered
Certificates will be made to Beneficial Owners only through the Clearing Agency
and its Clearing Agency Participants. Consequently, Beneficial Owners may
experience some delay in the receipt of their payments. See "Risk Factors --
Book Entry Registration" and "Description of the Certificates - Book Entry
Registration" in the Prospectus.
The Senior Certificates will be issued in definitive,
registered form to Beneficial Owners or their nominees, and thereupon such
Beneficial Owners will become Certificateholders if, and only if, one of the
following events shall occur (any such event being referred to as "Book Entry
Termination"): (i) the Clearing Agency or the Depositor advises the Trustee in
writing that the Clearing Agency is no longer willing or able properly to
discharge its responsibilities as a clearing corporation with respect to the
Senior Certificates and the Depositor and the Trustee are unable to engage a
qualified successor to serve as the Clearing Agency, or (ii) the Clearing
Agency, at the direction of Beneficial Owners representing a majority of the
outstanding principal amount of the Senior Certificates, advise the Trustee in
writing that the continuation of
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<PAGE>
a book entry system is no longer in the best interests of Beneficial Owners, or
(iii) the Depositor, at its option, advises the Trustee that it elects to
terminate the book entry system. Upon Book Entry Termination, Beneficial Owners
will become registered Certificateholders and will deal directly with the
Trustee with respect to transfers, notices and payments.
The Clearing Agency has advised the Depositor and the Trustee
that, prior to Book Entry Termination, the Clearing Agency will take any action
permitted to be taken by a Certificateholder under the Agreement only at the
direction of one or more Clearing Agency Participants to whom the Senior
Certificates are credited in an account maintained by the Clearing Agency. The
Clearing Agency has advised that it will take such action with respect to any
principal amount of the Senior Certificates only at the direction of and on
behalf of Clearing Agency Participants with respect to those principal amounts
of such Senior Certificates.
Issuance of the Senior Certificates in book entry form rather
than as physical Certificates may adversely affect the liquidity of such Senior
Certificates in the secondary market and the ability of Senior
Certificateholders to pledge them. In addition, because distributions on the
Senior Certificates will be made by the Trustee to the Clearing Agency and the
Clearing Agency will credit such distributions to the accounts of its
Participants, which will further credit them to the accounts of indirect
participants of the Senior Certificateholders such beneficial owners of the
Senior Certificates may experience delays in the receipt of such distributions.
Amounts of Distribution
On each Distribution Date, the Trustee will apply the
aggregate of amounts distributed in respect of the Lower Tier Interests on such
Distribution Date in the following order of priority:
(i) concurrently to the Owners of the Class A-1
Certificates, Class A-1 Monthly Interest (as defined below) and to the
Owners of the Class S-A Certificates, Class S-A Monthly Interest, any
shortfall being allocated among the Class A-1 Certificates and the
Class S-A Certificates in proportion to their respective amounts of
Class A-1 Monthly Interest and Class S-A Monthly Interest;
(ii) to the Owners of the Class A-1 Certificates, the Class
A Principal Distribution Amount until the Class A-1 Principal Balance
has been reduced to zero;
(iii) to the Owners of the Class B Certificates, the Class B
Monthly Interest;
(iv) to the Owners of the Class A-1 Certificates, any
Unpaid Delinquent Maturity Amount (as defined below) until the Class
A-1 Principal Balance has been reduced to zero;
(v) to the Owners of the Class B Certificates, the Class B
Principal Distribution Amount until the Class B Principal Balance has
been reduced to zero; and
(vi) sixth, to the Owners of the Class C Certificates, the
Class C Monthly Interest;
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<PAGE>
(vii) seventh, to the Owners of the Class C Certificates,
the Class C Principal Distribution Amount until the Class C Principal
Balance has been reduced to zero; and
(viii) eighth, to the Owners of the Class R Certificates,
all remaining Available Funds, if any.
In addition, on each Distribution Date, the Trustee shall
withdraw from the Prepayment Premium Account (as defined herein) an amount equal
to the aggregate of all Prepayment Premiums deposited therein during the
previous calendar month and shall distribute such amount (i) on each
Distribution Date prior to the Class A-1 Termination Date, (A) if such
Distribution Date is prior to , to the Owners of Class A Certificates, allocated
___% to the Class A-1 Certificates and __% to the Class S-A Certificates, and
(B) if such Distribution Date is after , solely to the Owners of Class A-1
Certificates, (ii) on the Class A-1 Termination Date, to the Holders of Class
A-1 Certificates and the Class S-A Certificates (in accordance with the
allocations described in subclauses (a) and (b) (as the case may be) of clause
(i) above) and the Owners of [Class B] Certificates in proportion to the
distributions of principal made in respect of the Class A-1 and Class B
Certificates, respectively, on the Class A-1 Termination Date, to the Owners of
Class [B Certificates].
"Monthly Interest" for the Class A-1, Class B and Class C
Certificates for any given Distribution Date is equal to one month's interest
accrued at the applicable Pass-Through Rate on the Certificate Principal Balance
immediately prior to such Distribution Date. Monthly Interest for the Class S-A
Certificates for any given Distribution Date is equal to the sum of (i) one
month's interest accrued at the Class S-A Pass-Through Rate on the Notional
Principal Balance immediately prior to such Distribution Date and (ii) any
Unpaid Class S-A Interest Shortfall (as defined herein).
The "Class Principal Balance" as to any Class of certificates
other than the Class S-A Certificates and the Residual Certificates, and as to
any Distribution Date, is the sum of (i) the applicable initial Class Principal
Balance thereof and (ii) the aggregate of all Interest Shortfalls for such Class
for previous Distribution Date, less all amounts distributed as principal of
such Class on previous Distribution Dates. The Class S-A Certificates and the
Residual Certificates have no Class Principal Balance.
An "Outstanding Mortgage Loan" is, as to any Distribution
Date, a Mortgage Loan which was not the subject of prepayment in full prior to
the end of the preceding calendar month, which did not become a Liquidated
Mortgage Loan prior to the end of such preceding calendar month, which was not
repurchased by the Company as a Defective Mortgage Loan on or prior to such
Distribution Date or which was not paid in full through the receipt of a Balloon
Payment on or before the related Determination Date.
The "Unpaid Principal Balance" is, as to any Mortgage Loan as
of any Distribution Date, the Cut-Off Date Principal Balance thereof, less (i)
all unscheduled payments by or on behalf of the Mortgagor allocable to principal
which were received prior to the end of the preceding calendar month; (ii) any
Balloon Payment or portion thereof received on or before the Determination Date
next preceding such Distribution Date; (iii) any Insurance Proceeds (other than
Liquidation Proceeds) applied in reduction of the principal balance of such
Mortgage
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Loan prior to the end of such preceding calendar month; (iv) the principal
component of any Monthly Payment which was due on the related Due Date and
received on or before the related Determination Date or, if delinquent on such
Determination Date, was included in a Monthly Advance made by the Servicer in
respect of such Distribution Date; (v) the aggregate of all REO Principal
Amortization Amounts prior to the end of such preceding calendar month; and
(vi) all amounts deemed to have been distributed to Holders of Class A-1
Certificates on previous Distribution Dates with respect to such Mortgage
Loans pursuant to the definition of Unpaid Delinquent Maturity Amount.
The "Unpaid Delinquent Maturity Amount" is, with respect to
any Distribution Date, the aggregate of the Unpaid Principal Balances of all
Outstanding Mortgage Loans which had Maturity Dates on or before the preceding
Due Date and were delinquent as of the close of business on the related
Determination Date. For purposes of clause (vi) of the definition of "Unpaid
Principal Balance" any amounts distributed to Class A-1 Certificateholders on
account of an Unpaid Delinquent Maturity Amount will be allocated to particular
delinquent Outstanding Mortgage Loans in the chronological order of their
Maturity Dates, beginning with all such Outstanding Mortgage Loans with Maturity
Dates in the twenty-third preceding calendar month with any excess over the
Unpaid Principal Balances of such Outstanding Mortgage Loans being applied to
all such Outstanding Mortgage Loans with Maturity Dates in the __________
preceding calendar month and so forth.
An "Unpaid Principal Shortfall" is, as to any Distribution
Date, the amount, if any, by which the aggregate of the Principal Shortfalls for
prior Distribution Dates is in excess of the aggregate of the amounts
distributed on prior Distribution Dates pursuant to clause (iv) of the
definition of Formula Distribution Amount.
A Mortgage Loan becomes a "Liquidated Mortgage Loan" when the
Servicer determines that all amounts which it expects to recover from or on
account of such Mortgage Loan have been recovered.
Monthly Advances
In the event that a monthly payment on a Mortgage Loan has not
been received by the Servicer as of the close of business on the Determination
Date immediately preceding the related Distribution Date, the Servicer will be
obligated to advance, for deposit in the Certificate Account, the aggregate of
payments of principal (other than any Balloon Payment) and interest at the Loan
Rate (less the Servicing Fee Rate) on the Mortgage Loans that were due on the
related Due Date, less the aggregate amount of any such delinquent payments that
the Servicer has determined would constitute a nonrecoverable advance if made (a
"Monthly Advance"). If the Servicer determines that it is not obligated to make
the entire Monthly Advance because all or a lesser portion of such Monthly
Advance would not be recoverable from Insurance Proceeds, Liquidation Proceeds
or otherwise, the Servicer will deliver to the Trustee for the benefit of the
Certificateholders an officer's certificate setting forth the reasons for the
Servicer's determination. The Servicer will be entitled to be reimbursed from
the Certificate Account for all such Monthly Advances.
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The obligation to make Monthly Advances with respect to any
Mortgage Loan shall continue until the earliest to occur of (i) payment thereof
in full, (ii) liquidation of the related Mortgaged Property and (iii) the
purchase or repurchase thereof from the Mortgage Trust pursuant to any
applicable provision of the Agreement.
If the rights and obligations of the Servicer under the
Agreement are terminated upon the occurrence of an event of default that remains
uncured, the Trustee will be the successor in all respects (with certain
exceptions relating to the repurchase of Mortgage Loans under certain
circumstances) to the Servicer in its capacity as servicer under the Agreement,
including the obligation to make all required Monthly Advances.
Subordination of the Subordinated Certificates
The rights of the Owners of the Subordinate Certificates to
receive distributions with respect to the Mortgage Loans will be subordinated to
such rights of the Owners of the Senior Certificates, in the case of the Class B
Certificates, and to the Owners of the Offered Certificates in the case of the
Class C Certificates. The subordination provided to the Senior Certificates by
the Class B Certificates and to the Class B Certificates by the Class C
Certificates is intended to enhance the likelihood of timely receipt by the
Owners of the respective Class of Certificates of the full amount of their
scheduled monthly payments and to afford such Owners protection against losses
resulting from Liquidated Mortgage Loans.
The protection afforded to the Owners of Senior Certificates
by means of the subordination of the Subordinate Certificates will be
accomplished by the preferential rights of such Owners to receive, prior to any
distribution being made on a Distribution Date in respect of the Subordinate
Certificates, the Class A-1 Monthly Interest and the Class S-A Monthly Interest,
respectively, and to the Class A-1 Certificateholders, the Class A Principal
Distribution Amount. The Class B Certificates will, however, receive the Class B
Monthly Interest before the Class A-1 Certificateholders receive any Unpaid
Delinquent Maturity Amount. The Class B Certificates will be entitled to the
Class B Principal Distribution Amount only after such time as the Class A-1
Principal Balance has been reduced to zero through payment to the Class A-1
Certificateholders of the Formula Principal Distribution Amount and then any
Unpaid Delinquent Maturity Amount.
Loss realized on the Mortgage Loans will not be allocated to
the Owners of the Class A-1 Certificates until the principal balances of the
Class C Certificates and then the Class B Certificates have both been reduced to
zero. Any losses allocated to the Class A-1 Certificates will be allocated pro
rata to all Owners of the Class A-1 Certificates. Any losses allocated to the
Class B Certificates will be allocated pro rata to all Owners of the Class B
Certificates.
Reports to Holders of the Certificates
The Trustee is required to prepare and mail to the Servicer,
to each Owner of a Class A-1, Class S-A and Class B Certificate a statement (a
"Monthly Report") setting forth:
(i) the Available Funds for such Distribution
Date, including, stated separately, any
Monthly Advance component thereof;
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(ii) the aggregate of all Principal Prepayments
received during the previous calendar month
together with, stated separately, the
aggregate of all REO Principal Amortization
Amounts for such preceding calendar month;
(iii) all previously undistributed Balloon
Payments or portions thereof received on or
before the preceding Determination Date;
(iv) the aggregate Unpaid Principal Balances of
all Mortgage Loans and Foreclosed Mortgage
Loans which became Liquidated Mortgage Loans
during the previous calendar month;
(v) the aggregate Unpaid Principal Balances of
all Mortgage Loans which are required to be
purchased by the Company prior to the
related Distribution Date pursuant to the
Agreement;
(vi) the amount of all Prepayment Premiums
received during the previous calendar month;
(vii) the Formula Principal Distribution Amount
for such Distribution Date;
(viii) the Class A-1 Monthly Interest for such
Distribution Date;
(ix) the Class S-A Monthly Interest for such
Distribution Date;
(x) the Class B Monthly Interest for such
Distribution Date;
(xi) the Class C Monthly Interest for such
Distribution Date;
(xii) the Unpaid Delinquent Maturity Amount for
such Distribution Date;
(xiii) the Class A-1 Distribution Amount (exclusive
of any distribution from the Prepayment
Premium Account) for such Distribution Date;
(xiv) the Class B Distribution Amount for such
Distribution Date;
(xv) the Class S-A Distribution Amount for such
Distribution Date;
(xvi) the Class C Distribution Amount for such
Distribution Date;
(xvii) any Interest Shortfall for the Class A-1 or
Class B Certificates, dated separately;
(xviii) any Unpaid Class S-A Interest Shortfall
immediately following such Distribution Date
together with the amount of any Class S-A
Interest Shortfall for such Distribution
Date;
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(xix) the Class A-1 Principal Balance immediately
following such Distribution Date;
(xx) the Class B Principal Balance immediately
following such Distribution Date;
(xxi) the Class C Principal Balance immediately
following such Distribution Date;
(xxii) any Unpaid Principal Shortfall for such
Distribution Date and any remaining Unpaid
Principal Shortfall after giving effect to
such distribution;
(xxiii) the amount and allocation of any
distribution from the Prepayment Premium
Account on such Distribution Date; and
(xxiv) the Pool Principal Balance for the following
Distribution Date;
(xxv) the number, percentage and aggregate unpaid
principal balances of Mortgage Loans
delinquent (a) 30 to 59 days and (b) 60 days
or more (including Foreclosed Mortgage
Loans), respectively, as of the end of the
preceding calendar month (separately stating
the aggregate unpaid principal balances of
Foreclosed Mortgage Loans);
(xxvi) with respect to any Mortgage Loan included
in (xxv) above, the number of each such
Mortgage Loan as set forth in the Agreement
and the Unpaid Principal Balance of each
such Mortgage Loan;
(xxvii) the number and aggregate principal balances
of any REO Properties;
(xxviii) with respect to each Mortgage Loan that has
become an REO Property included in (xxvii)
above, the number of such Mortgage Loan as
set forth in the Agreement and the Unpaid
Principal Balance of each such REO Property;
(xxix) with respect to each Mortgage Loan that
became a Liquidated Mortgage Loan during the
prior calendar month, the number of such
Mortgage Loan, as set forth in Exhibit [G]
to the Agreement, the Net Liquidation
Proceeds with respect to each such Mortgage
Loan and the Unpaid Principal Balance of
each such Mortgage Loan; and
(xxx) such other information as is required by the
Code and regulations thereunder to be made
available to Owners of the Class A-1, Class
S-A, Class B Certificates and Class C
Certificates.
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The Trustee shall be under no duty to recalculate or verify
the information (set forth above in subclauses (i) through (vi) and (xxiv)
through (xxiii)) provided to it by the Servicer in each Servicing Certificate
and shall be protected in relying upon such information in connection with the
calculation of all amounts and preparation of all reports and statements
required to be prepared by it pursuant to this Agreement. The Servicer shall
indemnify the Trustee for any loss, expense or cost incurred by it as a result
of any such reliance which is caused by the Servicer's gross negligence, willful
misconduct or bad faith.
In the case of information furnished pursuant to subclauses
(viii), (x), (xiii), (xiv), (xii), (xxv) and (xxvi) above, the amounts shall be
expressed as a dollar amount per Class A-1 Certificate and Class B Certificate,
as applicable, with a $1,000 denomination. In the case of the information
furnished pursuant to subclauses (ix), (xv) and (xix) above, the amount shall be
expressed as a dollar amount per Class S-A Certificate with a 100 Percentage
Interest. Any such statement furnished to an Owner of a Class A-1 Certificate,
Class S-A Certificate or Class B Certificate may, if requested by the Trustee,
omit information pertinent only to Certificates of Classes not held by such
Owner.
Within 90 days after the end of each calendar year, the
Trustee shall prepare and mail to each Person who at any time during the
calendar year was the Owner of a Class A-1 Certificate, Class S-A Certificate,
Class B Certificate or Class C Certificate, a statement containing the
information set forth in the subclauses mentioned in the preceding paragraph, as
applicable, aggregated for such calendar year or, in the case of each Person who
was an Owner of a Certificate for a portion of such calendar year, setting forth
such information for each month thereof for the portion of the year during which
such Person was an Owner of a Certificate of such Class. Such obligation of the
Trustee shall be deemed to have been satisfied to the extend that substantially
comparable information shall be provided by the Trustee pursuant to any
requirements of the Code.
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
The yield to maturity on the Offered Certificates will be
affected by the rate of principal payments on the Mortgage Loans including, for
this purpose, prepayments, which may include amounts received by virtue of
repurchase, condemnation, insurance or foreclosure. The rate of principal
payments on the Offered Certificates will correspond to the rate of principal
payments (including prepayments) on the Mortgage Loans. Principal prepayments
may be influenced by a variety of economic, geographic, demographic, social,
tax, legal and other factors. In general, if prevailing interest rates fall
significantly below the interest rates on the Mortgage Loans, the Mortgage Loans
are likely to be subject to higher prepayments than if prevailing rates remain
at or above the interest rates on such Mortgage Loans. Conversely, if prevailing
interest rates rise above the interest rates on such Mortgage Loans, the rate of
prepayment would be expected to decrease. Other factors affecting prepayment of
the Mortgage Loans include the availability of mortgage financing, changes in
tax laws (including depreciation benefits), changes in Mortgagors' net equity in
the Mortgaged Properties, servicing decisions and prevailing general economic
conditions. The Mortgage Loans may be prepaid at any time subject to the payment
of a prepayment penalty. See "The Mortgage Trust--Prepayment Provisions" herein.
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The effective yield to holders of the Offered Certificates
will differ from the yield otherwise produced by the applicable Pass-Through
Rate and purchase prices of such Offered Certificates because principal and
interest distributions will not be payable to such holders until at least the
___th day of the month following the month of accrual (without any additional
distribution of interest or earnings thereon in respect of such delay).
If the purchaser of an Offered Certificate offered at a
discount from its initial principal amount calculates its anticipated yield to
maturity based on an assumed rate of payment of principal that is faster than
that actually experienced on the Mortgage Loans, the actual yield to maturity
will be lower than that so calculated. Conversely, if the purchaser of an
Offered Certificate offered at a premium calculates its anticipated yield to
maturity based on an assumed rate of payment of principal that is slower than
that actually experienced on the Mortgage Loans, the actual yield to maturity
will be lower than that so calculated.
The timing of changes in the rate of prepayments on the
Mortgage Loans may affect an investor's actual yield to maturity, even if the
average rate of principal payments is consistent with an investor's expectation.
In general, the earlier a prepayment of principal of the Mortgage Loans, the
greater the effect on an investor's yield to maturity. The effect on an
investor's yield of principal payments occurring at a rate higher (or lower)
than the rate anticipated by the investor during the period immediately
following the issuance of the Offered Certificates may not be offset by a
subsequent like decrease (or increase) in the rate of principal payments. An
investor must make an independent decision as to the appropriate prepayment
scenario to be used in deciding whether to purchase the Offered Certificates.
Voluntary prepayments of a Mortgage Loan can be made only upon
the payment by the Mortgagor of a prepayment penalty based on a [yield
maintenance formula/predetermined schedule]. See "The Mortgage Trust--Prepayment
Provision" for a description of such formula. The payment of such prepayment
penalties by Mortgagors should have the effect of reducing the risk of rapid
rates of voluntary prepayments. If, however, such penalties were to be
uncollectible for any reason, investors would have to bear the risk that
prepayments on the Mortgage Loans, and therefore of principal payments on the
Offered Certificates, could coincide with periods of low prevailing interest
rates. In that event, the effective interest rates on securities in which an
investor might choose to reinvest amounts received as principal payments on such
investor's Certificate might be lower than the applicable Pass-Through Rate.
Conversely, slow rates of prepayments on the Mortgage Loans,
and therefore of principal payments on the Offered Certificates, may coincide
with periods of high prevailing interest rates. During such periods, the amount
of principal payments available to an investor for reinvestment at such high
prevailing interest rates may be relatively low.
Many of the Mortgage Loans contain "due-on-sale" provisions,
and the Agreement obligates the Servicer, with certain exceptions, to enforce
such "due-on-sale" provisions.
Because amounts distributable to Owners of the Class S-A
Certificates consist of interest payable on the Mortgage Loans, the yield to
maturity of the Class S-A Certificates will be sensitive to the repurchase and
default experience of the Mortgage Loans, and prospective
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<PAGE>
investors should fully consider the associated risks, including the risk that
such investors may not fully recover their initial investment. In particular,
investors in the Class S-A Certificates should be aware that the Mortgage
Loans may be required to be repurchased in the event of certain breaches of
representations and warranties relating to certain events. [Other calamity
calls] [With respect to voluntary prepayments, however, Class S-A
Certificateholders will be allocated a percentage of the prepayment penalties
discussed above. See also "Description of the Certificates--Amounts of
Distribution."]
Weighted Average Life of the Class A-1 and Class B Certificates
The following information is given solely to illustrate the
effect of prepayments of the Mortgage Loans on the weighted average lives of the
Class A-1 and Class B Certificates under the stated assumptions and is not a
prediction of the prepayment rate that might actually be experienced by the
Mortgage Loans.
"Weighted average life" refers to the average amount of time
that will elapse from the date of issuance of a security until each dollar of
principal of such security will be repaid to the investor. The weighted average
life of the Class A-1 and Class B Certificates will be influenced by the rate at
which principal payments on the Mortgage Loans are paid, which may be in the
form of scheduled amortization or prepayments (for this purpose, the term
"prepayment" includes prepayments, condemnation, insurance and liquidations due
to default). Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. [In the model used in this Prospectus Supplement,
the "constant prepayment rate" ("CPR") represents an assumed annualized rate of
prepayment relative to the then outstanding principal balance of a pool of new
mortgage loans.]
Based on the foregoing assumptions, the tables below indicate
the weighted average life of the Class A-1 and Class B Certificates, assuming
that the Mortgage Loans prepay according to the following CPR prepayment
scenarios:
[CPR PREPAYMENT SCENARIOS
Scenario I Scenario II Scenario III Scenario IV Scenario V
---------- ----------- ------------ ----------- ----------
Neither the CPR nor any other prepayment model or assumption
purports to be an historical description of prepayment experience or a
prediction of the anticipated rate of prepayment of any pool of mortgage loans,
including the Mortgage Loans included in the Trust. Variations in the actual
prepayment experience and the balance of the Mortgage Loans that prepay may
increase or decrease each weighted average life shown in the following tables.
Such variations may occur even if the average prepayment experience of all such
Mortgage Loans equals any of the specified percentages of the CPR.]
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WEIGHTED AVERAGE LIVES
Class A-1
CPR Weighted Earliest Retirement
Prepayment Average Life (years) Date (1)
---------- -------------------- --------
Class B
CPR Weighted Earliest Retirement
Prepayment Average Life (years) Date (1)
---------- -------------------- -------------------
- -------------------
(1) Assuming early termination or the Mortgage Loan Groups when the
aggregate Loan Balances decline to a level equal to 10% of the
aggregate principal balance of the Mortgage Loans as of the Cut-Off
Date.
There is no assurance that prepayments will occur, or, if they
do occur, that they will occur at any constant percentage of CPR or in
accordance with any of the aforementioned scenarios.
Payment Delay Feature of Class A-1 and Class B Certificates
The effective yield to the Owners of the Class A-1 and Class B
Certificates will be lower than the yield otherwise produced by the respective
Pass-Through Rate and the purchase price of such Certificates because principal
and interest distributions will not be payable to such Certificateholders until
at least the twenty-fifth day of the month following the month of accrual
(without any additional distributions of interest or earnings thereon in respect
of such delay).
Yield Sensitivity of the Class S-A Certificates
Because amounts distributable to Class S-A Certificateholders
consist entirely of interest, the yield to maturity of the Class S-A
Certificates will be extremely sensitive to the repurchase, prepayment and
default experience of the Mortgage Loans, and prospective investors
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<PAGE>
should fully consider the associated risks, including the risk that such
investors may not fully recover their initial investment. In particular,
investors in the Class S-A Certificates should be aware that Depositor may
cause a termination of the Trust when the aggregate outstanding principal
balance of the Mortgage Loans has declined to ___% or less of the aggregate
principal balance of the Mortgage Loans as of the Cut-Off Date.
The following table indicates certain relationships between
the assumed purchase price and the yield to maturity on the Class S-A
Certificates, stated on a corporate bond equivalent basis. Such table also
indicates such relationships on the assumption that (a) the Trust is not
terminated by the Depositor pursuant to its __% a "clean-up call", and (b) the
Trust is so terminated.
Sensitivity of the Class S-A Certificates to Prepayments
Pre-Tax Yield to Maturity
Prepayment 0% 22 47 50 55
Scenario CPR CPR CPR CPR CPR
- -------- --- --- --- --- ---
I
II
III
IV
V
On the basis of approximately __% CPR, and a purchase price of
____%, no termination of the Trust by the Depositor pursuant to its __%
"clean-up call" and the other assumptions described above, the pre-tax yield to
maturity of the Class S-A Certificates would be approximately __%. If the actual
prepayment rate were to exceed approximately __% CPR based on such assumptions,
an investor in the Class S-A Certificates as to which such percentage of CPR was
exceeded would not fully recover the initial purchase price thereof.
On the basis of approximately ___% CPR, a purchase price of
_______%, termination of the Trust by the Depositor pursuant to its ___%
"clean-up call" and the other assumptions described above, the pre-tax yield to
maturity of the Class S-A Certificates would be approximately ___%. If the
actual prepayment rate were to exceed approximately ___% CPR, on such
assumptions, an investor in the Class S-A Certificates as to which such
percentage of CPR was exceeded would not fully recover the initial purchase
price thereof.
It is highly unlikely that the Mortgage Loans will prepay at a
constant rate until maturity or that all of the Mortgage Loans will prepay at
the same rate. In fact, Mortgage Loans are expected to prepay at different
rates.
The yields set forth in the preceding tables were calculated
by determining the monthly discount rates which, when applied to the assumed
stream of cash flow to be paid on the Class S-A Certificates, would cause the
discounted present value of such assumed cash flows to
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equal the assumed purchase price of such Class S-A Certificates and by
converting such monthly rates to corporate bond equivalent rates. Such
calculations do not take into account variations that may occur in the
interest rates at which investors may be able to reinvest funds received by
them as distributions on the Class S-A Certificates and consequently do not
purport to reflect the return on any investment in the Class S-A Certificates
when such reinvestment rates are considered.
The Mortgage Loans will not necessarily have the
characteristics assumed above, and there can be no assurance the (i) the
Mortgage Loans will prepay at any of the rates shown in the table or at any
other particular rate or will prepay proportionately, (ii) the pre-tax yield on
the Class S-A Certificates will correspond to any of the pre-tax yields shown
above or (iii) the aggregate purchase price of the Class S-A Certificates will
be equal to the purchase price assumed.
Scheduled Final Distribution Date. The Scheduled Final
Distribution Date for the Class S-A Certificates is ___________ __, 200_.
DESCRIPTION OF THE POOLING AND SERVICING AGREEMENT
The Certificates will issued pursuant to the Pooling and
Servicing Agreement to be dated as of the Closing Date (the "Agreement"). The
following summaries describe certain provisions of the Agreement which are not
otherwise described elsewhere in this Prospectus Supplement. The summaries do
not purport to be complete and are subject to and qualified in their entirety by
reference to, the provisions of the Agreement. Wherever particular defined terms
used in the Agreement are referred to in this Prospectus Supplement, such
defined terms are hereby incorporated herein by reference.
The Mortgage Trust will consist of, to the extent provided in
the Agreement, (i) the Mortgage Loans that from time to time are subject to the
Agreement, and the Additional Collateral (as defined below), (ii) such assets as
shall from time to time be identified as deposited in the Certificate Account or
Prepayment Premium Account, in accordance with the Agreement, (iii) property
which secured a Mortgage Loan and which has been acquired by foreclosure or
deed-in-lieu of foreclosure.
Assignment of the Mortgage Loans
At the time of the initial issuance of the Certificates, the
Depositor will assign all its right, title and interest in and to the Mortgage
Trust (including the Mortgage Loans, [letters of credit with respect to certain
Mortgage Loans] and a collateral deposit account with respect to a certain
Mortgage Loan (such letters of credit and collateral deposit account are
referred to hereafter as the "Additional Collateral") to the Trustee, including
all principal and interest received by the Depositor on or with respect to the
Mortgage Loans after the Cut-Off Date (other than payments of interest and
principal due on the Mortgage Loans on or before the Cut-Off Date), together
with all its right, title and interest in and to the proceeds of any related
insurance policies. The Trustee, concurrently with such assignment, will declare
that it holds and will hold such rights and interest for the exclusive use and
benefit of the present and future Owners of the Certificates, other than the
Class RL Certificates. Each Mortgage Loan will be identified in the
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Mortgage Loan Schedule to the Agreement. The Mortgage Loan Schedule includes
information as to the Cut-Off Date principal balance of each Mortgage Loan,
the Loan Rate, the stated maturity date of the Mortgage Loan and the name of
the Mortgagor and address of the Mortgaged Property.
The Depositor is obligated to deliver and assign to the
Trustee at the Closing Date, the Mortgage Notes, the Mortgages and certain other
documents in respect of the Mortgage Loans (collectively, the "Mortgage Files")
and the Additional Collateral. By the Closing Date, the Trustee will review the
Mortgage Files (or copies thereof) in accordance with the Agreement and if any
document required to be included in any Mortgage File is found to be defective
in any material respect and such defect is not corrected or cured by the Closing
Date, the affected Mortgage Loan will not be included in the Mortgage Trust.
If (i) a document constituting a part of any Mortgage File is
defective, (ii) an Assignment of Mortgage is not recorded as required or (iii)
any representation, warranty or covenant to a Mortgage Loan as made by the
Company to the Depositor in connection with the sale of the Mortgage Loans to
the Depositor is breached, thereby materially and adversely affecting the
interests of the Owners of the Certificates in such Mortgage Loan (any such
Mortgage Loan being a "Defective Mortgage Loan"), the Company will be required
to repurchase the related Mortgage Loan (including any property acquired in
respect thereof and any insurance policy or insurance proceeds with respect
thereto) from the Trustee at a price equal to the Unpaid Principal Balance of
the Mortgage Loan as of the Distribution Date upon which the proceeds of the
repurchase would be distributed to Certificateholders, together with accrued and
unpaid interest at the Mortgage Loan's Loan Rate (less the Servicing Fee Rate)
for the calendar month preceding the date of repurchase (the "Purchase Price").
Upon receipt by the Trustee of written notification of any such repurchase, the
Trustee will execute and deliver an instrument of transfer or assignment
necessary to vest in the legal and beneficial ownership of such Mortgage Loan
(including any property acquired in respect thereof or proceeds of any insurance
policy with respect thereto). The obligation of the Company to repurchase any
such Mortgage Loan shall be the sole remedy available to the Owners of the
Certificates or the Trustee, on behalf of the Owners, against the Company under
the Agreement.
Notwithstanding the foregoing, in the case of any repurchase
of a Mortgage Loan that would result in the realization of a gain by the
Mortgage Trust or Trust Fund, the Company will not be required to repurchase
such Mortgage Loan unless the Trustee has received an opinion of counsel to the
effect that such repurchase will not be subject to tax as a result of being
deemed a "prohibited transaction" under Section 860F(a)(2) of the Code and a
certificate from the Company to the effect that such repurchase will not give
rise to net income taxable under Section 860F(a)(1) of the Code. The Company
will use its reasonable best efforts to obtain such opinion and deliver such
certificate. In the absence of such opinion or certificate, the Company will not
be required to so repurchase any Mortgage Loan unless there is an actual or
imminent default with respect thereto or unless such breach adversely affects
the enforceability of such Mortgage Loan.
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Collection and Other Servicing Procedures
The Servicer is required to service the Mortgage Loans,
subject to the terms of the Mortgage Loans themselves, pursuant to the Agreement
and the requirements of applicable law, in the same manner in which it services
mortgage loans for its own portfolio that are comparable to the Mortgage Loans,
giving due consideration to customary and usual standards of practice of prudent
institutional multifamily mortgage lenders and loan services utilized with
respect to comparable mortgage loans (the "Servicing Standard"). The Servicer
will make reasonable efforts to collect all payments called for under the
Mortgage Loans and will, consistent with the Agreement, follow such collection
procedures as are customary to the servicing of mortgage loans in its servicing
portfolio which are comparable to the Mortgage Loans. Consistent with the above,
the Servicer may, in its discretion, waive any late payment charge in respect of
a late Mortgage Loan payment or any other administrative fee.
The Servicer may extend the Maturity Date of any Mortgage Loan
without the consent of the Trustee or the Owners of the Certificates, subject to
the following conditions: (i) a determination must be made that a Balloon
Payment default is imminent and that the extension of the Maturity date is
reasonably likely to produce a greater recovery than liquidation of the related
Mortgage Loan; (ii) any such extension will be for a period of not greater than
[36] months; and (iii) prior to granting such extension, the Servicer must
determine: (a) that no deferred maintenance exists; (b) the ratio of the net
income from the operation of the Mortgaged Property to debt service on the
Mortgage Loan is not less than to; (c) no Mortgage Loan payment due during the
preceding 12 months had been more than 30 days delinquent; and (d) the related
mortgagor has made a reasonable effort to obtain new financing in an amount
sufficient to enable payment of the Balloon Payment.
The Servicer will not permit the placement of a subsequent
senior mortgage on any Mortgaged Property.
In any case in which a Mortgaged Property has been or is about
to be conveyed by the Mortgagor, the Servicer may not permit an assumption of
the related Mortgage Loan. If the Servicer, however, is prevented from enforcing
any such clause or any such clause, by its terms, is not operable, the Servicer
is authorized to take or enter into an assumption and modification agreement
with the person to whom such Mortgaged Property has been or is about to be
conveyed, pursuant to which such person becomes liable under the Mortgage Note
and the Mortgagor remains liable thereon or, if the Servicer finds it
appropriate, is released from liability thereon. In respect of transfers or
proposed transfers not covered by the above guideline, the Servicer will
exercise its right to accelerate the maturity of the related Mortgage Loan and
require that the principal balance thereof be paid in full. Any fee collected by
the Servicer for entering into any such agreement will be retained by the
Servicer as additional servicing compensation.
In addition, if Mortgage Loans contain due-on-encumbrance
clauses or require the consent of the holder of the Mortgage Loan to the
creation of any subordinate lien or encumbrance on the Mortgaged Property, the
Servicer, on behalf of the Trustee, will exercise any right it may have to
accelerate the payment of such Mortgage Loans upon, or to withhold its consent
to, the creation of such liens or encumbrances.
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[The Servicer is not required to establish any escrow account
into which it will deposit escrow payments from Mortgagors under the Mortgages
for the payment of taxes, insurance premiums, assessments or similar items.]
Payments on Mortgage Loans; Deposits to Certificate Account
and Prepayment Premium Account
The Trustee will establish and maintain in the name of the
Trustee a separate account (the "Certificate Account") for the benefit of the
Owners of the Certificates. The Certificate Account will be required to be an
Eligible Account (described below). The Servicer shall be required to remit to
the Trustee for deposit into the Certificate Account, daily, within one Business
Day of receipt thereof:
(i) all payments of interest on the Mortgage Loans (net of
the related Monthly Servicing Fee with respect to each such Mortgage
Loan which was an Outstanding Mortgage Loan as of the preceding
Distribution Date);
(ii) all payments of principal received in respect of the
Mortgage Loans;
(iii) the aggregate of all purchase prices paid by the
Company for the purchase of any Defective Mortgage Loan:
(iv) all cash ("Liquidation Proceeds") received in
connection with the liquidation of a Liquidated Mortgage Loan net of
expenses ("Liquidation Expenses") of the Servicer in connection with
such liquidation (such net liquidation proceeds being referred to
herein as "Net Liquidation Proceeds");
(v) the aggregate of any insurance proceeds received in
respect of a Mortgaged Property (net of amounts covering the related
reasonable expenses of the Servicer) that are not Liquidation Proceeds
and are applied to principal or interest on the related Mortgage Loan;
(vi) any amounts required to be deposited pursuant to the
Agreement in connection with any property ("REO Property") acquired by
the Mortgage Trust through foreclosure or deed in lieu of foreclosure;
(vii) any amounts required to be deposited pursuant to the
Agreement in connection with the application of co-insurance clauses,
flood damage to REO Properties and blanket policy deductibles; and
(viii) all advances made by the Servicer with respect to
payments of principal (other than Balloon Payments) and interest on the
Mortgage Loans that were due on the related Due Date and not received
as of the close of business on the Determination Date preceding the
related Distribution Date, less the aggregate amount of any such
delinquent payments that would constitute a Monthly Advance.
Payments and collections that do not constitute Available
Funds (e.g., assumption fees, late fees or other administrative charges) will
not be deposited in the Certificate Account
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and will be retained by [the Servicer as additional servicing compensation].
The Servicer may, from time to time, direct the Trustee to make withdrawals
from the Certificate Account referred to above, to make reimbursement of
certain expenses to the Servicer.
Trustee will establish and maintain, on behalf of the
Certificateholders, a trust account (the "Prepayment Premium Account") in which
shall be deposited any premium or yield maintenance payment by a Mortgagor with
respect to a related Mortgage Loan in connection with a Principal Prepayment (a
"Prepayment Premium"). The Servicer shall remit to the Trustee for deposit into
the Prepayment Premium Account, daily, within one Business Day of receipt
thereof from subservicers, all Prepayment Premiums received by it.
Any funds on deposit in the Certificate Account and Prepayment
Premium Account may be invested in Permitted Investments. Permitted
Investments are specified in the Agreement as including certain federal
government obligations and other highly rated obligations. Any net investment
income from such Permitted Investments will be for the benefit of [the
Servicer as part of its servicing compensation].
Hazard Insurance
The Servicer is required to cause to be maintained for each
Mortgaged Property a fire insurance policy with extended perils coverage which
contains a standard mortgagee's clause in an amount at least equal to the lesser
of (a) the replacement cost of the improvements on such Mortgaged Property or
(b) the current principal balance of such Mortgage Loan. As set forth above, all
amounts collected by the Servicer under any hazard policy (except for amounts to
be applied to the restoration or repair of the Mortgaged Property or released to
the borrower in accordance with the Servicer's normal servicing procedures or
the terms of the Mortgage Loan), to the extent they constitute Net Liquidation
Proceeds or insurance proceeds, will ultimately be deposited in the Certificate
Account. The ability of the Servicer to assure that hazard insurance proceeds
are appropriately applied may be dependent on its being named as an additional
insured under any hazard insurance policy, or upon the extend to which
information in this regard is furnished to the Servicer by a borrower. The
Agreement provides that the Servicer may satisfy its obligation to cause hazard
policies to be maintained by maintaining a blanket policy issued by an insurer
acceptable to the Rating Agency and fire insurance with extended perils coverage
on the Mortgage Loans. If such blanket policy contains a deductible clause, the
Servicer is obligated to deposit in the Certificate Account the sums which would
have been deposited therein but for such clause.
If the properties securing the Mortgage Loans have appreciated
in value and if the amount of hazard insurance maintained on the improvements
securing the Mortgage Loans were to decline as the principal balances owing
thereon decreased, hazard insurance proceeds could be insufficient to restore
fully the damaged property in the event of a partial loss. See "Description of
the Offered Certificates -- Subordination of the Subordinate Certificates" above
for a description of the protection afforded to holders of the Class A
Certificates and, to a lesser extent, the Class B Certificates against losses
occasioned by hazards which are otherwise uninsured against (including losses
caused by the application of the co-insurance clause described in the preceding
paragraph).
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If the protection afforded the Owners of the Class B
Certificates by the subordination of the Class C Certificates is exhausted, and
if a borrower defaults on his obligations to make payments on a Mortgage Loan,
the Owners of the Class B Certificates will bear all risk of loss resulting from
hazard losses not covered by hazard insurance. Once the Class Principal Balance
is reduced to zero, all such remaining losses will be by the Owners of the Class
A Certificates.
Realization Upon Defaulted Mortgage Loans
The Servicer will foreclose upon or otherwise comparably
convert the ownership of Mortgaged Properties securing such of the Mortgage
Loans as come into default when, in accordance with applicable servicing
procedures under the Agreement, no satisfactory arrangements can be made for the
collection of delinquent payments and the Servicer determines that such action
is in the best economic interest of the Certificateholders. In connection with
such foreclosure or other conversion, the Servicer will follow such practices as
it deems necessary or advisable and as are in keeping with the Servicer's
multifamily mortgage loan servicing activities and with the Servicing Standard,
provided the Servicer will not expend its own funds in connection foreclosure or
other conversion, correction of a default on a senior mortgage or restoration of
any property unless such foreclosure, correction or restoration is determined to
be in the best economic interest of the Trust. Any Mortgaged Property so
acquired by the Mortgage Trust is required to be disposed of in accordance with
applicable federal income tax law and regulations and consistent with the status
of the Trust Fund and the Mortgage Trust as REMICs, which regulations currently
require that such disposition occur within two years of the acquisition. The
Agreement will provide that the Servicer, acting on behalf of the Trust, may not
acquire title to a Mortgaged Property or take over its operation unless the
Servicer has previously determined, based on a report prepared by an independent
person who regularly conducts environmental audits, that the Mortgaged Property
is in compliance with applicable environmental laws or that it would be in the
best economic interest of the Trusts to take the actions necessary to comply
with such laws. [Special Servicer requirements.]
Servicing and Other Compensation and Payment of Expenses
The principal servicing compensation (the "Servicing Fee") to
be paid to the Servicer in respect of its servicing activities relating to the
Certificates will be paid to it with respect to each Distribution Date by
withholding from funds to be deposited into the Certificate Account out of
collections on the Mortgage Loans in an amount equal to, as to each Mortgage
Loan, one-twelfth of the product of (i) the rate set forth in the Mortgage Loan
Schedule (the "Servicing Fee Rate") and (ii) the Unpaid Principal Balance of
such Mortgage Loan as of such Distribution Date. All assumption fees, late
payment charges and extension and other administrative charges, to the extent
collected from borrowers, will be [retained by the Servicer]. The amounts of
late charges are limited by state law and range from __% to __% of the late
monthly payment. [Assumption fees range from __% to __% of the outstanding
amount of the Mortgage Loan.]
The Servicer will pay certain ongoing expenses associated with
the Trust and incurred by it in connection with its responsibilities under the
Agreement, including, without limitation, payment of the fees and disbursements
of the Trustee, any custodian appointed by the
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Trustee and any paying agent. In addition, as indicated in the preceding
section, the Servicer will be entitled to reimbursement for certain expenses
incurred by it in connection with defaulted Mortgage Loans and in connection
with the restoration of Mortgaged Properties, such right of reimbursement
being prior to the rights of Certificateholders to receive any related
insurance proceeds or Liquidation Proceeds.
Evidence as to Compliance
On or before __________ in each year, beginning with
__________, 199__, the Servicer at its expense is required to cause a firm of
independent public accountants to furnish a statement to the Trustee to the
effect that such firm has examined, for the preceding calendar year, certain
documents and records related to the servicing of mortgage loans under pooling
and servicing agreements (including the Agreement) substantially similar to the
Agreement and such examination, which as been conducted substantially in
compliance with the Uniform Single Audit Program for Mortgage Bankers, has
disclosed no items of noncompliance with the provisions of the Agreement which,
in the opinion of the firm, are material, except for such items as will be
referred to in the report.
The Agreement will also provide for delivery (on or before
__________ in each year, commencing with __________, 199__) to the Trustee of an
annual statement signed by an officer of the Servicer to the effect that the
Servicer has fulfilled its material obligations under the Agreement throughout
the preceding year.
Certain Matters Regarding the Servicer
The Agreement will provide that the Servicer may not resign
from its obligations and duties thereunder unless (i) its duties thereunder are
no longer permissible under applicable law or (ii) the Servicer no longer wishes
to be Servicer and has proposed a successor Servicer that (a) is reasonably
acceptable to the Trustee (b) whose appointment will not result in a reduction
of the rating assigned to the Offered Certificates or the Class C Certificates
and (c) is approved in writing by Owners of Percentages Interest aggregating not
less than 50% of each Class of Certificate then Outstanding.
The Agreement will also provide that neither the Servicer, nor
any director, officer, employee or agent of the Servicer will be under any
liability to the Trust Fund or the Owners of the Certificates for any action
taken or for refraining from the taking of any action in good faith pursuant to
the Agreement, or for errors in judgment; provided, however, that neither the
Servicer nor any such person will be protected against any liability which would
otherwise be imposed by reason of misfeasance, bad faith or negligence in the
performance of duties or by reason of reckless disregard of obligations and
duties thereunder. The Agreement will further provide that the Servicer and any
director, officer, employee or agent of the Servicer is entitled to
indemnification by the Trust Fund and will be held harmless against any loss,
liability or expense incurred in connection with any legal action relating to
the Agreement or the Owners of the Certificates, other than any loss, liability
or expense related to any specific Mortgage Loan or Mortgage Loans (except any
such loss, liability or expense otherwise reimbursable pursuant to the
Agreement) and any loss, liability or expense incurred by reason of reckless
disregard of obligations and duties thereunder. In addition, the Agreement will
provide that the Servicer will
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not be under any obligation to appear in, prosecute or defend any legal action
which is not incidental to its duties under the Agreement and which in its
opinion may involve it in any expense or liability. The Servicer may, however,
in its discretion undertake any such action which it may deem necessary or
desirable with respect to the Agreement and the rights and duties of the
parties thereto and the interests of the Owners of the Certificates
thereunder. In such event, the legal expenses and costs of such action and any
liability resulting therefrom will be expenses, costs and liabilities of the
Trust Fund and the Servicer will be entitled to be reimbursed therefor from
time to time on one or more Distribution Dates, only out of the Available
Funds for such Distribution Date that remain after the distributions to the
Certificateholders for such Distribution Date have been made. The Servicer's
right to such indemnity or reimbursement will survive any resignation or
termination of the Servicer (and will survive any termination of the Agreement
if the Servicer is still serving as the servicer at such termination) with
respect to any losses, expenses, costs or liabilities arising prior to such
resignation or termination (or arising from events that occurred prior to such
resignation or termination). Any such claims by or on behalf of the
Certificateholders or the Trust Fund will be S-35made only against the
Servicer, who will be liable with respect to its own acts and omissions as
well as the acts and omissions of its directors, officers, employees and
agents.
Any corporation into which the Servicer may be merged or
consolidated, or any corporation resulting from any merger, conversion or
consolidation to which the Servicer will be a party, or any corporation
succeeding to the business of the Servicer, which executes an agreement of
assumption to perform every obligation of the Servicer under the Agreement, will
be the successor of the Servicer thereunder, without the execution or filing of
any other paper or any further act on the part of any of the parties thereto,
anything therein to the contrary notwithstanding.
Events of Default
Events of Default under the Agreement will consist of (i) a
failure by the Servicer to deposit in the Certificate Account any deposit
required to be made under the Agreement, which failure continues unremedied for
five business days after the giving of written notice of such failure to the
Servicer by the Trustee, or to the Servicer and the Trustee by holders of the
Certificates of any class evidencing, as to such Class, Percentage Interests
aggregating not less than 25%; (ii) any failure by the Servicer duly to observe
or perform in any material respect any of its other covenants or agreements in
the Agreement which materially affects the Certificateholders and continues,
unremedied for 60 days after the giving of written notice of such failure to the
Servicer by the Trustee, or to the Servicer and the Trustee by holders of the
Certificates of any class evidencing, as to such Class, Percentage Interests
aggregating not less than 25%; and (iii) certain events of insolvency,
readjustment of debt, marshalling of assets and liabilities or similar
proceedings regarding the Servicer and certain actions by the Servicer
indicating its insolvency or inability to pay its obligations.
Rights Upon Event of Default
So long as an Event of Default remains unremedied by the
Servicer, the Depositor or the Trustee may, or at the written direction of the
Owners of Certificates evidencing not less than 51% of the Ownership Interests
in the Trust Fund (for the purposes of this percentage, the
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Class B, Class R and Class RL Certificateholders shall be deemed to hold 0% of
the Ownership Interests in the Trust Fund) shall, terminate all the rights and
obligations of the Servicer under the Agreement in and to the Mortgage Loans,
whereupon the Trustee will succeed to all the responsibilities, duties and
liabilities of the Servicer under the Agreement and will be entitled to
similar compensation arrangements; provided, however, that the Trustee may
waive any default by the Servicer in the performance of its obligations under
the Agreement and its consequences, except that a default in the making of any
required distribution on any of the Certificates may only be waived with the
consent of the Owners of Certificates of each Class affected thereby, voting
as a Class, evidencing, as to each such Class, Percentage Interests
aggregating not less than 66%]. Upon any such waiver of a past default, such
default shall cease to exist, and any Event of Default arising therefrom shall
be deemed to have been remedied for every purpose of the Agreement. No such
waiver shall extend to any subsequent or other default or impair any right
contingent thereon except to the extent expressly so waived.
In the event that the Trustee would be obligated to succeed
the Servicer but is unwilling or unable so to act, it may appoint, or petition a
court of competent jurisdiction for the appointment of, any established housing
and home finance institution that is then servicing a multi-family mortgage loan
portfolio and with a net worth of at least $__________ to act as successor to
the Servicer under the Agreement. Pending such appointment, the Trustee is
obligated to act in such capacity, unless the Trustee is prohibited by law from
so acting. The Trustee and such successor may agree upon the servicing
compensation to be paid, which in no event may be greater than the compensation
to the initial Servicer under the Agreement.
No Certificateholder will have any right under the Agreement
to institute any proceeding with respect to the Agreement unless such holder
previously has given to the Trustee written notice of default and unless holders
of Certificates of any Class evidencing, as to such Class, Percentage Interests
aggregating not less than 25% have made written request upon the Trustee to
institute such proceeding in its own name as Trustee thereunder and have offered
to the Trustee reasonable indemnity and the Trustee for 60 days after the
receipt of such request and after the indemnity has neglected or refused to
institute any such proceeding. The Trustee will be under no obligation to
exercise any of the trusts or powers vested in it by the Agreement or to make
any investigation of matters arising thereunder or to institute, conduct or
defend any litigation thereunder or in relation thereto at the request, order or
direction of any of the Owners of the Certificates covered by the Agreement,
unless such Owners of the Certificates have offered to the Trustee reasonable
security or indemnity against the costs, expenses and liabilities which may be
incurred therein or thereby.
Amendment
The Agreement may be amended from time to time by the
Servicer, the Depositor, the Company and the Trustee without the consent of any
of the Owners of the Certificates (a) to cure any error or any ambiguity or to
correct or supplement any provisions therein which may be inconsistent with any
other provisions therein, (b) to add to the duties or obligations of the
Servicer thereunder, (c) to maintain or improve the rating of the Class A
Certificates or the Class B Certificates then given by a Rating Agency (it being
understood that after obtaining the initial ratings of the Class A and Class B
Certificates, none of the Depositor, the Servicer or the Trustee is obligated to
maintain or improve such ratings), or (d) to add any
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other provisions with respect to matters or questions arising under the
Agreement; provided, however, that such action will not, as evidenced by an
Opinion of Counsel, adversely affect in any material respect the interests of
any Owner of a Certificate. The Agreement may also be amended from time to
time by the Servicer, the Depositor, and the Trustee, with the consent of the
Owners of Certificates of each Class affected thereby evidencing, as to such
Class, Percentage Interests aggregating not less than 51% for the purpose of
adding any provisions to or changing in any manner or eliminating any of the
provisions of the Agreement or of modifying in any manner the rights of Owners
of the Certificates; provided, however, that no such amendment will (a) reduce
in any manner the amount of, or delay the timing of, collections of payments
on Mortgage Loans or distributions which are required to be made on any
Certificate without the consent of the Owner of such Certificate or (b) reduce
the aforesaid percentage required to consent to any such amendment, without
the consent of the Owners of all Certificates then outstanding. The Agreement
may also be amended from time to time, without the consent of the Owners of
the Certificates, with regard to certain REMIC matters.
Termination; Retirement of the Certificates
The obligations created by the Agreement will terminate upon
the payment to Owners of the Certificates of all amounts held in the Certificate
Account or by the Servicer and required to be paid to them pursuant to the
Agreement following the earlier of (i) the final payment or other liquidation of
the last Mortgage Loan subject thereto or the disposition of all property
acquired upon foreclosure of any such Mortgage Loan and (ii) the repurchase by
the Servicer from the Mortgage Trust of all remaining Mortgage Loans and all
property acquired in respect of such Mortgage Loans, as described below. In no
event, however, will the trust created by the Agreement continue beyond the
expiration of 21 years from the death of the last to survive of certain persons
described in the Agreement. Written notice of termination of the Agreement will
be given to each Certificateholder, and the final distribution will be made only
upon surrender and cancellation of the Certificates at an office or agency
appointed by the Trustee which will be specified in the notice of termination.
At its option, the Depositor may repurchase from the Mortgage
Trust all remaining Mortgage Loans held by the Mortgage Trust at a price equal
to the greater of (a) the sum of (x) 100% of the Unpaid Principal Balance of
each Mortgage Loan (other than any Foreclosed Mortgage Loan represented by REO
Property whose fair market value is included pursuant to clause (y) below) as of
the Distribution Date upon which the proceeds of any repurchase are to be
distributed and (y) the fair market value of all Foreclosed Mortgage Loans
represented by REO Property. The right of the Depositor to make any such
purchase is conditioned upon the Pool Principal Balance being less than 10% of
the Cut-Off Date Pool Principal Balance. The termination of the Trusts is
required to be effected in a manner consistent with applicable federal income
tax regulations and their status as REMIC's.
The Trustee
____________________, a __________ banking association
organized under the laws of the United States, is the Trustee. Its Corporate
Trust Office is located at _________________________. The Depositor may also
remove the Trustee under certain circumstances, including, among others, failure
of the Trustee to continue to satisfy the eligibility
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requirements described in the Agreement or adjudication of the Trustee as
bankrupt or insolvent. Upon becoming aware of such circumstances, the
Depositor will be obligated to appoint a successor Trustee. The Trustee may
resign from its duties as Trustee under the Agreement. Any resignation or
removal of the Trustee and appointment of a successor Trustee will not become
effective until acceptance of the appointment by the successor Trustee.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following opinion of Dewey Ballantine LLP, special counsel
to the Depositor, as to certain of the material anticipated federal income tax
consequences of the purchase, ownership and disposition of the Offered
Certificates is to be considered only in connection with "Certain Federal Income
Tax Consequences" in the Prospectus. The discussion herein and in the Prospectus
is based upon laws, regulations, rulings and decisions now in effect, all of
which are subject to change. The discussion below and in the Prospectus does not
purport to deal with all federal tax consequences applicable to all categories
of investors, some of which may be subject to special rules. Investors should
consult their own tax advisors in determining the federal, state, local and any
other tax consequences to them of the purchase, ownership and disposition of the
Offered Certificates.
REMIC Elections
The Trustee will cause an election to be made to treat the
Mortgage Trust and the Trust Fund as "real estate mortgage investment conduits"
("REMICs") for federal income tax purposes. Dewey Ballantine LLP, special tax
counsel, is of the opinion that, for federal income tax purposes, assuming (i)
the REMIC elections are made and (ii) compliance with the Agreement, the
Mortgage Trust and the Trust Fund will be treated as REMICs, each Class of
Offered Certificates will be treated as "regular interests" in a REMIC and the
Class R Certificates will be treated as the sole class of "residual interests"
in such REMIC. For federal income tax purposes, regular interests in a REMIC
generally are treated as debt instruments issued by the REMIC on the date on
which those interests are created, and not as ownership interests in the REMIC
or its assets. Owners of Offered Certificates that otherwise report income under
a cash method of accounting will be required to report income with respect to
such Offered Certificates under an accrual method. The Offered Certificates may
be issued with "original issue discount" for federal income tax purposes. The
prepayment assumption to be used in determining whether any Class of Offered
Certificates is issued with original issue discount and the rate of accrual of
original issue discount is ___% of the CPR. No representation is made that any
of the Mortgage Loans will prepay at this rate or any other rate. See "Certain
Federal Income Tax Consequences--REMICS--Taxation of Holders of REMIC Regular
Securities--Original Issue Discount" in the Prospectus.
Although not free from doubt, it is anticipated that the Class
S-A Certificates will be treated as issued with original issue discount in an
amount equal to the excess of all payments thereon over their issue price
(including accrued interest), and the Trustee intends to report income in
respect of such Class of Certificates in this manner. Under this method, any
"negative" amounts of original issue discount attributable to rapid prepayments
would not be deductible currently, but would be offset against future positive
accruals of original issue
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discount, if any. A Class S-A Certificateholder may be entitled to a loss
deduction, which may be a capital loss, to the extent it becomes certain that
such holder will not recover a portion of its remaining basis in the Class S-A
Certificate, assuming no further prepayments.
ERISA CONSIDERATIONS
Any Plan fiduciary which proposes to cause a Plan to acquire
any of the Offered Certificates should consult with its counsel with respect to
the potential consequences under the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), and the Code, of the Plan's acquisition and
ownership of such Certificates.
General
ERISA imposes certain restrictions on employee benefit plans
subject to ERISA ("Plans") and on persons who are parties in interest or
disqualified persons ("parties in interest") with respect to such Plans. Certain
employee benefit plans, such as governmental plans and church plans (if no
election has been made under section 410(d) of the Code), are not subject to the
restrictions of ERISA, and assets of such plans may be invested in the Class A-1
and Class B Certificates without regard to the ERISA considerations described
below, subject to other applicable federal and state law. However, any such
governmental or church plan which is qualified under Section 401(a) of the Code
and exempt from taxation under Section 501(a) of the Code is subject to the
prohibited transaction rules set forth in Section 503 of the Code.
Investments by Plans are subject to ERISA's general fiduciary
requirements, including the requirement of investment prudence and
diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan.
Prohibited Transactions
General. Section 406 of ERISA prohibits parties in interest
with respect to a Plan from engaging in certain transactions involving a Plan
and its assets unless a statutory or administrative exemption applies to the
transaction. Section 4975 of the Code (or, in some cases, Section 502(i) of
ERISA) imposes certain excise taxes on parties in interest which engage in
non-exempt prohibited transactions.
The United States Department of Labor ("DOL") has issued a
final regulation (29 C.F.R. Section 2510.3-101) containing rules for determining
what constitutes the assets of a Plan. This regulation provides that, as a
general rule, the underlying assets and properties of corporations,
partnerships, trusts and certain other entities in which a Plan makes an "equity
investment" will be deemed for purposes of ERISA to be assets of the Plan unless
certain exceptions apply. One such exception provides that if less than 25% of
the value of the Certificates outstanding is held by Plans, the assets of the
Trusts would not be deemed to include assets of Plans that are
Certificateholders. However, there can be no assurance that the 25% exception
described in the regulations would be satisfied with respect to the Trusts.
Under the terms of the regulation, the Trusts may be deemed to
hold plan assets by reason of a Plan's investment in a Certificate; such plan
assets would include an undivided
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interest in the Mortgage Loans and any other assets held by the Trusts. In
such an event, the Depositor, the Servicer, the Trustee and other persons, in
providing services with respect to the Mortgage Loans, may be parties in
interest, subject to the fiduciary responsibility provisions of Title I of
ERISA, including the prohibited transaction provisions of Section 406 of ERISA
(and of Section 4975 of the Code), with respect to transactions involving the
Mortgage Loans unless such transactions are subject to a statutory or
administrative exemption.
[Availability of Administrative Exemption for Class A-1 and
Class S-A Certificates. The U.S. Department of Labor has granted to
___________________________ an administrative exemption (Prohibited Transaction
Exemption _______, ________________________________________ from certain of the
prohibited transaction rules of ERISA with respect to the initial purchase, the
holding and the subsequent resale by Plans of certificates representing
interests in asset-backed pass-through trusts that consist of certain
receivables, loans and other obligations that meet the conditions and
requirements of PTE ______. The receivables covered by the exemption include
mortgage loans such as the Mortgage Loans. The exemption will apply to the
acquisition, holding and resale of the Class A-1 and Class S-A Certificates by a
Plan, provided that certain conditions (certain of which are described below)
are met.
Among the conditions which must be satisfied for PTE ______
to apply to he Class A-1 and Class S-A Certificates are the following:
(1) The acquisition of the Class A-1 and Class S-A
Certificates by a Plan is on terms (including the price for the Class A-1 and
Class S-A Certificates) that are at least as favorable to the Plan as they would
be in an arm's-length transaction with an unrelated party;
(2) The rights and interests evidenced by the Class A-1 and
Class S-A Certificates acquired by the Plan are not subordinated to the rights
and interests evidenced by other certificates of the Trust Fund;
(3) The Class A-1 and Class S-A Certificates acquired by the
Plan have received a rating at the time of such acquisition that is in one of
the three highest generic rating categories from any of S&P, Moody's, Duff &
Phelps Credit Rating Co. or Fitch Investors Service, Inc.;
(4) The Trustee is not an affiliate of any member of the
Restricted Group (as defined below);
(5) The sum of all payments made in connection with the resale
of the Class A-1 and Class S-A Certificates represents not more than reasonable
compensation for reselling the Class A-1 and Class S-A Certificates. The sum of
all payments made to and retained by the Depositor pursuant to the sale of the
Mortgage Loans to the Mortgage Trust represents not more than the fair market
value of such Mortgage Loans. The sum of all payments made to and retained by
the Servicer represents not more than reasonable compensation for the Servicer's
services under the Agreement and reimbursement of the Servicer's reasonable
expenses in connection therewith; and
S-51
<PAGE>
(6) The Plan investing in the Class A-1 and Class S-A
Certificates is an "accredited investor" as defined in Rule 501(a)(1) of
Regulation D of the Securities and Exchange Commission under the 1933 Act.
Moreover, PTE _______ would provide relief from certain
self-dealing/conflict of interest prohibited transactions only if, among other
requirements, (i) in the case of the acquisition of Class A-1 and Class S-A
Certificates in connection with the initial issuance, at least fifty percent
(50%) of the Class A-1 and Class S-A Certificates are acquired by persons
independent of the Restricted Group (as defined below), (ii) the Plan's
investment in Class A-1 or Class S-A Certificates does not exceed twenty-five
percent (25%) of all of the Class A-1 and Class S-A Certificates outstanding at
the time of the acquisition and (iii) immediately after acquisition, no more
than twenty-five percent (25%) of the assets of the Plan are invested in
certificates representing an interest in one or more trusts containing assets
sold or serviced by the same entity. PTE ____ does not apply to Plans sponsored
by the Servicer, the Depositor, the Trustee, any obligor with respect to
Mortgage Loans included in the Mortgage Trust constituting more than five
percent of the aggregate unamortized principal balance of the assets in the
Mortgage Trust, or any affiliate of such parties (the "Restricted Group")
____ believes that the exemption will apply to the acquisition
and holding of the Class A-1 and Class S-A Certificates by Plans and that all
conditions of the exemption other than those within the control of the investors
have been met. [In addition, as of the date hereof, there is no single obligor
with respect to Mortgage Loans included in the Mortgage Trust that constitutes
more than five percent of the aggregate unamortized principal balance of the
assets of the Mortgage Trust.]
Under current law the purchase and holding of the Class B
Certificates by or on behalf of any Plan subject to the fiduciary responsibility
provisions of ERISA may result in "prohibited transactions" within the meaning
of ERISA and the Code. [No transfer of a Class B Certificate or any interest
therein may be made to any Plan or other retirement arrangement, including
individual retirement accounts and annuities, Keogh plans and collective
investment and separate accounts in which such plans, accounts or arrangements
are invested that is subject to ERISA or the Code unless the prospective
transferee of the Class B Certificate provides the Trustee with a representation
letter and an opinion of counsel, each in the form required under the Agreement.
See "ERISA Considerations" herein and in the Prospectus.]
Review By Plan Fiduciaries. Due to the complexity of these
rules and the penalties imposed upon persons involved in prohibited
transactions, it is especially important that any Plan fiduciary who proposes to
cause a Plan to purchase Class A-1 or Class S-A Certificates should consult with
its own counsel with respect to the potential consequences under ERISA and the
Code of the Plan's acquisition and ownership of Class A-1 or Class S-A
Certificates. Assets of a Plan or individual retirement account should not be
invested in the Class A-1 and Class S-A Certificates unless it is clear that the
assets of the Trusts will not be plan assets or unless it is clear that the PTE
______ or a prohibited transaction class exemption will apply and exempt all
potential prohibited transactions.
S-52
<PAGE>
LEGAL INVESTMENT CONSIDERATIONS
[As long as the Class A Certificates are rated in one of the
two highest rating categories by at least one nationally recognized statistical
rating organization, the Class A Certificates will constitute "mortgage related
securities" within the meaning of SMMEA and as such will be legal investments
for persons, trusts, corporations, partnerships, associations, business trusts
and business entities (including depository institutions, life insurance
companies and pension funds) created pursuant to or existing under the laws of
the United States or of any State whose authorized investments are subject to
state regulation to the same extent that, under applicable law, obligations
issued by or guaranteed as to principal and interest by the United States or any
agency or instrumentality thereof constitute legal investments for such
entities. Under SMMEA, however, if a State enacted legislation on or prior to
October 3, 1991 specifically limiting the legal investment authority of any such
entities with respect to "mortgage related securities," such securities will
constitute legal investments for entities subject to such legislation only to
the extent provided therein. Certain States have enacted legislation which
overrides the preemption provisions of SMMEA.
SMMEA has amended the legal investment authority of
federally-chartered depository institutions as follows: federal savings and loan
associations and federal savings banks may invest in, sell or otherwise deal
with "mortgage related securities" without limitation as to the percentage of
their assets represented thereby, federal credit unions may invest in such
securities, and national banks may purchase such securities for their own
account without regard to the limitations generally applicable to investment
securities set forth in 12 U.S.C. 24 (seventh), subject in each case to such
regulations as the applicable federal regulatory authority may prescribe.]
The [Class B] Certificates will not be "mortgage securities"
for purposes of SMMEA. As a result, the appropriate characterization of the
[Class B] Certificates under various legal investment restrictions, and thus the
ability of investors subject to these restrictions to purchase the [Class B]
Certificates, is subject to significant interpretive uncertainties.
The Depositor makes no representation as to the ability of
particular investors to purchase the Offered Certificates under applicable legal
investment or restrictions. All institutions whose investment activities are
subject to legal investments and regulations, regulatory requirements or review
by regulatory authorities should consult with their own advisors in determining
whether and to what extent the Offered Certificates constitute legal investments
for or are subject to investment, capital or other restrictions.
RATINGS
It is a condition to the issuance of the Offered Certificates
that the Class A-1 and Class S-A Certificates each be rated no lower than "AAA"
by S&P and "Aaa" by Moody's and that the Class B Certificates be rated no lower
than "____" by _____. A security rating is not a recommendation to buy, sell or
hold securities and may be subject to revision or withdrawal at any time by the
assigning rating agency. Each security rating should be evaluated independently
of any other security rating.
S-53
<PAGE>
The ratings assigned by the Rating Agencies to mortgage
pass-through certificates address the likelihood of the receipt by
certificateholders of all distributions to which such certificateholders are
entitled. The ratings assigned to mortgage pass-through certificates do not
constitute a statement regarding the frequency or extent of principal
prepayments. The ratings do not address the possibility that certificateholders
might receive a lower than anticipated yield on their investment.
UNDERWRITING
Under the terms and subject to the conditions set forth in the
Underwriting Agreement for the sale of the Offered Certificates, the Depositor
has agreed to cause the Trust to sell and ___________________ (the
"Underwriters") have agreed to purchase the Offered Certificates.
In the Underwriting Agreement, the Underwriters have agreed,
subject to the terms and conditions set forth therein, to purchase, the entire
principal amount of each Class of Offered Certificates.
The Underwriters have advised the Depositor that they propose
to offer the Offered Certificates for sale from time to time in one or more
registered transactions or otherwise, at market prices prevailing at the time of
sale, at prices related to such market prices or at negotiated prices. The
Underwriters may effect such transactions by selling such Certificates to or
through dealers, and such dealers may receive compensation in the form of
underwriting discounts, concessions or commissions from the Underwriters or
purchasers of the Offered Certificates for whom they may act as agent. Any
dealers that participate with the Underwriters in the distribution of the
Offered Certificates purchased by the Underwriters may be deemed to be
underwriters, and any discounts or commissions received by them or the
Underwriters and any profit on the resale of Offered Certificates by them or the
Underwriters may be deemed to be underwriting discounts or commissions under the
Securities Act.
The Company has agreed to indemnify the Underwriters against
certain liabilities including liabilities under the Securities Act of 1933.
The Depositor has been advised by the Underwriters that the
Underwriters presently intends to make a market in each Class of Offered
Certificates, as permitted by applicable laws and regulations. The Underwriters
are not obligated, however, to make a market in either Class of Offered
Certificates and such market-making may be discontinued at any time at the sole
discretion of the Underwriters. Accordingly, no assurance can be given as to the
liquidity of, or trading markets for, the Offered Certificates.
LEGAL MATTERS
Certain legal matters relating to the validity of the issuance
of the Certificates will be passed upon for the Depositor by Dewey Ballantine
LLP, New York, New York and by Alan L. Langus, chief counsel to the Company.
Certain legal matters relating to insolvency issues and certain federal income
tax matters concerning the Certificates will be passed upon for the
S-54
<PAGE>
Depositor by Dewey Ballantine LLP. Certain legal matters relating to the
validity of the Certificates will be passed upon for the Underwriter by
________________________.
S-55
<PAGE>
EXHIBIT A
MORTGAGE LOAN SCHEDULE
S-56
<PAGE>
APPENDIX A
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS
AAA..........................................................................9
accredited investor.........................................................52
Additional Collateral.......................................................39
Agreement....................................................................3
Appraised Values............................................................20
balloon......................................................................3
Balloon Payments............................................................15
Book Entry Termination......................................................27
CERCLA......................................................................12
Certain Federal Income Tax Consequences......................................9
Certificate Account.........................................................42
Certificate Registrar.......................................................26
Certificates..............................................................2, 1
Class A-1 Certificates.......................................................2
Class A-1 Principal Distribution Amount......................................4
Class B Certificates.........................................................2
Class B Principal Distribution Amount........................................5
Class C Certificates.........................................................2
Class Principal Balance.....................................................29
Class R Certificates.........................................................2
Class RL Certificates........................................................2
Class S-A Certificates.......................................................2
clean-up call...............................................................38
Clearing Agency.............................................................27
Clearing Agency Participants................................................27
Code........................................................................10
Company......................................................................3
constant prepayment rate....................................................36
CPR.........................................................................36
Default Rate................................................................24
Defective Mortgage Loan.....................................................40
Depositor....................................................................3
Description of the Offered Certificates-- Amounts of Distribution............6
Distribution Date............................................................3
DOL.........................................................................50
due-on-sale.................................................................35
equity investment...........................................................50
Events of Default...........................................................24
Final Scheduled Distribution Date............................................8
Liquidated Mortgage Loan....................................................30
Liquidation Expenses........................................................42
Liquidation Proceeds........................................................42
Lower Tier REMIC.........................................................4, 10
MAI.........................................................................23
Monthly Interest...........................................................29
Monthly Advance..........................................................6, 30
Monthly Report..............................................................31
Moody's......................................................................9
Mortgage Files..............................................................40
Mortgage Loan Schedule......................................................17
Mortgage Loans............................................................3, 2
S-57
<PAGE>
mortgage related securities.............................................11, 53
mortgage securities.........................................................53
Mortgage Trust...............................................................3
Mortgaged Properties......................................................3, 2
Net Liquidation Proceeds....................................................42
Net Losses..................................................................19
Notional Principal Balance...................................................2
Offered Certificates.........................................................2
operator....................................................................12
original issue discount..................................................9, 49
Originator...................................................................3
Outstanding Mortgage Loan...................................................29
owner.......................................................................12
Owners......................................................................27
parties in interest.........................................................50
Payment Date................................................................27
Percentage Interest.........................................................27
Plan of Distribution.........................................................2
Policies....................................................................25
prepayment..................................................................36
Prepayment Premium..........................................................43
Prepayment Premium Account..................................................43
Prepayments..................................................................9
prohibited transaction......................................................40
prohibited transactions.................................................10, 52
Purchase Price..............................................................40
Rating Agencies..............................................................9
Ratings......................................................................9
real estate mortgage investment conduit.....................................49
real estate mortgage investment conduits.................................4, 10
real estate owned...........................................................18
Realized Losses..............................................................7
Record Date..............................................................3, 27
regular interest.............................................................4
regular interests....................................................3, 10, 49
REMICs.......................................................................4
REO Property................................................................42
Residual Certificates........................................................2
residual interests......................................................10, 49
Restricted Group............................................................52
Risk Factors.............................................................2, 12
S&P..........................................................................9
Senior Certificates.......................................................2, 1
Servicer.....................................................................3
Servicing Fee...............................................................44
Servicing Fee Rate.......................................................7, 44
Servicing Standard..........................................................41
SREA........................................................................23
SRPA........................................................................23
Subordinate Certificates.....................................................2
superlien...................................................................12
The Mortgage Loans--General.................................................15
The Mortgage Trust -- Mortgage Loan Characteristics..........................3
The Mortgage Trust-Underwriting Standards....................................2
Trust Fund................................................................3, 2
Trustee......................................................................3
S-58
<PAGE>
Trusts....................................................................3, 2
Underwriters................................................................54
Underwriting Standards......................................................17
Unpaid Delinquent Maturity Amount.........................................30
Unpaid Principal Balance...................................................29
Unpaid Principal Shortfall.................................................30
Unpaid Principal Balance....................................................30
Upper Tier REMIC.............................................................4
Weighted average life.......................................................36
Yield, Prepayment and Maturity Considerations.............................3
S-59
<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.......................................24
Advances.........................................................24
Primary Mortgage Insurance.......................................27
Standard Hazard Insurance........................................27
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..........29
Master Servicer..................................................29
ADMINISTRATION........................................................30
Assignment of Mortgage Assets....................................30
Evidence as to Compliance........................................32
The Trustee......................................................32
Administration of the Certificate Account........................33
Reports..........................................................34
Forward Commitments; Pre-Funding.................................34
Servicer Events of Default.......................................35
Rights Upon Servicer Event of Default............................35
Amendment........................................................35
Termination......................................................36
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..............................................45
LEGAL INVESTMENT MATTERS..............................................49
ERISA CONSIDERATIONS..................................................50
CERTAIN FEDERAL INCOME TAX CONSEQUENCES...............................51
Federal Income Tax Consequences For REMIC Certificates...........51
Taxation of Regular Certificates.................................53
Taxation of Residual Certificates................................57
Treatment of Certain Items of REMIC Income and Expense...........59
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......................63
Liquidation of the REMIC Pool....................................63
Administrative Matters...........................................64
Limitations on Deduction of Certain Expenses.....................64
Taxation of Certain Foreign Investors............................65
Backup Withholding...............................................65
Reporting Requirements...........................................66
Federal Income Tax Consequences for Certificates as to
Which No REMIC Election Is Made................................66
Standard Certificates............................................66
Premium and Discount.............................................67
Stripped Certificates............................................69
Reporting Requirements and Backup Withholding....................71
Taxation of Certain Foreign Investors............................71
Taxation of Securities Classified as Partnership Interests.......71
PLAN OF DISTRIBUTION..................................................72
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; 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.
<PAGE>
B. Contracts......................... Contracts may include conditional
sales contracts and installment
sales or loan agreements or
participation interests therein
secured by new or used Manufactured
Homes (as defined herein). Contracts
may be conventional (i.e., not
insured or guaranteed by any
government agency) or insured by the
FHA, including Title I Contracts, or
partially guaranteed by the Veterans
Administration ("VA"), as specified
in the related Prospectus
Supplement. See "The Trusts -
Contracts" herein.
C. Mortgage-
Backed Securities................ "Mortgage-Backed Securities" (or
"MBS") may include (i) private (that
is, not guaranteed or insured by the
United States or any agency or
instrumentality thereof) mortgage
participations, mortgage
pass-through certificates or other
mortgage-backed securities or (ii)
certificates insured or guaranteed
by Federal Home Loan Mortgage
Corporation ("FHLMC") or Federal
National Mortgage Association
("FNMA") or Government National
Mortgage Association ("GNMA"). See
"The Trusts - Mortgage-Backed
Securities" herein.
D. Other Mortgage Securities......... Other Mortgage Securities may
include other securities that
directly or indirectly represent an
ownership interest in, or are
secured by and payable from,
mortgage loans on real property or
mortgage-backed securities, such as
residual interests in issuances of
collateralized mortgage obligations
or mortgage pass-through
certificates. See "The Trusts -
Other Mortgage Securities" herein.
Trust assets may also include
reinvestment income, reserve funds,
cash accounts, insurance policies,
guaranties, letters of credit or
other assets as described in the
related Prospectus Supplement.
The related Prospectus Supplement
for a series of Certificates will
describe the Mortgage Assets to be
included in the Trust for such
series.
The Certificates...................... The Certificates of any series may
be issued in one or more classes, as
specified in the Prospectus
Supplement. One or more classes of
Certificates of each series (i) may
be entitled to receive distributions
allocable only to principal, only to
interest or to any combination
thereof; (ii) may be entitled to
receive distributions only of
prepayments of principal throughout
the lives of the Certificates or
during specified periods; (iii) may
be subordinated in the right to
receive distributions of scheduled
payments of principal, prepayments
of principal, interest or any
combination thereof to one or more
other classes of Certificates of
such series throughout the lives of
the Certificates or during specified
periods; (iv) may be entitled to
receive such distributions only
after the occurrence of events
specified in the Prospectus
Supplement; (v) may be entitled to
receive distributions in accordance
with a schedule or formula or on the
basis of collections from designated
portions of the assets in the
related Trust; (vi) as to
Certificates entitled to
distributions allocable to interest,
may be entitled to receive interest
at a fixed rate or a rate that is
subject to change from time to time;
(vii) may accrue interest, with such
accrued interest added to the
principal or notional amount of the
Certificates, and no payments being
made thereon until certain other
classes of the series have been paid
in full; and (viii) as to
Certificates entitled to
distributions allocable to interest,
may be entitled to distributions
allocable to interest only after the
occurrence of events specified in
the Prospectus Supplement and may
accrue interest until such events
occur, in each case as specified in
the related Prospectus Supplement.
The timing and amounts of such
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<PAGE>
distributions may vary among
classes, over time, or otherwise as
specified in the related Prospectus
Supplement.
Distributions on
the Certificates................. The related Prospectus Supplement
will specify (i) whether
distributions on the Certificates
entitled thereto will be made
monthly, quarterly, semi-annually or
at other intervals and dates out of
the payments received in respect of
the Mortgage Assets included in the
related Trust and other assets, if
any, pledged for the benefit of the
related Owners of Certificates; (ii)
the amount allocable to payments of
principal and interest on any
Distribution Date; and (iii) whether
all distributions will be made pro
rata to Owners of Certificates of
the class entitled thereto.
The aggregate original principal
balance of the Certificates will
equal the aggregate distributions
allocable to principal that such
Certificates will be entitled to
receive; the Certificates will have
an aggregate original principal
balance equal to or less than the
aggregate unpaid principal balance
of the related Mortgage Assets (plus
amounts held in a Pre-Funding
Account, if any) as of the first day
of the month of creation of the
Trust; and the Certificates will
bear interest in the aggregate at a
rate (the "Pass-Through Rate") equal
to the interest rate borne by the
related Mortgage Assets net of
servicing fees and any other
specified amounts.
Pre-Funding Account................... A Trust may enter into an agreement
(each, a "Pre-Funding Agreement")
with the Depositor whereby the
Depositor will agree to transfer
additional Mortgage Assets to such
Trust following the date on which
such Trust is established and the
related Certificates are issued. Any
Pre-Funding Agreement will require
that any Mortgage Loans so
transferred conform to the
requirements specified in such
Pre-Funding Agreement. If a
Pre-Funding Agreement is to be
utilized, the related Trustee will
be required to deposit in a
segregated account (each, a
"Pre-Funding Account") all or a
portion of the proceeds received by
the Trustee in connection with the
sale of one or more classes of
Certificates of the related series;
subsequently, the additional
Mortgage Assets will be transferred
to the related Trust in exchange for
money released to the Depositor from
the related Pre-Funding Account.
Each Pre-Funding Agreement will set
a specified period during which any
such transfers must occur. If all
moneys originally deposited to such
Pre-Funding Account are not used by
the end of such specified period,
then any remaining moneys will be
applied as a mandatory prepayment of
a class or classes of Certificates
as specified in the related
Prospectus Supplement. The specified
period for the acquisition by a
Trust of additional Mortgage Loans
will generally not exceed three
months from the date such Trust is
established.
Optional Termination.................. The Servicer, the Seller, the
Depositor, or, if specified in the
related Prospectus Supplement, the
Owners of a related class of
Certificates or a credit enhancer
may at their respective options
effect early retirement of a series
of Certificates through the purchase
of the Mortgage Assets in the
related Trust. See "Administration -
Termination" herein.
Mandatory Termination................. The Trustee, the Servicer or certain
other entities specified in the
related Prospectus Supplement may be
required to effect early retirement
of a series of Certificates by
soliciting competitive bids for the
purchase of the assets of the
related Trust or otherwise. See
"Administration - Termination"
herein.
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<PAGE>
Advances.............................. The Servicer of the Mortgage Loans
and Contracts will be obligated (but
only to the extent set forth in the
related Prospectus Supplement) to
advance delinquent installments of
principal and/or interest (less
applicable servicing fees) on the
Mortgage Loans and Contracts in a
Trust. Any such obligation to make
advances may be limited to amounts
due to the Owners of Certificates of
the related series, to amounts
deemed to be recoverable from late
payments or liquidation proceeds, to
specified periods or to any
combination thereof, in each case as
specified in the related Prospectus
Supplement. Any such advance will be
recoverable as specified in the
related Prospectus Supplement. See
"Servicing of Mortgage Loans and
Contracts" herein.
Credit Enhancement.................... If specified in the related
Prospectus Supplement, a series of
Certificates, or certain classes
within such series, may have the
benefit of one or more types of
credit enhancement ("Credit
Enhancement") including but not
limited to overcollateralization,
cross support, mortgage pool
insurance, special hazard insurance,
a bankruptcy bond, reserve funds,
other insurance, guaranties and
similar instruments and
arrangements. Credit Enhancement
also may be provided in the form of
subordination of one or more classes
of Certificates in a series under
which losses are first allocated to
any Subordinated Certificates up to
a specified limit. The protection
against losses afforded by any such
Credit Enhancement will be limited
as described in the related
Prospectus Supplement. See "Credit
Enhancement" herein.
Book Entry Registration............... Certificates of one or more classes
of a series may be issued in book
entry form ("Book Entry
Certificates") in the name of a
clearing agency (a "Clearing
Agency") registered with the
Securities and Exchange Commission,
or its nominee. Transfers and
pledges of Book Entry Certificates
may be made only through entries on
the books of the Clearing Agency in
the name of brokers, dealers, banks
and other organizations eligible to
maintain accounts with the Clearing
Agency ("Clearing Agency
Participants") or their nominees.
Transfers and pledges by purchasers
and other beneficial owners of Book
Entry Certificates ("Beneficial
Owners") other than Clearing Agency
Participants may be effected only
through Clearing Agency
Participants. All references to the
Owners of Certificates shall mean
Beneficial Owners to the extent
Beneficial Owners may exercise their
rights through a Clearing Agency.
Except as otherwise specified in
this Prospectus or a related
Prospectus Supplement, the term
"Owners" shall be deemed to include
Beneficial Owners. See "Risk Factors
- Book Entry Registration" and
"Description of the Certificates -
Book Entry Registration" herein.
Certain Federal Income Tax
Consequences..................... Federal income tax consequences will
depend on, among other factors,
whether one or more elections are
made to treat a Trust or specified
portions thereof as a "real estate
mortgage investment conduit"
("REMIC") under the Internal Revenue
Code of 1986, as amended (the
"Code"), or, if no REMIC election is
made, whether the Certificates are
considered to be Standard
Certificates, Stripped Certificates
or Partnership Interests. The
related Prospectus Supplement for
each series of Certificates will
specify whether one or more REMIC
elections will be made. See "Certain
Federal Income Tax Consequences"
herein and in the related Prospectus
Supplement.
4
<PAGE>
ERISA Considerations.................. A fiduciary of any employee benefit
plan subject to the Employee
Retirement Income Security Act of
1974, as amended ("ERISA"), or the
Code should carefully review with
its own legal advisors whether the
purchase or holding of Certificates
could give rise to a transaction
prohibited or otherwise
impermissible under ERISA or the
Code. Certain classes of
Certificates may not be transferred
unless the Trustee and the Depositor
are furnished with a letter of
representation or an opinion of
counsel to the effect that such
transfer will not result in a
violation of the prohibited
transaction provisions of ERISA and
the Code and will not subject the
Trustee, the Depositor or the
Servicer to additional obligations.
See "Description of the Certificates
- General" herein and "ERISA
Considerations" herein and in the
related Prospectus Supplement.
Legal Investment Matters.............. Certificates that constitute
"mortgage related securities" under
the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA")
will be so described in the related
Prospectus Supplement. Certificates
that are not so qualified may not be
legal investments for certain types
of institutional investors, subject,
in any case, to any other
regulations which may govern
investments by such institutional
investors. See "Legal Investment
Matters" herein and in the related
Prospectus Supplement.
Use of Proceeds....................... Substantially all the net proceeds
from the sale of a series of
Certificates will be applied to the
simultaneous purchase of the
Mortgage Assets included in the
related Trust (or to reimburse the
amounts previously used to effect
such purchase), the costs of
carrying the Mortgage Assets until
sale of the Certificates and to pay
other expenses. See "Use of
Proceeds" herein.
Rating................................ Each class of Certificates offered
by a Prospectus Supplement will be
rated in one of the four highest
rating categories of a nationally
recognized statistical rating
agency; provided, however, that one
or more classes of Subordinated
Certificates and Residual
Certificates, which will not be so
offered, need not be so rated.
Risk Factors.......................... Investment in the Certificates will
be subject to one or more risk
factors, including declines in the
value of Mortgaged Properties,
prepayment of Mortgage Loans, higher
risks of defaults on particular
types of Mortgage Loans, limitations
on security for the Mortgage Loans,
limitations on credit enhancement
and various other factors. See "Risk
Factors" herein and in the related
Prospectus Supplement.
5
<PAGE>
RISK FACTORS
Prospective investors should consider, among other things, the
following risk factors in connection with the purchase of the Certificates:
General. If the residential real estate market in general or a
regional or local area where Mortgage Assets for a Trust are concentrated
should experience an overall decline in property values, or a significant
downturn in economic conditions, rates of delinquencies, foreclosures and
losses could be higher than those now generally experienced in the mortgage
lending industry. See "The Trusts - Mortgage Loans" herein.
Limited Obligations. The Certificates will not represent an interest
in or obligation of the Depositor. The Certificates of each series will not be
insured or guaranteed by any government agency or instrumentality, the
Depositor, any Servicer or the Seller.
Prepayment Considerations. The prepayment experience on Mortgage
Loans or Contracts constituting or underlying the Mortgage Assets will affect
the average life of each class of Certificates relating to a Trust.
Prepayments may be influenced by a variety of economic, geographic, social and
other factors, including changes in interest rate levels. In general, if
mortgage interest rates fall, the rate of prepayment would be expected to
increase. Conversely, if mortgage interest rates rise, the rate of prepayment
would be expected to decrease. Other factors affecting prepayment of mortgage
loans include changes in housing needs, job transfers, unemployment and
servicing decisions. See "Prepayment and Yield Considerations" in the related
Prospectus Supplement.
Risk of Higher Default Rates for Mortgage Loans with Balloon
Payments. A portion of the aggregate principal balance of the Mortgage Loans
at any time may be "balloon loans" that provide for the payment of the
unamortized principal balance of such Mortgage Loan in a single payment at
maturity ("Balloon Loans"). Such Balloon Loans provide for equal monthly
payments, consisting of principal and interest, generally based on a 30-year
amortization schedule, and a single payment of the remaining balance of the
Balloon Loan generally 5, 7, 10, or 15 years after origination. Amortization
of a Balloon Loan based on a scheduled period that is longer than the term of
the loan results in a remaining principal balance at maturity that is
substantially larger than the regular scheduled payments. The Depositor does
not have any information regarding the default history or prepayment history
of payments on Balloon Loans. Because borrowers of Balloon Loans are required
to make substantial single payments upon maturity, it is possible that the
default risk associated with the Balloon Loans is greater than that associated
with fully-amortizing Mortgage Loans.
Security Interests and Other Aspects of the Contracts. Contracts may
be secured by a security interest in a Manufactured Home. Perfection of
security interests in the Manufactured Homes and enforcement of rights to
realize upon the value of the Manufactured Homes as collateral for the
Contracts are subject to a number of Federal and state laws, including the
Uniform Commercial Code as adopted in each state and each state's certificate
of title statutes. The steps necessary to perfect the security interest in a
Manufactured Home will vary from state to state. Because of the expense and
administrative inconvenience involved, no party will be required to amend any
certificates of title to change the lienholder specified therein to the
Trustee and no party will be required to deliver any certificate of title to
the Trustee or note thereon the Trustee's interest. Consequently, in some
states, in the absence of such an amendment, the assignment to the Trustee of
the security interest in the Manufactured Home may not be effective or such
security interest may not be perfected and, in the absence of such notation or
delivery to the Trustee, the assignment of the security interest in the
Manufactured Home may not be effective against creditors of the previous owner
of the related Contract or a trustee in bankruptcy of such previous owner. In
addition, numerous Federal and state consumer protection laws impose
requirements on lending under conditional sales contracts and installment loan
agreements such as the Contracts, and the failure by the lender or seller of
goods to comply with such requirements could give rise to liabilities of
assignees for amounts due under such agreements and claims by such assignees
may be subject to set-off as a result of such lender's or seller's
noncompliance. These laws would apply to the Trustee as assignee of the
Contracts. Each Seller of Contracts will warrant that each Contract sold by it
complies with all requirements of law and will make certain warranties
relating to the validity, subsistence, perfection and priority of the security
interest in each Manufactured Home securing a Contract. A breach of any such
warranty that materially adversely affects any Contract would create an
obligation of the Seller to repurchase such Contract unless such breach is
cured. If any related Credit Enhancement is exhausted and
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<PAGE>
recovery of amounts due on the Contracts is dependent on repossession and resale
of Manufactured Homes securing Contracts that are in default, certain other
factors may limit the ability of the Trust to realize upon the Manufactured
Homes or may limit the amount realized to less than the amount due. See "Certain
Legal Aspects of the Mortgage Assets - The Contracts" herein.
Limited Liquidity. There will be no market for the Certificates of
any series prior to the issuance thereof, and there can be no assurance that a
secondary market will develop or, if it does develop, that it will provide
liquidity of investment or will continue for the life of the Certificates of
such series. The market value of the Certificates will fluctuate with changes
in prevailing rates of interest. Consequently, the sale of Certificates in any
market that may develop may be at a discount from the Certificates' par value
or purchase price. Owners of Certificates generally have no right to request
redemption of Certificates, and the Certificates are subject to redemption
only under the limited circumstances described in the related Prospectus
Supplement. In addition, the Certificates will not be listed on any securities
exchange.
Limited Assets. Owners of Certificates of each series must rely upon
distributions on the related Mortgage Assets, together with the other specific
assets pledged for the benefit of such series (which assets may be subject to
release from such pledge prior to payment in full of the Certificates), for
the payment of principal of, and interest on, that series of Certificates. If
the assets comprising the Trust are insufficient to make payments on such
Certificates, no other assets of the Depositor will be available for payment
of the deficiency. Because payments of principal will be applied to classes of
outstanding Certificates of a series in the priority specified in the related
Prospectus Supplement, a deficiency may have a disproportionately greater
effect on the Certificates of classes having lower priority in payment. In
addition, due to the priority of payments and the allocation of losses,
defaults experienced on the assets comprising a Trust may have a
disproportionate effect on a specified class or classes within such series.
Certain of the Mortgage Loans included in a Trust, particularly those
secured by Multifamily Properties, may not be fully amortizing (or may not
amortize at all) over their terms to maturity and, thus, will require
substantial payments of principal and interest (that is, balloon payments) at
their stated maturity. Mortgage Loans of this type involve a greater degree of
risk than self-amortizing loans because the ability of a Mortgagor to make a
balloon payment typically will depend upon its ability either to fully
refinance the loan or to sell the related Mortgaged Property at a price
sufficient to permit the Mortgagor to make the balloon payment. The ability of
a Mortgagor to accomplish either of these goals will be affected by a number
of factors, including the value of the related Mortgaged Property, the level
of available mortgage rates at the time of sale or refinancing, the
Mortgagor's equity in the related Mortgaged Property, prevailing general
economic conditions, the availability of credit for loans secured by
comparable real properties and, in the case of Multifamily Properties, the
financial condition and operating history of the Mortgagor and the related
Mortgaged Property, tax laws and rent control laws.
It is anticipated that some or all of the Mortgage Loans included in
any Trust, particularly Mortgage Loans secured by Multifamily Properties, will
be nonrecourse loans or loans for which recourse may be restricted or
unenforceable. As to those Mortgage Loans, recourse in the event of Mortgagor
default will be limited to the specific real property and other assets, if
any, that were pledged to secure the Mortgage Loan. However, even with respect
to those Mortgage Loans that provide for recourse against the Mortgagor and
its assets generally, there can be no assurance that enforcement of such
recourse provisions will be practicable, or that the other assets of the
Mortgagor will be sufficient to permit a recovery in respect of a defaulted
Mortgage Loan in excess of the liquidation value of the related Mortgaged
Property.
Limitations, Reduction and Substitution of Credit Enhancement. Credit
Enhancement may be provided in one or more of the forms described in the
related Prospectus Supplement, including, but not limited to, prioritization
as to payments of one or more classes of such series, a Mortgage Pool
Insurance Policy, a Special Hazard Insurance Policy, a bankruptcy bond, one or
more Reserve Funds, other insurance, guaranties and similar instruments and
agreements, or any combination thereof. See "Credit Enhancement" herein.
Regardless of the Credit Enhancement provided, the amount of coverage may be
limited in amount and in most cases will be subject to periodic reduction in
accordance with a schedule or formula. Furthermore, such Credit Enhancement
may provide only very limited coverage as to certain types of losses and may
provide no coverage as to certain other types of losses. The Trustee may be
permitted to reduce, terminate or substitute all or a portion of the Credit
Enhancement for any series of Certificates, if the applicable rating agencies
indicate that the then-current rating thereof will not be adversely affected.
7
<PAGE>
Original Issue Discount. All the Compound Interest Certificates and
Stripped Certificates that are entitled only to interest distributions will
be, and certain of the other Certificates may be, issued with original issue
discount for federal income tax purposes. An Owner of a Certificate issued
with original issue discount will be required to include original issue
discount in ordinary gross income for federal income tax purposes as it
accrues, in advance of receipt of the cash attributable to such income.
Accrued but unpaid interest on such Certificates generally will be treated as
original issue discount for this purpose. See "Certain Federal Income Tax
Consequences - Federal Income Tax Consequences for REMIC Certificates," "-
Taxation of Regular Certificates - Variable Rate Regular Certificates,"
"Certain Federal Income Tax Consequences - Federal Income Tax Consequences for
Certificates as to Which No REMIC Election Is Made - Standard Certificates,"
and "Certain Federal Income Tax Consequences - Premium and Discount" and "-
Stripped Certificates" herein.
Book Entry Registration. Because transfers and pledges of Book Entry
Certificates may be effected only through book entries at a Clearing Agency
through Clearing Agency Participants, the liquidity of the secondary market
for Book Entry Certificates may be reduced to the extent that some investors
are unwilling to hold Certificates in book entry form in the name of Clearing
Agency Participants and the ability to pledge Book Entry Certificates may be
limited due to lack of a physical certificate. Beneficial Owners of Book Entry
Certificates may, in certain cases, experience delay in the receipt of
payments of principal and interest because such payments will be forwarded by
the Trustee to the Clearing Agency who will then forward payment to the
Clearing Agency Participants who will thereafter forward payment to Beneficial
Owners. In the event of the insolvency of the Clearing Agency or of a Clearing
Agency Participant in whose name Certificates are recorded, the ability of
Beneficial Owners to obtain timely payment and (if the limits of applicable
insurance coverage by the Securities Investor Protection Corporation are
exceeded, or if such coverage is otherwise unavailable) ultimate payment of
principal and interest on Book Entry Certificates may be impaired.
Certain Matters Relating to Insolvency. The Sellers of the Mortgage
Assets to the Depositor and the Depositor intend that the transfers of such
Mortgage Assets to the Depositor, and in turn to the applicable Trust,
constitute sales rather than pledges to secure indebtedness for insolvency
purposes. If, however, a seller of Mortgage Assets were to become a debtor
under the federal bankruptcy code, it is possible that a creditor,
trustee-in-bankruptcy or receiver of such seller may argue that the sale
thereof by such Seller is a pledge rather than a sale. This position, if
argued or accepted by a court, could result in a delay in or reduction of
distributions on the related Certificates.
Junior Lien Mortgage Loans. Because Mortgage Loans secured by junior
(i.e., second, third, etc.) liens are subordinate to the rights of the
beneficiaries under the related senior deeds of trust or senior mortgages, a
decline in the residential real estate market would adversely affect the
position of the related Trust as a junior beneficiary or junior mortgagee
before having such an effect on the position of the related senior
beneficiaries or senior mortgagees. A rise in interest rates over a period of
time, the general condition of a Mortgaged Property and other factors may also
have the effect of reducing the value of the Mortgaged Property from the value
at the time the junior lien Mortgage Loan was originated and, as a result, may
reduce the likelihood that, in the event of a default by the borrower,
liquidation or other proceeds will be sufficient to satisfy the junior lien
Mortgage Loan after satisfaction of any senior liens and the payment of any
liquidation expenses.
Liquidation expenses with respect to defaulted Mortgage Loans do not
vary directly with the outstanding principal balance of the Mortgage Loans at
the time of default. Therefore, assuming that a Servicer took the same steps
in realizing upon defaulted Mortgage Loans having small remaining principal
balances as in the case of defaulted Mortgage Loans having larger principal
balances, the amount realized after expenses of liquidation would be smaller
as a percentage of the outstanding principal balance of the smaller Mortgage
Loans. To the extent the average outstanding principal balances of the
Mortgage Loans in a Trust are relatively small, realizations net of
liquidation expenses may also be relatively small as a percentage of the
principal amount of the Mortgage Loans.
Limitations on Interest Payments and Foreclosures. Generally, under
the terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as amended
(the "Relief Act"), or similar state legislation, a Mortgagor who enters
military service after the origination of the related Mortgage Loan (including
a Mortgagor who is a member of the National Guard or is in reserve status at
the time of the origination of the Mortgage Loan and is later called to active
duty) may not be charged interest (including fees and charges) above an annual
rate of 6% during the period of such Mortgagor's active duty status, unless a
court orders otherwise upon application of the lender. It is possible that
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<PAGE>
such action could have an effect, for an indeterminate period of time, on the
ability of the related Servicer to collect full amounts of interest on certain
of the Mortgage Loans. In addition, the Relief Act imposes limitations that
would impair the ability of the related Servicer to foreclose on an affected
Mortgage Loan during the Mortgagor's period of active duty status. Thus, in
the event that such a Mortgage Loan goes into default, there may be delays and
losses occasioned by the inability to realize upon the Mortgaged Property in a
timely fashion.
Security Ratings. The rating of Certificates credit enhanced through
external credit enhancement such as a letter of credit, financial guaranty
insurance policy or mortgage pool insurance will depend primarily on the
creditworthiness of the issuer of such external credit enhancement device (a
"Credit Enhancer"). Any reduction in the rating assigned to the claims-paying
ability of the related Credit Enhancer below the rating initially given to the
related Certificates would likely result in a reduction in the rating of the
Certificates. See "Ratings" in the Prospectus Supplement.
Other Legal Considerations. Applicable federal and state laws
generally regulate interest rates and other charges, require certain
disclosures, prohibit unfair and deceptive practices, regulate debt
collection, and require licensing of the originators of the mortgage loans and
contracts. Depending on the provisions of the applicable law and the specified
facts and circumstances involved, violations of those laws, policies and
principles may limit the ability to collect all or part of the principal of or
interest on the Mortgage Loans and Contracts and may entitle the borrower to a
refund of amounts previously paid. See "Certain Legal Aspects of the Mortgage
Assets" herein.
DESCRIPTION OF THE CERTIFICATES
Each Trust will be created pursuant to an Agreement entered into
among the Depositor, the Trustee, the Master Servicer, if any, and the
Servicer. The provisions of each Agreement will vary depending upon the nature
of the Certificates to be issued thereunder and the nature of the related
Trust. Certificates which represent beneficial interests in the Trust will be
issued pursuant to the Agreement similar to the form filed as an Exhibit to
the Registration Statement of which this Prospectus is a part. The following
summaries and the summaries set forth under "Administration" describe certain
provisions relating to each series of Certificates. The Prospectus Supplement
for a series of Certificates will describe the specific provisions relating to
such series. The Depositor will provide Owners of Certificates, without
charge, on written request a copy of the Agreement for the related series.
Requests should be addressed to ContiSecurities Asset Funding Corp., 277 Park
Avenue, 38th Floor, New York, New York 10172. The Agreement relating to a
series of Certificates will be filed with the Securities and Exchange
Commission within 15 days after the date of issuance of such series of
Certificates (the "Delivery Date").
The Certificates of a series will be entitled to payment only from
the assets of the Trust and any other assets pledged for the benefit of the
Certificates and will not be entitled to payments in respect of the assets
included in any other trust fund established by the Depositor. The
Certificates will not represent obligations of the Depositor, the Trustee, the
Master Servicer, if any, any Servicer or any affiliate thereof and will not be
guaranteed by any governmental agency. See "The Trusts" herein.
The Mortgage Assets relating to a series of Certificates, other than
Title I Loans and GNMA MBS, will not be insured or guaranteed by any
governmental entity and, to the extent that delinquent payments on or losses
in respect of defaulted Mortgage Assets, are not advanced or paid from any
applicable Credit Enhancement, such delinquencies may result in delays in the
distribution of payments on, or losses allocated to one or more classes of
Certificates of such series.
General
The Certificates of each series will be issued either in book entry
form or in fully registered form. The minimum original denomination of each
class of Certificates will be specified in the related Prospectus Supplement.
The original "Certificate Principal Balance" of each Certificate will equal
the aggregate distributions or payments allocable to principal to which such
Certificate is entitled and distributions allocable to interest on each
Certificate that is not entitled to distributions allocable to principal will
be calculated based on the "Notional Principal Balance" of such Certificate.
The Notional Principal Balance of a Certificate will not evidence an interest
in or entitlement to
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distributions allocable to principal but will be used solely for convenience in
expressing the calculation of interest and for certain other purposes.
Except as described below under "Book Entry Registration" with
respect to Book Entry Certificates, the Certificates of each series will be
transferable and exchangeable on a "Certificate Register" to be maintained at
the corporate trust office or such other office or agency maintained for such
purposes by the Trustee. The Trustee will be appointed initially as the
"Certificate Registrar" and no service charge will be made for any
registration of transfer or exchange of Certificates, but payment of a sum
sufficient to cover any tax or other governmental charge may be required.
Under current law the purchase and holding of certain classes of
Certificates may result in "prohibited transactions" within the meaning of
ERISA and the Code. See "ERISA Considerations" herein and in the related
Prospectus Supplement. Transfer of Certificates of such a class will not be
registered unless the transferee (i) executes a representation letter stating
that it is not, and is not purchasing on behalf of, any such plan, account or
arrangement or (ii) provides an opinion of counsel satisfactory to the Trustee
and the Depositor that the purchase of Certificates of such a class by or on
behalf of such plan, account or arrangement is permissible under applicable
law and will not subject the Trustee, the Servicer or the Depositor to any
obligation or liability in addition to those undertaken in the Agreement.
As to each series, one or more elections may be made to treat the
related Trust or designated portions thereof as a REMIC for federal income tax
purposes. The related Prospectus Supplement will specify whether a REMIC
election is to be made. Alternatively, the Agreement for a series may provide
that a REMIC election may be made at the discretion of the Depositor or the
Servicer and may only be made if certain conditions are satisfied. See
"Certain Federal Income Tax Considerations" herein. As to any such series, the
terms and provisions applicable to the making of a REMIC election, as well as
any material federal income tax consequences to Owners of Certificates not
otherwise described herein, will be set forth in the related Prospectus
Supplement. If such an election is made with respect to a series, one of the
classes will be designated as evidencing the "residual interests" in the
related REMIC, as defined in the Code. All other classes of Certificates in
such a series will constitute "regular interests" in the related REMIC, as
defined in the Code. As to each series with respect to which a REMIC election
is to be made, the Servicer, the Trustee, an Owner of Residual Certificates or
another person as specified in the related Prospectus Supplement will be
obligated to take all actions required in order to comply with applicable laws
and regulations and will be obligated to pay any prohibited transaction taxes.
The person so specified will be entitled to reimbursement for any such
payment.
Classes of Certificates
Each series of Certificates will be issued in one or more classes
which will evidence the beneficial ownership in the assets of the Trust that
are allocable to (i) principal of such class of Certificates and (ii) interest
on such Certificates. If specified in the Prospectus Supplement, one or more
classes of a series of Certificates may evidence beneficial ownership
interests in separate groups of assets included in the related Trust.
The Certificates will have an aggregate original Certificate
Principal Balance equal to the aggregate unpaid principal balance of the
Mortgage Assets (plus, amounts held in a Pre-Funding Account, if any) as of
the time and day prior to creation of the Trust specified in the related
Prospectus Supplement (the "Cut-Off Date") after deducting payments of
principal due before the Cut-Off Date and will bear interest at rates which,
on a weighted basis, will be equal to the Pass-Through Rate. The Pass-Through
Rate will equal the weighted average rate of interest borne by the related
Mortgage Assets, net of the aggregate servicing fees, amounts allocated to the
residual interests and any other amounts as are specified in the Prospectus
Supplement. The original Certificate Principal Balance (or Notional Principal
Balance) of the Certificates of a series and the interest rate on the classes
of such Certificates will be determined in the manner specified in the
Prospectus Supplement.
Each class of Certificates that is entitled to distributions
allocable to interest will bear interest at a fixed rate or a rate that is
subject to change from time to time (a) in accordance with a schedule, (b) by
reference to an index, or (c) otherwise (each, a "Certificate Interest Rate").
One or more classes of Certificates may provide for interest that accrues but is
not currently payable ("Compound Interest Certificates"). With respect to any
class of Compound
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Interest Certificates, any interest that has accrued but is not paid on a given
Distribution Date will be added to the aggregate Certificate Principal Balance
of such class of Certificates on that Distribution Date.
A series of Certificates may include one or more classes entitled
only to distributions or payments (i) allocable to interest, (ii) allocable to
principal (and allocable as between scheduled payments of principal and
Principal Prepayments, as defined below), or (iii) allocable to both principal
(and allocable as between scheduled payments of principal and Principal
Prepayments) and interest. A series of Certificates may consist of one or more
classes as to which distributions or payments will be allocated (i) on the
basis of collections from designated portions of the assets of the Trust, (ii)
in accordance with a schedule or formula, (iii) in relation to the occurrence
of events, or (iv) otherwise. The timing and amounts of such distributions or
payments may vary among classes, over time or otherwise.
A series of Certificates may include one or more Classes of Scheduled
Amortization Certificates and Companion Certificates. "Scheduled Amortization
Certificates" are Certificates with respect to which payments of principal are
to be made in specified amounts on specified Distribution Dates, to the extent
of funds available on such Distribution Date. "Companion Certificates" are
Certificates which receive payments of all or a portion of any funds available
on a given Distribution Date which are in excess of amounts required to be
applied to payments on Scheduled Amortization Certificates on such
Distribution Date. Because of the manner of application of payments of
principal to Companion Certificates, the weighted average lives of Companion
Certificates of a series may be expected to be more sensitive to the actual
rate of prepayments on the Mortgage Assets in the related Trust than will the
Scheduled Amortization Certificates of such series.
One or more series of Certificates may constitute series of "Special
Allocation Certificates", which may include Senior Certificates, Subordinated
Certificates, Priority Certificates and Non-Priority Certificates. As
specified in the related Prospectus Supplement for a series of Special
Allocation Certificates, the timing and/or priority of payments of principal
and/or interest may favor one or more classes of Certificates over one or more
other classes of Certificates. Such timing and/or priority may be modified or
reordered upon the occurrence of one or more specified events. Losses on Trust
assets for such series may be disproportionately borne by one or more classes
of such series, and the proceeds and distributions from such assets may be
applied to the payment in full of one or more classes within such series
before the balance, if any, of such proceeds are applied to one or more other
classes within such series. For example, Special Allocation Certificates in a
series may be comprised of one or more classes of Senior Certificates having a
priority in right to distributions of principal and interest over one or more
classes of Subordinated Certificates, as a form of Credit Enhancement. See
"Credit Enhancement - Subordination" herein. Typically, the Subordinated
Certificates will carry a rating by the rating agencies lower than that of the
Senior Certificates. In addition, one or more classes of Certificates
("Priority Certificates") may be entitled to a priority of distributions of
principal or interest from assets in the Trust over another class of
Certificates ("Non-Priority Certificates"), but only after the exhaustion of
other Credit Enhancement applicable to such series. The Priority Certificates
and Non-Priority Certificates nonetheless may be within the same rating
category.
Distributions of Principal and Interest
General. Distributions of principal and interest will be made to the
extent of funds available therefor, on the dates specified in the Prospectus
Supplement (each, a "Distribution Date") to the persons in whose names the
Certificates are registered (the "Owners") at the close of business on the
dates specified in the Prospectus Supplement (each, a "Record Date"). With
respect to Certificates other than Book Entry Certificates, distributions will
be made by check or money order mailed to the person entitled thereto at the
address appearing in the Certificate Register or, if specified in the
Prospectus Supplement, in the case of Certificates that are of a certain
minimum denomination as specified in the Prospectus Supplement, upon written
request by the Owner of a Certificate, by wire transfer or by such other means
as are agreed upon with the person entitled thereto; provided, however, that
the final distribution in retirement of the Certificates (other than Book
Entry Certificates) will be made only upon presentation and surrender of the
Certificates at the office or agency of the Trustee specified in the notice of
such final distribution. With respect to Book Entry Certificates, such
payments will be made as described below under "Book Entry Registration".
Distributions will be made out of, and only to the extent of, funds
in a separate account established and maintained for the benefit of the
Certificates of the related series (the "Certificate Account" with respect to
such
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series), including any funds transferred from any related Reserve Fund. Amounts
may be invested in the Eligible Investments specified herein and in the
Prospectus Supplement, and all income or other gain from such investments will
be deposited in the related Certificate Account and may be available to make
payments on the Certificates of the applicable series on the next succeeding
Distribution Date or pay after amounts owed by the Trust.
Distributions of Interest. Interest will accrue on the aggregate
Certificate Principal Balance (or, in the case of Certificates entitled only
to distributions allocable to interest, the aggregate Notional Principal
Balance (as defined below)) of each class of Certificates entitled to interest
from the date, at the applicable Certificate Interest Rate and for the periods
(each, an "Interest Accrual Period") specified in the Prospectus Supplement.
The aggregate Certificate Principal Balance of any class of Certificates
entitled to distributions of principal will be the aggregate original
Certificate Principal Balance of such class of Certificates, reduced by all
distributions allocable to principal, and, in the case of Compound Interest
Certificates, increased by all interest accrued but not then distributable on
such Compound Interest Certificates. With respect to a class of Certificates
entitled only to distributions allocable to interest, such interest will
accrue on a notional principal balance (the "Notional Principal Balance") of
such class, computed solely for purposes of determining the amount of interest
accrued and payable on such class of Certificates.
To the extent funds are available therefor, interest accrued during
each Interest Accrual Period on each class of Certificates entitled to
interest (other than a class of Compound Interest Certificates) will be
distributable on the Distribution Dates specified in the Prospectus Supplement
until the aggregate Certificate Principal Balance of the Certificates of such
class has been distributed in full or, in the case of Certificates entitled
only to distributions allocable to interest, until the aggregate Notional
Principal Balance of such Certificates is reduced to zero or for the period of
time designated in the Prospectus Supplement. Distributions of interest on
each class of Compound Interest Certificates will commence only after the
occurrence of the events specified in the Prospectus Supplement and, prior to
such time, the aggregate Certificate Principal Balance (or Notional Principal
Balance) of such class of Compound Interest Certificates, will increase on
each Distribution Date by the amount of interest that accrued on such class of
Compound Interest Certificates during the preceding Interest Accrual Period
but that was not required to be distributed to such class on such Distribution
Date. Any such class of Compound Interest Certificates will thereafter accrue
interest on its outstanding Certificate Principal Balance (or Notional
Principal Balance) as so adjusted.
Distributions of Principal. The Prospectus Supplement will specify
the method by which the amount of principal to be distributed on the
Certificates on each Distribution Date will be calculated and the manner in
which such amount will be allocated among the classes of Certificates entitled
to distributions of principal.
One or more classes of Certificates may be entitled to receive all or
a disproportionate percentage of the payments of principal which are received
on the related Mortgage Assets in advance of their scheduled due dates and are
not accompanied by amounts representing scheduled interest due after the month
of such payments ("Principal Prepayments"). Any such allocation may have the
effect of accelerating the amortization of such Certificates relative to the
interests evidenced by the other Certificates.
Unscheduled Distributions. The Certificates of a series may be
subject to receipt of distributions before the next scheduled Distribution
Date under the circumstances and in the manner described below and in the
related Prospectus Supplement. If applicable, such unscheduled distributions
will be made on the Certificates of a series on the date and in the amount
specified in the related Prospectus Supplement if, due to substantial payments
of principal (including Principal Prepayments) on the related Mortgage Assets,
low rates then available for reinvestment of such payments or both, it is
determined, based on specified assumptions, that the amount anticipated to be
on deposit in the Certificate Account for such series on the next related
Distribution Date, together with, if applicable, any amounts available to be
withdrawn from any related Reserve Fund or from any other Credit Enhancement
provided for such series, may be insufficient to make required distributions
on the Certificates on such Distribution Date. The amount of any such
unscheduled distribution that is allocable to principal will not exceed the
amount that would otherwise have been required to be distributed as principal
on the Certificates on the next Distribution Date and will include interest at
the applicable Certificate Interest Rate (if any) on the amount of the
unscheduled distribution allocable to principal for the period and to the date
specified in the Prospectus Supplement.
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All distributions allocable to principal in any unscheduled
distribution will be made in the same priority and manner as distributions of
principal on the Certificates would have been made on the next Distribution
Date except as otherwise stated in the related Prospectus Supplement, and,
with respect to Certificates of the same class, unscheduled distributions of
principal will be made on a pro rata basis. Notice of any unscheduled
distribution will be given by the Trustee prior to the date of such
distribution.
Book Entry Registration
Certificates may be issued as Book Entry Certificates and held in the
name of a Clearing Agency registered with the Securities and Exchange
Commission or its nominee. Transfers and pledges of Book Entry Certificates
may be made only through entries on the books of the Clearing Agency in the
name of Clearing Agency Participants or their nominees. Clearing Agency
Participants may also be Beneficial Owners of Book Entry Certificates.
Purchasers and other Beneficial Owners may not hold Book Entry
Certificates directly but may hold, transfer or pledge their ownership
interest in the Certificates only through Clearing Agency Participants.
Furthermore, Beneficial Owners will receive all payments of principal and
interest with respect to the Certificates and, if applicable, may request
redemption of Certificates, only through the Clearing Agency and the Clearing
Agency Participants. Beneficial Owners will not be registered Owners of
Certificates or be entitled to receive definitive certificates representing
their ownership interest in the Certificates except under the limited
circumstances, if any, described in the related Prospectus Supplement. See
"Risk Factors - Book Entry Registration" herein.
If Certificates of a series are issued as Book Entry Certificates,
the Clearing Agency will be required to make book entry transfers among
Clearing Agency Participants, to receive and transmit payments of principal
and interest with respect to the Certificates of such series, and to receive
and transmit requests for redemption with respect to such Certificates.
Clearing Agency Participants with whom Beneficial Owners have accounts with
respect to such Book Entry Certificates will be similarly required to make
book entry transfers and receive and transmit payments and redemption requests
on behalf of their respective Beneficial Owners. Accordingly, although
Beneficial Owners will not be registered Owners of Certificates and will not
possess physical certificates, a method will be provided whereby Beneficial
Owners may receive payments, transfer their interests, and submit redemption
requests.
List of Owners of Certificates
Upon written request of a specified number or percentage interests of
Owners of Certificates of record of a series of Certificates for purposes of
communicating with other Owners of Certificates with respect to their rights
as Owners of Certificates, the Trustee will afford such Owners access during
business hours to the most recent list of Owners of Certificates of that
series held by the Trustee. With respect to Book Entry Certificates, the only
named Owner on the Certificate Register will be the Clearing Agency.
The Agreement will not provide for the holding of any annual or other
meetings of Owners of Certificates.
THE TRUSTS
The Trust for a series of Certificates will consist of: (i) the
Mortgage Assets (subject, if specified in the Prospectus Supplement, to
certain exclusions) received on and after the related Cut-Off Date; (ii) all
payments (subject, if specified in the Prospectus Supplement, to certain
exclusions) in respect of such Mortgage Assets, which may be adjusted, to the
extent specified in the related Prospectus Supplement, in the case of interest
payments on Mortgage Assets, to the Pass-Through Rate; (iii) if specified in
the Prospectus Supplement, reinvestment income on such payments; (iv) with
respect to a Trust that includes Mortgage Loans, or Contracts, all property
acquired by foreclosure or deed in lieu of foreclosure with respect to any
such Mortgage Loan or Contract; (v) certain rights of the Trustee, the
Depositor and the Servicer under any policies required to be maintained in
respect of the related Mortgage Assets; (vi) certain rights of the Depositor
or one of its affiliates under any Mortgage Loan purchase
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agreement, including in respect of any representations and warranties therein;
and (vii) if so specified in the Prospectus Supplement, one or more forms of
Credit Enhancement.
The Certificates of each series will be entitled to payment only from
the assets of the related Trust and any other assets pledged therefor and will
not be entitled to payments in respect of the assets of any other trust
established by the Depositor.
Mortgage Assets may be acquired by the Depositor from affiliated or
unaffiliated originators. The following is a brief description of the Mortgage
Assets expected to be included in the Trusts. If specific information
respecting the Mortgage Assets is not known at the time the related series of
Certificates initially are offered, more general information of the nature
described below will be provided in the related Prospectus Supplement, and
specific information will be set forth in a report on Form 8-K to be filed
with the Securities and Exchange Commission within fifteen days after the
initial issuance of such Certificates. A copy of the Agreement with respect to
each series of Certificates will be attached to the Form 8-K and will be
available for inspection at the corporate trust office of the Trustee
specified in the related Prospectus Supplement. A schedule of the Mortgage
Assets relating to each series of Certificates, will be attached to the
related Agreement delivered to the Trustee upon delivery of such Certificates.
Mortgage Loans
The Mortgage Loans will be evidenced by promissory notes (the
"Mortgage Notes") secured by mortgages or deeds of trust (the "Mortgages")
creating liens on residential properties (the "Mortgaged Properties"). Such
Mortgage Loans will be within the broad classifications of single family
mortgage loans, defined generally as loans on residences containing
one-to-four dwelling units or multifamily loans. If specified in the
Prospectus Supplement, the Mortgage Loans may include cooperative apartment
loans ("Cooperative Loans") secured by security interests in shares issued by
Cooperatives and in the related proprietary leases or occupancy agreements
granting exclusive rights to occupy specific dwelling units in such
Cooperatives' buildings, or the Mortgage Loans may be secured by junior liens
on the related mortgaged properties, including Title I Loans and other types
of home improvement retail installment contracts. The Mortgaged Properties
securing the Mortgage Loans may include investment properties and vacation and
second homes. The Mortgaged Property for such loans may also consist of
residential properties consisting of five or more rental or
cooperatively-owned dwelling units in high-rise, mid-rise or garden apartment
buildings or projects ("Multifamily Properties"). Each Mortgage Loan will be
selected by the Depositor for inclusion in the Trust from among those acquired
by the Depositor or originated or acquired by one or more affiliated or
unaffiliated originators, including newly originated loans. Mortgaged
Properties may be located in any one of the 50 states, the District of
Columbia or the Commonwealth of Puerto Rico.
The Mortgage Loans will be "conventional" mortgage loans, that is
they will not be insured or guaranteed by any governmental agency, the
principal and interest on the Mortgage Loans included in the Trust for a
series of Certificates will be payable either on the first day of each month
or on different scheduled days throughout each month, and the interest will be
calculated either on a simple-interest or accrual method as described in the
related Prospectus Supplement. When a full principal amount is paid on a
Mortgage Loan during a month, the mortgagor is generally charged interest only
on the days of the month actually elapsed up to the date of such prepayment,
at a daily interest rate that is applied to the principal amount of the
Mortgage Loan so prepaid.
The payment terms of the Mortgage Loans to be included in a Trust for
a series will be described in the related Prospectus Supplement and may
include any of the following features or combinations thereof or other
features described in the related Prospectus Supplement:
(a) Interest may be payable at a fixed rate, a rate adjustable from
time to time in relation to an index, a rate that is fixed for a period
of time or under certain circumstances and followed by an adjustable
rate, a rate that otherwise varies from time to time, or a rate that is
convertible from an adjustable rate to a fixed rate. Changes to an
adjustable rate may be subject to periodic limitations, maximum rates,
minimum rates or a combination of such limitations. Accrued interest
may be deferred and added to the principal of a Mortgage Loan for such
periods and under such circumstances as may be specified in the related
Prospectus Supplement. Mortgage Loans may provide for the payment of
interest at a rate lower than the specified mortgage rate for a period
of time or for the life of the Mortgage Loan with the amount
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of any difference contributed from funds supplied by the seller of the
Mortgaged Property or another source.
(b) Principal may be payable on a level debt service basis
to fully amortize the Mortgage Loan over its term, may be calculated
on the basis of an amortization schedule that is longer than the
original term to maturity or on an interest rate that is different
from the interest rate on the Mortgage Loan or may not be amortized
during all or a portion of the original term. Payment of all or a
substantial portion of the principal may be due on maturity.
Principal may include interest that has been deferred and added to
the principal balance of the Mortgage Loan.
(c) Monthly payments of principal and interest may be fixed
for the life of the Mortgage Loan, may increase over a specified
period of time or may change from period to period. Mortgage Loans
may include limits on periodic increases or decreases in the amount
of monthly payments and may include maximum or minimum amounts of
monthly payments.
(d) Prepayments of principal may be subject to a prepayment
fee, which may be fixed for the life of the Mortgage Loan or may
decline over time, and may be prohibited for the life of the Mortgage
Loan or for certain periods ("lockout periods"). Certain Mortgage
Loans may permit prepayments after expiration of the applicable
lockout period and may require the payment of a prepayment fee in
connection with any such subsequent prepayment. Other Mortgage Loans
may permit prepayments without payment of a fee unless the prepayment
occurs during specified time periods. The Mortgage Loans may include
"due-on-sale" clauses which permit the mortgagee to demand payment of
the entire Mortgage Loan in connection with the sale or certain
transfers of the related mortgaged property. Other Mortgage Loans may
be assumable by persons meeting the then applicable underwriting
standards of the Servicer, or as may be required by any applicable
government program.
(e) Another type of mortgage loan described in the Prospectus
Supplement.
With respect to a series for which the related Trust includes Mortgage
Loans, the related Prospectus Supplement may specify, among other things,
information regarding the interest rates (the "Mortgage Rates"), the average
Principal Balance and the aggregate Principal Balance, the years of origination
and original principal balances and the original loan-to-value ratios. The
"Principal Balance" of any Mortgage Loan will be the unpaid principal balance of
such Mortgage Loan as of the Cut-Off Date, after deducting any principal
payments due before the Cut-Off Date, reduced by all principal payments,
including principal payments advanced pursuant to the related Agreement,
previously distributed with respect to such Mortgage Loan and reported as
allocable to principal.
The "Loan-to-Value Ratio" of any Mortgage Loan will be determined by
dividing the amount of the Mortgage Loan by the Original Value (defined below)
of the related Mortgaged Property. The "principal amount" of the Mortgage
Loan, for purposes of computation of the Loan-to-Value Ratio of any Mortgage
Loan, will include any part of an origination fee that has been financed. In
some instances, it may also include amounts which the seller or some other
party to the transaction has paid to the mortgagee, such as minor reductions
in the purchase price made at the closing. The "Original Value" of a Mortgage
Loan is (a) in the case of any purchase money Mortgage Loan, the lesser of (i)
the value of the mortgaged property, based on an appraisal thereof and (ii)
the selling price, and (b) otherwise the value of the mortgaged property,
based on an appraisal thereof.
There can be no assurance that the Original Value will reflect actual
real estate values during the term of a Mortgage Loan. If the residential real
estate market should experience an overall decline in property values such
that the outstanding principal balances of the Mortgage Loans become equal to
or greater than the values of the Mortgaged Properties, the actual rates of
delinquencies, foreclosures and losses could be significantly higher than
those now generally experienced in the mortgage lending industry. In addition,
adverse economic conditions (which may or may not affect real estate values)
may affect the timely and ultimate payment by mortgagors of scheduled payments
of principal and interest on the Mortgage Loans and, accordingly, the actual
rates of delinquencies, foreclosures and losses with respect to the Mortgage
Loans.
Multifamily Loans will consist of Multifamily Loans consisting of
either Conventional Multifamily Loans or FHA-Insured Multifamily Loans secured
by mortgages or deeds of trust or other similar security instruments
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creating a lien on rental apartment buildings or projects containing five or
more units, including, but not limited to, high-rise, mid-rise and garden
apartments or secured by apartment buildings owned by cooperative housing
corporations. The Multifamily Properties may include mixed commercial and
residential structures. Unless otherwise specified in the related Prospectus
Supplement, each Mortgage Loan will create a first priority mortgage lien on a
Mortgaged Property. A Multifamily Loan may create a lien on a borrower's
leasehold estate in a property; however, unless otherwise specified in the
related Prospectus Supplement, the term of any such leasehold will exceed the
term of the Mortgage Loan by at least two years. The Depositor expects that
Mortgage Loans will have been originated by mortgagees in the ordinary course of
their real estate lending activities. Each Multifamily Loan will bear interest
at an annual fixed rate or adjustable rate of interest specified in the
Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, all
of the Multifamily Loans will have had original terms to maturity of not more
than 40 years and will provide for scheduled payments of principal, interest
or both, to be made on specified dates ("Due Dates") that occur monthly,
quarterly or semi-annually. A Multifamily Loan (i) may provide for accrual of
interest thereon at an interest rate (a "Mortgage Loan Rate") that is fixed
over its term of that adjusts from time to time, or that may be converted at
the borrower's election from an adjustable to a fixed Mortgage Loan Rate, or
from a fixed to an adjustable Mortgage Loan Rate, (ii) may provide for level
payments to maturity or for payments that adjust from time to time to
accommodate changes in the Mortgage Loan Rate or to reflect the occurrence of
certain events, and may permit negative amortization, (iii) may be fully
amortizing over its term to maturity, or may provide for little or no
amortization over its term and thus require a balloon payment on its stated
maturity date, and (iv) may contain a prohibition on prepayment (the period of
such prohibition, a "Lock-out Period" and its date of expiration, a "Lock-out
Expiration Date") or require payment of a premium or a yield maintenance
penalty (a "Prepayment Premium") in connection with a prepayment, in each case
as described in the related Prospectus Supplement. A Multifamily Loan may also
contain a provision that entitles the lender to a share of profits realized
from the operation or disposition of the Mortgaged Property (an "Equity
Participation"), as described in the related Prospectus Supplement. If holders
of any class or classes of Certificates of a series will be entitled to all or
a portion of an Equity Participation, the related Prospectus Supplement will
describe the Equity Participation and the method or methods by which
distributions in respect thereof will be made to such holders.
Lenders typically look to the Debt Service Coverage Ratio of a loan
secured by income-producing property as an important measure of the risk of
default on such loan. Unless otherwise defined in the related Prospectus
Supplement, the "Debt Service Coverage Ratio" of a Multifamily Loan at any
given time is the ratio of (i) the Net Operating Income of the related
Mortgaged Property for a twelve-month period to (ii) the annualized scheduled
payments on the Multifamily Loan and on any other loan that is secured by a
lien on the Mortgaged Property prior to the lien of the related Mortgage.
Unless otherwise defined in the related Prospectus Supplement, "Net Operating
Income" means, for any given period, the total operating revenues derived from
a Mortgaged Property during such period, minus the total operating expenses
incurred in respect of such Mortgaged Property during such period other than
(i) non-cash items such as depreciation and amortization, (ii) capital
expenditures and (iii) debt service on loans (including the related
Multifamily Loan) secured by liens on the Mortgaged Property. The Net
Operating Income of a Mortgage Property will fluctuate over time and may or
may not be sufficient to cover debt service on the related Multifamily Loan at
any given time. As the primary source of the operating revenues of a non-owner
occupied income-producing property, rental income (and maintenance payments
from tenant-stockholders of a Cooperative) may be affected by the condition of
the applicable real estate market and/or area economy.
Increases in operating expenses due to the general economic climate
or economic conditions in a locality or industry segment, such as increases in
interest rates, real estate tax rates, energy costs, labor costs and other
operating expenses and/or to changes in governmental rules, regulations and
fiscal policies, may also affect the risk of default on a Multifamily Loan. As
may be further described in the related Prospectus Supplement, in some cases
leases of Mortgaged Properties may provide that the lessee, rather than the
borrower/landlord, is responsible for payment of operating expenses ("Net
Leases"). However, the existence of such "net of expense" provisions will
result in stable Net Operating Income to the borrower/landlord only to the
extent that the lessee is able to absorb operating expense increases while
continuing to make rent payments.
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Contracts
Each pool of Contracts included in the Trust with respect to a series
of Certificates (the "Contract Pool") will consist of manufactured housing
conditional sales contracts and installment loan agreements or participation
interests therein (collectively, "Contracts"). The Contracts may be
conventional manufactured housing contracts or contracts insured by the FHA,
including Title I Contracts, or partially guaranteed by the VA. Each Contract
is secured by a Manufactured Home. The Prospectus Supplement will specify
whether the Contracts will be fully amortizing or have a balloon payment and
whether they will bear interest at a fixed or variable rate.
The Manufactured Homes securing the Contracts consist of manufactured
homes within the meaning of 42 United States Code, Section 5402(6), which
defines a "Manufactured Home" as "a structure, transportable in one or more
sections, which in the traveling mode, is eight body feet or more in width or
forty body feet or more in length, or, when erected on site, is three hundred
twenty or more square feet, and which is built on a permanent chassis and
designed to be used as a dwelling with or without permanent foundation when
connected to the required utilities, and includes the plumbing, heating,
air-conditioning, and electrical systems contained therein; except that such
term shall include any structure which meets all the requirements of this
paragraph except the size requirements and with respect to which the
manufacturer voluntarily files a certification required by the Secretary of
Housing and Urban Development and complies with the standards established
under [this] chapter." Moreover, if an election is made to treat the Trust as
a REMIC as described in "Certain Federal Income Tax Consequences - Federal
Income Tax Consequences for REMIC Certificates" herein, Manufactured Homes
will have a minimum of 400 square feet of living space and a minimum width in
excess of 102 inches.
For purposes of calculating the loan-to- value ratio of a Contract
relating to a new Manufactured Home, the "Collateral Value" is no greater than
the sum of a fixed percentage of the list price of the unit actually billed by
the manufacturer to the dealer (exclusive of freight to the dealer site)
including "accessories" identified in the invoice (the "Manufacturer's Invoice
Price"), plus the actual cost of any accessories purchased from the dealer, a
delivery and set-up allowance, depending on the size of the unit and the cost
of state and local taxes, filing fees and up to three years prepaid hazard
insurance premiums. The Collateral Value of a used Manufactured Home is the
least of the sales price, the appraised value, and the National Automobile
Dealer's Association book value plus prepaid taxes and hazard insurance
premiums. The appraised value of a Manufactured Home is based upon the age and
condition of the manufactured housing unit and the quality and condition of
the mobile home park in which it is situated, if applicable.
The related Prospectus Supplement may specify for the Contracts
contained in the related Contract Pool, among other things, the date of
origination of the Contracts; the annual percentage rates on the Contracts;
the loan-to-value ratios; the minimum and maximum outstanding principal
balance as of the Cut-Off Date and the average outstanding principal balance;
the outstanding principal balances of the Contracts included in the Contract
Pool; the original maturities of the Contracts; and the last maturity date of
any Contract.
Mortgage-Backed Securities
"Mortgage-Backed Securities" (or "MBS") may include (i) private (that
is, not guaranteed or insured by the United States or any agency or
instrumentality thereof) mortgage participations, mortgage pass-through
certificates or other mortgage-backed securities or (ii) certificates insured
or guaranteed by FHLMC or FNMA or GNMA.
Any MBS will have been issued pursuant to a participation and
servicing agreement, a pooling and servicing agreement, an indenture or
similar agreement (an "MBS Agreement"). A seller (the "MBS Issuer") and/or
servicer (the "MBS Servicer") of the underlying mortgage loans will have
entered into the MBS Agreement with a trustee or a custodian under the MBS
Agreement (the "MBS Trustee"), if any, or with the original purchaser or
purchasers of the MBS.
The MBS may have been issued in one or more classes with
characteristics similar to the classes of Certificates described herein.
Distributions in respect of the MBS will be made by the MBS Servicer or the
MBS Trustee on the dates specified in the related Prospectus Supplement. The
MBS Issuer or the MBS Servicer or another person specified in the related
Prospectus Supplement may have the right or obligation to repurchase or
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substitute assets underlying the MBS after a certain date or under other
circumstances specified in the related Prospectus Supplement.
Reserve funds, subordination, cross-support or other credit
enhancement similar to that described for the Certificates under "Credit
Enhancement" may have been provided with respect to the MBS. The type,
characteristics and amount of such credit enhancement, if any, will be a
function of the characteristics of the underlying mortgage loans and other
factors and generally will have been established on the basis of the
requirements of any rating agency that may have assigned a rating to the MBS,
or by the initial purchasers of the MBS.
The Prospectus Supplement for a series of Certificates that evidence
interests in MBS will specify, to the extent available, (i) the aggregate
approximate initial and outstanding principal amount and type of the MBS to be
included in the Trust, (ii) the original and remaining term to stated maturity
of the MBS, if applicable, (iii) the pass-through or bond rate of the MBS or
the formula for determining such rates, (iv) the payment characteristics of
the MBS, (v) the MBS Issuer, MBS Servicer and MBS Trustee, as applicable, (vi)
a description of the credit support, if any, (vii) the circumstances under
which the stated underlying mortgage loans, or the MBS themselves may be
purchased prior to their maturity, (viii) the terms on which mortgage loans
may be substituted for those originally underlying the MBS, (ix) the servicing
fees payable under the MBS Agreement, (x) to the extent available to the
Depositor, information in respect of the underlying mortgage loans, and (xi)
the characteristics of any cash flow agreements that relate to the MBS.
Other Mortgage Securities
Other Mortgage Securities include other securities that directly or
indirectly represent an ownership interest in, or are secured by and payable
from, mortgage loans on real property or mortgage-backed securities, including
residual interests in issuances of collateralized mortgage obligations or
mortgage pass-through certificates. Any Other Mortgage Securities that are
privately placed securities will not be included in a Trust until such time as
such privately placed securities would be freely transferable pursuant to Rule
144A of the Securities Act of 1933, as amended. Further (i) such privately
placed securities will have been acquired in the secondary market and not
pursuant to an initial offering thereof and (ii) the underlying issuer of such
securities will not be affiliated with the Depositor and will not have an
interest in the Trust. The Prospectus Supplement for a series of Certificates
will describe any Other Mortgage Securities to be included in the Trust for
such series.
CREDIT ENHANCEMENT
General. Various forms of Credit Enhancement may be provided with
respect to one or more classes of a series of Certificates or with respect to
the assets in the related Trust. Credit Enhancement may be in the form of the
subordination of one or more classes of the Certificates of such series, the
establishment of one or more Reserve Funds, the use of a cross-support
feature, use of a Mortgage Pool Insurance Policy, Special Hazard Insurance
Policy, bankruptcy bond, or another form of Credit Enhancement described in
the related Prospectus Supplement, or any combination of the foregoing. Credit
Enhancement may not provide protection against all risks of loss and may not
guarantee repayment of the entire principal balance of the Certificates and
interest thereon. If losses occur which exceed the amount covered by Credit
Enhancement or which are not covered by the Credit Enhancement, Owners of
Certificates will bear their allocable share of deficiencies.
Financial Guaranty Insurance Policies. If so specified in the related
Prospectus Supplement, a financial guaranty insurance policy or surety bond
("Financial Guaranty Insurance Policy") may be obtained and maintained for
each class or series of Certificates. The issuer of any Financial Guaranty
Insurance Policy (a "Financial Guaranty Insurer") will be described in the
related Prospectus Supplement. Such description will include financial
information on the Financial Guaranty Insurer. In addition, the audited
financial statements of a Financial Guaranty Insurer and an auditors consent
to use such financial statements will be filed with the Securities and
Exchange Commission on Form 8-K or will be incorporated by reference to
financial statements already on file with the Securities and Exchange
Commission.
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Unless otherwise specified in the related Prospectus Supplement, a
Financial Guaranty Insurance Policy will unconditionally and irrevocably
guarantee to Certificateholders that an amount equal to each full and
completed insured payment will be received by an agent of the Trustee (an
"Insurance Paying Agent") on behalf of Certificateholders, for distribution by
the Trustee to each Certificateholder. The "insured payment" will be defined
in the related Prospectus Supplement, and will generally equal the full amount
of the distributions of principal and interest to which Certificateholders are
entitled under the related Agreement plus any other amounts specified therein
or in the related Prospectus Supplement (the "Insured Payment").
Financial Guaranty Insurance Policies may apply only to certain
specified classes, or may apply at the Mortgage Asset level and only to
specified Mortgage Assets.
The specific terms of any Financial Guaranty Insurance Policy will be
as set forth in the related Prospectus Supplement. Financial Guaranty
Insurance Policies may have limitations including (but not limited to)
limitations on the insurer's obligation to guarantee the obligations of the
Seller or Depositor to repurchase or substitute for any Mortgage Loans,
Financial Guaranty Insurance Policies will not guarantee any specified rate of
prepayments and/or to provide funds to redeem Certificates on any specified
date.
Subject to the terms of the related Agreement, the Financial Guaranty
Insurer may be subrogated to the rights of Certificateholder to receive
payments under the Certificates to the extent of any payment by such Financial
Guaranty Insurer under the related Financial Guaranty Insurance Policy.
Subordination. Distributions in respect of scheduled principal,
interest or any combination thereof otherwise payable to one or more classes
of Certificates of a series (the "Subordinated Certificates") may be paid to
one or more other classes of such series (the "Senior Certificates") under the
circumstances and to the extent provided in the Prospectus Supplement. If
specified in the Prospectus Supplement, delays in receipt of scheduled
payments on the Mortgage Assets and losses on defaulted Mortgage Assets will
be borne first by the various classes of Subordinated Certificates and
thereafter by the various classes of Senior Certificates, in each case under
the circumstances and subject to the limitations specified in the Prospectus
Supplement. The aggregate distributions in respect of delinquent payments on
the Mortgage Assets over the lives of the Certificates or at any time, the
aggregate losses in respect of defaulted Mortgage Assets which must be borne
by the Subordinated Certificates by virtue of subordination and the amount of
the distributions otherwise distributable to the Subordinated Certificates
that will be distributable to Owners of Senior Certificates on any
Distribution Date may be limited as specified in the Prospectus Supplement. If
aggregate distributions in respect of delinquent payments on the Mortgage
Assets or aggregate losses in respect of such Mortgage Assets were to exceed
the total amounts payable and available for distribution to Owners of
Subordinated Certificates or, if applicable, were to exceed the specified
maximum amount, Owners of Senior Certificates could experience losses on the
Certificates.
In addition to or in lieu of the foregoing, all or any portion of
distributions otherwise payable to Subordinated Certificates on any
Distribution Date may instead be deposited into one or more Reserve Funds (as
defined below) established by the Trustee. If so specified in the Prospectus
Supplement, such deposits may be made on each Distribution Date, on each
Distribution Date for specified periods, or on each Distribution Date until
the balance in the Reserve Fund has reached a specified amount and, following
payments from the Reserve Fund to Owners of Senior Certificates or otherwise,
thereafter to the extent necessary to restore the balance in the Reserve Fund
to required levels, in each case as specified in the Prospectus Supplement. If
so specified in the Prospectus Supplement, amounts on deposit in the Reserve
Fund may be released to the Depositor or the Owners of any class of
Certificates at the times and under the circumstances specified in the
Prospectus Supplement.
If specified in the Prospectus Supplement, various classes of
Subordinate Certificates and Subordinated Certificates may themselves be
subordinate in their right to receive certain distributions to other classes
of Senior and Subordinated Certificates, respectively, through a cross-support
mechanism or otherwise.
As between classes of Senior Certificates and as between classes of
Subordinated Certificates, distributions may be allocated among such classes
(i) in the order of their scheduled final distribution dates, (ii) in
accordance with a schedule or formula, (iii) in relation to the occurrence of
events, or (iv) otherwise, in each case as specified in the Prospectus
Supplement. As between classes of Subordinated Certificates, payments with
respect to Senior
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Certificates on account of delinquencies or losses and payments to any Reserve
Fund will be allocated as specified in the Prospectus Supplement.
Overcollateralization. If specified in the Prospectus Supplement,
subordination provisions of a Trust may be used to accelerate to a limited
extent the amortization of one or more classes of Certificates relative to the
amortization of the related Mortgage Loans. The accelerated amortization is
achieved by the application of certain excess interest to the payment of
principal of one or more classes of Certificates. This acceleration feature
creates, with respect to the Mortgage Loans or groups thereof,
overcollateralization which results from the excess of the aggregate principal
balance of the related Mortgage Loans, or a group thereof, over the principal
balance of the related class of Certificates. Such acceleration may continue
for the life of the related Certificates, or may be limited. In the case of
limited acceleration, once the required level of overcollateralization is
reached, and subject to certain provisions specified in the related Prospectus
Supplement, such limited acceleration feature may cease, unless necessary to
maintain the required level of overcollateralization.
Cross-Support. If specified in the related Prospectus Supplement, the
beneficial ownership of separate groups of assets included in the Trust for a
series may be evidenced by separate classes of related series of Certificates.
In such case, Credit Enhancement may be provided by a cross-support feature
which may require that distributions be made with respect to Certificates
evidencing beneficial ownership of one or more asset groups prior to
distributions to Subordinated Certificates evidencing a beneficial ownership
interest in other asset groups within the same Trust. The Prospectus
Supplement for a series which includes a cross-support feature will describe
the manner and conditions for applying such cross-support feature.
If specified in the Prospectus Supplement, the coverage provided by
one or more forms of Credit Enhancement may apply concurrently to two or more
separate Trusts for a separate series of Certificates. If applicable, the
Prospectus Supplement will identify the Trusts to which such credit support
relates and the manner of determining the amount of the coverage provided
thereby and of the application of such coverage to the identified Trusts.
Pool Insurance. If specified in the related Prospectus Supplement,
one or more mortgage pool insurance policies (each, a "Mortgage Pool Insurance
Policy") will be obtained.
Any such Mortgage Pool Insurance Policy will, subject to the
limitations described below and in the Prospectus Supplement, cover loss by
reason of default in payments on such Mortgage Loans up to the amounts
specified in the Prospectus Supplement or report on Form 8-K and for the
periods specified in the Prospectus Supplement. The Trustee under the related
Agreement will agree to use its best reasonable efforts to cause to be
maintained in effect any such Mortgage Pool Insurance Policy and to supervise
the filing of claims thereunder to the issuer of such Mortgage Pool Insurance
Policy (the "Pool Insurer") for the period of time specified in the related
Prospectus Supplement. A Mortgage Pool Insurance Policy, however, is not a
blanket policy against loss, because claims thereunder may only be made
respecting particular defaulted Mortgage Loans and only upon satisfaction of
certain conditions precedent set forth in such policy as described in the
related Prospectus Supplement. The Mortgage Pool Insurance Policies, if any,
will not cover loss due to a failure to pay or denial of a claim under a
primary mortgage insurance policy, irrespective of the reason therefor. The
related Prospectus Supplement will describe the terms of any applicable
Mortgage Pool Insurance Policy and will set forth certain information with
respect to the related Pool Insurer.
In general, a Mortgage Pool Insurance Policy may not insure against
loss sustained by reason of a default arising from, among other things, (i)
fraud or negligence in the origination or servicing of a Mortgage Loan,
including misrepresentation by the Mortgagor or persons involved in the
origination thereof or (ii) failure to construct a Mortgaged Property in
accordance with plans and specifications. If so specified in the related
Prospectus Supplement, a failure of coverage attributable to one of the
foregoing events might result in a breach of a representation of the Seller
and in such event might give rise to an obligation on the part of the Seller
to purchase the defaulted Mortgage Loan if the breach materially and adversely
affects the interests of the Owners of the Certificates and cannot be cured by
the Seller.
The original amount of coverage under any Mortgage Pool Insurance
Policy will be reduced over the life of such Certificates by the aggregate
dollar amount of claims paid less the aggregate of the net amounts realized by
the
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Pool Insurer upon disposition of all foreclosed properties. The amount of claims
paid will generally include certain expenses incurred with respect to the
applicable Mortgage Loans as well as accrued interest on delinquent Mortgage
Loans to the date of payment of the claim. See "Certain Legal Aspects of the
Mortgage Assets - Foreclosure" herein. Accordingly, if aggregate net claims paid
under any Mortgage Pool Insurance Policy reach the original policy limit,
coverage under that Mortgage Pool Insurance Policy will be exhausted and any
further losses will be borne by one or more classes of Certificates unless
otherwise covered by another form of Credit Enhancement, as specified in the
Prospectus Supplement.
Since any Mortgage Pool Insurance Policy may require that the
Mortgaged Property subject to a defaulted Mortgage Loan be restored to its
original condition prior to claiming against the Pool Insurer, such policy may
not provide coverage against hazard losses. As set forth under "Servicing of
Mortgage Loans and Contracts C Standard Hazard Insurance", the hazard policies
concerning the Mortgage Loans typically exclude from coverage physical damage
resulting from a number of causes and even when the damage is covered, may
afford recoveries which are significantly less than the full replacement cost
of such losses. Even if special hazard insurance is applicable as specified in
the Prospectus Supplement, no coverage in respect of special hazard losses
will cover all risks, and the amount of any such coverage will be limited. See
"Special Hazard Insurance" below. As a result, certain hazard risks will not
be insured against and will therefore be borne by Owners of the Certificates,
unless otherwise covered by another form of Credit Enhancement, as specified
in the Prospectus Supplement.
The terms of any Mortgage Pool Insurance Policy relating to a
Contract Pool will be described in the related Prospectus Supplement.
Special Hazard Insurance. If specified in the related Prospectus
Supplement, one or more special hazard insurance policies (each, a "Special
Hazard Insurance Policy") will be obtained.
Any such Special Hazard Insurance Policy will, subject to limitations
described below and in the Prospectus Supplement, cover (i) loss by reason of
damage to Mortgaged Properties caused by certain hazards (including
earthquakes and, to a limited extent, tidal waves and related water damage)
not covered by the standard form of hazard insurance policy for the respective
states in which the Mortgaged Properties are located or under flood insurance
policies, if any, covering the Mortgaged Properties, and (ii) loss caused by
reason of the application of the coinsurance clause contained in hazard
insurance policies. See "Servicing of Mortgage Loans and Contracts C Standard
Hazard Insurance." Any Special Hazard Insurance Policy may not cover losses
occasioned by war, civil insurrection, certain governmental actions, errors in
design, faulty workmanship or materials (except under certain circumstances),
nuclear reaction, flood (if the Mortgaged Property is located in a federally
designated flood are"-, chemical contamination and certain other risks.
Aggregate claims under each Special Hazard Insurance Policy will be limited as
described in the related Prospectus Supplement. Any Special Hazard Insurance
Policy may also provide that no claim may be paid unless hazard and, if
applicable, flood insurance on the Mortgaged Property has been kept in force
and other protection and preservation expenses have been paid.
Subject to the foregoing limitations, any Special Hazard Insurance
Policy generally will provide that, where there has been damage to property
securing a foreclosed Mortgage Loan (title to which has been acquired by the
insured) and to the extent such damage is not covered by the hazard insurance
policy or flood insurance policy, if any, maintained with respect to such
Mortgage Loan, the issuer of the Special Hazard Insurance Policy (the "Special
Hazard Insurer") will pay the lesser of (i) the cost of repair or replacement
of such property or (ii) upon transfer of the property to the special hazard
insurer, the unpaid principal balance of such Mortgage Loan at the time of
acquisition of such property by foreclosure or deed in lieu of foreclosure,
plus accrued interest to the date of claim settlement and certain expenses
incurred with respect to such property. If the unpaid principal balance plus
accrued interest and certain expenses is paid by the Special Hazard Insurer,
the amount of further coverage under the related Special Hazard Insurance
Policy will be reduced by such amount less any net proceeds from the sale of
the property. Any amount paid as the cost of repair or replacement of the
property will also reduce coverage by such amount. Restoration of the property
with the proceeds described under (i) above will satisfy the condition under
any applicable Mortgage Pool Insurance Policy that the property be restored
before a claim under such Mortgage Pool Insurance Policy may be validly
presented with respect to the defaulted Mortgage Loan secured by such
property. The payment described under (ii) above will render unnecessary
presentation of a claim in respect of such Mortgage Loan under any related
Mortgage Pool Insurance Policy. Therefore, so long as a Mortgage Pool
Insurance Policy remains in effect, the payment by the Special Hazard Insurer
under a Special Hazard Insurance Policy of the cost of
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repair or replacement or the unpaid principal balance of the Mortgage Loan plus
accrued interest and certain expenses will not affect the total insurance
proceeds but will affect the relative amounts of coverage remaining under any
related Special Hazard Insurance Policy and any related Mortgage Pool Insurance
Policy.
The terms of any Special Hazard Insurance Policy relating to a
Contract Pool will be described in the related Prospectus Supplement.
Bankruptcy Bond. In the event of a bankruptcy of a borrower, the
bankruptcy court may establish the value of the property securing the related
Mortgage Loan at an amount less than the then outstanding principal balance of
such Mortgage Loan. The amount of the secured debt could be reduced to such
value and the holder of such Mortgage Loan thus would become an unsecured
creditor to the extent the outstanding principal balance of such Mortgage Loan
exceeds the value so assigned to the property by the bankruptcy court. In
addition, certain other modifications of the terms of a Mortgage Loan can
result from a bankruptcy proceeding, including the reduction in monthly
payments required to be made by the borrower. See "Certain Legal Aspects of
the Mortgage Assets" herein. If so provided in the related Prospectus
Supplement, the Depositor will obtain a bankruptcy bond or similar insurance
contract (the "bankruptcy bond") for proceedings with respect to borrowers
under the Bankruptcy Code. The bankruptcy bond will cover certain losses
resulting from a reduction by a bankruptcy court of scheduled payments of
principal of and interest on a Mortgage Loan or a reduction by such court of
the principal amount of a Mortgage Loan and will cover certain unpaid interest
on the amount of such a principal reduction from the date of the filing of a
bankruptcy petition.
The bankruptcy bond will provide coverage in the aggregate amount
specified in the related Prospectus Supplement. Such amount will be reduced by
payments made under such bankruptcy bond in respect of the related Mortgage
Loans and will not be restored.
If specified in the related Prospectus Supplement, other forms of
Credit Enhancement may be provided to cover such bankruptcy-related losses.
Any bankruptcy bond or other form of Credit Enhancement provided to cover
bankruptcy-related losses will be described in the related Prospectus
Supplement.
Reserve Funds. If specified in the Prospectus Supplement, cash, U.S.
Treasury securities, instruments evidencing ownership of principal or interest
payments thereon, letters of credit, surety bonds, demand notes, certificates
of deposit or a combination thereof in the aggregate amount specified in the
Prospectus Supplement will be deposited by the Depositor on the Delivery Date
in one or more accounts (each, a "Reserve Fund") established and maintained
with the Trustee. Such cash and the principal and interest payments on such
other investments will be used to enhance the likelihood of timely payment of
principal of, and interest on, or, if so specified in the Prospectus
Supplement, to provide additional protection against losses in respect of, the
assets in the related Trust, to pay the expenses of the Trust or for such
other purposes specified in the Prospectus Supplement. Whether or not the
Depositor has any obligation to make such a deposit, certain amounts to which
the Owners of Subordinated Certificates, if any, would otherwise be entitled
may instead be deposited into the Reserve Fund from time to time and in the
amounts as specified in the Prospectus Supplement. Any cash in any Reserve
Fund and the proceeds of any other instrument upon maturity will be invested
in Eligible Investments. If a letter of credit is deposited with the Trustee,
such letter of credit will be irrevocable. Any instrument deposited therein
will name the Trustee as a beneficiary and will be issued by an entity
acceptable to each rating agency that rates the Certificates. Additional
information with respect to such instruments deposited in the Reserve Funds
may be set forth in the Prospectus Supplement.
Any amounts so deposited and payments on instruments so deposited
will be available for withdrawal from the Reserve Fund for distribution with
respect to the Certificates for the purposes, in the manner and at the times
specified in the Prospectus Supplement.
Other Insurance, Guaranties and Similar Instruments or Agreements. If
specified in the Prospectus Supplement, the related Trust may also include
insurance, guaranties, surety bonds, letters of credit, guaranteed investment
contracts or similar arrangements for the purpose of (i) maintaining timely
payments or providing additional protection against losses on the assets
included in such Trust, (ii) paying administrative expenses, (iii)
establishing a minimum reinvestment rate on the payments made in respect of
such assets or principal payment rate on such assets, (iv) guaranteeing timely
payment of principal and interest under the Certificates, or for such other
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purpose as is specified in such Prospectus Supplement. Such arrangements may
include agreements under which Owners of Certificates are entitled to receive
amounts deposited in various accounts held by the Trustee upon the terms
specified in the Prospectus Supplement. Such arrangements may be in lieu of any
obligation of the Servicers or the Seller to advance delinquent installments in
respect of the Mortgage Loans. See "Servicing of Mortgage Loans and Contracts -
Advances" herein.
SERVICING OF MORTGAGE LOANS AND CONTRACTS
With respect to each series of Certificates, the related Mortgage
Loans and Contracts will be serviced by a sole servicer or by a master
servicer with various sub-servicers pursuant to, or as provided for in, the
Agreement. The Prospectus Supplement for each series will specify the servicer
and the master servicer, if any, for such series.
The related Prospectus Supplement will specify whether the Servicer
is a FNMA- or FHLMC-approved servicer of conventional mortgage loans. In
addition, the Depositor will require adequate servicing experience, where
appropriate, and financial stability, generally including a net worth
requirement (to be specified in the Agreement) as well as satisfaction of
certain other criteria.
Each Servicer will be required to perform the customary functions of
a mortgage loan servicer, including collection of payments from borrowers (the
"Mortgagors") and remittance of such collections to the Trustee, maintenance
of applicable standard hazard insurance or primary mortgage insurance
policies, attempting to cure delinquencies, supervising foreclosures,
management of Mortgaged Properties under certain circumstances, and
maintaining accounting records relating to the Mortgage Loans and Contracts,
as applicable, and, if specified in the related Prospectus Supplement,
maintenance of escrow or impoundment accounts of Mortgagors for payment of
taxes, insurance, and other items required to be paid by the Mortgagor
pursuant to the Mortgage Loan or Contract. Each Servicer will also be
obligated to make advances in respect of delinquent installments on Mortgage
Loans and Contracts, as applicable, as described more fully under "- Payments
on Mortgage Loans" and "- Advances" below and in respect of certain taxes and
insurance premiums not paid on a timely basis by Mortgagors.
Each Servicer will be entitled to a monthly servicing fee as
specified in the related Prospectus Supplement. Each Servicer will also
generally be entitled to collect and retain, as part of its servicing
compensation, late payment charges and assumption underwriting fees. Each
Servicer will be reimbursed from proceeds of one or more of the insurance
policies described herein ("Insurance Proceeds") or from proceeds received in
connection with the liquidation of defaulted Mortgage Loans ("Liquidation
Proceeds") for certain expenditures pursuant to the Agreement. See "-
Advances" and "- Servicing Compensation and Payment of Expenses" below.
Each Servicer will be required to service each Mortgage Loan and
Contract, as applicable, pursuant to the terms of the Agreement for the entire
term of such Mortgage Loan and Contract, as applicable, unless such Agreement
is earlier terminated. Upon termination, a replacement for the Servicer will
be appointed.
Payments on Mortgage Loans
Each Servicer will establish and maintain a separate account (each, a
"Custodial Account"). Subject to the following paragraph, each Custodial
Account must be an account the deposits in which are fully insured by either
the Federal Deposit Insurance Corporation ("FDIC") or the National Credit
Union Administration ("NCUA") or are, to the extent such deposits are in
excess of the coverage provided by such insurance, continuously secured by
certain obligations issued or guaranteed by the United States of America. If
at any time the amount on deposit in such Custodial Account shall exceed the
amount so insured or secured, the applicable Servicer must remit to the
Trustee the amount on deposit in such Custodial Account which exceeds the
amount so insured or secured, less any amount such Servicer may retain for its
own account pursuant to its Servicing Agreement.
Notwithstanding the foregoing, the deposits in a Servicer's Custodial
Account will not be required to be fully insured or secured as described
above, and such Servicer will not be required to remit amounts on deposit
therein in excess of the amount so insured or secured, so long as such
Servicer meets certain requirements established by the rating agencies
requested to rate the Certificates.
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Each Servicer is required to deposit into its Custodial Account on a
daily basis all amounts in respect of each Mortgage Loan received by such
Servicer, with interest adjusted to a rate (the "Remittance Rate") equal to
the related Mortgage Rate less the Servicer's servicing fee rate. On the day
of each month specified in the related Prospectus Supplement (the "Remittance
Date"), each Servicer of the Mortgage Loans will remit to the Trustee all
funds held in its Custodial Account with respect to each Mortgage Loan;
provided, however, that Principal Prepayments may be remitted on the
Remittance Date in the month following the month of such prepayment. Each
Servicer will be required pursuant to the terms of the Agreement and as
specified in the related Prospectus Supplement, to remit with each Principal
Prepayment interest thereon at the Remittance Rate through the last day of the
month in which such Principal Prepayment is made. Each Servicer may also be
required to advance its own funds as described below.
Advances
With respect to a delinquent Mortgage Loan or Contract, the related
Servicer may be obligated (but only to the extent set forth in the related
Prospectus Supplement) to advance its own funds or funds from its Custodial
Account equal to the aggregate amount of payments of principal and interest
(adjusted to the applicable Remittance Rate) which were due on a due date and
which are delinquent as of the close of business on the business day preceding
the Remittance Date ("Monthly Advance"). Generally, such advances will be
required to be made by the Servicer unless the Servicer determines that such
advances ultimately would not be recoverable under any applicable insurance
policy, from the proceeds of liquidation of the related Mortgaged Properties,
or from any other source (any amount not so reimbursable being referred to
herein as a "Nonrecoverable Advance"). Such advance obligation generally will
continue through the month following the month of final liquidation of such
Mortgage Loan or Contract. Any Servicer funds thus advanced will be
reimbursable to such Servicer out of recoveries on the Mortgage Loans or
Contracts with respect to which such amounts were advanced. Each Servicer will
also be obligated to make advances with respect to certain taxes and insurance
premiums not paid by Mortgagors on a timely basis. Funds so advanced are
reimbursable to the Servicers out of recoveries on the related Mortgage Loans
or Contracts. Each Servicer's right of reimbursement for any advance will be
prior to the rights of the Trust to receive any related Insurance Proceeds or
Liquidation Proceeds. Failure by a Servicer to make a required Monthly Advance
will be grounds for termination under the related Agreement.
Collection and Other Servicing Procedures
Each Servicer will service the Mortgage Loans and Contracts pursuant
to guidelines established in the related Agreement.
Mortgage Loans. The Servicer will be responsible for making
reasonable efforts to collect all payments called for under the Mortgage
Loans. The Servicer will be obligated to follow such normal practices and
procedures as it deems necessary or advisable to realize upon a defaulted
Mortgage Loan. In this regard, the Servicer may (directly or through a local
assignee) sell the property at a foreclosure or trustee's sale, negotiate with
the Mortgagor for a deed in lieu of foreclosure or, in the event a deficiency
judgment is available against the Mortgagor or other person (see "Certain
Legal Aspects of the Mortgage Assets C Foreclosure - Anti-Deficiency
Legislation and Other Limitations on Lenders" for a description of the limited
availability of deficiency judgments), foreclose against such property and
proceed for the deficiency against the appropriate person. The amount of the
ultimate net recovery (including the proceeds of any Mortgage Pool Insurance
Policy or other applicable Credit Enhancement), after reimbursement to the
Servicer of its expenses incurred in connection with the liquidation of any
such defaulted Mortgage Loan and prior unreimbursed advances of principal and
interest with respect thereto will be deposited in the Certificate Account
when realized and will be distributed to Owners of Certificates on the next
Distribution Date following the month of receipt.
With respect to Cooperative Loans, any prospective purchaser will
generally have to obtain the approval of the board of directors of the
relevant Cooperative before purchasing the shares and acquiring rights under
the related proprietary lease or occupancy agreement. See "Certain Legal
Aspects of the Mortgage Assets" herein. This approval is usually based on the
purchaser's income and net worth and numerous other factors. Although the
Cooperative's approval is unlikely to be unreasonably withheld or delayed, the
necessity of acquiring such approval
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could limit the number of potential purchasers for those shares and otherwise
limit the Trust's ability to sell and realize the value of those shares.
In general, a "tenant-stockholder" (as defined in Code Section 216(b)
(2)) of a corporation that qualifies as a "cooperative housing corporation"
within the meaning of Code Section 216(b)(1) is allowed a deduction for
amounts paid or accrued within his taxable year to the corporation
representing his proportionate share of certain interest expenses and certain
real estate taxes allowable as a deduction under Code Section 216(a) to the
corporation under Code Sections 163 and 164. In order for a corporation to
qualify under Code Section 216(b)(1) for its taxable year in which such items
are allowable as a deduction to the corporation, such Section requires, among
other things, that at least 80% of the gross income of the corporation be
derived from its tenant-stockholders. By virtue of this requirement, the
status of a corporation for purposes of Code Section 216(b)(1) must be
determined on a year-to-year basis. Consequently, there can be no assurance
that Cooperatives relating to the Cooperative Loans will qualify under such
Section for any particular year. In the event that such a Cooperative fails to
qualify for one or more years, the value of the collateral securing any
related Cooperative Loans could be significantly impaired because no deduction
would be allowable to its tenant-stockholders under Code Section 216(a) with
respect to those years. In view of the significance of the tax benefits
accorded tenant-stockholders of a corporation that qualifies as a cooperative
housing corporation, however, the likelihood that such a failure would be
permitted to continue over a period of years appears remote.
The Servicer will expend its own funds to restore property securing a
Mortgage Loan which has sustained uninsured damage only if it determines that
such restoration will increase the proceeds to the Trust of liquidation of the
Mortgage Loan after the reimbursement to the Servicer of its expenses.
If a Mortgaged Property has been or is about to be conveyed by the
Mortgagor, the Servicer will be obligated (to the extent it has knowledge of
such conveyance) to accelerate the maturity of the Mortgage Loan, unless it
reasonably believes it is unable to enforce that Mortgage Loan's "due-on-sale"
clause under the applicable law. If it reasonably believes it may be
restricted by law, for any reason, from enforcing such a "due-on-sale" clause,
the Servicer may enter into an assumption and modification agreement with the
person to whom such property has been or is about to be conveyed, pursuant to
which such person becomes liable under the Mortgage Note, provided such person
satisfies the criteria required to maintain the coverage provided by
applicable insurance policies (unless otherwise restricted by applicable law).
Any fee collected by the Servicer for entering into an assumption agreement
will be retained by the Servicer as additional servicing compensation. For a
description of circumstances in which the Servicer may be unable to enforce
"due-on-sale" clauses, see "Certain Legal Aspects of the Mortgage Assets -
Foreclosure - Enforceability of Certain Provisions" herein. In connection with
any such assumption, the Mortgage Rate borne by the related Mortgage Note may
not be decreased.
If specified in the related Prospectus Supplement, the Servicer will
maintain with one or more depository institutions one or more accounts into
which it will deposit all payments of taxes, insurance premiums, assessments
or comparable items received for the account of the Mortgagors. Withdrawals
from such account or accounts may be made only to effect payment of taxes,
insurance premiums, assessments or comparable items, to reimburse the Servicer
out of related collections for any cost incurred in paying taxes, insurance
premiums and assessments or otherwise preserving or protecting the value of
the Mortgages, to refund to mortgagors any amounts determined to be overages
and to pay interest to Mortgagors on balances in such account or accounts to
the extent required by law.
So long as it acts as servicer of the Mortgage Loans, the Servicer
will be required to maintain certain insurance covering errors and omissions
in the performance of its obligations as servicer and certain fidelity bond
coverage ensuring against losses through wrongdoing of its officers, employees
and agents.
In the case of Multifamily Loans, a Mortgagor's failure to make
required Mortgage Loan payments may mean that operating income is insufficient
to service the mortgage debt, or may reflect the diversion of that income from
the servicing of the mortgage debt. In addition, a Mortgagor under a
Multifamily Loan that is unable to make Mortgage Loan payments may also be
unable to make timely payment of taxes and otherwise to maintain and insure
the related Mortgaged Property. In general, the Servicer will be required to
monitor any Multifamily Loan that is in default, evaluate whether the causes
of the default can be corrected over a reasonable period without significant
impairment of the value of the related Mortgaged Property, initiate corrective
action in cooperation with the Mortgagor if cure is likely, inspect the
related Mortgaged Property and take such other actions as are consistent with
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the Agreement. A significant period of time may elapse before the Servicer is
able to assess the success of any such corrective action or the need for
additional in initiatives. The time within which the Servicer can make the
initial determination of appropriate action, evaluate the success of corrective
action, develop additional initiatives, institute foreclosure proceedings and
actually foreclose (or accept a deed to a Mortgaged Property in lieu of
foreclosure) on behalf of the Owners of the related series may vary considerably
depending on the particular Multifamily Loan, the Mortgaged Property, the
Mortgagor, the presence of an acceptable party to assume the Multifamily Loan
and the laws of the jurisdiction in which the Mortgaged Property is located. If
a Mortgagor files a bankruptcy petition, the Servicer may not be permitted to
accelerate the maturity of the related Multifamily Loan or to foreclose on the
Mortgaged Property for a considerable period of time. See "Certain Legal Aspects
of Mortgage Loans."
Contracts. Pursuant to the Agreement, the Servicer will service and
administer the Contracts assigned to the Trustee as more fully set forth
below. The Servicer, either directly or through sub-servicers subject to
general supervision by the Servicer, will perform diligently all services and
duties required to be performed under the Agreement, in the same manner as
performed by prudent lending institutions of manufactured housing installment
sales contracts of the same type as the Contracts in those jurisdictions where
the related Manufactured Homes are located. The duties to be performed by the
Servicer will include collection and remittance of principal and interest
payments, collection of insurance claims and, if necessary, repossession.
Each Agreement will provide that when any Manufactured Home securing
a Contract is about to be conveyed by the borrower, the Servicer (to the
extent it has knowledge of such prospective conveyance and prior to the time
of the consummation of such conveyance) may exercise its rights to accelerate
the maturity of such Contract under the applicable "due-on-sale" clause, if
any, unless the Servicer reasonably believes it is unable to enforce such
"due-on-sale" clause under applicable law. In such case the Servicer is
authorized to take or enter into an assumption agreement from or with the
person to whom such Manufactured Home has been or is about to be conveyed,
pursuant to which such person becomes liable under the Contract, provided such
person satisfies the criteria required to maintain the coverage provided by
applicable insurance policies (unless otherwise restricted by applicable law).
Where authorized by the Contract, the annual percentage rate may be increased,
upon assumption, to the then-prevailing market rate but will not be decreased.
Under each Agreement the Servicer will repossess or otherwise
comparably convert the ownership of properties securing such of the related
Contracts as come into and continue in default and as to which no satisfactory
arrangements can be made for collection of delinquent payments. In connection
with such repossession or other conversion, the Servicer will follow such
practices and procedures as it deems necessary or advisable and as shall be
normal and usual in its general servicing activities. The Servicer, however,
will not be required to expend its own funds in connection with any
repossession or towards the restoration of any property unless it determines
(i) that such restoration or repossession will increase the proceeds of
liquidation of the related Contract to the Trust after reimbursement to itself
for such expenses and (ii) that such expenses will be recoverable to it either
through Liquidation Proceeds or through Insurance Proceeds.
Primary Mortgage Insurance
Mortgage Loans that the Depositor acquires will generally not have
primary mortgage insurance. If obtained, the primary mortgage insurance
policies will not insure against certain losses which may be sustained in the
event of a personal bankruptcy of the mortgagor under a Mortgage Loan.
Standard Hazard Insurance
Mortgage Loans. The Servicer will be required to cause to be
maintained for each Mortgage Loan a standard hazard insurance policy. The
coverage of such policy is required to be in an amount not less than the
maximum insurable value of the improvements securing such Mortgage Loan from
time to time or the principal balance owing on such Mortgage Loan from time to
time, whichever is less. In all events, such coverage shall be in an amount
sufficient to ensure avoidance of the applicability of the co-insurance
provisions under the terms and conditions of the applicable policy. The
ability of each Servicer to assure that hazard insurance proceeds are
appropriately applied may be dependent on its being named as an additional
insured under any standard hazard insurance policy and under any flood
insurance policy referred to below, or upon the extent to which information in
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this regard is furnished to such Servicer by Mortgagors. Each Agreement may
provide that the related Servicer may satisfy its obligation to cause hazard
insurance policies to be maintained by maintaining a blanket policy insuring
against hazard losses on the Mortgage Loans serviced by such Servicer.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements on the property
by fire, lightning, explosion, smoke, wind-storm and hail, riot, strike and
civil commotion, subject to the conditions and exclusions particularized in
each policy. Although the policies relating to the Mortgage Loans will be
underwritten by different insurers and, therefore, will not contain identical
terms and conditions, the basic terms thereof are dictated by state law. Such
policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other
water-related causes, earth movement (including earthquakes, landslides and
mud flow), nuclear reactions, wet or dry rot, vermin, rodents, insects or
domestic animals, theft and, in certain cases, vandalism. The foregoing list
is merely indicative of certain kinds of uninsured risks and is not intended
to be all-inclusive. If the property securing a Mortgage Loan is located in a
federally designated flood area, flood insurance will be required to be
maintained in such amounts as would be required by FNMA in connection with its
mortgage loan purchase program. The Depositor may also purchase special hazard
insurance against certain of the uninsured risks described above. See "Credit
Enhancement - Special Hazard Insurance".
Since the amount of hazard insurance the Servicer is required to
cause to be maintained on the improvements securing the Mortgage Loans
declines as the principal balances owing thereon decrease, if the residential
properties securing the Mortgage Loans appreciate in value over time, the
effect of coinsurance in the event of partial loss may be that hazard
insurance proceeds will be insufficient to restore fully the damaged property.
The Depositor will not require that a standard hazard or flood
insurance policy be maintained on the cooperative dwelling relating to any
Cooperative Loan. Generally, the Cooperative itself is responsible for
maintenance of hazard insurance for the property owned by the Cooperative and
the tenant-stockholders of that Cooperative do not maintain individual hazard
insurance policies. To the extent, however, that a Cooperative and the related
borrower on a Cooperative Loan do not maintain such insurance or do not
maintain adequate coverage or any insurance proceeds are not applied to the
restoration of damaged property, any damage to such borrower's cooperative
dwelling or such Cooperative's building could significantly reduce the value
of the collateral securing such Cooperative Loan to the extent not covered by
other credit support.
Contracts. The Servicer will generally be required to cause to be
maintained with respect to each Contract one or more hazard insurance policies
which provide, at a minimum, the same coverage as a standard form fire and
extended coverage insurance policy that is customary for manufactured housing,
issued by a company authorized to issue such policies in the state in which
the Manufactured Home is located and in an amount which is not less than the
maximum insurable value of such Manufactured Home or the principal balance due
from the borrower on the related Contract, whichever is less. When a
Manufactured Home's location was, at the time of origination of the related
Contract, within a federally designated special flood hazard area, the
Servicer also shall cause such flood insurance to be maintained, which
coverage shall be at least equal to the minimum amount specified in the
preceding sentence or such lesser amount as may be available under the federal
flood insurance program.
The Servicer may maintain, in lieu of causing individual hazard
insurance policies to be maintained with respect to each Manufactured Home,
and shall maintain, to the extent that the related Contract does not require
the borrower to maintain a hazard insurance policy with respect to the related
Manufactured Home, one or more blanket insurance policies covering losses on
the borrowers' interests in the Contracts resulting from the absence or
insufficiency of individual hazard insurance policies.
The Servicer, to the extent practicable, will cause the borrowers to
pay all taxes and similar governmental charges when and as due. To the extent
that nonpayment of any taxes or charges would result in the creation of a lien
upon any Manufactured Home having a priority equal or senior to the lien of
the related Contract, the Servicer will pay any such delinquent tax or charge.
If the Servicer repossesses a Manufactured Home on behalf of the
Trustee, the Servicer will either (i) maintain at its expense hazard insurance
with respect to such Manufactured Home or (ii) indemnify the Trustee against
any damage to such Manufactured Home prior to resale or other disposition.
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Title Insurance Policies
The Agreements will generally require that a title insurance policy
be in effect on each of the Mortgaged Properties and that such title insurance
policy contain no coverage exceptions, except customary exceptions generally
accepted in the mortgage banking industry.
Claims Under Primary Mortgage Insurance Policies and Standard Hazard Insurance
Policies; Other Realization Upon Defaulted Loan
Each Servicer will present claims to any primary insurer under any
related primary mortgage insurance policy and to the hazard insurer under any
related standard hazard insurance policy. All collections under any related
primary mortgage insurance policy or any related standard hazard insurance
policy (less any proceeds to be applied to the restoration or repair of the
related Mortgaged Property or to the reimbursement of Advances by the
Servicer) will be remitted to the Trustee.
If any Mortgaged Property securing a defaulted Mortgage Loan is
damaged and proceeds, if any, from the related standard hazard insurance
policy are insufficient to restore the damaged property to a condition
sufficient to permit recovery under any applicable Mortgage Pool Insurance
Policy or any related primary mortgage insurance policy, each Servicer may be
required to expend its own finds to restore the damaged property to the extent
specified in the related Prospectus Supplement, but only to the extent it
determines such expenditures are recoverable from Insurance Proceeds or
Liquidation Proceeds.
If recovery under any applicable Mortgage Pool Insurance Policy or
any related primary mortgage insurance policy is not available, the Servicer
will nevertheless be obligated to attempt to realize upon the defaulted
Mortgage Loan. Foreclosure proceedings will be conducted by the Servicer in
accordance with the Agreement. If the proceeds of any liquidation of the
Mortgaged Property securing the defaulted Mortgage Loan are less than the
Principal Balance of the defaulted Mortgage Loan plus interest accrued
thereon, a loss will be realized on such Mortgage Loan, to the extent the
applicable Credit Enhancement is not sufficient, in the amount of such
difference plus the aggregate of expenses which are incurred by the Servicer
in connection with such proceedings and are reimbursable under the Agreement.
In such case there will be a reduction in the value of the Mortgage Loans and
Trust may be unable to recover the full amount of principal and interest due
thereon.
In addition, where a Mortgaged Property securing a defaulted Mortgage
Loan can be resold for an amount exceeding the principal balance of the
related Mortgage Loan together with accrued interest and expenses, it may be
expected that, where retention of any such amount is legally permissible, the
Pool Insurer will exercise its right under the related Mortgage Pool Insurance
Policy, if any, to purchase such Mortgaged Property and realize for itself any
excess proceeds. Any amounts remaining in the Certificate Account after such
foreclosure or liquidation and attributable to such Mortgage Loan will be
distributed to Owners of the Certificates.
Realization Upon or Sale of Defaulted Multifamily Loans
Unless otherwise specified in the related Prospectus Supplement, the
Servicer may not acquire title to any Multifamily Property securing a Mortgage
Loan or take any other action that would cause the related Trustee, for the
benefit of Owners of the related series, or any other specified person to be
considered to hold title to, to be a "mortgagee-in-possession" of, or to be an
"owner" or an "operator" of such Mortgaged Property within the meaning of
certain federal environmental laws, unless the Servicer has previously
determined, based on a report prepared by a person who regularly conducts
environmental audits, that either:
(i) the Mortgaged Property is in compliance with applicable
environmental laws and regulations or, if not, that taking such
actions are necessary to bring the Mortgaged Property into compliance
therewith is reasonably likely to produce a greater recovery on a
present value basis than not taking such actions; and
(ii) there are no circumstances or conditions present at the
Mortgaged Property that have resulted in any contamination for which
investigation, testing, monitoring, containment, clean-up or
remediation could be required under any applicable environmental laws
and regulations or, if such circumstances or
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conditions are present for which any such action could be required,
taking such actions with respect to the Mortgaged Property is
reasonably likely to produce a greater recovery on a present value
basis than not taking such actions. See "Certain Legal Aspects of
Mortgage Loans)Foreclosure Environmental Legislation."
In addition, unless otherwise specified in the related Prospectus
Supplement, the Servicer will not be obligated to foreclose upon or otherwise
convert the ownership of any Mortgaged Property securing a single family
Mortgage Loan if it has received notice or has actual knowledge that such
property may be contaminated with or affected by hazardous wastes or hazardous
substances; however, no environmental testing will generally be required. The
Servicer will not be liable to the Owners of the related series if, based on
its belief that no such contamination or affect exists, the Servicer
forecloses on a Mortgaged Property and takes title to such Mortgaged Property,
and thereafter such Mortgaged Property is determined to be so contaminated or
affected.
Servicing Compensation and Payment of Expenses
As compensation for its servicing duties, each Servicer will be
entitled to a monthly servicing fee in the amount specified in the related
Prospectus Supplement. In addition to the primary compensation, a Servicer may
be permitted to retain all assumption underwriting fees and late payment
charges, to the extent collected from Mortgagors.
As set forth above, each Servicer will be entitled to reimbursement
for certain expenses incurred by it in connection with the liquidation of
defaulted Mortgage Loans and Contracts and in connection with advancing
delinquent payments. No loss will be suffered on the Certificates by reason of
such expenses to the extent claims for such expenses are paid directly under
any applicable Mortgage Pool Insurance Policy, a primary mortgage insurance
policy, the special hazard insurance policy or from other forms of Credit
Enhancement. In the event, however, that the defaulted Mortgage Loans are not
covered by a Mortgage Pool Insurance Policy, primary mortgage insurance
policies, the Special Hazard Insurance Policy or another form of Credit
Enhancement, or claims are either not made or paid under such policies or
Credit Enhancement, or if coverage thereunder has ceased, such a loss will
occur to the extent that the proceeds from the liquidation of a defaulted
Mortgage Loan or Contract, after reimbursement of the Servicer's expenses, are
less than the Principal Balance of such defaulted Mortgage Loan or Contract.
Master Servicer
A Master Servicer may be specified in the related Prospectus
Supplement for the related series of Certificates. Customary servicing
functions with respect to Mortgage Loans constituting the Mortgage Pool will
be provided by the Servicer directly or through one or more Sub-Servicers
subject to supervision by the Master Servicer. If the Master Servicer is not
directly servicing the Mortgage Loans, then the Master Servicer will (i)
administer and supervise the performance by the Servicer of its servicing
responsibilities under the Agreement with the Master Servicer, (ii) maintain a
current data base with the payment histories of each Mortgagor, (iii) review
monthly servicing reports and data relating to the Mortgage Pool for
discrepancies and errors, and (iv) act as back-up Servicer during the term of
the transaction unless the Servicer is terminated or resigns in such case the
Master Servicer shall assume the obligations of the Servicer.
The Master Servicer will be a party to the Agreement for any series
for which Mortgage Loans comprise the assets of a Trust. The Master Servicer
will be required to satisfy the standard established for the qualification of
the Master Servicer in the related Agreement. The Master Servicer will be
compensated for the performance of its services and duties under each
Agreement as specified in the related Prospectus Supplement.
ADMINISTRATION
The following summary describes certain provisions which will be
common to each Agreement. The summary does not purport to be complete and is
subject to the provisions of a particular Agreement.
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Assignment of Mortgage Assets
Assignment of the Mortgage Loans. At the time of issuance of the
Certificates, the Depositor will assign the Mortgage Loans to the Trustee,
together with all principal and interest adjusted to the Remittance Rate,
subject to exclusions specified in the Prospectus Supplement, due on or with
respect to such Mortgage Loans on or after the Cut-Off Date. The Trustee will,
concurrently with such assignment, execute, countersign and deliver the
Certificates to the Depositor in exchange for the Mortgage Loans. Each
Mortgage Loan will be identified in a schedule appearing as an exhibit to the
Agreement. Such schedule may include information as to the Principal Balance
of each Mortgage Loan as of the Cut-Off Date, as well as information
respecting the Mortgage Rate, the scheduled monthly payment of principal and
interest as of the Cut-Off Date and the maturity date of each Mortgage Note.
In addition, as to each Mortgage Loan, the Depositor will deliver to
the Trustee the Mortgage Note and Mortgage, any assumption and modification
agreement, an assignment of the Mortgage in recordable form (but not
necessarily recorded), evidence of title insurance, if obtained, and, if
applicable, the certificate of private mortgage insurance. In instances where
recorded documents cannot be delivered due to delays in connection with
recording, the Depositor may deliver copies thereof and deliver the original
recorded documents promptly upon receipt.
With respect to any Mortgage Loans which are Cooperative Loans, the
Depositor will cause to be delivered to the Trustee, the related original
Cooperative note endorsed to the order of the Trustee, the original security
agreement, the proprietary lease or occupancy agreement, the recognition
agreement, an executed financing agreement and the relevant stock certificate
and related blank stock powers. The Depositor will file in the appropriate
office an assignment and a financing statement evidencing the Trustee's
security interest in each Cooperative Loan.
Each Seller generally will represent and warrant to the Depositor
with respect to the Mortgage Loans sold by it, among other things, that (i)
the information set forth in the schedule of Mortgage Loans attached thereto
is correct in all material respects: (ii) a lender's title insurance policy or
binder for each Mortgage Loan subject to the Agreement was issued on the date
of origination thereof and each such policy or binder assurance is valid and
remains in full force and effect or a legal opinion concerning title or title
search was obtained or conducted in connection with the origination of the
Mortgage Loans; (iii) at the date of initial issuance of the Certificates, the
Seller has good title to the Mortgage Loans and the Mortgage Loans are free of
offsets, defenses or counterclaims; (iv) at the date of initial issuance of
the Certificates, each Mortgage is a valid first lien on the property securing
the Mortgage Note (subject only to (a) the lien of current real property taxes
and assessments, (b) covenants, conditions, and restrictions, rights of way,
easements and other matters of public record as of the date of the recording
of such Mortgage, such exceptions appearing of record being acceptable to
mortgage lending institutions generally in the area wherein the property
subject to the Mortgage is located or specifically reflected in the appraisal
obtained by the Depositor and (c) other matters to which like properties are
commonly subject which do not materially interfere with the benefits of the
security intended to be provided by such Mortgage) and such property is free
of material damage and is in good repair or, with respect to a junior lien
Mortgage Loan, that such Mortgage is a valid junior lien Mortgage, as the case
may be and specifying the percentage of the Mortgage Loan Pool comprised of
junior lien Mortgage Loans; (v) at the date of initial issuance of the
Certificates, no Mortgage Loan is 31 or more days delinquent (with such
exceptions as may be specified in the related Prospectus Supplement) and there
are no delinquent tax or assessment liens against the property covered by the
related Mortgage; (vi) at the date of initial issuance of the Certificates,
the portion of each Mortgage Loan, if any, which in the circumstances set
forth below under "Servicing of Mortgage Loans and Contracts - Primary
Mortgage Insurance" should be insured with a private mortgage insurer is so
insured; and (vii) each Mortgage Loan at the time it was made complied in all
material respects with applicable state and federal laws, including, with out
limitation, usury, equal credit opportunity and disclosure laws. The
Depositor's rights against the Seller in the event of a breach of its
representations will be assigned to the Trustee for the benefit of the
Certificates of such series.
Assignment of Contracts. The Depositor will cause the Contracts to be
assigned to the Trustee, together with principal and interest due on or with
respect to the Contracts on and after the Cut-Off Date. Each Contract will be
identified in a loan schedule ("Contract Loan Schedule") appearing as an
exhibit to the related Agreement. Such Contract Loan Schedule may specify,
with respect to each Contract, among other things: the original principal
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balance and the outstanding Principal Balance as of the Cut-Off Date; the
interest rate; the current scheduled payment of principal and interest; and the
maturity date.
In addition, with respect to each Contract, the Depositor will
deliver or cause to be delivered to the Trustee, the original Contract and
copies of documents and instruments related to each Contract and the security
interest in the Manufactured Home securing each Contract. To give notice of
the right, title and interest of the Trust to the Contracts, the Depositor
will cause a UCC-1 financing statement to be filed identifying the Trustee as
the secured party and identifying all Contracts as collateral. The Contracts
will not be stamped or otherwise marked to reflect their assignment from the
Depositor to the Trustee. Therefore, if a subsequent purchaser were able to
take physical possession of the Contracts without notice of such assignment,
the interest of the Trust in the Contracts could be defeated. See "Certain
Legal Aspects of the Mortgage Assets" herein.
The Depositor or the related Seller, as the case may be, may provide
limited representations and warranties to the Trustee concerning the
Contracts. Such representations and warranties may include: (i) that the
information contained in the Contract Loan Schedule provides an accurate
listing of the Contracts and that the information respecting such Contracts
set forth in such Contract Loan Schedule is true and correct in all material
respects at the date or dates respecting which such information is furnished;
(ii) that, immediately prior to the conveyance of the Contracts, the Depositor
had good title to and was sole owner of, each such Contract; and (iii) that
there has been no other sale by it of such Contract and that the Contract is
not subject to any lien, charge, security interest or other encumbrance.
Assignment of Mortgage-Backed Securities and Other Mortgage
Securities. With respect to each series, the Depositor will cause any
Mortgage-Backed Securities and Other Mortgage Securities included in the
related Trust to be registered in the name of the Trustee (directly or through
a participant in a depository). The Trustee (or its custodian) will have
possession of any certificated Mortgage-Backed Securities and Other Mortgage
Securities. The Trustee will not be in possession of or be assignee of record
of any underlying assets for a Mortgage-Backed Security or Other Mortgage
Security. Each Mortgage-Backed Security and Other Mortgage Security will be
identified in a schedule appearing as an exhibit to the related Agreement
which may specify certain information with respect to such security,
including, as applicable, the original principal amount, outstanding principal
balance as of the Cut-Off Date, annual pass-through rate or interest rate and
maturity date and certain other pertinent information for each such security.
The Depositor will represent and warrant to the Trustee, among other things,
the information contained in such schedule is true and correct and that
immediately prior to the transfer of the related securities to the Trustee,
the Depositor had good title to, and was the sole owner of, each such
security.
Repurchase or Substitution of Mortgage Loans and Contracts. The
Trustee will review the documents delivered to it with respect to the Mortgage
Loans and Contracts included in the related Trust. If any document is not
delivered or is found to be defective in any material respect and the
Depositor or the related Seller, if so required cannot deliver such document
or cure such defect within the period specified in the related Prospectus
Supplement after notice thereof (which the Trustee will undertake to give
within the period specified in the related Prospectus Supplement), and if any
other party obligated to deliver such document or cure such defect has not
done so and has not substituted or repurchased the affected Mortgage Loan or
Contract then the Depositor will cause the Seller, not later than the first
date designated for the deposit of payments into the Certificate Account (a
"Deposit Date") which is more than a specified number of days after such
period, (a) if so provided in the Prospectus Supplement to remove the affected
Mortgage Loan or Contract from the Trust and substitute one or more other
Mortgage Loans or Contracts therefor or (b) repurchase the Mortgage Loan or
Contract from the Trustee for a price equal to 100% of its Principal Balance
plus one month's interest thereon at the applicable Remittance Rate. This
repurchase and, if applicable, substitution obligation will generally
constitute the sole remedy available to the Trustee for a material defect in a
document relating to a Mortgage Loan or Contract.
The Depositor is required to cause the Seller to do either of the
following (a) cure any breach of any representation or warranty that
materially and adversely affects the interests of the Owners of the
Certificates in a Mortgage Loan (each, a "Defective Mortgage Loan") or
Contract within a specified number of days of its discovery by the Depositor
or its receipt of notice thereof from the Trustee, (b) repurchase such
Defective Mortgage Loan or Contract not later than the first Deposit Date
which is more than a specified number of days after such period for a price
equal to 100% of its Principal Balance plus one month's interest thereon at
the applicable Remittance Rate, or (c) if so specified in the Prospectus
Supplement, remove the affected Mortgage Loan or Contract from the Trust and
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substitute one or more other mortgage loans or contracts therefor. This
repurchase and, if applicable, substitution obligation will generally
constitute the sole remedies available to the Trustee for any such breach.
If the related Prospectus Supplement so provides, the Depositor or a
designated affiliate may be obligated to repurchase or substitute Mortgage
Loans or Contracts as described above, whether or not the Depositor obtains
such an agreement from the Seller which sold such Mortgage Loans or Contracts.
If a REMIC election is to be made with respect to all or a portion of
a Trust, there may be federal income tax limitations on the right to
substitute Mortgage Loans or Contracts.
Evidence as to Compliance
The Agreement will provide that on or before a specified date in each
year, beginning the first such date that is at least a specified number of
months on and after the Cut-Off Date, a firm of independent public accountants
will furnish a statement to the Trustee to the effect that, based on an
examination of certain specified documents and records relating to the
servicing of the Depositor's mortgage loan portfolio conducted substantially
in compliance with the audit program for mortgages serviced for FNMA or FHLMC,
the United States Department of Housing and Urban Development Mortgage Audit
Standards or the Uniform Single Audit Program for Mortgage Bankers or in
accordance with other standards specified in the Agreement (the "Applicable
Accounting Standards"), such firm is of the opinion that such servicing has
been conducted in compliance with the Applicable Accounting Standards except
for (a) such exceptions as such firm shall believe to be immaterial and (b)
such other exceptions as shall be set forth in such statement.
The Trustee
Any commercial bank or trust company serving as Trustee may have
normal banking relationships with the Depositor. In addition, the Depositor
and the Trustee acting jointly will have the power and the responsibility for
appointing co-trustees or separate trustees of all or any part of the Trust
relating to a particular series of Certificates. In the event of such
appointment, all rights, powers, duties and obligations conferred or imposed
upon the Trustee by the Agreement shall be conferred or imposed upon the
Trustee and such separate trustee or co-trustee jointly, or, in any
jurisdiction in which the Trustee shall be incompetent or unqualified to
perform certain acts, singly upon such separate trustee or co-trustee who
shall exercise and perform such rights, powers, duties and obligations solely
at the direction of the Trustee.
The Trustee will make no representations as to the validity or
sufficiency of the Agreement, the Certificates or of any Mortgage Asset or
related document, and will not be accountable for the use or application by
the Depositor of any funds paid to the Depositor in respect of the
Certificates or the related assets, or amounts deposited in the Certificate
Account or deposited into the Distribution Account. If no Event of Default has
occurred, the Trustee will be required to perform only those duties
specifically required of it under the Agreement. However, upon receipt of the
various certificates, reports or other instruments required to be furnished to
it, the Trustee will be required to examine them to determine whether they
conform to the requirements of the Agreement.
The Trustee may resign at any time, and the Depositor may remove the
Trustee if the Trustee ceases to be eligible to continue as such under the
Agreement, if the Trustee becomes insolvent or in such other instances, if
any, as are set forth in the Agreement. Following any resignation or removal
of the Trustee, the Depositor will be obligated to appoint a successor
Trustee. Any resignation or removal of the Trustee and appointment of a
successor Trustee will not become effective until acceptance of the
appointment by the successor Trustee.
Administration of the Certificate Account
The Agreement will require that the Certificate Account be either (i)
maintained with a depository institution the debt obligations of which (or, in
the case of a depository institution which is a part of a holding company
structure, the debt obligations of the holding company of which) have a rating
acceptable to each rating agency that was requested to rate the Certificates,
or (ii) an account or accounts the deposits in which are fully insured by
either the Bank Insurance Fund (the "BIF") of the FDIC or the Savings
Association Insurance Fund (as
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successor to the Federal Savings and Loan Insurance Corporation) ("SAIF") of the
FDIC. The collateral eligible to secure amounts in the Certificate Account is
limited to United States government securities and other investments acceptable
to the rating agencies rating such series of Certificates, and may include one
or more Certificates of a series ("Eligible Investments"). If so specified in
the related Prospectus Supplement, a Certificate Account may be maintained as an
interest bearing account, or the funds held therein may be invested pending each
succeeding Payment Date in Eligible Investments. If so specified in the related
Prospectus Supplement, the Servicer or its designee will be entitled to receive
any such interest or other income earned on funds in the Certificate Account as
additional compensation. The Servicer will deposit in the Certificate Account
from amounts previously deposited by it into the Servicer's Custodial Account on
the related Remittance Date the following payments and collections received or
made by it on and after the Cut-Off Date (including scheduled payments of
principal and interest due on and after the Cut-Off Date but received before the
Cut-Off Date):
(i) all Mortgagor payments on account of principal, including
Principal Prepayments and, if specified in the related Prospectus
Supplement, prepayment penalties;
(ii) all Mortgagor payments on account of interest, adjusted
to the Remittance Rate;
(iii) all Liquidation Proceeds net of certain amounts
reimbursed to the Servicer or other person entitled thereto, as
described above;
(iv) all Insurance Proceeds, other than proceeds to be
applied to the restoration or repair of the related property or
released to the Mortgagor and net of certain amounts reimbursed to the
Servicer or other person entitled thereto, as described above;
(v) all condemnation awards or settlements which are not
released to the Mortgagor in accordance with normal servicing
procedures;
(vi) any Advances made as described under "Servicing of
Mortgage Loans and Contracts - Advances" herein and certain other
amounts required under the Agreement to be deposited in the Certificate
Account;
(vii) all proceeds of any Mortgage Loan or Contract or
property acquired in respect thereof repurchased by the Depositor, the
Seller or otherwise as described above or under "Termination" below;
(viii) all amounts, if any, required to be deposited in the
Certificate Account from any Credit Enhancement for the related series;
and
(ix) all other amounts required to be deposited in the
Certificate Account pursuant to the related Agreement.
Reports
Concurrently with each distribution on the Certificates, there will
be mailed to Owners a statement generally setting forth, to the extent
applicable to any series, among other things:
(i) the aggregate amount of such distribution allocable to
principal, separately identifying the amount allocable to each class;
(ii) the amount of such distribution allocable to interest,
separately identifying the amount allocable to each class;
(iii) the aggregate Certificate Principal Balance of each
class of the Certificates after giving effect to distributions on such
Distribution Date;
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(iv) the aggregate Certificate Principal Balance of any class
of Compound Interest Certificates after giving effect to any increase
in such Principal Balance that results from the accrual of interest
that is not yet distributable thereon;
(v) if applicable, the amount otherwise distributable to any
class of Certificates that was distributed to other classes of
Certificates;
(vi) if any class of Certificates has priority in the right
to receive Principal Prepayments, the amount of Principal Prepayments
in respect of the related Mortgage Assets;
(vii) the aggregate Principal Balance and number of Mortgage
Loans and Contracts which were delinquent as to a total of two
installments of principal and interest; and
(viii) the aggregate Principal Balances of Mortgage Loans and
Contracts which (a) were delinquent 30-59 days, 60-89 days, and 90 days
or more, and (b) were in foreclosure.
Customary information deemed necessary for Owners to prepare their
tax returns will be furnished annually.
Forward Commitments; Pre-Funding
The Trustee of a Trust may enter into a Pre-Funding Agreement for the
transfer of additional Mortgage Loans to such Trust following the date on
which such Trust is established and the related Certificates are issued. The
Trustee of a Trust may enter into Pre-Funding Agreements to permit the
acquisition of additional Mortgage Loans that could not be delivered by the
Depositor or have not formally completed the origination process, in each case
prior to the Delivery Date. Any Pre-Funding Agreement will require that any
Mortgage Loans so transferred to a Trust conform to the requirements specified
in such Pre-Funding Agreement. If a Pre-Funding Agreement is to be utilized,
the related Trustee will be required to deposit in the Purchase Account all or
a portion of the proceeds received by the Trustee in connection with the sale
of one or more classes of Certificates of the related series; the additional
Mortgage Loans will be transferred to the related Trust in exchange for money
released from the related Pre-Funding Account. Each Pre-Funding Agreement will
set a specified period during which any such transfers must occur. The
Pre-Funding Agreement or the related Agreement will require that, if all
moneys originally deposited to such Pre-Funding Account are not so used by the
end of such specified period, then any remaining moneys will be applied as a
mandatory prepayment of the related class or classes of Certificates as
specified in the related Prospectus Supplement. The specified period for the
acquisition by a Trust of additional Mortgage Loans is not expected to exceed
three months from the date such Trust is established.
Servicer Events of Default
"Events of Default" under the Agreement will consist of (i) any
failure by the Servicer to duly observe or perform in any material respect any
other of its covenants or agreements in the Agreement materially affecting the
rights of Owners which continues unremedied for a specified number of days
after the giving of written notice of such failure to the Depositor by the
Trustee or to the Servicer and the Trustee by the Owners of Certificates
evidencing interests aggregating not less than 25% of the affected class of
Certificates; and (ii) certain events of insolvency, readjustment of debt,
marshaling of assets and liabilities or similar proceedings and certain
actions by the Servicer indicating its insolvency, reorganization or inability
to pay its obligations.
Rights Upon Servicer Event of Default
As long as an Event of Default under the Agreement remains unremedied
by the Servicer, the Trustee, or Owners of Certificates may terminate all the
rights and obligations of the Servicer under the Agreement, whereupon the
Trustee or Master Servicer, if any, or a new Servicer appointed pursuant to the
Agreement, will succeed to all the responsibilities, duties and liabilities of
the Servicer under the Agreement and will be entitled to similar compensation
arrangements. Following such termination, the Depositor shall appoint any
established mortgage loan servicer satisfying the qualification standards
established in the Agreement to act as successor to the Servicer under
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the Agreement. If no such successor shall have been appointed within a specified
number of days following such termination, then either the Depositor or the
Trustee may petition a court of competent jurisdiction for the appointment of a
successor Servicer. Pending the appointment of a successor Servicer, the Trustee
or the Master Servicer, if any, shall act as Servicer.
The Owners of Certificates will not have any right under the
Agreement to institute any proceeding with respect to the Agreement, unless
they previously have given to the Trustee written notice of default and unless
the Owners of the percentage of the Certificates specified in the Prospectus
Supplement have made written request to the Trustee to institute such
proceeding in its own name as Trustee thereunder and have offered to the
Trustee reasonable indemnity and the Trustee for a specified number of days
has neglected or refused to institute any such proceedings. However, the
Trustee is under no obligation to exercise any of the trusts or powers vested
in it by the Agreement or to make any investigation of matters arising
thereunder or to institute, conduct or defend any litigation thereunder or in
relation thereto at the request, order or direction of any of the Owners,
unless such Owners have offered to the Trustee reasonable security or
indemnity against the costs, expenses and liabilities which may be incurred
therein or thereby.
Amendment
An Agreement generally may be amended by the Depositor, the Servicer
and the Trustee, without the consent of the Owners of the Certificates, to
cure any ambiguity, to correct or supplement any provision therein which may
be defective or inconsistent with any other provision therein, to take any
action necessary to maintain REMIC status of any Trust as to which a REMIC
election has been made, to add any other provisions with respect to matters or
questions arising under the Agreement which are not materially inconsistent
with the provisions of the Agreement or for any other purpose, provided that
with respect to amendments for any other purpose (a) the Depositor shall
deliver an opinion of counsel satisfactory to the Trustee, that such amendment
will not adversely affect in any material respect the interests of any Owners
of Certificates of that series and (B) such amendment will not result in a
withdrawal or reduction of the rating of any rated Certificate.
Notwithstanding the foregoing, no such amendment may (i) reduce in any manner
the amount of, or delay the timing of, collections of payments received on the
related Mortgage Assets or distributions which are required to be made on any
Certificate without the consent of the Owner of such Certificate, (ii)
adversely affect in any material respect the interests of the Owners of any
class of Certificates in any manner other than as described in (i), without
the consent of the Owners of Certificates of such class evidencing not less
than a majority of the interests of such class or (iii) reduce the aforesaid
percentage of Certificates of any class required to consent to any such
amendment, without the consent of the Owners of all Certificates of such class
then outstanding. Any other amendment provisions inconsistent with the
foregoing shall be specified in the related Prospectus Supplement.
Termination
The obligations of the Depositor, the Servicer, and the Trustee
created by the Agreement will terminate upon the payment as required by the
Agreement of all amounts held by the Servicer or in the Certificate Account
and required to be paid to them pursuant to the Agreement after the later of
(i) the maturity or other liquidation of the last Mortgage Asset subject
thereto or the disposition of all property acquired upon foreclosure of any
such Mortgage Loan or Contract or (ii) the repurchase by the Depositor from
the Trust of all the outstanding Certificates or all remaining assets in the
Trust. The Agreement will establish the repurchase price for the assets in the
Trust and the allocation of such purchase price among the classes of
Certificates. The exercise of such right will effect early retirement of the
Certificates of that series, but the Depositor's right so to repurchase will
be subject to the conditions described in the related Prospectus Supplement.
If a REMIC election is to be made with respect to all or a portion of a Trust,
there may be additional conditions to the termination of such Trust which will
be described in the related Prospectus Supplement. In no event, however, will
the trust created by the Agreement continue beyond the expiration of 21 years
from the death of the survivor of certain persons named in the Agreement. The
Trustee will give written notice of termination of the Agreement to each
Owner, and the final distribution will be made only upon surrender and
cancellation of the Certificates at an office or agency of the Trustee
specified in such notice of termination.
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USE OF PROCEEDS
Substantially all the net proceeds to be received from the sale of
each series of Certificates will be applied to the simultaneous purchase of
the Mortgage Assets related to such series (or to reimburse the amounts
previously used to effect such a purchase), the costs of carrying such
Mortgage Assets until sale of the Certificates and to pay other expenses.
THE DEPOSITOR
The Depositor will have no ongoing servicing obligations or
responsibilities with respect to any Mortgage Pool or Contract Pool. The
Depositor does not have, nor is it expected in the future to have, any
significant net worth.
The Depositor anticipates that it will acquire Mortgage Assets in the
open market or in privately negotiated transactions, which may be through or
from an affiliate.
Neither the Depositor nor any of its affiliates will insure or
guarantee the Certificates of any series.
CERTAIN LEGAL ASPECTS OF THE MORTGAGE ASSETS
The following discussion contains summaries of certain legal aspects
of mortgage loans and manufactured housing contracts which are general in
nature. Because such legal aspects are governed primarily by applicable state
law (which laws may differ substantially), the summaries do not purport to be
complete nor to reflect the laws of any particular state, nor to encompass the
laws of all states in which the security for the Mortgage Loans and Contracts
is situated. The summaries are qualified by reference to the applicable
federal and state laws governing the Mortgage Loans and Contracts.
General
Mortgages. The Mortgage Loans will be secured either by deeds of
trust or mortgages. A mortgage creates a lien upon the real property
encumbered by the mortgage. It is not prior to liens for real estate taxes and
assessments. Priority between mortgages depends on their terms and generally
on the order of filing with a state or county office. There are two parties to
a mortgage: the mortgagor, who is the borrower and homeowner or the land
trustee (as described below), and the mortgagee, who is the lender. Under the
mortgage instrument, the mortgagor delivers to the mortgagee a note or bond
and the mortgage. Although a deed of trust is similar to a mortgage, a deed of
trust formally has three parties, the borrower-homeowner called the trustor
(similar to a mortgager), a lender (similar to a mortgagee) called the
beneficiary, and a third-party grantee called the trustee. Under a deed of
trust, the borrower grants the property, irrevocably until the debt is paid,
in trust and generally with a power of sale, to the trustee to secure payment
of the obligation. The trustee's authority under a deed of trust and the
mortgagee's authority under a mortgage are governed by law, the express
provisions of the deed of trust or mortgage and, in some cases, the directions
of the beneficiary.
Cooperatives. Certain of the Mortgage Loans may be Cooperative Loans.
The private, non-profit, cooperative apartment corporation owns all the real
property that comprises the project, including the land, separate dwelling
units and all common areas. The cooperative is directly responsible for
project management and, in most cases, payment of real estate taxes and hazard
and liability insurance. If there is a blanket mortgage on the cooperative
apartment building and or underlying land, as is generally the case, the
cooperative, as project mortgagor, is also responsible for meeting these
mortgage obligations. A blanket mortgage is ordinarily incurred by the
cooperative in connection with the construction or purchase of the
cooperative's apartment building. The interest of the occupant under
proprietary leases or occupancy agreements to which that cooperative is a
party are generally subordinate to the interest of the holder of the blanket
mortgage in that building. If the cooperative is unable to meet the payment
obligations arising under its blanket mortgage, the mortgagee holding the
blanket mortgage could foreclose on that mortgage and terminate all
subordinate proprietary leases and occupancy agreements. In addition,
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the blanket mortgage on a cooperative may provide financing in the form of a
mortgage that does not fully amortize with a significant portion of principal
being due in one lump sum at final maturity. The inability of the cooperative to
refinance this mortgage and its consequent inability to make such final payment
could lead to foreclosure by the mortgagee providing the financing. A
foreclosure in either event by the holder of the blanket mortgage could
eliminate or significantly diminish the value of any collateral held by the
lender who financed the purchase by an individual tenant-stockholder of
cooperative shares or in the case of a Trust including Cooperative Loans, the
collateral securing the Cooperative Loans.
The cooperative is owned by tenant-stockholders who, through
ownership of stock shares or membership certificates in the corporation,
receive proprietary leases or occupancy agreements which confer exclusive
rights to occupy specific units. Generally, a tenant-stockholder of a
cooperative must make a monthly payment to the cooperative representing such
tenant-stockholder's pro rata share of the cooperative's payments for its
blanket mortgage, real property taxes, maintenance expenses and other capital
or ordinary expenses. An ownership interest in a cooperative and accompanying
occupancy rights is financed through a cooperative share loan evidenced by a
promissory note and secured by a security interest in the occupancy agreement
or proprietary lease and in the related cooperative shares. The lender takes
possession of the share certificate and a counterpart of the proprietary lease
or occupancy agreement and a financing statement covering the proprietary
lease or occupancy agreement and the cooperative shares is filed in the
appropriate state and local offices to perfect the lenders interest in its
collateral. Subject to the limitations discussed below, upon default of the
tenant-stockholder, the lender may sue for judgment on the promissory note,
dispose of the collateral at a public or private sale or otherwise proceed
against the collateral or tenant-stockholder as an individual as provided in
the security agreement covering the assignment of the proprietary lease or
occupancy agreement and the pledge of cooperative shares.
Foreclosure
Mortgages. Foreclosure of a deed of trust is generally accomplished
by a non-judicial trustee's sale under a specific provision in the deed of
trust that authorizes the trustee to sell the property to a third party upon
any default by the borrower under the terms of the note or deed of trust. In
some states, the trustee must record a notice of default and send a copy to
the borrower-trustor or and any person who has recorded a request for a copy
of a notice of default and notice of sale. In addition, the trustee must
provide notice in some states to any other individual having an interest in
the real property, including any junior lienholders. The borrower, or any
other person having a junior encumbrance on the real estate, may, during a
reinstatement period, cure the default by paying the entire amount in arrears
plus the costs and expenses incurred in enforcing the obligation. Generally,
state law controls the amount of foreclosure expenses and costs, including
attorney's fees' which may be recovered by a lender. If the deed of trust is
not reinstated, a notice of sale must be posted in a public place and, in most
states, published for a specific period of time in one or more newspapers. In
addition, some state laws require that a copy of the notice of sale be posted
on the property and sent to all parties having an interest in the real
property.
Foreclosure of a mortgage is generally accomplished by judicial
action. The action is initiated by the service of legal pleadings upon all
parties having an interest in the real property. Delays in completion of the
foreclosure may occasionally result from difficulties in locating necessary
parties defendant. Judicial foreclosure proceedings are often not protested by
any of the parties defendant. However, when the mortgagee's right to foreclose
is contested, the legal proceedings necessary to resolve the issue can be time
consuming. After the completion of judicial foreclosure, the court generally
issues a judgment of foreclosure and appoints a referee or other court officer
to conduct the sale of the property.
In case of foreclosure under either a mortgage or a deed of trust,
the sale by the referee or other designated officer or by the trustee is a
public sale. However, because of the difficulty a potential buyer at the sale
would have in determining the exact status of title and because the physical
condition of the property may have deteriorated during foreclosure
proceedings, it is uncommon for a third party to purchase the property at the
foreclosure sale. Rather it is common for the lender to purchase the property
from the trustee or referee for an amount equal to the principal amount of the
mortgage or deed of trust, accrued and unpaid interest and expenses of
foreclosure. Thereafter, the lender will assume the burdens of ownership,
including paying real estate taxes, obtaining casualty insurance and making
such repairs at its own expense as are necessary to render the property
suitable for sale. The lender will commonly obtain the services of a real
estate broker and pay the broker's commission in connection with the sale of
the property. Depending upon market conditions, the ultimate proceeds of the
sale of the property may
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not equal the lender's investment in the property. Any loss may be reduced by
the receipt of any mortgage insurance proceeds.
When the junior mortgagee or beneficiary under a junior deed of trust
cures the default and state law allows it to reinstate or redeem by paying the
full amount of the senior mortgage or deed of trust, then in those states the
amount paid so to cure or redeem generally becomes a part of the indebtedness
secured by the junior mortgage or deed of trust. See "Junior Liens; Rights of
Senior Mortgagors or Beneficiaries" below.
A sale conducted in accordance with the terms of the power of sale
contained in a mortgage or deed of trust is generally presumed to be conducted
regularly and fairly, and a conveyance of the real property by the trustee
confers, in most states, legal title to the real property to the purchaser, free
of all junior mortgages or deeds of trust and free of all other liens and claims
subordinate to the mortgage or deed of trust under which the sale is made (with
the exception of certain governmental liens). The purchaser's title is, however,
subject to all senior liens, encumbrances and mortgages and may be subject to
mechanic's and materialman's liens in some states. Thus, if the mortgage or deed
of trust being foreclosed is a junior mortgage or deed of trust, the sheriff or
trustee will convey title to the purchaser of the real property, subject to any
existing first mortgage or deed of trust and any other prior liens and claims.
The foreclosure of a junior mortgage or deed of trust, generally, will have an
effect on the first mortgage or deed of trust, if the senior mortgage or deed of
trust grants to the senior mortgagee or beneficiary the right to accelerate its
indebtedness under a "due-on-sale" clause or "due on further encumbrance" clause
contained in the senior mortgage or deed of trust. See "Anti-Deficiency
Legislation and Other Limitations on Lenders" below.
The proceeds received by the sheriff or trustee from the sale are
applied pursuant to the terms of the deed of trust, which may require
application first to the costs, fees and expenses of sale and then in
satisfaction of the indebtedness secured by the mortgage or deed of trust
under which the sale was conducted. In some states, any surplus money
remaining may be available to satisfy claims of the holders of junior
mortgages or deeds of trust and other junior liens and claims in order of
their priority, whether or not the mortgagor or trustee is in default, while
in some states, any surplus money remaining may be payable directly to the
mortgagor or trustor. Any balance remaining is generally payable to the
mortgagor or trustor. Following the sale, in some states the mortgagee or
beneficiary following a foreclosure of a mortgage or deed of trust may not
obtain a deficiency judgment against the mortgagor or trustor. A junior
lienholder whose rights in the property are terminated by the foreclosure by a
senior lienholder will not share in the proceeds from the subsequent
disposition of the property.
Cooperative Loans. The cooperative shares owned by the
tenant-stockholder and pledged to the lender are, in almost all cases, subject
to restrictions on transfer as set forth in the cooperative's Certificate of
Incorporation and Bylaws, as well as the proprietary lease or occupancy
agreement, and may be canceled by the cooperative for failure by the
tenant-stockholder to pay rent or other obligations or charges owned by such
tenant-stockholder, including mechanics' liens against the cooperative
apartment building incurred by such tenant-stockholder. The proprietary lease
or occupancy agreement generally permits the cooperative to terminate such
lease or agreement in the event an obligor fails to make payments or defaults
in the performance of covenants required thereunder. Typically, the lender and
the cooperative enter into a recognition agreement which establishes the
rights and obligations of both parties in the event of a default by the
tenant-stockholder on its obligations under the proprietary lease or occupancy
agreement. A default by the tenant-stockholder under the proprietary lease or
occupancy agreement will usually constitute a default under the security
agreement between the lender and the tenant-stockholder.
The recognition agreement generally provides that, in the event that
the tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the cooperative will recognize the
lender's lien against proceeds from a sale of the cooperative apartment,
subject, however, to the cooperative's right to sums due under such
proprietary lease or occupancy agreement. The total amount owed to the
cooperative by the tenant-stockholder, which the lender generally cannot
restrict and does not monitor, could reduce the value of the collateral below
the outstanding principal balance of the cooperative loan and accrued and
unpaid interest thereon.
Recognition agreements also provide that in the event of a
foreclosure on a cooperative loan, the lender must obtain the approval or
consent of the cooperative as required by the proprietary lease before
transferring the
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cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited in any rights it may have to dispossess the tenant-stockholders.
In some states, foreclosure on the cooperative shares is accomplished
by a sale in accordance with the provisions of Article 9 of the Uniform
Commercial Code (the "UCC") and the security agreement relating to those
shares. Article 9 of the UCC requires that a sale be conducted in a
"commercially reasonable" manner. Whether a foreclosure sale has been
conducted in a "commercially reasonable" manner will depend on the facts in
each case. In determining commercial reasonableness, a court will look to the
notice given the debtor and the method, manner, time, place and terms of the
foreclosure. Generally, a sale conducted according to the usual practice of
banks selling similar collateral will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to
reimbursement is subject to the right of the cooperative corporation to
receive sums due under the proprietary lease or occupancy agreement. If there
are proceeds remaining, the lender must account to the tenant-stockholder for
the surplus. Conversely, if a portion of the indebtedness remains unpaid, the
tenant-stockholder is generally responsible for the deficiency. See
"Anti-Deficiency Legislation and Other Limitations on Lenders" below.
Junior Liens; Rights of Senior Mortgagees or Beneficiaries. Certain
of the Mortgage Loans, including Title I Loans, may be secured by mortgages or
deeds of trust providing for junior (i.e., second, third, etc.) liens on the
related Mortgaged Properties which are junior to the other mortgages or deeds
of trust held by other lenders or institutional investors. The rights of the
beneficiary under a junior deed of trust or as mortgagee under a junior
mortgage are subordinate to those of the mortgagee or beneficiary under the
senior mortgage or deed of trust, including the prior rights of the senior
mortgagee or beneficiary to receive hazard insurance and condemnation proceeds
and to cause the property securing the Mortgage Loans to be sold upon default
of the mortgagor or trustor. As discussed more fully below, a junior mortgagee
or beneficiary in some states may satisfy a defaulted senior loan in full and
in some states may cure such default and bring the senior loan current, in
either event adding the amounts expended to the balance due on the junior
loan. In most states, absent a provision in the senior mortgage or deed of
trust, no notice of default is required to be given to a junior mortgagee or
beneficiary.
The forms of the mortgage or deed of trust used by most institutional
lenders generally confer on the mortgagee or beneficiary the right both to
receive all proceeds collected under any hazard insurance policy and all
awards made in connection with any condemnation proceedings, and to apply such
proceeds and awards to any indebtedness secured by the mortgage or deed of
trust, in such order as the mortgagee or beneficiary may determine. Thus, in
the event improvements on the property are damaged or destroyed by fire or
other casualty, or in the event the bankruptcy is taken by condemnation, the
mortgagee or beneficiary under the underlying first mortgage or deed of trust
may have the prior right to collect any insurance proceeds payable under a
hazard insurance policy and any award of damages in connection with the
condemnation and to apply the same to the indebtedness secured by the first
mortgage or deed of trust. In those situations, proceeds in excess of the
amount of first mortgage indebtedness generally may be applied to the
indebtedness of a junior mortgage or trust deed.
Other provisions typically found in the form of the mortgagee or deed
of trust generally used by most institutional lenders obligate the mortgagor
or trustor to pay before delinquency all taxes and assessments on the property
and, when due, all encumbrances, charges and liens on the property which
appear prior to the mortgage or deed of trust, to provide and maintain fire
insurance on the property, to maintain and repair the property and not to
commit or permit any waste thereof, and to appear in and defend any action or
proceeding purporting to affect the property or the rights of the mortgagee or
beneficiary under the mortgage or deed of trust. Upon a failure of the
mortgagor or trustor to perform any of these obligations, the mortgagee or
beneficiary typically is given the right under the mortgage or deed of trust
to perform the obligation itself at its election, with the mortgagor or
trustor agreeing to reimburse the mortgagee or beneficiary for any sums
expended by the mortgagee or beneficiary on behalf of the trustor. All sums so
expended by the mortgagee or beneficiary generally become part of the
indebtedness secured by the mortgage or deed of trust
Right of Redemption. In some states, after sale pursuant to a deed of
trust or foreclosure of a mortgage, the borrower and foreclosed junior lienors
are given a statutory period in which to redeem the property following
foreclosure. In some states, redemption may occur only upon payment of the
entire principal balance of the loan, accrued interest and expenses of
foreclosure. In other states, redemption may be authorized if the former
borrower
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pays only a portion of the sums due. The effect of a statutory right of
redemption is to diminish the ability of the lender to sell the foreclosed
property. The rights of redemption would defeat the title of any purchaser from
the lender subsequent to foreclosure or sale under a deed of trust.
Consequently, the practical effect of the redemption right is to force the
lender to retain the property and pay the expenses of ownership until the
redemption period has run.
Anti-Deficiency Legislation and Other Limitations on Lenders. Certain
states have imposed statutory prohibitions that limit the remedies of a
beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment would be a personal judgment against the
former borrower equal in most cases to the difference between the net amount
realized upon the public sale of the real property and the amount due to the
lender. Other statutes require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an
attempt to satisfy the full debt before bringing a personal action against the
borrower. Finally, other statutory provisions limit any deficiency judgment
against the former borrower following a judicial sale to the excess of the
outstanding debt over the fair market value of the property at the time of the
public sale. The purpose of these statutes is generally to prevent a
beneficiary or a mortgagee from obtaining a large deficiency judgment against
the former borrower as a result of low or no bids at the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments,
numerous other statutory provisions, including the federal bankruptcy laws and
state laws affording relief to debtors, may interfere with or affect the
ability of the secured mortgage lender to realize upon collateral and/or
enforce a deficiency judgment. For example, with respect to federal bankruptcy
law, a court with federal bankruptcy jurisdiction may permit a debtor through
his or her Chapter 11 or Chapter 13 rehabilitative plan to cure a monetary
default in respect of a mortgage loan on a debtor's residence by paying
arrearages within a reasonable time period and reinstating the original
mortgage loan payment schedule even though the lender accelerated the mortgage
loan and final judgment of foreclosure had been entered in state court
(provided no sale of the residence had yet occurred) prior to the filing of
the debtor's petition. Some courts with federal bankruptcy jurisdiction have
approved plans, based on the particular fact of the reorganization case, that
effected the curing of a mortgage loan default by paying arrearages over a
number of years.
Courts with federal bankruptcy jurisdiction have also indicated that
the terms of a mortgage loan secured by property of the debtor may be
modified. These courts have suggested that such modifications may include
reducing the amount of each monthly payment, changing the rate of interest,
altering the repayment schedule and reducing the lender's security interest to
the value of the residence, thus leaving the lender a general unsecured
creditor for the difference between the value of the residence and the
outstanding balance of the loan. Federal bankruptcy law and limited case law
indicate that the foregoing modifications could not be applied to the terms of
a loan secured by property that is the principal residence of the debtor.
The Code provides priority to certain tax liens over the lien of the
mortgage. In addition, substantive requirements are imposed upon mortgage
lenders in connection with the origination and the servicing of mortgage loans
by numerous federal and some state consumer protection laws. These laws
include the federal Truth-in-Lending Act, Real Estate Settlement Procedures
Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair Credit
Reporting Act and related statutes. These federal laws impose specific
statutory liabilities upon lenders who originate mortgage loans and who fail
to comply with the provisions of the law. In some cases, this liability may
affect assignees of the mortgage loans.
Generally, Article 9 of the UCC governs foreclosure on cooperative
shares and the related proprietary lease or occupancy agreement. Some courts
have interpreted section 9-504 of the UCC to prohibit a deficiency award
unless the creditor establishes that the sale of the collateral (which, in the
case of a Cooperative Loan, would be the shares of the cooperative and the
related proprietary lease or occupancy agreement) was conducted in a
commercially reasonable manner.
Enforceability of Certain Provisions. Certain of the Mortgage Loans
will contain due-on-sale clauses. These clauses permit the lender to
accelerate the maturity of a loan if the borrower sells, transfers, or conveys
the property. The enforceability of these clauses was the subject of
legislation or litigation in many states, and in some cases the enforceability
of these clauses was limited or denied. However, the Garn-St. Germain
Depository
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Institutions Act of 1982 (the "Garn-St. Germain Act") preempts state
constitutional, statutory and case law prohibiting the enforcement of
due-on-sale clauses and permits lenders to enforce these clauses in accordance
with their terms, subject to certain limited exceptions. The Garn-St. Germain
Act does "encourage" lenders to permit assumption of loans at the original rate
of interest or at some other rate less than the average of the original rate and
the market rate.
The Garn-St. Germain Act also sets forth nine specific instances in
which a mortgage lender covered by the Garn-St. Germain Act (including federal
savings and loan associations and federal savings banks) may not exercise a
due-on-sale clause, notwithstanding the fact that a transfer of the property
may have occurred. These include intra-family transfers, certain transfers by
operation of law, leases of fewer than three years and the creation of a
junior encumbrance. Regulations promulgated under the Garn-St. Germain Act by
the Federal Home Loan Bank Board as succeeded by the Office of Thrift
Supervision (the "OTS"), also prohibit the imposition of a prepayment penalty
upon the acceleration of a loan pursuant to a due-on-sale clause. Any
inability of the Depositor to enforce due-on-sale clauses may affect the
average life of the Mortgage Loans and the number of Mortgage Loans that may
be outstanding until maturity.
Upon foreclosure, courts have imposed general equitable principles.
These equitable principles are generally designed to relieve the borrower from
the legal effect of his defaults under the loan documents. Examples of
judicial remedies that have been fashioned include requirements that the
lender undertake affirmative and expensive actions to determine the causes for
the borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's judgment and have required that lenders reinstate loans or recast
payment schedules in order to accommodate borrowers who are suffering from
temporary financial disability. In other cases, courts have limited the right
of the lender to foreclose if the default under the mortgage instrument is not
monetary, such as the borrower falling to adequately maintain the property or
the borrower executing a second mortgage or deed of trust affecting the
property. Finally, some courts have been faced with the issue of whether or
not federal or state constitutional provisions reflecting due process concerns
for adequate notice require that borrowers under deeds of trust or mortgages
receive notices in addition to the statutory-prescribed minimum. For the most
part, these cases have upheld the notice provisions as being reasonable or
have found that the sale by a trustee under a deed of trust, or under a
mortgage having a power of sale, does not involve sufficient state action to
afford constitutional protections to the borrower.
The standard forms of note, mortgage and deed of trust generally
contain provisions obligating the borrower to pay a late charge if payments
are not timely made, and in some circumstances may provide for prepayment fees
or penalties if the obligation is paid prior to maturity. In certain states,
there are or may be specific limitations upon late charges which a lender may
collect from a borrower for delinquent payments. Certain states also limit the
amounts that a lender may collect from a borrower as an additional charge if
the loan is prepaid. Under the Agreement, late charges (to the extent
permitted by law and not waived by the Servicer) will be retained by the
Servicer as additional servicing compensation.
Adjustable Rate Loans. The laws of certain states may provide that
mortgage notes relating to adjustable rate loans are not negotiable
instruments under the UCC. In such event, the Trustee will not be deemed to be
a "holder in due course," within the meaning of the UCC and may take such a
mortgage note subject to certain restrictions on its ability to foreclose and
to certain contractual defenses available to a mortgagor.
Environmental Legislation. Certain states impose a statutory lien for
associated costs on property that is the subject of a cleanup action by the
state on account of hazardous wastes or hazardous substances released or
disposed of on the property. Such a lien will generally have priority over all
subsequent liens on the property and, in certain of these states, will have
priority over prior recorded liens including the lien of a mortgage. In
addition, under federal environmental legislation and under state law in a
number of states, a secured party which takes a deed in lieu of foreclosure or
acquires a mortgaged property at a foreclosure sale or assumes active control
over the operation or management of a property so as to be deemed an "owner"
or "operator" of the property may be liable for the costs of cleaning up a
contaminated site. Although such costs could be substantial, it is unclear
whether they would be imposed on a secured lender (such as a Trust) to
homeowners. In the event that title to a Mortgaged Property securing a
Mortgage Loan in a Trust was acquired by the Trust and cleanup costs were
incurred in respect of the Mortgaged Property, the Trust might realize a loss
if such costs were required to be paid by the Trust.
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Soldiers' and Sailors' Civil Relief Act
Generally, under the terms of the Relief Act, a borrower who enters
military service after the origination of a Mortgage Loan or Contract by such
borrower (including a borrower who is a member of the National Guard or is in
reserve status at the time of the origination of the Mortgage Loan and is
later called to active duty) may not be charged interest above an annual rate
of 6% during the period of such borrower's active duty status, unless a court
orders otherwise upon application of the lender. It is possible that such
interest rate limitation or similar limitations under state law could have an
effect, for an indeterminate period of time, on the ability of the Servicer to
collect full amounts of interest on certain of the Mortgage Loans. In
addition, the Relief Act imposes limitations which would impair the ability of
the Servicer to foreclose on an affected Mortgage Loan during the borrower's
period of active duty status. Thus, in the event that such a Mortgage Loan
goes into default there may be delays and losses occasioned by the inability
to realize upon the Mortgaged Property in a timely fashion.
Any shortfalls in interest collections resulting from application of
the Relief Act could adversely affect Certificates.
The Contracts
General. As a result of the Depositor's assignment of the Contracts
to the Trustee, the Owners of Certificates will succeed collectively to all
the rights (including the right to receive payment on the Contracts) and will
assume certain obligations of the Depositor. Each Contract evidences both (a)
the obligation of the obligor to repay the loan evidenced thereby, and (b) the
grant of a security interest in the Manufactured Home to secure repayment of
such loans. Certain aspects of both features of the Contracts are described
more fully below.
The Contracts generally are "chattel paper" as defined in the UCC in
effect in the states which the Manufactured Homes initially were registered.
Pursuant to the UCC, the sale of chattel paper is treated in a manner similar
to perfection of a security interest in chattel paper. Under the Agreement,
the Depositor will transfer physical possession of the Contracts to the
Trustee or its custodians. In addition, the Depositor will make an appropriate
filing of a UCC-1 financing statement in the appropriate states to give notice
of the Trustee's ownership of the Contracts. The Contracts will not be stamped
or marked otherwise to reflect their assignment from the Depositor to the
Trustee. Therefore, if a subsequent purchaser were able to take physical
possession of the Contracts without notice of such assignment the Trustee's
interest in Contracts could be defeated.
Security Interests in the Manufactured Homes. The Manufactured Homes
securing the Contracts may be located in all 50 states. Security interests in
manufactured homes may be perfected either by notation of the secured party's
lien on the certificate of title or by delivery of the required documents and
payment of a fee to the state motor vehicle authority, depending on state law.
In some nontitle states, perfection pursuant to the provisions of the UCC is
required. The Depositor may effect such notation or delivery of the required
documents and fees, and obtain possession of the certificate of title, as
appropriate under the laws of the state in which any manufactured home
securing a manufactured housing conditional sales contract is registered. In
the event the Depositor fails, due to clerical errors, to effect such notation
or delivery, or files the security interest under the wrong law (for example,
under a motor vehicle title statute rather than under the UCC, in a few
states), the Trustee may not have a first priority security interest in the
Manufactured Home securing a Contract. As manufactured homes have become
larger and often have been attached to their sites without any apparent
intention to move them, courts in many states have held that manufactured
homes, under certain circumstances, may become subject to real estate title
and recording laws. As a result, a security interest in a manufactured home
could be rendered subordinate to the interests of other parties claiming an
interest in the home under applicable state real estate law. In order to
perfect a security interest in a manufactured home under real estate law, the
holder of the security interest must file either a "fixture filing" under the
provisions of the UCC or a real estate mortgage under the real estate laws of
the state where the home is located. These filings must be made in the real
state records office of the county where the home is located. So long as the
borrower does not violate this agreement, a security interest in the
Manufactured Home will be governed by the certificate of title laws or the
UCC, and the notation of the security interest on the certificate of title or
the filing of a UCC financing statement will be effective to maintain the
priority of the security interest in the Manufactured Home. If, however, a
Manufactured Home is permanently attached to this site, other parties could
obtain an interest in the Manufactured Home which is prior to the security
interest transferred to the Trustee. With respect to a series of Certificates
and as described in the related Prospectus Supplement, the Depositor may be
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required to perfect a security interest in the Manufactured Home under
applicable real estate laws. If such real estate filings are not required and if
any of the foregoing events were to occur, the only recourse would be to pursue
the Trust's rights to require repurchase for breach of warranties.
The Depositor will assign its security interest in the Manufactured
Homes to the Trustee. Neither the Depositor nor the Trustee will amend the
certificates of title to identify the Trust as the new secured party.
Accordingly, the Depositor will continue to be named as the secured party on
the certificates of title relating to the Manufactured Homes. In most states,
such assignment is an effective conveyance of such security interest without
amendment of any lien noted on the related certificate of title and the new
secured party succeeds to the Depositor's rights as the secured party.
However, in some states there exists a risk that, in the absence of an
amendment to the certificate of title, such assignment of the security
interest might not be held effective against creditors of the Depositor.
In the absence of fraud, forgery or permanent affixation of the
Manufactured Home to its site by the Manufactured Home owner, or
administrative error by state recording officials, the notation of the lien of
the Depositor on the certificate of title or delivery of the required
documents and fees will be sufficient to protect the Trust against the rights
of subsequent purchasers of a Manufactured Home or subsequent lenders who take
a security interest in the Manufactured Home. If there are any Manufactured
Homes as to which the security interest is not perfected, such security
interest would be subordinate to, among others, subsequent purchasers for
value of Manufactured Homes and holders of perfected security interests. There
also exists a risk in not identifying the Trust as the new secured party on
the certificate of title that, through fraud or negligence, the security
interest of the Trust could be released.
Enforcement of Security Interests in Manufactured Homes. The Servicer
on behalf of the Trustee, to the extent required by the related Agreement, may
take action to enforce the Trustee's security interest with respect to
Contracts in default by repossession and resale of the Manufactured Homes
securing such Contracts in default. So long as the Manufactured Home has not
become subject to the real estate law, a creditor can repossess a Manufactured
Home securing a Contract by voluntary surrender, by "self-help" repossession
that is "peaceful" (i.e., without breach of the peace) or in the absence of
voluntary surrender and the ability to repossess without breach of the peace,
by judicial process. The holder of a Contract must give the debtor a number of
days' notice, which varies from 10 to 30 days depending on the state, prior to
commencement of any repossession. The UCC and consumer protection laws in most
states place restrictions on repossession sales, including requiring prior
notice to the debtor and commercial reasonableness in effecting such a sale.
The law in most states also requires that the debtor be given notice of any
sale prior to resale of the unit so that the debtor may redeem at or before
such resale. In the event of such repossession and resale of a Manufactured
Home, the Trustee would be entitled to be paid out of the sale proceeds before
such proceeds could be applied to the payment of the claims of unsecured
creditors or the holders of subsequently perfected security interests or,
thereafter, to the debtor.
If the owner of a Manufactured Home moves it to a state other than
the state in which such Manufactured Home initially is registered, under the
laws of most states the perfected security interest in the Manufactured Home
would continue for four months after such relocation and thereafter only if
and after the owner registers the Manufactured Home in such state. If the
owner were to relocate a Manufactured Home to another state and not
re-register the Manufactured Home in such state, and if steps are not taken to
re-perfect the Trustee's security interest in such state, the security
interest in the Manufactured Home would cease to be perfected. A majority of
states generally requires surrender of a certificate of title to re-register a
Manufactured Home; accordingly, the Trustee must surrender possession if it
holds the certificate of title to such Manufactured Home or, in the case of
Manufactured Homes registered in states which provide for notation of lien,
the Trustee would receive notice of surrender if the security interest in the
Manufactured Home is noted on the certificate of title. Accordingly, the
Trustee would have the opportunity to re-perfect its security interest in the
Manufactured Home in the state of relocation. In states which do not require a
certificate of title for registration of a manufactured home, re-registration
could defeat perfection. In the ordinary course of servicing the manufactured
housing conditional sales contracts, the Servicer will be required to take
steps to effect such re-perfection upon receipt of notice of re-registration
or information from the obligor as to relocation. Similarly, when an obligor
under a manufactured housing conditional sales contract sells a manufactured
home, the Trustee must surrender possession of the certificate of title or
will receive notice as a result of its lien noted thereon and accordingly will
have an opportunity to require satisfaction of the related manufactured
housing conditional sales contract before release of the lien.
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Under each Agreement the Servicer is obligated to take such steps, at the
Servicer's expense, as are necessary to maintain perfection of security
interests in the Manufactured Homes.
Under the laws of most states, liens for repairs performed on a
Manufactured Home take priority even over a perfected security interest. The
Depositor will represent in the Agreement that it has no knowledge of any such
liens with respect to any Manufactured Home securing payment on any Contract.
However, such liens could arise at any time during the term of a Contract. No
notice will be given to the Trustee in the event such a lien arises.
Under the laws applicable in most states, a creditor is entitled to
obtain a deficiency judgment from a debtor for any deficiency on repossession
and resale of the manufactured home securing such debtor's loan.
However, some states impose prohibitions or limitations on deficiency
judgments.
Certain other statutory provisions, including federal and state
bankruptcy and insolvency laws and general equitable principles, may limit or
delay the ability of a lender to repossess and resell collateral or enforce a
deficiency judgment.
Consumer Protection Laws. The so-called "Holder-in-Due-Course" rule
of the Federal Trade Commission is intended to defeat the ability of the
transferor of a consumer credit contract which is the seller of goods which
gave rise to the transaction (and certain related lenders and assignees) to
transfer such contract free of notice of claims by the debtor thereunder. The
effect of this rule is to subject the assignee of such a contract to all
claims and defenses which the debtor could assert against the seller of goods.
Liability under this rule is limited to amounts paid under a Contract;
however, the obligor also may be able to assert the rule to set off remaining
amounts due as a defense against a claim brought by the Trust against such
obligor. Numerous other federal and state consumer protection laws impose
requirements applicable to the origination of and lending pursuant to the
Contracts, including the Truth-in-Lending Act, the Federal Trade Commission
Act, the Fair Credit Billing Act, the Fair Credit Reporting Act, the Equal
Credit Opportunity Act, the Fair Debt Collection Practices Act and the Uniform
Consumer Credit Code. In the case of some of these laws, the failure to comply
with their provisions may affect the enforceability of the related Contract
Transfers of Manufactured Homes; Enforceability of "Due-on-Sale"
Clauses. The Contracts, in general, prohibit the sale or transfer of the
related Manufactured Homes without the consent of the Depositor and permit the
acceleration of the maturity of the Contracts by the Depositor upon any such
sale or transfer for which consent has not been granted. In certain cases, the
transfer may be made by a delinquent obligor in order to avoid a repossession
proceeding with respect to a Manufactured Home.
In the case of a transfer of a Manufactured Home after which the
Servicer desires to accelerate the maturity of the related Contract, the
Servicer's ability to do so will depend on the enforceability under state law
of the "due-on-sale" clause. The Garn-St. Germain Act preempts, subject to
certain exceptions and conditions, state laws prohibiting enforcement of
"due-on-sale" clauses applicable to the Manufactured Homes. Consequently, in
some states the Servicer may be prohibited from enforcing a "due-on-sale"
clause in respect of certain Manufactured Homes.
The Title I Program
Certain of the Mortgage Loans or Contracts contained in a Trust may
be loans insured under the FHA Title I credit insurance program created
pursuant to Sections 1 and 2(a) of the National Housing Act of 1934 (the
"Title I Program"). Under the Title I Program, the FHA is authorized and
empowered to insure qualified lending institutions against losses on eligible
loans. The Title I Program operates as a coinsurance program in which the FHA
insures up to 90% of certain losses incurred on an individual insured loan,
including the unpaid principal balance of the loan, but only to the extent of
the insurance coverage available in the lender's FHA insurance coverage
reserve account. The owner of the loan bears the uninsured loss on each loan.
The types of loans, which are eligible for insurance by the FHA under
the Title I Program, include property improvement loans ("Property Improvement
Loans" or "Title I Loans") and manufactured home loans ("Manufactured Home
Loans" or "Title I Contracts"). A Property Improvement Loan or Title I Loan
means a loan
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made to finance actions or items that substantially protect or improve the basic
livability or utility of a property and includes: (1) single family, multifamily
and nonresidential property improvement loans; (2) manufactured home improvement
loans, where the home is classified as personalty; (3) historic preservation
loans; and (4) fire safety equipment loans in existing health care facilities. A
Manufactured Home Loan or Title I Contract means a loan for the purchase or
refinancing of a manufactured home and/or the lot on which to place such home
and includes: (1) manufactured home purchase loans; (2) manufactured home lot
loans; and (3) combination loans.
In addition to these types of loans, there are two basic methods of
lending or originating loans which include a "direct loan" or a "dealer loan".
With respect to a direct loan, the borrower makes application directly to a
lender without any assistance from a dealer, which application may be filled
out by the borrower or by a person acting at the direction of the borrower who
does not have a financial interest in the loan transaction, and the lender may
disburse the loan proceeds solely to the borrower or jointly to the borrower
and other parties to the transaction. With respect to a dealer loan, the
dealer, who has a direct or indirect financial interest in the loan
transaction, assists the borrower in preparing the loan application or
otherwise assists the borrower in obtaining the loan from the lender and the
lender may disburse proceeds solely to the dealer or the borrower or jointly
to the borrower and the dealer or other parties. With respect to a dealer
Title I Loan, a dealer may include a seller, a contractor or supplier of goods
or services' and with respect to a dealer Title I Contract, a dealer is a
person engaged in the business of manufactured home retail sales.
Loans insured under the Title I Program are required to have fixed
interest rates and, generally, provide for equal installment payments due
weekly, biweekly, semi-monthly, or monthly, except that a loan may be payable
quarterly or semi-annually in order to correspond with the borrower's
irregular flow of income The first or last payments (or both) may vary in
amount but may not exceed 150% of the regular installment payment, and the
first payment may be due no later than two months from the date of the loan.
The note must contain a provision permitting full or partial prepayment of the
loan. The interest rate may be established by the lender and must be fixed for
the term of the loan and recited in the note. Interest on an insured loan must
accrue from the date of the loan and be calculated according to the actuarial
method. The lender must assure that the note and all other documents
evidencing the loan are in compliance with applicable Federal, state and local
laws.
Each insured lender is required to use prudent lending standards in
underwriting individual loans and to satisfy the applicable loan underwriting
requirements under the Title I Program prior to its approval of the loan and
disbursement of loan proceeds. Generally, the lender must exercise prudence
and diligence to determine whether the borrower and any co-maker are solvent
and acceptable credit risks, with a reasonable ability to make payments on the
loan obligation. The lender's credit application and review must determine
whether the borrower's income will be adequate to meet the periodic payments
required by the loan, as well as the borrower's other housing and recurring
expenses, which determination must be made in accordance with the
expense-to-income ratios published by the Secretary of the United States
Department of Housing and Urban Development ("HUD").
Under the Title I Program, the FHA does not review or approve for
qualification for insurance the individual loans insured thereunder at the
time of approval by the lending institution. If, after a loan has been made
and reported for insurance under the Title I Program, the lender discovers any
material misstatement of fact or that the loan proceeds have been misused by
the borrower, dealer or any other party, it shall promptly report this to the
FHA. In such case, provided that the validity of any lien on the property has
not been impaired, the insurance of the loan under the Title I Program will
not be affected unless such material misstatement of fact or misuse of loan
proceeds was caused by (or was knowingly sanctioned by) the lender or its
employees.
Requirements for Title I Loans. The maximum principal amounts for
Title I Loans must not exceed the actual cost of the project plus any
applicable fees and charges allowed under the Title I Program; provided that
such maximum amount does not exceed the following loan amounts: (i) $25,000
for a single family property improvement loan and nonresidential property
improvement loans; (ii) the lesser of $60,000 or an average of $12,000 per
dwelling unit for multifamily property improvement loans; and (iii) $17,500
for a manufactured home improvement loan. Generally, the term of a Title I
Loan may not be less than six months nor greater than 20 years and 32 days,
except that the maximum term of a single family property improvement loan on a
manufactured home is limited to 15 years and 32 days and the maximum term of a
manufactured home improvement loan is limited to 12 years and 32 days. A
borrower may obtain multiple Title I Loans with respect to multiple
properties, and a borrower may obtain more than one Title I Loan with respect
to a single property, in each case as long as the total outstanding
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balance of all Title I Loans on the same property does not exceed the maximum
loan amount for the type of Title I Loan thereon having the highest permissible
loan amount
Borrower eligibility for a Title I Loan requires that the borrower
have at least a one-half interest in either fee simple title to the real
property, a lease thereof for a term expiring at least six months after the
final maturity of the Title I Loan or a recorded land installment contract for
the purchase of the real property, and that the borrower have equity in the
property being improved at least equal to the amount of the Title I Loan if
such loan amount exceeds $15,000. Any Title I Loan in excess of $5,000 must be
secured by a recorded lien on the improved property which is evidenced by a
mortgage or deed of trust executed by the borrower and all other owners in fee
simple.
The proceeds from a Title I Loan may be used only to finance property
improvements which substantially protect or improve the basic livability or
utility of the property as disclosed in the loan application. The Secretary of
HUD has published a list of items and activities which cannot be financed with
proceeds from any Title I Loan and from time to time the Secretary of HUD may
amend such list of items and activities. With respect to any dealer Title I
Loan, before the lender may disburse funds, the lender must have in its
possession a completion certificate on a HUD-approved form, signed by the
borrower and the dealer. With respect to any direct Title I Loan the lender is
required to obtain, promptly upon completion of the improvements but not later
than 6 months after disbursement of the loan proceeds with one 6 month
extension if necessary, a completion certificate, signed by the borrower. The
lender is required to conduct an on-site inspection on any Title I Loan where
the principal obligation is $7,500 or more, and or any direct Title I Loan
where the borrower fails to submit a completion certificate.
Requirements for Title I Contracts. The maximum principal amount for
any Title I Contract must not exceed the sum of certain itemized amounts,
which include a specified percentage of the purchase price of the manufactured
home depending on whether it is a new or existing home; provided that such
maximum amount does not exceed the following loan amounts: (i) $40,500 for a
new or existing manufactured home purchase loan; (ii) $13,500 for a
manufactured home lot purchase; and (iii) $54,000 for a combination loan
(i.e., a loan to purchase a new or existing manufactured home and the lot for
such home). Generally, the term of a Title I Contract may not be less than six
months nor greater than 20 years and 32 days, except that the maximum term of
a manufactured home lot loan is limited to 15 years and 32 days and the
maximum term of a multimodule manufactured home and lot in combination is
limited to 25 years and 32 days.
Borrower eligibility for a Title I Contract requires that the
borrower become the owner of the property to be financed with such loan and
occupy the manufactured home as the borrower's principal residence, except for
a manufactured home lot loan which allows six months to occupy the home as the
borrower's principal residence. If a manufactured home is classified as
realty, then ownership of the home must be in fee simple, and also, the
ownership of the manufactured home lot must be in fee simple, except for a lot
which consists of a share in a cooperative association that owns the
manufactured home park. The borrower's minimum cash down payment requirement
to obtain financing through a Title I Contract is as follows: (i) at least 5%
of the first $5,000 and 10% of the balance of the purchase price of a new
manufactured home and at least 10% of the purchase price of an existing
manufactured home for a manufactured home purchase loan, or in lieu of a full
or partial cash down payment, the trade-in of the borrower's equity in an
existing manufactured home; (ii) at least 10% of the purchase price and
development costs of a lot for a manufactured home lot loan; and (iii) at
least 5% of the first $5,000 and 10% of the balance of the purchase price of
the manufactured home and lot for a combination loan.
Any manufactured home financed by a Title I Contract must be
certified by the manufacturer to have been constructed in compliance with the
National Manufactured Housing Construction and Safety Standards Act of 1974
(42 U.S.C. 5401-5426), so as to conform to all applicable Federal construction
and safety standards, and with respect to the purchase of a new manufactured
home, the manufacture must furnish the borrower with a one year written
warranty on a HUD approved form which obligates the manufacturer to correct
any nonconformity with all applicable Federal construction and safety
standards or any defects in materials or workmanship for the one year period
after the date of delivery. The proceeds from a Title I Contract may be used
as follows: the purchase or refinancing of a manufactured home, a suitably
developed lot for a manufactured home already owned by the borrower, or a
manufactured home and suitably developed lot for the home in combination; or
the refinancing of an existing manufactured home already owned by the borrower
in connection with the purchase of a manufactured home lot or an existing lot
already owned by the borrower in connection with the purchase of a
manufactured home. In addition, the proceeds for a Title I Contract which is a
manufactured home purchase loan or a combination loan
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may be used for the purchase, construction or installation of a garage, carport,
patio or other comparable appurtenance to the home. The proceeds from a Title I
Contract cannot be used for the purchase of furniture or the financing of any
items and activities which are set forth on the list published by the Secretary
of HUD as amended from time to time.
Any Title I Contract must be secured by a recorded lien on the
manufactured home, its furnishings, equipment, accessories and appurtenance,
which lien must be a first lien, superior to any other lien on the property.
With respect to any Title I Contract involving a manufactured home purchase
loan or combination loan and the sale of the manufactured home by a dealer,
the lender or its agent (other than the dealer) must conduct a
site-of-placement inspection within 60 days after the date of the loan to
verify that the terms and conditions of the purchase contract have been met,
the manufactured home and any options and appurtenances included in the
purchase price or financed with the loan have been delivered and installed,
and the placement certificate executed by the borrower and the dealer is in
order.
FHA Insurance Coverage. Under the Title I Program the FHA establishes
an insurance coverage reserve account for each lender which has been granted a
Title I insurance contract. The amount of insurance coverage in this account
is 10% of the amount disbursed, advanced or expended by the lender in
originating or purchasing eligible loans registered with the FHA for Title I
insurance, with certain adjustments. The balance in the insurance coverage
reserve account is the maximum amount of insurance claims the FHA is required
to pay. Loans to be insured under the Title I Program will be registered for
insurance by the FHA and the insurance coverage attributable to such loans
will be included in the insurance coverage reserve account for the originating
or purchasing lender following the receipt and acknowledgment by the FHA of a
loan report on the prescribed form pursuant to the Title I regulations. The
FHA charges a fee of 0.50% per annum of the net proceeds (the original
balance) of any eligible loan so reported and acknowledged for insurance by
the originating lender. The FHA bills the lender for the insurance premium on
each insured loan annually, on approximately the anniversary date of the
loan's origination. If an insured loan is prepaid during the year, the FHA
will not refund or abate the insurance premium.
Under the Title I Program the FHA will reduce the insurance coverage
available in the lender's FHA insurance coverage reserve account with respect
to loans insured under the lender's contract of insurance by (i) the amount of
the FHA insurance claims approved for payment relating to such insured loans,
(ii) the amount of the Annual Reductions attributable to such insured loans
and (iii) the amount of insurance coverage attributable to insured loans sold
by the lender, and such insurance coverage may be reduced for any FHA
insurance claims rejected by the FHA. After a lender has held its Title I
contract of insurance for five years, the lender's FHA insurance coverage
reserve account is subject to an annual reduction (the "Annual Reduction") on
each October in an amount equal to 10% of the insurance coverage reserves
available on such date with respect to such contract of insurance; provided
that such Annual Reduction shall not reduce the insurance coverage to an
amount less than $50,000. The balance of the lender's FHA insurance coverage
reserve account will be further adjusted as required under Title I or by the
FHA, and the insurance coverage therein may be earmarked with respect to each
or any eligible loans insured thereunder, if a determination is made by the
Secretary of HUD that it is in its interest to do so. Originations and
acquisitions of new eligible loans will continue to increase a lender's
insurance coverage reserve account balance by 10% of the amount disbursed,
advanced or expended in originating or acquiring such eligible loans
registered with the FHA for insurance under the Title I Program. The Secretary
of HUD may transfer insurance coverage between insurance coverage reserve
accounts with earmarking with respect to a particular insured loan or group of
insured loans when a determination is made that it is in the Secretary's
interest to do so.
The lender may transfer (except as collateral in a bona fide loan
transaction) insured loans and loans reported for insurance only to another
qualified lender under a valid Title I contract of insurance. Unless an
insured loan is transferred with recourse or with a guarantee or repurchase
agreement, the FHA, upon receipt of written notification of the transfer of
such loan in accordance with the Title I regulations, will transfer from the
transferor's insurance coverage reserve account to the transferee's insurance
coverage reserve account an amount, if available, equal to 10% of the actual
purchase price or the net unpaid principal balance of such loan (whichever is
less). However, under the Title I Program not more than $5,000 in insurance
coverage shall be transferred to or from a lender's insurance coverage reserve
account during any October 1 to September 30 period without the prior approval
of the Secretary of HUD.
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Claims Procedures Under Title I. Under the Title I Program the lender
may accelerate an insured loan following a default on such loan only after the
lender or its agent has contacted the borrower in a face-to-face meeting or by
telephone to discuss the reasons for the default and to seek its cure. If the
borrower does not cure the default or agree to a modification agreement or
repayment plan, the lender will notify the borrower in writing that, unless
within 30 days the default is cured or the borrower enters into a modification
agreement or repayment plan, the loan will be accelerated and that, if the
default persists, the lender will report the default to an appropriate credit
agency. The lender may rescind the acceleration of maturity after full payment
is due and reinstate the loan only if the borrower brings the loan current,
executes a modification agreement or agrees to an acceptable repayment plan.
Following acceleration of maturity upon a secured Title I Loan, the
lender may either (a) proceed against the Mortgaged Property under any
security instrument or (b) make a claim under the lender's contract of
insurance. If the lender chooses to proceed against the Mortgaged Property
under a security instrument (or if it accepts a voluntary conveyance or
surrender of the Mortgaged Property), the lender may file an insurance claim
only with the prior approval of the Secretary of HUD. After acceleration of
maturity on a defaulted Title I Contract, the lender must proceed against the
loan security by foreclosure or repossession, as appropriate, and acquire
good, marketable title to the property securing the loan. The lender must take
all actions necessary under applicable law to preserve its rights, if any, to
obtain a deficiency judgment against the borrower. Before filing a claim for
insurance with the FHA, the lender must sell for the best price obtainable any
property which the lender acquired by the foreclosure or repossession of such
property securing a defaulted Title I Contract.
When a lender files an insurance claim with the FHA under the Title I
Program, the FHA reviews the claim, the complete loan file and documentation
of the lender's efforts to obtain recourse against any dealer who has agreed
thereto, certification of compliance with applicable state and local laws in
carrying out any foreclosure or repossession, and evidence that the lender has
properly filed proofs of claims, where the borrower is bankrupt or deceased.
Generally, a claim for reimbursement for loss on any eligible loan must be
filed with the FHA no later than (i) for any Title I Loan, 9 months after the
date of default of such loan, or (ii) for any Title I Contract, 3 months after
the date of sale of the property securing such loan, but not to exceed 18
months after the date of default. Concurrently with filing the insurance
claim, the lender shall assign to the United States of America the lender's
entire interest in the loan note (or a judgment in lieu of the note), in any
security held and in any claim filed in any legal proceedings. If, at the time
the note is assigned the Secretary has reason to believe that the note is not
valid or enforceable against the borrower, the FHA may deny the claim and
reassign the note to the lender. If either such defect is discovered after the
FHA has paid a claim, the FHA may require the lender to repurchase the paid
claim and to accept a reassignment of the loan note. If the lender
subsequently obtains a valid and enforceable judgment against the borrower,
the lender may resubmit a new insurance claim with an assignment of the
judgment. The FHA may contest any insurance claim and make a demand for
repurchase of the loan at any time up to two years from the date the claim was
certified for payment and may do so thereafter in the event of fraud or
misrepresentation on the part of the lender.
Under the Title I Program the amount of an FHA insurance claim
payment, when made, is equal to the Claimable Amount, up to the amount of
insurance coverage in the lender's insurance coverage reserve account. The
"Claimable Amount" is equal to 90% of the sum of: (a) the unpaid loan
obligation (net unpaid principal and the uncollected interest earned to the
date of default) with adjustments thereto if the lender has proceeded against
property securing such loan; (b) the interest on the unpaid amount of the loan
obligation from the date of default to the date of the claim's initial
submission for payment plus 15 calendar days (but not to exceed 9 months from
the date of default), calculated at the rate of 7% per annum; (c) the
uncollected court costs; (d) the attorneys fees not to exceed $500; (e) the
expenses for recording the assignment of the security to the United States;
and (f) if the loan is a Title I Contract, certain costs incurred in
connection with the foreclosure or repossession of the manufactured home
and/or lot.
LEGAL INVESTMENT MATTERS
The Certificates may constitute "mortgage related securities" for
purposes of SMMEA, so long as they are rated in one of the two highest rating
categories by the Rating Agency or Agencies identified in the related
Prospectus Supplement and, as such, would be legal investments for persons,
trusts, corporations, partnerships, associations, business trusts and business
entities (including but not limited to state-chartered savings banks,
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commercial banks, saving and loan associations and insurance companies, as
well as trustees and state government employee retirement systems) created
pursuant to or existing under the laws of the United States or any State
(including the District of Columbia and Puerto Rico) whose authorized
investments are subject to State regulation to the same extent that, under
applicable law, obligations issued by or guaranteed as to principal and
interest by the United States or any agency or instrumentality thereof
constitute legal investments for such entities. Under SMMEA, in all States
which enacted legislation prior to October 4, 1991 specifically limiting the
legal investment authority of any of such entities with respect to "mortgage
related securities," the Certificates will constitute legal investments for
entities subject to such legislation only to the extent provided in such
legislation SMMEA provides, however, that in no event will the enactment of
any such legislation affect the validity of any contractual commitment to
purchase, bold or invest in any securities or require the sale or over
disposition of any securities, so long as such contractual commitment was made
or such securities were acquired prior to the enactment of such legislation.
Alaska, Arkansas, Colorado, Connecticut, Delaware, Florida, Georgia, Illinois,
Kansas, Louisiana, Maryland, Michigan, Missouri, Nebraska, New Hampshire, New
York, North Carolina, Ohio, South Dakota, Utah, Virginia and West Virginia
each enacted legislation overriding the exemption afforded by SMMEA prior to
the October 4, 1991 deadline.
Institutions whose investment activities are subject to legal
investment laws or regulations or review by certain regulatory authorities may
be subject to restrictions on investment in certain classes of the
Certificates. Any financial institution which is subject to the jurisdiction
of the Comptroller of the Currency, the Board of Governors of the Federal
Reserve System, the FDIC, the OTS, the NCUA or other federal or state agencies
with similar authority should review any applicable rules, guidelines and
regulations prior to purchasing the certificates. The Federal Financial
Institutions Examination Council, for example, has issued a Supervisory Policy
Statement on Securities Activities effective February 10, 1992 (the "Policy
Statement"). The Policy Statement has been adopted by the Comptroller of the
Currency, the Federal Reserve Board, the FDIC and the OTS with respect to the
depository institutions that they regulate. The Policy Statement prohibits
depository institutions from investing in certain "high-risk mortgage
securities" except under limited circumstances, and sets forth certain
investment practices deemed to be unsuitable for regulated institutions. The
NCUA issued final regulations effective December 2, 1991 that restrict and in
some instances prohibit the investment by federal credit unions in certain
types of mortgage related securities.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not
limited to "prudent investor" provisions, percentage-of-assets limits and
provisions which may restrict or prohibit investment in securities which are
not "interest bearing" or "income paying," or in securities which are issued
in book-entry form.
Investors should consult their own legal advisors in determining
whether and to what extent the Certificates constitute legal investments for
such investors.
ERISA CONSIDERATIONS
ERISA imposes requirements on employee benefit plans (and on certain
other retirement plans and arrangements, including individual retirement
accounts and annuities, Keogh plans and collective investment funds and
separate accounts in which such plans, accounts or arrangements are invested)
(collectively, "Plans") subject to ERISA and on persons who are fiduciaries
with respect to such Plans. Among other things, ERISA requires that the assets
of Plans be held in trust and that the trustee, or other duly authorized
fiduciary, have exclusive authority and discretion to manage and control the
assets of such Plans. ERISA also imposes certain duties on persons who are
fiduciaries of Plans. Under ERISA, any person who exercises any authority or
control respecting the management or disposition of the assets of a Plan is
considered to be a fiduciary of such Plan (subject to certain exceptions not
here relevant). In addition to the imposition of general fiduciary standards
of investment prudence and diversification, ERISA prohibits a broad range of
transactions involving Plan assets and persons ("Parties in Interest") having
certain specified relationships to a Plan and imposes additional prohibitions
where Parties in Interest are fiduciaries with respect to such Plan.
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The United States Department of Labor (the "DOL") has issued
regulations concerning the definition of what constitutes the assets of a
Plan. (DOL Reg Section 2510.3-101). Under this regulation, the underlying
assets and properties of corporations, partnerships and certain other entities
in which a Plan makes an "equity" investment could be deemed for purposes of
ERISA to be assets of the investing Plan in certain circumstances. In such
case, the fiduciary making such an investment for the Plan could be deemed to
have delegated his or her asset management responsibility, and the underlying
assets and properties could be subject to ERISA reporting and disclosure.
Certain exceptions to the regulation may apply in the case of a Plan's
investment in the Certificates, but the Depositor cannot predict in advance
whether such exceptions apply due to the factual nature of the conditions to
be met. Accordingly, because the Mortgage Loans may be deemed Plan assets of
each Plan that purchases Certificates, an investment in the Certificates by a
Plan might give rise to a prohibited transaction under ERISA Sections 406 and
407 and be subject to an excise tax under Code Section 4975 unless a statutory
or administrative exemption applies.
DOL Prohibited Transaction Exemption 83-1 ("PTE 83-1") exempts from
ERISA's prohibited transaction rules certain transactions relating to the
operation of residential mortgage investment trusts and the purchase, sale and
holding of "mortgage pool pass-through certificates" in the initial issuance
of such certificates. PTE 83-1 permits, subject to certain conditions,
transactions which might otherwise be prohibited between Plans and Parties in
Interest with respect to those Plans involving the origination, maintenance
and termination of mortgage pools consisting of mortgage loans secured by
first or second mortgages or deeds of trust on single-family residential
property, and the acquisition and holding of certain mortgage pool
pass-through certificates representing an interest in such mortgage pools by
PTE.
PTE 83-1 sets forth three general conditions which must be satisfied
for any transaction to be eligible for exemption: (i) the maintenance of a
system of insurance or other protection for the pooled mortgage loans and
property securing such loans, and for indemnifying Owners against reductions
in pass-through payments due to property damage or defaults in loan payments
in an amount not less than the greater of one percent of the aggregate
principal balance of all covered pooled mortgage loans or the principal
balance of the largest covered pooled mortgage loan, (ii) the existence of a
pool trustee who is not an affiliate of the sponsor, and (iii) a limitation on
the amount of the payments retained by the pool sponsor, together with other
funds inuring to its benefit, to not more than adequate consideration for
selling the mortgage loans plus reasonable compensation for services provided
by the pool sponsor.
Although the Trustee for any series of Certificates will be
unaffiliated with the Depositor, there can be no assurance that the system of
insurance or subordination will meet the general or specific conditions
referred to above. In addition, the nature of a Trust's assets or the
characteristics of one or more classes of the related series of Certificates
may not be included within the scope of PTE 83-1 or any other class exemption
under ERISA. The Prospectus Supplement will provide additional information
with respect to the application of ERISA and the Code to the related
Certificates.
Several underwriters of mortgage-backed securities have applied for
and obtained ERISA prohibited transactions exemptions which are in some
respects broader than PTE 83-1. Such exemptions can only apply to
mortgage-backed securities which, among other conditions, are sold in an
offering with respect to which such underwriter serves as the sole or a
managing underwriter, or as a selling or placement agent. Several other
underwriters have applied for similar exemptions. If such an exemption might
be applicable to a series of Certificates, the related Prospectus Supplement
will refer to such possibility.
Each Plan fiduciary who is responsible for making the investment
decisions whether to purchase or commit to purchase and to hold Certificates
must make its own determination as to whether the general and the specific
conditions of PTE 83-1 have been satisfied or as to the availability of any
other prohibited transaction exemptions Each Plan fiduciary should also
determine whether, under the general fiduciary standards of investment
prudence and diversification, an investment in the Certificates is appropriate
for the Plan, taking into account the overall investment policy of the Plan
and the composition of the Plan's investment portfolio.
Any Plan proposing to invest in Certificates should consult with its
counsel to confirm that such investment will not result in a prohibited
transaction and will satisfy the other requirements of ERISA and the Code.
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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 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
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95%. Notwithstanding the foregoing, however, REMIC income received by a REIT
owning a residual interest in a REMIC Pool could be treated in part as
non-qualifying REIT income if the REMIC Pool holds Mortgage Assets with respect
to which income is contingent on mortgagor profits or property appreciation. In
addition, if the assets of the REMIC include buy-down Mortgage Assets, it is
possible that the percentage of such assets constituting "qualifying real
property loans" or "loans secured by an interest in real property" for purposes
of Code Sections 593(d)(1) and 7701(a)(19)(C)(v), respectively, may be required
to be reduced by the amount of the related buy-down funds. REMIC Certificates
held by a regulated investment company will not constitute "government
securities" within the meaning of Code Section 851(b)(4)(a)(i). REMIC
Certificates held by certain financial institutions will constitute an "evidence
of indebtedness" within the meaning of Code Section 582(c)(i). REMIC
Certificates representing interests in obligations secured by manufactured
housing treated as single family residences under Code Section 25(e)(10) will be
considered interests in "qualified mortgages" as defined in Code Section
860E(a)(3).
Qualification as a REMIC. In order for the REMIC Pool to qualify as a
REMIC, there must be ongoing compliance on the part of the REMIC Pool with the
requirements set forth in the Code. The REMIC Pool must fulfill an asset test,
which requires that no more than a de minimis amount of the assets of the
REMIC Pool, as of the close of the third calendar month beginning after the
Delivery Date (which for purposes of this discussion is the date of issuance
of the REMIC Certificates) and at all times thereafter, may consist of assets
other than "qualified mortgages" and "permitted investments." The REMIC
Regulations provide a "safe harbor" pursuant to which the de minimis
requirement will be met if at all times the aggregate adjusted basis of any
nonqualified assets (i.e., assets other than qualified mortgages and permitted
investments) is less than 1% of the aggregate adjusted basis of all the REMIC
Pool's assets.
If a REMIC Pool fails to comply with one or more of the requirements
of the Code for REMIC status during any taxable year, the REMIC Pool will not
be treated as a REMIC for such year and thereafter. In this event, the
classification of the REMIC Pool for federal income tax purposes is uncertain.
The REMIC Pool could be treated as a taxable mortgage pool (a "TMP"), in which
case any residual income of the REMIC Pool (income from the Mortgage Assets
(possibly without a deduction 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
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principal amount upon the request of a Regular Certificateholder or by random
lot (a "Retail Class Certificate")) will be treated as a single installment
obligation for purposes of determining the original issue discount includible in
a Regular Certificateholder's income. The total amount of original issue
discount on a Regular Certificate is the excess of the "stated redemption price
at maturity" of the Regular Certificate over its "issue price." The issue price
of a Regular Certificate is the first price at which a substantial amount of
Regular Certificates of that class are first sold to the public. The Depositor
will determine original issue discount by including the amount paid by an
initial Regular Certificateholder for accrued interest that relates to a period
prior to the issue date of the Regular Certificate in the issue price of a
Regular Certificate and will include in the stated redemption price at maturity
any interest paid on the first Distribution Date to the extent such interest is
attributable to a period in excess of the number of days between the issue date
and such first Distribution Date. The stated redemption price at maturity of a
Regular Certificate always includes the original principal amount of the Regular
Certificate, but generally will not include distributions of stated interest if
such interest distributions constitute "qualified stated interest." Qualified
stated interest generally means stated interest that is unconditionally payable
in cash or in property (other than debt instruments of the issuer) at least
annually at (i) a single fixed rate, (ii) one or more qualified floating rates
(as described below), (iii) a fixed rate followed by one or more qualified
floating rates, (iv) a single objective rate (as described below) or (v) a fixed
rate and an objective rate that is a qualified inverse floating rate. The OID
Regulations state that interest payments are unconditionally payable only if
reasonable remedies exist to compel payment or late payment and nonpayment are
remote. Because the debt securities will generally not provide the holders 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
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accrual period, rather than the monthly period corresponding to the prior
calendar month. With respect to each Regular Certificate, a calculation will be
made of the original issue discount that accrues during each successive full
accrual period (or shorter period from the date of original issue) that ends on
the day before the related Distribution Date on the Regular Certificate. For a
Regular Certificate, original issue discount is to be calculated initially based
on a schedule of maturity dates that takes into account the level of prepayments
and an anticipated reinvestment rate that are most likely to occur, which is
expected to be based on the Prepayment Assumption. The original issue discount
accruing in a full accrual period would be the excess, if any, of (i) the sum of
(a) the present value of all of the remaining distributions to be made on the
Regular Certificate as of the end of that accrual period that are included in
the Regular Certificate's stated redemption price at maturity and (b) the
distributions made on the Regular Certificate during the accrual period that are
included in the Regular Certificate's stated redemption price at maturity over
(ii) the adjusted issue price of the Regular Certificate at the beginning of the
accrual period. The present value of the remaining distributions referred to in
the preceding sentence is calculated based on (i) the yield to maturity of the
Regular Certificate at the issue date, (ii) events (including actual
prepayments) that have occurred prior to the end of the accrual period and (iii)
the Prepayment Assumption. For these purposes, the adjusted issue price of a
Regular Certificate at the beginning of any accrual period equals the issue
price of the Regular Certificate, increased by the aggregate amount of original
issue discount with respect to the Regular Certificate that accrued in all prior
accrual periods and reduced by the amount of distributions included in the
Regular Certificate's stated redemption price at maturity that were made on the
Regular Certificate in such prior period. The original issue discount accruing
during any accrual period (as determined in this paragraph) will then be divided
by the number of days in the period to determine the daily portion of original
issue discount for each day in the period.
Under the method described above, the daily portions of original
issue discount required to be included in income by a Regular
Certificateholder generally will increase to take into account prepayments on
the Regular Certificates as a result of prepayments on the Mortgage Assets or
that exceed the Prepayment Assumption, and generally will decrease (but not
below zero for any period) if the prepayments are slower than the Prepayment
Assumption. 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
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single objective rate that is a qualified inverse floating rate. Third, the
instrument must provide that each qualified floating rate or objective rate in
effect during an accrual period is set at a current value of that rate (one
occurring in the interval beginning three months before and ending one year
after the rate is first in effect on the Regular Certificate). A rate is a
qualified floating rate if variations in the rate can reasonably be expected to
measure contemporaneous variations in the cost of newly borrowed funds.
Generally, neither (i) a multiple of a qualified floating rate in excess of a
fixed multiple that is greater than 0.65 but not more than 1.35 (and increased
or decreased by a fixed rate) nor (ii) a cap or floor that is likely to cause
the interest rate on a Regular Certificate to be significantly less or more than
the overall expected return on the Regular Certificate is considered a qualified
floating rate. An objective rate generally is a rate based on a single fixed
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
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into account the Prepayment Assumption. The Conference Committee Report to the
1986 Act provides that until such regulations are issued, such market discount
would accrue either (i) on the basis of a constant interest rate or (ii) in the
ratio of stated interest allocable to the relevant period to the sum of the
interest for such period plus the remaining interest as of the end of such
period, or in the case of a Regular Certificate issued with original issue
discount, in the ratio of original issue discount accrued for the relevant
period to the sum of the original issue discount accrued for such period plus
the remaining original issue discount as of the end of such period. Such
purchaser also generally will be required to treat a portion of any gain on a
sale or exchange of the Regular Certificate as ordinary income to the extent of
the market discount accrued to the date of disposition under one of the
foregoing methods, less any accrued market discount previously reported as
ordinary income as partial distributions in reduction of the stated redemption
price at maturity were received. Such purchaser will be required to defer
deduction of a portion of the excess of the interest paid or accrued on
indebtedness incurred to purchase or carry a Regular Certificate over the
interest distributable thereon. The deferred portion of such interest expense in
any taxable year generally will not exceed the accrued market discount on the
Regular Certificate for such year. Any such deferred interest expense is, in
general, allowed as a deduction not later than the year in which the related
market discount income is recognized or the Regular Certificate is disposed of.
As an alternative to the inclusion of market discount in income on the foregoing
basis, the Regular Certificateholder may elect to include market discount in
income currently as it accrues in all market discount instruments acquired by
such Regular Certificateholder in that taxable year or thereafter, in which case
the interest deferral rule will not apply. In Revenue Procedure 92-67, the
Internal Revenue Service set forth procedures for taxpayers (1) electing under
Code Section 1278(b) to include market discount in income currently, (2)
electing under rules of Code Section 1276(b) to use a constant interest rate to
determine accrued market discount on a bond where the holder of the bond is
required to determine the amount of accrued market discount at a time prior to
the holder's disposition of the bond, and (3) requesting consent to revoke an
election under Code Section 1278(b).
By analogy to the OID Regulations, market discount with respect to a
Regular Certificate will be considered to be zero if such market discount is
less than 0.25% of the remaining stated redemption price at maturity of such
Regular Certificate multiplied by the weighted average maturity of the Regular
Certificate (determined as described above under "Original Issue Discount")
remaining after the date of purchase. Treasury regulations implementing the
market discount rules have not yet been issued, and therefore investors should
consult their own tax advisors regarding the application of these rules as
well as the advisability of making any of the elections with respect thereto.
Premium. A Regular Certificate purchased at a cost greater than its
remaining stated redemption price at maturity generally is considered to be
purchased at a premium. If the Regular Certificateholder holds such Regular
Certificate as a "capital asset" within the meaning of Code Section 1221, the
Regular Certificateholder may elect under Code Section 171 to amortize such
premium as an offset to interest income under a constant yield method that
reflects compounding based on the interval between payments on the Regular
Certificates. This election, once made, applies to all obligations held by the
taxpayer at the beginning of the first taxable year to which such section
applies and to all taxable debt obligations thereafter acquired and is binding
on such taxpayer in all subsequent years. The Conference Committee Report to
the 1986 Act indicates a Congressional intent that the same rules that apply
to the accrual of market discount on installment obligations will also apply
to amortizing bond premium under Code Section 171 on installment obligations
such as the Regular Certificates.
Sale or Exchange of Regular Certificates. If a Regular
Certificateholder sells or exchanges a Regular Certificate, the Regular
Certificateholder will recognize gain or loss equal to the difference, if any,
between the amount received and his adjusted basis in the Regular Certificate.
The adjusted basis of a Regular Certificate generally will equal the cost of
the Regular Certificate to the seller, increased by any original issue
discount or market discount previously included in the seller's gross income
with respect to the Regular Certificate and reduced by amounts included in the
stated redemption price at maturity of the Regular Certificate that were
previously received by the seller and by any amortized premium.
Except as described above with respect to market discount, and except
as provided in this paragraph, any gain or loss on the sale or exchange of a
Regular Certificate realized by an investor who holds the Regular Certificate
as a capital asset will be capital gain or loss and will be long-term or
short-term depending on whether the Regular Certificate has been held for the
long-term capital gain holding period (currently more than one year). Gain
from the disposition of a Regular Certificate that might otherwise be capital
gain will be treated as ordinary
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income to the extent that such gain does not exceed the excess, if any, of (i)
the amount that would have been includible in the gross income of the holder if
his yield on such Regular Certificate were 110% of the applicable Federal rate
under Code Section 1274(d) as of the date of purchase over (ii) the amount of
income actually includible in the gross income of such holder with respect to
the Regular Certificate. In addition, gain or loss recognized from the sale of a
Regular Certificate by certain banks or thrift institutions will be treated as
ordinary income or loss pursuant to Code Section 582(c).
Taxation of Residual Certificates
Taxation of REMIC Income. Generally, the "daily portions" of REMIC
taxable income or net loss will be includible as ordinary income or loss in
determining the federal taxable income of holders of Residual Certificates
("Residual Certificateholders") and will not be taxed separately to the REMIC
Pool. The daily portions of REMIC taxable income or net loss of a Residual
Certificateholder are determined by allocating the REMIC Pool's taxable income
or net loss for each calendar quarter ratably to each day in such quarter and
by allocating such daily portion among the Residual Certificateholders in
proportion to their respective holdings of Residual Certificates in the REMIC
Pool on such day. REMIC taxable income is generally determined in the same
manner as the taxable income of an individual using a calendar year and the
accrual method of accounting, except that (i) the limitation on deductibility
of investment interest expense and expenses for the production of income do
not apply, (ii) all bad loans will be deductible as business bad debts and
(iii) the limitation on the deductibility of interest and expenses related to
tax-exempt income will apply. REMIC taxable income generally means the REMIC
Pool's gross income, including interest, original issue discount income and
market discount income, if any, on the Mortgage Assets, plus income on
reinvestment of cashflows and reserve assets, minus deductions, including
interest and original issue discount expense on the Regular Certificates,
servicing fees on the Mortgage Assets and other administrative expenses of the
REMIC Pool, amortization of premium, if any, with respect to the Mortgage
Assets, and any tax imposed on the REMIC's income from foreclosure property.
The requirement that Residual Certificateholders report their pro rata share
of taxable income or net loss of the REMIC Pool will continue until there are
no Certificates of any class of the related series outstanding.
The taxable income recognized by a Residual Certificateholder in any
taxable year will be affected by, among other factors, the relationship
between the timing of recognition of interest and original issue discount or
market discount income or amortization of premium with respect to the Mortgage
Assets, on the one hand, and the timing of deductions for interest (including
original issue discount) on the Regular Certificates, on the other hand.
Because of the way REMIC taxable income is calculated, a Residual
Certificateholder may recognize "phantom" income (i.e., income recognized for
tax purposes in excess of income as determined under financial accounting or
economic principles) which will be matched in later years by a corresponding
tax loss or reduction in taxable income, but which could lower the yield to
Residual Certificateholders due to the lower present value of such future loss
or reduction. For example, if an interest in the Mortgage Assets is acquired
by the REMIC Pool at a discount, and one or more of such Mortgage Assets is
prepaid, the Residual Certificateholder may recognize taxable income without
being entitled to receive a corresponding amount of cash because (i) the
prepayment may be used in whole or in part to make distributions in reduction
of principal on the Regular Certificates and (ii) the discount income on the
Mortgage Loan which is includible in the REMIC's taxable income may exceed the
discount deduction allowed to the REMIC upon such distributions on the Regular
Certificates. When there is more than one class of Regular Certificates that
distribute principal sequentially, this mismatching of income and deductions
is particularly likely to occur in the early years following issuance of the
Regular Certificates when distributions in reduction of principal are being
made in respect of earlier maturing classes of Certificates. If taxable income
attributable to such a mismatching is realized in general, losses would be
allowed in later years as distributions on the later classes of Regular
Certificates are made. Taxable income may also be greater in earlier years
than in later years as a result of the fact that interest expense deductions,
expressed as a percentage of the outstanding principal amount of such a series
of Regular Certificates, may increase over time as distributions in reduction
of principal are made on the lower yielding classes of Regular Certificates,
where interest income with respect to any given Mortgage Loan will remain
constant over time as a percentage of the outstanding principal amount of that
loan. Consequently, Residual Certificateholders must have sufficient other
sources of cash to pay any federal, state or local income taxes due as a
result of such mismatching or unrelated deductions against which to offset
such income. Prospective investors should be aware, however, that a portion of
such income may be ineligible for offset by such investor's unrelated
deductions. See the discussion of "excess inclusions" below under "Limitations
on Offset or Exemption of REMIC Income; Excess Inclusions." The timing of such
mismatching of income and deductions described in this paragraph,
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if present with respect to a series of Certificates, may have a significant
adverse effect upon the Residual Certificateholder's after-tax rate of return.
In addition, a Residual Certificateholder's taxable income during certain
periods may exceed the income reflected by such Certificateholder for such
periods in accordance with generally accepted accounting principles.
Basis and Losses. The amount of any net loss of the REMIC Pool that
may be taken into account by the Residual Certificateholder is limited to the
adjusted basis of the Residual Certificate as of the close of the quarter (or
time of disposition of the Residual Certificate if earlier), determined
without taking into account the net loss for the quarter. The initial adjusted
basis of a purchaser of a Residual Certificate is the amount paid for such
Residual Certificate. Such adjusted basis will be increased by the amount of
taxable income of the REMIC Pool reportable by the Residual Certificateholder
and decreased by the amount of loss of the REMIC Pool reportable by the
Residual Certificateholder. A cash distribution from the REMIC Pool also will
reduce such adjusted basis (but not below zero). Any loss that is disallowed
on account of this limitation may be carried over indefinitely with respect to
the Residual Certificateholder as to whom such loss was disallowed and may be
used by such Residual Certificateholder only to offset any income generated by
the residual from such REMIC Pool. Residual Certificateholders should consult
their tax advisors about other limitations on the deductibility of net losses
that may apply to them.
A Residual Certificateholder will not be permitted to amortize
directly the cost of its Residual Certificate as an offset to its share of the
taxable income of the related REMIC Pool. However, such taxable income will
not include cash received by the REMIC Pool that represents a recovery of the
REMIC Pool's basis in its assets. Such recovery of basis by the REMIC Pool
will have the effect of amortization of the issue price of the Residual
Certificates over their life. However, in view of the possible acceleration of
the income of Residual Certificateholders described above under "Taxation of
REMIC Income," the period of time over which such issue price is effectively
amortized may be longer than the economic life of the Residual Certificates.
If a Residual Certificate has a negative value, it is not clear
whether its issue price would be considered to be zero or such negative amount
for purposes of determining the REMIC Pool's basis in its assets. The REMIC
Regulations do not address whether residual interests could have a negative
basis and a negative issue price. The Depositor does not intend to treat a
class of Residual Certificates as having a value of less than zero for
purposes of determining the bases of the related REMIC Pool in its assets.
Further, to the extent that the initial adjusted basis of a Residual
Certificateholder (other than an original holder) in the Residual Certificate
is greater than the corresponding portion of the REMIC Pool's basis in the
Mortgage Assets, the Residual Certificateholder will not recover a portion of
such basis until termination of the REMIC Pool unless Treasury regulations yet
to be issued provide for periodic adjustments to the REMIC income otherwise
reportable by such holder. The REMIC Regulations do not so provide. See
"Treatment of Certain Items of REMIC Income and Expense - Market Discount"
below regarding the basis of Mortgage Assets to the REMIC Pool and "Sale or
Exchange of Residual Certificates" below regarding possible treatment of a
loss upon termination of the REMIC Pool as a capital loss.
Mark to Market Rules
Prospective purchasers of a Residual Certificate should be aware that
on December 24, 1996, the Internal Revenue Service issued final regulations
(the "Mark to Market Regulations") relating to the requirement that a
securities dealer mark to market securities held for sale to customers. This
mark-to-market requirement applies to all securities of a dealer, except to
the extent that the dealer has specifically identified a security as held for
investment. The Mark to Market Regulations provide that for purposes of this
mark-to-market requirement, a Residual Certificate acquired after January 4,
1995, is not treated as a security and thus may not be marked to market.
Treatment of Certain Items of REMIC Income and Expense
Original Issue Discount. Generally, the REMIC Pool's deductions for
original issue discount will be determined in the same manner as original
issue discount income on Regular Certificates as described above under
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"Taxation of Regular Certificates - Original Issue Discount" and "Variable
Rate Regular Certificates," without regard to the de minimis rule described
therein.
Market Discount. The REMIC Pool will have market discount income in
respect of Mortgage Assets if, in general, the basis of the REMIC Pool in such
Mortgage Assets is exceeded by their unpaid principal balances. The REMIC
Pool's basis in such Mortgage Assets is generally the fair market value of the
Mortgage Assets immediately after the transfer thereof to the REMIC Pool. The
REMIC Regulations provide that such basis is equal in the aggregate to the
issue prices of all regular and residual interests in the REMIC Pool. In
respect of Mortgage Assets that have market discount to which Code Section
1276 applies, the accrued portion of such market discount would be recognized
currently by the REMIC as an item of ordinary income. Market discount income
generally should accrue in the manner described above under "Taxation of
Regular Certificates - Market Discount."
Premium. Generally, if the basis of the REMIC Pool in the Mortgage
Assets exceeds the unpaid principal balances thereof, the REMIC Pool will be
considered to have acquired such Mortgage Assets at a premium equal to the
amount of such excess. As stated above, the REMIC Pool's basis in the Mortgage
Assets is the fair market value of the Mortgage Assets, based on the aggregate
of the issue prices of the regular and residual interests in the REMIC Pool
immediately after the transfer thereof to the REMIC Pool. In a manner
analogous to the discussion above under "Taxation of Regular Certificates -
Premium," a person that holds a Mortgage Loan as a capital asset under Code
Section 1221 may elect under Code Section 171 to amortize premium on Mortgage
Assets originated after September 27, 1985 under a constant yield method.
Amortizable bond premium will be treated as an offset to interest income on
the Mortgage Assets, rather than as a separate deduction item. Premium on
Mortgage Assets may be deductible in accordance with a reasonable method
regularly employed by the holder thereof. The allocation of such premium pro
rata among principal payments should be considered a reasonable method;
however, the Internal Revenue Service may argue that such premium should be
allocated in a different manner, such as allocating such premium entirely to
the final payment of principal.
Limitations on Offset or Exemption of REMIC Income; Excess
Inclusions. A portion of the income allocable to a Residual Certificate
(referred to in the Code as an "excess inclusion") for any calendar quarter,
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
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accruals for all prior quarters, and decreased (but not below zero) by the
aggregate amount of payments made on the Residual Certificate before the
beginning of such quarter. The Federal long-term rate is an average of current
yields on Treasury securities with a remaining term of greater than nine years,
computed and published monthly by the IRS.
The Code provides that to the extent provided in regulations, as an
exception to the general rule described above, the entire amount of income
accruing on a Residual Certificate will be treated as an excess inclusion if
the Residual Certificates in the aggregate are considered not to have
"significant value." The Treasury Department has not yet provided regulations
in this respect and the REMIC Regulations did not adopt this rule.
Under Treasury regulations to be promulgated, a portion of the
dividends paid by a REIT which owns a Residual Certificate are to be
designated as excess inclusions in an amount corresponding to the Residual
Certificate's allocable share of the excess inclusions. Similar rules apply in
the case of regulated investment companies, common trust funds and
cooperatives. Thus, investors in such entities which own a Residual
Certificate will be subject to the limitations on excess inclusions described
above. The REMIC Regulations do not provide guidance on this issue.
Tax-Related Restrictions on Transfer of Residual Certificates
Disqualified Organizations. If legal title or beneficial interest in
a Residual Certificate is transferred to a Disqualified Organization (as
defined below), a tax would be imposed in an amount equal to the product of
(i) the present value of the total anticipated excess inclusions with respect
to such Residual Certificate for periods after the transfer and (ii) the
highest marginal federal corporate income tax rate. The REMIC Regulations
provide that the anticipated excess inclusion are based on actual prepayment
experience to the date of the transfer and projected payments based on the
Prepayment Assumption. The present value discount rate equals the applicable
Federal rate under Code Section 1274(d) that would apply to a debt instrument
that was issued on the date the Disqualified Organization acquired the
Residual Certificate and whose term ended on the close of the last quarter in
which excess inclusion was expected to accrue with respect to the Residual
Certificate. Such a tax generally would be imposed on the transferor of the
Residual Certificate, except that where such transfer is through an agent
(including a broker, nominee, or other middleman) for a Disqualified
Organization, the tax would instead be imposed on such agent. However, a
transferor of a Residual Certificate would in no event be liable for such tax
with respect to a transfer if the transferee furnishes to the transferor an
affidavit that the transferee is not a Disqualified Organization and, as of
the time of the transfer, the transferor does not have actual knowledge that
such affidavit is false. The tax also may be waived by the Treasury Department
if the Disqualified Organization promptly disposes of the Residual Certificate
and the transferor pays income tax at the highest corporate rate on the excess
inclusion for the period the Residual Certificate is actually held by the
Disqualified Organization.
In addition, if a "Pass-Through Entity" (as defined below) has excess
inclusion income with respect to a Residual Certificate during a taxable year
and a Disqualified Organization is the record holder of an equity interest in
such entity, then a tax is imposed on such entity equal to the product of (i)
the amount of excess inclusions that are allocable to the interest in the
Pass-Through Entity during the period such interest is held by such
Disqualified Organization and (ii) the highest marginal federal corporate
income tax rate. Such tax would be deductible from the ordinary gross income
of the Pass-Through Entity for the taxable year. The Pass-Through Entity would
not be liable for such tax if it has received an affidavit from such record
holder that (i) states under penalty of perjury that it is not a Disqualified
Organization or (ii) furnishes a social security number and states under
penalties of perjury that the social security number is that of the
transferee, provided that during the period such person is the record holder
of the Residual Certificate, the Pass-Through Entity does not have actual
knowledge that such affidavit is false. Excess inclusion income of a Residual
Certificate held by an electing large partnership (as defined in Code section
775) is subject to tax in the hands of the partnership.
For these purposes, (i) "Disqualified Organization" means the United
States, any state or political subdivision thereof, any foreign government,
any international organization, any agency or instrumentality of any of the
foregoing (provided, that such term does not include an instrumentality if all
its activities are subject to tax and a majority of its board of directors is
not selected by any such governmental entity), any cooperative organization
furnishing electric energy or providing telephone service to persons in rural
areas as described in Code Section 1381(a)(2)(C), and any organization (other
than a farmers' cooperative described in Code Section 521) that is
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exempt from taxation under the Code unless such organization is subject to the
tax on unrelated business income imposed by Code Section 511 and (ii)
"Pass-Through Entity" means any regulated investment company, real estate
investment trust, common trust fund, partnership, trust or estate and certain
corporations operating on a cooperative basis. Except as may be provided in
Treasury regulations yet to be issued, any person holding an interest in a
Pass-Through Entity as a nominee for another will, with respect to such
interest, be treated as a Pass-Through Entity.
The Agreement with respect to a series of Certificates will provide
that neither legal title nor beneficial interest in a Residual Certificate may
be transferred or registered unless (i) the proposed transferee provides to
the Depositor and the Trustee an affidavit to the effect that such transferee
is not a Disqualified Organization, is not purchasing such Residual
Certificates on behalf of a Disqualified Organization (i.e., as a broker,
nominee or middleman thereof) and is not an entity that holds REMIC residual
securities as nominee to facilitate the clearance and settlement of such
securities through electronic book-entry changes in accounts of participating
organizations and (ii) the transferor provides a statement in writing to the
Depositor and the Trustee that it has no actual knowledge that such affidavit
is false. Moreover, the Agreement will provide that any attempted or purported
transfer in violation of these transfer restrictions will be null and void and
will vest no rights in any purported transferee. Each Residual Certificate
with respect to a series will have a legend referring to such restrictions on
transfer, and each Residual Certificateholder will be deemed to have agreed,
as a condition of ownership thereof, to any amendments to the related
Agreement required under the Code or applicable Treasury regulations to
effectuate the foregoing restrictions. Information necessary to compute an
applicable excise tax must be furnished to the Internal Revenue Service and to
the requesting party within 60 days of the request, and the Depositor or the
Trustee may charge a fee for computing and providing such information.
Noneconomic Residual Interests. Under the REMIC Regulations certain
transfers of Residual Certificates are disregarded, in which case the
transferor continues to be treated as the owner of the Residual Certificates
and thus continues to be subject to tax on its allocable portion of the net
income of the REMIC Pool. Under the Final REMIC Regulations, a transfer of a
Noneconomic Residual Interest (defined below) to a Residual Certificateholder
(other than a Residual Certificateholder who is not a U.S. Person, as defined
below under "Foreign Investors") is disregarded for all federal income tax
purposes unless no significant purpose of the transfer is to impede the
assessment or collection of tax. A residual interest in a REMIC (including a
residual interest with a positive value at issuance) is a "Noneconomic
Residual Interest" unless, at the time of the transfer, (i) the present value
of the expected future distributions on the residual interest at least equals
the product of the present value of the anticipated excess inclusions and the
highest federal corporate income tax rate in effect for the year in which the
transfer occurs, and (ii) the transferor reasonably expects that the
transferee will receive distributions from the REMIC at or after the time at
which taxes accrue on the anticipated excess inclusions in an amount
sufficient to satisfy the accrued taxes. The anticipated excess inclusions and
the present value rate are determined in the same manner as set forth above
under "Disqualified Organizations." A significant purpose to impede the
assessment or collection of tax exists if the transferor, at the time of the
transfer, either knew or should have known (had "improper knowledge") that the
transferor would be unwilling or unable to pay taxes due on its share of the
taxable income of the REMIC. Under the REMIC Regulations, a transferor is
presumed not to have improper knowledge if (i) the transferor conducted, at
the time of the transfer, a reasonable investigation of the financial
condition of the transferee and, as a result of the investigation, the
transferor found that the transferee had historically paid its debts as they
came due and found no significant evidence to indicate that the transferor
will not continue to pay its debts as they come due in the future; and (ii)
the transferee represents to the transferor that it understands that, as the
holder of the Noneconomic Residual Interest, the transferee may incur tax
liabilities in excess of any cash flows generated by the residual interest and
that the transferee intends to pay taxes associated with holding 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
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will equal at least 30% of the excess inclusions and (ii) that each such amount
will be distributed at or after the time at which the excess inclusion accrues
and not later than the close of the calendar year following the calendar year of
accrual. If the non-U.S. Person transfers the Residual Certificate back to a
U.S. Person, the transfer will be disregarded and the foreign transferor will
continue to be treated as the owner unless arrangements are made so that the
transfer does not have the effect of allowing the transferor to avoid tax on
accrued excess inclusions.
The Prospectus Supplement relating to a series of Certificates may
provide that a Residual Certificate may not be purchased by or transferred to
any person that is not a U.S. Person or may describe the circumstances and
restrictions pursuant to which such a transfer may be made. The term "U.S.
Person" means a citizen or resident of the United States, a corporation,
partnership or other entity created or organized in or under the laws of the
United States or any political subdivision thereof, 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
modification of the Mortgage-Backed Securities, provided that the trust
issuing the Mortgage-Backed Securities was not created to avoid prohibited
transaction rules.
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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 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
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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.
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.
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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).
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
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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
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.
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Accordingly, if the Internal Revenue Service's approach is upheld, a
servicer that receives excess servicing fees would be viewed as retaining an
ownership interest in a portion of the interest payments on the Mortgage
Assets. Under the rules of Code Section 1286, the separation of the right to
receive some or all of the interest payments on an obligation from the right
to receive some or all of the principal payments on the obligation would
result in treatment of such Mortgage Assets as "stripped coupons" and
"stripped bonds." While Certificateholders would still be treated as owners of
beneficial interests in a grantor trust for federal income tax purposes, the
corpus of such trust could be viewed as excluding the portion of the Mortgage
Assets the ownership of which is attributed to a servicer, or as including
such portion as a second class of equitable interest. Applicable Treasury
regulations treat such an arrangement as a fixed investment trust, since the
multiple classes of trust interests should be treated as merely facilitating
direct investments in the trust assets and the existence of multiple classes
of ownership interests is incidental to that purpose. In general, such a
recharacterization should not have any significant effect upon the timing or
amount of income reported by a Certificateholder. See "Stripped Certificates"
below for a further description of the federal income tax treatment of
stripped bonds and stripped coupons.
In the alternative, the amount, if any, by which the servicing fees
paid to the servicers are deemed to exceed reasonable compensation for
servicing could be treated as deferred payments of purchase price by the
Certificateholders to purchase an undivided interest in the Mortgage Assets.
In such event, the present value of such additional payments might be included
in the Certificateholder's basis in such undivided interests for purposes of
determining whether the Certificate was acquired at a discount, at par, or at
a premium. Under this alternative, Certificateholders may also be entitled to
a deduction for unstated interest with respect to each deferred payment. The
Internal Revenue Service may take the position that the specific statutory
provisions of Code Section 1286 described above override the alternative
described in this paragraph. Certificateholders are advised to consult their
tax advisors as to the proper treatment of the amounts paid to the servicers
as set forth herein as servicing compensation or under either of the
alternatives set forth above.
Sale or Exchange of Certificates. Upon sale or exchange of a
Certificate, a Certificateholder will recognize gain or loss equal to the
difference between the amount realized on the sale and its aggregate adjusted
basis in the Mortgage Assets and other assets represented by the Certificate.
In general, the aggregate adjusted basis will equal the Certificateholder's
cost for the Certificate, increased by the amount of any income previously
reported with respect to the Certificate and decreased by the amount of any
losses previously reported with respect to the Certificate and the amount of
any distributions received thereon. Except as provided above with respect to
market discount on any Mortgage Assets, and except for certain financial
institutions subject to the provisions of Code Section 582(c), any such gain
or loss would be capital gain or loss if the Certificate was held as a capital
asset.
Stripped Certificates
General. Pursuant to Code Section 1286, the separation of ownership
of the right to receive some or all of the principal payments on an obligation
from ownership of the right to receive some or all of the interest payments
results in the creation of "stripped bonds" with respect to principal payments
and "stripped coupons" with respect to interest payments. For purposes of this
discussion, Certificates that are subject to those rules will be referred to
as "Stripped Certificates." The Certificates will be subject to those rules if
(i) the Depositor or any of its affiliates retains (for its own account or for
purposes of resale), in the form of fixed retained yield or otherwise, an
ownership interest in a portion of the payments on the Mortgage Assets, (ii)
the Depositor, any of its affiliates or a servicer is treated as having an
ownership interest in the Mortgage Assets to the extent it is paid (or
retains) servicing compensation in an amount greater than reasonable
consideration for servicing the Mortgage Assets (see "Standard Certificates -
Recharacterization of the Servicing Fees" above) and (iii) Certificates are
issued in two or more classes or subclasses representing the right to non pro
rata percentages of the interest and principal payments on the Mortgage
Assets.
In general, a holder of a Stripped Certificate (a "Stripped
Certificateholder") will be considered to own "stripped bonds" with respect to
its pro rata share of all or a portion of the principal payments on each
Mortgage Loan and/or "stripped coupons" with respect to its pro rata share of
all or a portion of the interest payments on each Mortgage Loan, including the
Stripped Certificate's allocable share of the servicing fees paid, to the
extent that such fees represent reasonable compensation for services rendered.
See discussion above under "Standard Certificates - Recharacterization of
Servicing Fees." For this purpose the Trust intends to allocate the servicing
fees to the Stripped Certificates in proportion to the respective offering
price of each class (or subclass) of Stripped Certificates.
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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 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
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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 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."
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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
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
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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
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 4
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
INDEX TO LOCATION OF PRINCIPAL
DEFINED TERMS
Page
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
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APPENDIX
Page
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, 4, 52
INDEX TO LOCATION OF PRINCIPAL
DEFINED TERMS
REMIC Certificates 51
REMIC Pool 52
REMIC Regulations 51
Remittance Date 24
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
74
<PAGE>
===============================================================================
No dealer, salesperson or other person has been authorized to give any infor-
mation or to make any representation not contained in this Prospectus Sup-
plement or the Prospectus and, if given or made, such information or
representation must not be relied upon as having been authorized by the
Depositor or by the Underwriters. This Prospectus Supplement and the
Prospectus do not constitute an offer to sell, or a solicitation of an offer
to buy any of the securities offered hereby in any jurisdiction to any person
to whom it is unlawful to make such offer in such jurisdiction. Neither the
delivery of this Prospectus Supplement or the Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that
information herein is correct as of any time subsequent to the date hereof or
that there has been no change in the affairs of the Depositor since such date.
TABLE OF CONTENTS
Page
PROSPECTUS SUPPLEMENT
SUMMARY OF TERMS......................................1
RISK FACTORS.........................................12
THE PORTFOLIO OF HOME EQUITY LOANS...................15
USE OF PROCEEDS......................................17
THE DEPOSITOR........................................17
THE HOME EQUITY LOAN POOL............................17
PREPAYMENT AND YIELD CONSIDERATIONS..................25
FORMATION OF THE TRUST AND TRUST PROPERTY............30
ADDITIONAL INFORMATION...............................30
DESCRIPTION OF THE CLASS A CERTIFICATES..............31
CERTAIN FEDERAL INCOME TAX CONSEQUENCES..............49
ERISA CONSIDERATIONS.................................50
RATINGS..............................................52
UNDERWRITING.........................................53
CERTAIN LEGAL MATTERS................................54
ANNEX I...............................................1
TO PROSPECTUS SUPPLEMENT..............................1
GLOBAL CLEARANCE SETTLEMENT AND
TAX DOCUMENTATION PROCEDURES........................1
===============================================================================
===============================================================================
__________________________ Home Equity
Loan Trust 199____-___
$_____________________
$_____________________
Class A-1 Certificates
$_____________________
Class A-2 Certificates
$_____________________
Class A-3 Certificates
$_____________________
Class A-4 Certificates
$_____________________
Class A-5 Certificates
$_____________________
Class A-6 Certificates
_______________ Home Equity Loan
Pass-Through Certificates, Series
199____-__
===============================================================================
<PAGE>
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.
<PAGE>
Item 16. Exhibits.
(a) Financial Statements:
None.
(b) Exhibits:
**1.1 --Form of Underwriting Agreement.
**3.1 --Certificate of Incorporation of
ContiSecurities Asset Funding Corp.
**3.2 --By-Laws of ContiSecurities Asset Funding
Corp.
**4.1 --Form of Pooling and Servicing Agreement.
***5.1 --Opinion of 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. 333-39505.
*** 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:
<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.
<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.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933,
the Registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form S-3 and has duly caused this
amendment to the 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 27th day of August 1998.
CONTISECURITIES ASSET FUNDING CORP.
By: /s/ Peter Abeles
---------------------------
Name: Peter Abeles
Title: President
Pursuant to the requirements of the Securities Act of 1933,
this amendment to the 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>
President (Principal Executive Officer) August 28, 1998
/s/ Peter Abeles
- ------------------------
Peter Abeles
* Vice President (Principal Financial and August 28, 1998
Accounting Officer)
- ------------------------
Robert E. Riedl
* Director August 28, 1998
- ------------------------
James J. Bigham
* Director August 28, 1998
- ------------------------
Joseph G. Krassy
* Director August 28, 1998
- ------------------------
James E. Moore
</TABLE>
* By: /s/ Peter Abeles
----------------------
Peter Abeles
Attorney-In-Fact
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
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.
333-19427.
*** To be filed by amendment.
