<PAGE>
Filed pursuant to Rule 424(b)(5)
Registration File No. 333-61863
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED SEPTEMBER 17, 1998
$1,000,000,000
ContiMortgage Home Equity Loan Trust 1998-4
[LOGO]
Seller and Servicer
ContiWest Corporation
Seller
ContiSecurities Asset Funding Corp.
Depositor
------------------
The trust is offering its 6.415% Class A Certificates for sale pursuant to this
prospectus supplement. The property of the trust consists of a pool of fixed
rate, first or second lien residential mortgage loans. The trust will also
issue a subordinated class, the Class B Certificates, and a residual
interest, neither of which are being offered by this prospectus
supplement. The Class B Certificates are being privately placed with
one or more third party investors; the Depositor or its affiliates
will initially retain the residual interest. Interest and
principal on the Certificates is scheduled to be paid monthly on
the 15th day of the month, or the next business
day. The first scheduled payment date is
January 15, 1999.
You should read the section entitled "Risk Factors" starting on page S-7 of this
supplement and page 6 of the prospectus and consider these factors before
making in the Class A Certificates. Neither the Securities and Exchange
Commission nor any state securities commission has approved or
disapproved of these securities or passed upon the accuracy or adequacy
of this prospectus supplement. Any representation to the contrary is a
criminal offense.
The Class A Certificates represent non-recourse asset-backed obligations of the
trust only and are not interests in or obligations of any other person or
entity. Neither the Class A Certificates nor the underlying loans will be
insured or guaranteed by any governmental agency or instrumentality. This
prospectus supplement may be used to offer and sell the Class A
Certificates only if accompanied by the prospectus. The Class A
Certificates will have the benefit of an insurance policy from MBIA
Insurance Corporation which will guarantee certain
payments with respect to the Class A
Certificates.
[LOGO]
<TABLE>
<CAPTION>
Underwriting
Discounts
Initial Pass-Through Price To and Proceeds To
Principal Balance Rate Public(1) Commissions Depositor(1)(2)
----------------- ------------ ------------ -------------- ------------
<S> <C> <C> <C> <C> <C>
Class A Certificates...................... $ 1,000,000,000 6.415% 99.99540% 0.181% 99.81440%
Total..................................... $ 1,000,000,000 $999,954,000 $1,810,000 $998,144,000
</TABLE>
(1) Plus accrued interest from December 8, 1998
(2) Before deducting expenses estimated to be $750,000.
The offering of the Class A Certificates is subject to certain conditions, which
are discussed in the "Underwriting" section of this prospectus supplement.
Delivery of the Class A Certificates is expected in book-entry form through The
Depository Trust Company, Cedelbank and the Euroclear System on or about
December 17, 1998.
Credit Suisse First Boston ContiFinancial Services Corporation
Prospectus Supplement dated December 2, 1998
<PAGE>
Important notice about the information presented in this prospectus supplement
and the accompanying prospectus
We provide information to you about the certificates in two separate
documents that progressively provide more detail: (1) the accompanying
prospectus, which provides general information, some of which may not apply to
your securities and (2) this prospectus supplement, which describes the specific
terms of your securities and may be different from the information in the
prospectus.
This prospectus supplement does not contain complete information about the
offering of the certificates. Additional information is contained in the
prospectus. You are urged to read both this prospectus supplement and the
prospectus in full. We cannot sell these securities to you unless you have
received both this prospectus supplement and the prospectus.
If the terms of your securities and other information contained herein vary
between this prospectus supplement and the accompanying prospectus, you should
rely on the information in this prospectus supplement.
ContiSecurities Asset Funding Corp. has filed with the Securities and
Exchange Commission (the "Commission") a registration statement under the
Securities Act of 1933, as amended, with respect to the notes offered pursuant
to this prospectus supplement. This prospectus supplement and the 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. You may inspect the registration statement at the Public
Reference Room at 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 the Citibank Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. You can obtain copies of such materials at
prescribed rates from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549. In addition, the Commission
maintains a site on the World Wide Web at http://www.sec.gov containing reports,
proxy materials, information statements and other items.
You should rely only on the information incorporated by reference or
provided in this prospectus supplement and the accompanying prospectus. We have
not authorized anyone else to provide you with different information. You should
not assume that the information in this prospectus supplement or the
accompanying prospectus is accurate as of any date other than the date on the
cover page of this prospectus supplement or the accompanying prospectus.
We include cross-references in this prospectus supplement and the
accompanying prospectus to captions in these materials where you can find
further related discussions. The following table of contents and the table of
contents included in the accompanying prospectus provide the pages on which
these captions are located.
S-ii
<PAGE>
TABLE OF CONTENTS
SUMMARY OF TERMS...........................................S-3
RISK FACTORS...............................................S-7
THE SELLERS AND THE SERVICER...............................S-7
General....................................................S-7
Recent Developments........................................S-7
Credit and Underwriting Guidelines.........................S-7
Indemnification by the Depositor...........................S-7
Delinquency, Loan Loss and Foreclosure Information.........S-7
USE OF PROCEEDS............................................S-7
THE DEPOSITOR..............................................S-7
THE HOME EQUITY LOANS......................................S-7
PREPAYMENT AND YIELD CONSIDERATIONS........................S-7
General....................................................S-7
Payment Lag Feature of the Class A Certificates............S-7
Decrement Tables...........................................S-7
FORMATION OF THE TRUST AND TRUST PROPERTY..................S-7
ADDITIONAL INFORMATION.....................................S-7
DESCRIPTION OF THE CERTIFICATES............................S-7
General....................................................S-7
Payment Dates..............................................S-7
Distributions..............................................S-7
Book-Entry Registration of the Class A Certificates........S-7
Assignment of Rights.......................................S-7
CREDIT ENHANCEMENT.........................................S-7
The Certificate Insurance Policy...........................S-7
THE CERTIFICATE INSURER....................................S-7
THE POOLING AND SERVICING AGREEMENT........................S-7
Covenant of the Sellers to Take Certain Actions
with Respect to the Home Equity Loans in
Certain Situations ......................................S-7
Assignment of Home Equity Loans............................S-7
Servicing and Sub-Servicing................................S-7
Removal and Resignation of Servicer........................S-7
The Trustee................................................S-7
Reporting Requirements.....................................S-7
Removal of Trustee for Cause...............................S-7
Governing Law..............................................S-7
Amendments.................................................S-7
Termination of the Trust...................................S-7
Optional Termination.......................................S-7
CERTAIN FEDERAL INCOME TAX CONSEQUENCES....................S-7
REMIC Election.............................................S-7
ERISA CONSIDERATIONS.......................................S-7
The Class A Certificates...................................S-7
RATINGS....................................................S-7
LEGAL INVESTMENT CONSIDERATIONS............................S-7
UNDERWRITING...............................................S-7
EXPERTS....................................................S-7
CERTAIN LEGAL MATTERS......................................S-7
INDEX OF PRINCIPAL DEFINED TERMS...........................S-1
S-1
<PAGE>
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SUMMARY OF TERMS
o This summary highlights selected information from this prospectus
supplement and does not contain all of the information that you need to consider
in making your investment decision. To understand all of the terms of the
offering of the certificates, read carefully this entire prospectus supplement
and the accompanying prospectus.
o This summary provides an overview of certain calculations, cash flows and
other information to aid your understanding and is qualified by the full
description of these calculations, cash flows and other information in this
prospectus supplement and the accompanying prospectus.
o Reference is made to the Index of Principal Defined Terms for the
location of certain capitalized terms.
Issuer: ContiMortgage Home Equity Loan Trust 1998-4.
The Trust: The Trust will be created pursuant to a Pooling and Servicing
Agreement to be dated as of December 1, 1998, among
ContiSecurities Asset Funding Corp., ContiMortgage Corporation,
ContiWest Corporation, and Manufacturers and Traders Trust
Company. ContiMortgage Corporation and ContiWest Corporation will
sell the home equity loans to ContiSecurities Asset Funding Corp.
ContiSecurities Asset Funding Corp. will deposit the home equity
loans into the trust. ContiMortgage Corporation will service the
home equity loans for the trust. Manufacturers and Traders Trust
Company will act as trustee for the benefit of the
Certificateholders.
The Trust will also issue a residual interest (the "Residual
Interest") which is not offered. The Residual Interest will be
retained initially by the Depositor or its affiliates. The
Residual Interest is subordinate to both classes of Certificates,
and essentially represents the excess of the pool balance over
the sum of the Class A and Class B principal balance, together
with any excess cashflow which is not required to be applied to
payments on the Certificates.
The Class A Certificates will initially be issued in book-entry
form through DTC, Cedel or Euroclear. We refer you to
"Description of the Certificates-Book-Entry Registration of the
Class A Certificates" herein, and Annex I herein, and
"Description of the Certificates-Book-Entry Registration" in the
Prospectus for more detail.
Certificates
Issued: $1,049,318,000 ContiMortgage Home Equity Loan Pass-Through
Certificates, Series 1998-4, to be issued in the following
classes and original principal balances set forth below:
Initial
Certificate
Principal Pass-Through
Class Tranche Type Balance Rate
------- ------------ -------------- ------------
Class A Senior $1,000,000,000 6.415%
Certificates
Class B Subordinate $49,318,000 8.815%*
Certificates
*Subject to a cap on the interest rate.
The Class B Certificates are being privately placed with one or
more third party investors, and are not offered by this
prospectus supplement.
Class B
Certificates
(not offered): The Class B Certificates are subordinate in right of distribution
to the Class A Certificates. The initial principal balance of the
Class B Certificates will equal approximately 4.70% of the
original pool balance of the home equity loans.
Depositor: ContiSecurities Asset Funding Corp. (the "Depositor"), a Delaware
corporation.
Servicer: ContiMortgage Corporation (the "Servicer"), a Delaware
corporation.
Sellers: ContiMortgage Corporation, a Delaware corporation and ContiWest
Corporation, a Nevada corporation (each a "Seller" and
collectively, the "Sellers").
- --------------------------------------------------------------------------------
S-3
<PAGE>
- --------------------------------------------------------------------------------
Originator: ContiMortgage Corporation (the "Originator"), a Delaware
corporation.
Trustee: Manufacturers and Traders Trust Company (the "Trustee"), a New
York banking corporation.
Cut-Off
Date: As of the close of business on December 7, 1998. The Trust will
be entitled to all moneys due and received on the home equity
loans after such date.
Statistical
Calculation
Date: As of the close of business on November 16, 1998.
Closing
Date: On or about December 17, 1998.
Final
Scheduled
Payment
Dates: The final scheduled payment dates for each of the classes are as
follows, although it is anticipated that the actual final payment
date for each class will occur earlier than the Final Scheduled
Payment Date. We refer you to "Prepayment and Yield
Considerations" for more detail.
Class Final Scheduled Payment Date
- ----- ----------------------------
Class A December 15, 2029
Class B December 15, 2029
The Home
Equity
Loans: The home equity loans are fixed rate conventional home equity
loans secured by either first or second liens. The mortgaged
properties consist primarily of single-family residences, with
some mixed use properties and manufactured housing. The mortgaged
properties may be owner-occupied or non-owner occupied investment
properties. No combined loan-to-value ratio (based upon
appraisals made at the time of origination) exceeded 100%. The
home equity loans are not insured by either primary or pool
mortgage insurance policies. The home equity loans are not
guaranteed by the Sellers or any affiliate thereof.
The home equity loans will be serviced by the Servicer generally
in accordance with the standards and procedures required by
FannieMae for FannieMae mortgage-backed securities.
The home equity loans conform to Freddie Mac and Fannie Mae's
guidelines for maximum original loan balances.
We refer you to "Additional Information" in this Prospectus
Supplement and "ANNEX II--THE HOME EQUITY LOAN POOL" for more
detail.
Distributions: You will be entitled to receive payments of interest each month.
You may not necessarily receive a distribution of principal in
any given month. The amount of principal you will be entitled to
receive will vary depending on a number of factors, including the
payments received on the home equity loans. Each month, the
trustee will calculate the amounts to be paid to the
certificateholders. If you hold a certificate on the last day of
a calendar month, you will be entitled to receive payments on the
payment date in the next month. Distributions will be made on
each payment date. A "payment date" is the 15th day of each
month, or, if such day is not a business day, then on the next
succeeding Business Day. The first payment date is in January,
1999.
In summary, on each payment date the funds available to be
distributed will be applied in the following order of priority:
o first, for the payment of certain fees;
o second, interest on the Class A Certificates;
o third, interest on the Class B Certificates;
o fourth, to reimburse the Certificate Insurer, up to a
specified maximum amount;
o fifth, principal on the Class A Certificates, to the extent
necessary to reduce the principal amount of the Class A
Certificates to a specified level;
o sixth, principal on the Class B Certificates to the extent
necessary to reduce the principal amount of the
- --------------------------------------------------------------------------------
S-4
<PAGE>
- --------------------------------------------------------------------------------
Class B Certificates to a specified level;
o seventh, certain accrued and unpaid interest on the Class B
Certificates;
o eighth, to pay losses which resulted in prior "write-downs"
of the Class B Certificates;
o ninth, to reimburse the servicer for prior unreimbursed
advances and/or other expenses; and
o tenth, to make a distribution to the residual holder.
Credit
Enhancement: Credit enhancement refers to a mechanism that is intended to
protect the holders of certain classes of certificates against
losses due to defaults by the borrowers under the home equity
loans.
The Class A Certificates have the benefit of four types of credit
enhancement:
o the use of excess interest to cover losses and to create
overcollateralization;
o subordination of distributions on the Class B Certificates;
o the allocation of losses on the home equity loans to the
Class B Certificates; and
o the financial guaranty insurance policy.
Optional
Termination: On any date when the principal balance of the home equity loans
is less than or equal to 10% of what it was on the Cut-Off Date,
the holder of the residual interest will have the right to
terminate the trust on a subsequent payment date. Termination of
the trust will be accomplished by the holder of the residual
interest purchasing all of the home equity loans from the trust
and making some additional payments.
Upon receipt of the purchase price of the home equity loans from
the holder of the residual interest, the trustee will make a
final payment to the certificateholders.
Ratings: Before the Certificates can be issued, the trust must obtain the
ratings set out below from Moody's, Standard & Poor's and Fitch:
Standard
Class Moody's & Poor's Fitch
----- ------- -------- -----
Class A Aaa AAA AAA
Certificates
Class B Baa2 BBB- BBB
Certificates
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 rating agency. We refer you to "Prepayment and Yield
Considerations" and "Ratings" herein for more detail.
Risk Factors: For a discussion of other risk factors that should be considered
by prospective investors in the Certificates, we refer you to
"Risk Factors" herein and in the Prospectus.
Federal Tax
Aspects: Dewey Ballantine LLP acted as counsel to the trust and is of the
opinion that:
o the trust will be treated as a real estate mortgage
investment conduit, or REMIC, for federal income tax
purposes.
o the Class A and Class B Certificates will be "regular
interests" in the REMIC and will be treated as debt
instruments of the REMIC for federal income tax purposes. We
refer you to "Certain Federal Income Tax Consequences" for
more detail.
ERISA
Considerations: As described under "ERISA Considerations" herein, the Class A
Certificates may be purchased by ERISA plans. We refer you to
"ERISA Considerations" herein and in the Prospectus for more
detail.
- --------------------------------------------------------------------------------
S-5
<PAGE>
- --------------------------------------------------------------------------------
Legal Investment
Considerations: The Secondary Mortgage Enhancement Act of 1984 defines "mortgage
related securities" to include only first lien mortgages, and not
second lien mortgages. Because the pool of home equity loans
owned by the trust includes second lien home equity loans, the
certificates will not be "mortgage related securities" under that
definition. Some institutions may be limited in their legal
investment authority to only first-lien mortgages or "mortgage
related securities" and will not be able to invest in the Class A
or Class B Certificates.
- --------------------------------------------------------------------------------
S-6
<PAGE>
RISK FACTORS
You should consider the following risk factors prior to any purchase of the
certificates. You should also consider the information under the "Risk Factors"
in the prospectus.
Underwriting Standards. Each seller's underwriting standards generally are
less stringent than those of Fannie Mae or Freddie Mac. The home equity loans
originated by the sellers have been made to borrowers that typically have
limited access to traditional mortgage financing for a variety of reasons, such
as impaired past credit experience, limited credit history, insufficient home
equity value, or a high level of debt-to-income ratios. As a result of this
approach to underwriting, the home equity loans in the home equity loan pool may
experience higher rates of delinquencies, defaults and foreclosures than home
equity loans underwritten in accordance with Fannie Mae or Freddie Mac's
guidelines. In turn, if MBIA fails to perform its obligations under the policy,
you will experience a loss.
The Home Equity Loans May Prepay at Any Time, Resulting in Uncertainty As
to the Amortization Rate of the Class A Certificates. The home equity loans can
be prepaid at any time by the borrowers. The rate of prepayment on the home
equity loans will affect the amortization rate of the certificates, as well as
their weighted average lives. Certain of the home equity loans may be prepaid in
whole or in part at any time without penalty. In addition, a substantial portion
of the home equity loans contain due-on-sale provisions which, if enforced by
the servicer, will result in the prepayment of such home equity loans. We refer
you to "Prepayment and Yield Considerations" herein and "Certain Legal Aspects
of Mortgage Assets-Enforceability of Certain Provisions" in the Prospectus for
more detail.
The home equity loans are all fixed rate. The rate of prepayments on
fixed-rate mortgage loans is sensitive to prevailing interest rates. Generally,
if prevailing interest rates fall significantly below the interest rates on the
home equity loans, the home equity loans are likely to be subject to higher
prepayment rates than if prevailing rates remain at or above the interest rates
on the home equity loans. Conversely, if prevailing interest rates rise
significantly above the interest rates on the home equity loans, the rate of
prepayments is likely to decrease. The average lives of the certificates and, if
purchased at other than par, the yields realized by owners of the certificates
will be sensitive to levels of payment (including prepayments relating to the
home equity loans on the home equity loans. In general, the yield on a
certificate that is purchased at a premium from its outstanding principal amount
may be adversely affected by a higher than anticipated level of prepayments of
the home equity loans. Conversely, the yield on a certificate that is purchased
at a discount from its outstanding principal amount may be adversely affected by
a lower than anticipated level of prepayments.
Nature of Collateral. Home equity loans that are secured by junior
mortgages will receive proceeds from the sale of the related mortgaged property
only after any senior mortgage loans and prior statutory liens have been paid.
If the remaining proceeds are insufficient to satisfy the home equity loan in
the trust and MBIA fails to perform its obligations under the policy, then:
o There will be a delay in distributions to you if a deficiency judgment
against the borrower is sought.
o You may incur a loss if a deficiency judgment cannot be obtained.
We refer you to "The Pooling and Servicing Agreement-Servicing and
Sub-Servicing" for more detail.
Second lien mortgages are also more sensitive to a decline in the value of
a property and could cause the Trust's interest in the property to be reduced or
extinguished.
The Home Equity Loans Are Highly Regulated, And This Regulation May Impede
Collections. Many state and federal 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. 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
S-7
<PAGE>
the principal of or interest on the home equity loans, may entitle the borrower
to a refund of amounts previously paid and, in addition, could subject the
sellers to damages and administrative enforcement. We refer you to "Certain
Legal Aspects of Mortgage Assets" in the Prospectus for more detail.
Risk of Higher Default Rates for Home Equity Loans with Balloon Payments. A
portion of the home equity loans are "balloon loans" that provide for the
payment of the unamortized principal balance in a single payment at maturity.
Because borrowers of balloon loans are required to make substantial single
payments upon maturity, it is possible that the default risk associated with the
balloon loans is greater than that associated with fully-amortizing home equity
loans.
Risk of Seller Insolvency. Each seller believes that the transfer of the
home equity loans to the depositor and by the depositor to the trust constitutes
a sale by such seller to the depositor and by the depositor to the trust. As a
result, such home equity loans will not be available to other creditors of such
seller. However, in the event of an insolvency of a seller, it is possible that
a bankruptcy trustee or a creditor of such seller may argue that the transaction
between such seller and the depositor was a pledge of such home equity loans in
connection with a borrowing by such seller rather than a true sale. Such an
attempt, even if unsuccessful, could result in delays in distributions on the
certificates.
On the date the certificates are issued, Dewey Ballantine LLP, counsel to
the sellers, will give its legal opinion, with respect to the true sale of the
home equity loans from each of the sellers to the depositor and from the
depositor to the trustee.
Ratings of Class A Certificates. The ratings assigned to the Class A
Certificates by the rating agencies will be based on the credit and other
characteristics of the home equity loans and on the respective ratings assigned
to the financial strength of the Certificate Insurer. Any reduction in the
ratings so assigned to the Certificate Insurer by the rating agencies could
result in the reduction of the ratings assigned to the Class A Certificates. Any
such reduction in the ratings assigned to the Class A Certificates could
adversely affect the liquidity and market value of the Class A Certificates.
DTC and the Year 2000 Issue. With respect to Year 2000 issues, The
Depository Trust Company ("DTC") has informed members of the financial community
that it has developed and is implementing a program so that its systems, as the
same relate to the timely payment of distributions (including principal and
interest payments) to securityholders, book-entry deliveries, and settlement of
trades within DTC continue to function appropriately on and after January 1,
2000. This program includes a technical assessment and a remediation plan, each
of which is complete. Additionally, DTC's plan includes a testing phase, which
is expected to be completed within appropriate time frames.
However, DTC's ability to perform properly its services is also dependent
upon other parties, including but not limited to, its participating
organizations (through which certificateholders will hold their offered
certificates), as well as the computer systems of third party service providers.
DTC has informed the financial community that it is contacting (and will
continue to contact) third party vendors from whom DTC acquires services to: (i)
impress upon them the importance of such services being Year 2000 compliant and
(ii) determine the extent of their efforts for year 2000 remediation (and, as
appropriate, testing) of their services. In addition, DTC has stated that it is
in the process of developing such contingency plans as it deems appropriate.
If problems associated with the Year 2000 issue were to occur with respect
to DTC and the services described above, distributions to certificateholders
could be delayed or otherwise adversely affected.
Year 2000 Issue May Adversely Affect The Distributions to Certificateholders
As is the case with most companies using computers in their operations, the
servicer and the trustee are faced with the task of completing their compliance
goals in connection with the year 2000 issue. The year 2000 issue is the result
of prior computer programs being written using two digits, rather than four
digits, to define the applicable year. Any of these parties' computer programs
that have time-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. Any such occurrence could result in major
computer system
S-8
<PAGE>
failure or miscalculations. Each of these parties is presently expected to be
engaged in various procedures to ensure that its computer systems and software
will be year 2000 compliant. However, in the event that the servicer and the
trustee, or any of their suppliers, customers, brokers or agents do not
successfully and timely achieve year 2000 compliance, the performance of their
obligations of the transaction agreements could be materially adversely
affected.
S-9
<PAGE>
THE SELLERS AND THE SERVICER
General
ContiMortgage Corporation, a Delaware corporation, will act as the Servicer
and the Originator as well as one of the two Sellers and has been engaged in the
mortgage banking business since 1987. It is engaged in originating or purchasing
and servicing home equity loans secured by first and second mortgages and deeds
of trust in at least 49 states and the District of Columbia. It is a subsidiary
of ContiFinancial Corporation, a subsidiary of Continental Grain Company and an
affiliate of ContiFinancial Services Corporation, one of the Underwriters and
ContiWest Corporation, the other Seller. ContiFinancial Corporation's common
stock is publicly traded on the New York Stock Exchange.
ContiWest Corporation, a Nevada corporation, will act as the other Seller
and has been engaged in the mortgage banking business since September 1996. It
is engaged in the purchase of home equity loans secured by first and second
mortgages and deeds of trust. It is a wholly-owned subsidiary of ContiFinancial
Corporation, a subsidiary of Continental Grain Company and an affiliate of
ContiFinancial Services Corporation, one of the Underwriters and ContiMortgage
Corporation.
The Originator has originated or purchased each of the home equity loans. A
portion of the home equity loans were purchased by ContiWest Corporation from
the Originator. ContiWest Corporation and the Originator (in its capacity as a
Seller) are selling the home equity loans to the Depositor. The Sellers will
sell and assign their respective home equity loans to the Depositor in
consideration of the net proceeds from the sale of the Certificates and the
Residual Interest, which is being issued to affiliates of the Sellers. The
Servicer will service each home equity loan.
The Servicer may not assign its obligations under the Pooling and Servicing
Agreement, in whole or in part, unless it shall have first obtained the written
consent of the Trustee and the Certificate Insurer, which consent is required
not to be unreasonably withheld; provided, however, that any assignee must meet
the eligibility requirements for a successor servicer set forth in the Pooling
and Servicing Agreement.
With the consent of the Certificate Insurer, the Servicer may enter into
sub-servicing agreements (the "Sub-Servicing Agreements") with qualified
sub-servicers (the "Sub-Servicers") with respect to the servicing of the home
equity loans. Under the Pooling and Servicing Agreement, such sub-servicing
arrangements will not discharge the Servicer from its servicing obligations. See
"The Pooling and Servicing Agreement-Servicing and Sub-Servicing" herein.
The Trustee at the direction of the Certificate Insurer, unless a
Certificate Insurer Default has occurred and is continuing, or the Certificate
Insurer (unless a Certificate Insurer Default has occurred) may remove the
Servicer, and the Servicer may resign, only in accordance with the terms of the
Pooling and Servicing Agreement. No removal or resignation shall become
effective until the Trustee or a successor servicer shall have assumed the
Servicer's responsibilities and obligations in accordance therewith.
Any collections received by the Servicer after removal or resignation shall
be endorsed by it to the Trustee and remitted directly to the Trustee.
Upon removal or resignation of the Servicer, the Trustee may solicit bids
for a successor Servicer and, pending the appointment of a successor Servicer as
a result of soliciting such bids, will be required to serve as Servicer. If the
Trustee is unable to obtain a qualifying bid and is prevented by law from acting
as servicer, the Trustee will be required to appoint, or petition a court of
competent jurisdiction to appoint, an eligible successor. Any successor is
required to be a housing and home finance institution, bank or mortgage
servicing institution which has been designated as an approved seller-servicer
by FannieMae or FHLMC, having equity of not less than $5,000,000 as determined
in accordance with generally accepted accounting principles, which is acceptable
to the Certificate Insurer and which shall assume all of the responsibilities,
duties or liabilities of the Servicer.
S-10
<PAGE>
The Certificates will not represent an interest in or obligation of, nor
are the home equity loans guaranteed by, the Sellers or any of their affiliates
or the Certificate Insurer.
Recent Developments
ContiFinancial Corporation ("ContiFinancial"), the corporate parent of
ContiMortgage Corporation and ContiWest Corporation and ContiSecurities Asset
Funding Corp., reported net losses of $114.3 million for the quarter ended
September 30, 1998. ContiFinancial's results for the quarter were significantly
and adversely affected by extremely difficult market conditions during the
quarter. Particularly affected was the market for commercial real estate loans
and securities backed by such loans.
ContiFinancial and its subsidiaries are dependent on continued access to
short- and long-term sources of funding for its continued operations. Failure of
ContiFinancial to have continued access to sources of funding could have a
material adverse effect on ContiFinancial's and its subsidiaries' liquidity,
financial condition and operations.
ContiFinancial is required to comply with various financial covenants in
certain of its financing facilities. ContiFinancial was in compliance with such
covenants as of September 30, 1998, but may not be in compliance as of December
31, 1998. No assurance can be given that any relief with respect to such
covenants, if breached, will be forthcoming.
If ContiFinancial's liquidity, financial condition and operations are
materially and adversely affected by market conditions or otherwise, it could
impair the ability of ContiMortgage Corporation and ContiWest Corporation to
repurchase home equity loans for breaches of representations and warranties and
could have an adverse effect on the ability of the Servicer to service the home
equity loans, including the Servicer's obligation to make Delinquent Advances
and/or Servicing Advances. In addition, the failure of ContiMortgage
Corporation, as Servicer, and/or ContiFinancial to satisfy certain financial
conditions may allow the Certificate Insurer to remove ContiMortgage Corporation
as Servicer. Any removal of the Servicer would result in a transfer of the
servicing responsibility for the home equity loans. Experience indicates that
servicing transfers, no matter how well executed, frequently result in at least
temporary increases in delinquency rates.
Credit and Underwriting Guidelines
The following is a description of the underwriting guidelines customarily
employed by the Originator with respect to home equity loans which it purchases
or originates. Each home equity loan was underwritten according to these
guidelines. The Originator believes its standards are consistent with those
utilized by home equity lenders generally. The underwriting process is intended
to assess both the prospective borrower's ability to repay and the adequacy of
the real property security as collateral for the loan granted. In certain cases,
loans may be made outside of those guidelines with the prior approval of an
underwriting manager of the Originator.
The Originator generally originates or purchases loans which either fully
amortize over a period not to exceed 360 months or provide for amortization over
a 360 month schedule with a "balloon" payment required at the maturity date,
which will not be less than five years after origination. The loan amounts
generally range from a minimum of $10,000 to a maximum of $350,000 unless a
higher amount is specifically approved by a senior official of the Originator.
The Originator primarily originates or purchases non-purchase money first or
second mortgage loans although the Originator has programs for origination of
certain purchase money first mortgages.
The homes used for collateral to secure the loans may be either primary
residential (which includes second and vacation homes) or investor owned one- to
four- family homes, condominiums or townhouses and may include manufactured
housing. Generally, each home must have a minimum Appraised Value (as defined
below) of $35,000. Mobile housing or agricultural land are not accepted as
collateral. In addition, mixed-use loans secured by owner-occupied properties,
including one-to-four family and small multifamily residences, are made where
the proceeds may be used for business purposes. In some cases, the loan may be
secured by the owner-occupied residence plus additional collateral such as
rental units and small multifamily properties which may have a storefront.
S-11
<PAGE>
Each property proposed as security for a loan must be appraised not more
than 6 months prior to the date of such loan; provided that in the case of a
loan originated as part of the Originator's retention program, the property must
be appraised not more than 18 months prior to the date of such loan. The
combined loan-to-value ratio of the first and second mortgages generally may not
exceed 90%, and is less than 90% for lower credit grades; see Annex II. If a
prior mortgage exists, the Originator first reviews the first mortgage history.
If it contains open end, advance or negative amortization provisions, the
maximum potential first mortgage balance is used in calculating the combined
loan-to-value ratio which determines the maximum loan amount. The Originator
does not originate or purchase loans where the first mortgage contains a shared
appreciation clause.
For the Originator's full documentation process, each mortgage applicant
must provide, and the Originator must verify, personal financial information.
The applicant's total monthly obligations (which includes principal and interest
on each mortgage, tax assessments, other loans, charge accounts and all other
scheduled indebtedness) generally cannot exceed 50% of the applicant's gross
monthly income. Applicants who are salaried employees must provide current
employment information in addition to two recent years of employment history and
the Originator verifies this information. Verifications are based on written
confirmation from employers or a combination of the two most recent pay stubs,
the two most recent years' W-2 tax forms and telephone confirmation from the
employer. Self-employed applicants must be self-employed in the same field for a
minimum of two years. The self-employed applicant must provide signed copies of
complete federal income tax returns (including schedules) filed for the most
recent two years.
For the Originator's non-income verifier program, proof of two year's
history of self employment plus proof of current self-employed status is
required. The applicant's debt-to-income ratio is calculated based on income as
certified by the borrower on the application and must, in the credit
underwriter's judgment, be reasonable. The maximum loan-to-value ratio generally
may not exceed 75% for the non-income verifier program. Non-income verifier
loans are also available to borrowers other than self-employed borrowers on
one-to-four family, owner-occupied properties up to a loan-to-value ratio
generally not to exceed 65%.
The Originator has a "pay for performance" program, permitting the
lower-credit borrower to which the program applies to receive pre-determined
reductions of the Coupon Rate (0.5% per year) at the end of each of the first
three years of the loan, which reductions are dependent upon the borrower's
making monthly payments on the loan on time and in accordance with its terms.
A credit report by an independent credit reporting agency is required
reflecting the applicant's complete credit history. The credit report should
reflect all delinquencies of 30 days or more, repossessions, judgments,
foreclosures, garnishments, bankruptcies, divorce actions and similar adverse
credit practices that can be discovered by a search of public records. If the
report is obtained more than 60 days prior to the loan closing, the lender must
determine that the reported information has not changed. Written verification is
obtained of any first mortgage balance, its status and whether local taxes,
interest, insurance and assessments are included in the applicant's monthly
payment. All taxes and assessments not included in the payment must be verified
as current.
Generally, the applicant should have an acceptable credit history given the
amount of equity available, the strength of the applicant's employment history
and the level of the applicant's income to debt obligations. The rescission
period must have expired prior to funding a loan. The rescission period may not
be waived by the applicant except as permitted by law. Either an ALTA title
insurance policy or an attorney's opinion of title is required for all loans.
The applicant is required to secure property insurance in an amount
sufficient to cover the new loan and any prior mortgage. If the sum of the
outstanding first mortgage, if any, and the home equity loan exceeds replacement
value, insurance equal to replacement value may be accepted. The Originator must
ensure that its name and address is properly added to the "Mortgagee Clause" of
the insurance policy. In the event the Originator's name is added to a "Loss
Payee Clause" and the policy does not provide for written notice of policy
changes or cancellation, an endorsement adding such provision is required.
The Originator's credit underwriting guidelines require that any major
deferred maintenance on any property must be cured from the proceeds of the
loan.
S-12
<PAGE>
Indemnification by the Depositor
Under the Pooling and Servicing Agreement, the Depositor 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 or any Owner may sustain in any way related to the failure of the
Depositor to perform its duties in compliance with the terms of the Pooling and
Servicing Agreement.
Delinquency, Loan Loss and Foreclosure Information
The following tables set forth information relating to the delinquency,
loan loss and foreclosure experience of the Servicer for its servicing portfolio
of home equity loans for the past three years.
The information in the tables below has not been adjusted to eliminate the
effect of the significant growth in the size of the Servicer's home equity loan
portfolio during the periods shown. Accordingly, loss and delinquency
information as percentages of the aggregate principal balance of home equity
loans serviced for each period would be higher than those shown if a group of
home equity loans were isolated at a point in time and the information showed
the activity only for that isolated group.
S-13
<PAGE>
Delinquency and Foreclosure Information (Dollars in Thousands)(1)
<TABLE>
<CAPTION>
As of As of December 31,
September 30, -------------------------------------------------
1998 1997 1996 1995
=========== =========== =========== ===========
<S> <C> <C> <C> <C>
Portfolio At $12,535,874 $ 9,122,792 $ 5,699,145 $ 3,427,190
Delinquency
Percentage (2)
- --------------
30-59 days 2.02% 2.37% 3.09% 2.02%
60-89 days 0.74% 0.74% 0.72% 0.70%
90 days and over 0.57% 0.31% 0.36% 1.01%
================ =========== =========== =========== ===========
Total Delinquency 3.33% 3.42% 4.17% 3.73%
Total Delinquency Amount $ 417,862 $ 311,821 $ 237,642 $ 128,063
=========== =========== =========== ===========
Default
Percentage (3)
- --------------
Foreclosure 1.95% 2.78% 2.62% 1.15%
Bankruptcy 1.53% 1.53% 1.12% 0.69%
Real Estate Owned 0.93% 0.65% 0.49% 0.08%
Loss Mitigation(4) 0.91% 0.59% 0.15% 0.12%
================== =========== =========== =========== ===========
Total Default 5.32% 5.55% 4.38% 2.04%
Total Default Amount $ 666,687 $ 506,774 $ 249,714 $ 69,962
=========== =========== =========== ===========
</TABLE>
- --------------
(1) Columns may not add due to rounding.
(2) The period of the delinquency is based on the number of days payments are
contractually past due. The delinquency percentage for the period
represents the ratio of the dollar value of home equity loans contractually
past due, exclusive of home equity loans in foreclosure, bankruptcy, real
estate owned or forbearance to the total dollar value of the total
portfolio.
(3) The default percentage represents the ratio of the dollar value of
delinquent home equity loans in foreclosure, bankruptcy, real estate owned
or forbearance to the total dollar value of the total portfolio.
(4) As a result of a reporting change, this category has been renamed to "Loss
Mitigation" from "Forebearance", and includes non-performing accounts
specifically identified for accelerated resolution under the Servicer's
loss mitigation program. Resolution strategies include refinances,
reinstatements, and full payoffs; forbearance plans; pre-foreclosure sales
for less than full payoff; third party foreclosure sales; deed-in-lieu (or
"cash for keys"); and charge-offs. Accordingly, this category now includes
some home equity loans that, prior to the fourth quarter of 1997, would
have been reported in one of the three Delinquency categories or in the
Foreclosure category.
S-14
<PAGE>
Loan Loss Experience on the
Servicer's Servicing Portfolio
of Home Equity Loans(1)
<TABLE>
<CAPTION>
Nine Months
Ending Year Ending December 31,
September 30, ---------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Average Amount Outstanding (2) $10,777,818 $ 7,248,686 $ 4,261,983 $ 2,641,686 $ 1,400,163
Gross REMIC Losses (3) 57,372 30,146 9,487 2,754 1,203
Recoveries (4) 1,060 116 77 65 0
Net REMIC Losses (5) 56,313 30,030 9,410 2,689 1,203
Net Losses on Loans and Properties
Purchased Out of REMIC 8,579 20,671
----------- ----------- ----------- ----------- -----------
Total Net Losses $ 64,892 $ 50,701 $ 9,410 $ 2,689 $ 1,203
=========== =========== =========== =========== ===========
Net Losses as a Percentage of
Average Amount Outstanding(6):
REMIC Losses 0.70% 0.41% 0.22% 0.10% 0.09%
Loans and properties
purchased out of
REMIC 0.11% 0.29% 0.00% 0.00% 0.00%
----------- ----------- ----------- ----------- -----------
Total Net Losses 0.80% 0.70% 0.22% 0.10% 0.09%
=========== =========== =========== =========== ===========
</TABLE>
- -----------------
(1) Columns may not add due to rounding.
(2) "Average Amount Outstanding" during the period is the arithmetic average of
the principal balances of the home equity loans outstanding on the last
business day of each month during the period.
(3) "Gross REMIC Losses" are actual losses incurred on liquidated properties in
the existing REMIC trusts for each respective period. Losses include all
principal, foreclosure costs and all accrued interest.
(4) "Recoveries" are recoveries from liquidation proceeds and deficiency
judgments.
(5) "Net REMIC Losses" means "Gross REMIC Losses" minus "Recoveries".
(6) For the nine months ending September 30, 1998, the percentages shown were
annualized by multiplying the corresponding dollar amounts by approximately
1.33 (precisely, 4/3) prior to calculating the percentages.
USE OF PROCEEDS
The Depositor will sell the home equity loans to the Trust concurrently
with delivery of the Certificates. Net proceeds from the sale of the
Certificates will be applied by the Depositor to the purchase of the home equity
loans from the Sellers. Such net proceeds will (together with the Residual
Interest retained by the Depositor or its affiliates) represent the purchase
price to be paid by the Trust to the Depositor for the home equity loans. The
Depositor or its affiliates may apply all or any portion of such net proceeds to
the repayment of debt, including "warehouse" debt secured by the home equity
loans (prior to their sale to the Trust). One or more of the Underwriters (or
its affiliates) may have acted as a "warehouse lender" to the Depositor or its
affiliates, and may receive a portion of such proceeds as repayment of such
"warehouse" debt.
S-15
<PAGE>
THE DEPOSITOR
The Depositor was incorporated in the State of Delaware on January 31, 1991
and is a wholly-owned subsidiary of ContiFinancial Corporation and an affiliate
of ContiFinancial Services Corporation, one of the Underwriters. The Depositor
maintains its principal offices at 3811 West Charleston Boulevard, Las Vegas,
Nevada 89102. Neither the Depositor, the Sellers nor the Servicer nor any of
their affiliates will insure or guarantee distributions on the Certificates.
ContiFinancial Corporation's common stock is publicly traded on the New York
Stock Exchange.
THE HOME EQUITY LOANS
The home equity loans will consist of fixed rate conventional home equity
loans evidenced by promissory notes (the "Notes") secured by first and second
lien deeds of trust, security deeds or mortgages (the "Mortgages"). The
properties securing the home equity loans (the "Properties") 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 and manufactured housing. The
Properties may be owner-occupied or non-owner occupied investment properties. No
Combined Loan-to-Value Ratio (based upon appraisals made at the time of
origination) exceeded 100% as of the Statistical Calculation Date. The home
equity loans are not insured by either primary or pool mortgage insurance
policies. The home equity loans are not guaranteed by the Sellers or any
affiliate thereof. The home equity loans will be serviced by the Servicer
generally in accordance with the standards and procedures required by FannieMae
for FannieMae mortgage-backed securities.
The home equity loans conform to Freddie Mac and Fannie Mae's guidelines
for maximum original loan balances.
The statistical information presented in this Prospectus Supplement
concerning the pool of home equity loans is based on the pool of home equity
loans as of the Statistical Calculation Date. Additional home equity loans will
be purchased by the Trust from the Depositor on the Closing Date. The pool
aggregated approximately $802,634,679 as of the Statistical Calculation Date.
The Depositor expects that the actual pool as of the Closing Date will represent
approximately $1,049,318,000. In addition, with respect to the home equity loans
as of the Statistical Calculation Date as to which statistical information is
presented herein, some amortization of the home equity loans will occur prior to
the Closing Date. Moreover, certain loans included in the pool as of the
Statistical Calculation Date may prepay in full, or may be determined not to
meet the eligibility requirements for the final pools, and may not be included
in the final pool. As a result of the foregoing, the statistical distribution of
characteristics as of the Closing Date for the final home equity loan pool will
vary from the statistical distribution of such characteristics as of the
Statistical Calculation Date as presented in this Prospectus Supplement. Unless
otherwise noted, all statistical percentages in this Prospectus Supplement are
measured by the aggregate principal balance of the home equity loans, as of the
Statistical Calculation Date.
The home equity loan pool consists of fixed-rate home equity loans with
remaining terms to maturity of not more than 360 months (including both fully
amortizing home equity loans and Balloon Loans). The home equity loans have the
characteristics set forth below as of the Statistical Calculation Date.
Percentages expressed herein based on Loan Balances and number of home equity
loans have been rounded, and in the tables set forth herein the sum of the
percentages may not equal the respective totals due to such rounding.
The Loan-to-Value Ratios and Combined Loan-to-Value Ratios were calculated
based upon the appraised values of the Properties at the time of origination
(the "Appraised Values"). In a limited number of circumstances, and within the
Originator's underwriting guidelines, the Originator has reduced the Appraised
Value of Properties where the Properties are unique, have a high value or where
the comparables are not within FannieMae 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
S-16
<PAGE>
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.
Certain statistical information regarding the home equity loans is set
forth in Annex II hereto.
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 the Certificates"), the yield to
maturity on the Certificates will relate to the rate of payment of principal of
the home equity loans, including for this purpose prepayments, liquidations due
to defaults, casualties and condemnations, and repurchases by the Sellers of
home equity loans and any accelerated payment of principal and the effect of a
Delinquency Trigger Event or a Cumulative Realized Loss Trigger Event. 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 home equity loans with fixed rates such as the home equity loans are affected
by prevailing market rates for home equity loans of a comparable term and risk
level. When the market interest rate is below the mortgage coupon, mortgagors
may have an increased incentive to refinance their home equity loans. Depending
on prevailing market rates, the future outlook for market rates and economic
conditions generally, some mortgagors may sell or refinance mortgaged properties
in order to realize their equity in the mortgaged properties, to meet cash flow
needs or to make other investments.
The prepayment experience on non-conventional mortgage loans may differ
from that on conventional first mortgage loans, primarily due to the credit
quality of the typical borrower. Because the credit histories of many
non-conventional borrowers may preclude them from other traditional sources of
financing, such borrowers may be less likely to refinance due to a decline in
market interest rates. Non-conventional mortgage loans may experience more
prepayments in a rising interest rate environment as the borrowers' finances are
stressed to the point of default. Prepayments may also affect the yield to the
Owners of the Certificates, if the weighted average margins are reduced.
In addition to the foregoing factors affecting the weighted average life of
the Class A Certificates, the overcollateralization provisions of the Trust may
result in an additional reduction of the Class A Certificates relative to the
amortization of the related home equity loans in the early months of the
transaction (but only after the first four months). The accelerated amortization
is achieved by the application of the excess interest (i.e., interest received
on the related home equity loans in excess of that needed to fund Certificate
interest and fees) to the payment of the Certificate Principal Balance of the
Class A Certificates then entitled to distributions of principal. This creates
overcollateralization which results from the excess of the Pool Balance of the
home equity loans over the Aggregate Certificate Principal Balance. Once the
Targeted Overcollateralization Amount is reached, the application of the excess
interest to pay down principal will cease, unless necessary to maintain the
related Overcollateralization Amount at the Targeted Overcollateralization
Amount.
"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 Class A Certificates will be influenced by, among other things, the
rate at which principal of the home equity loans is paid, which may be in the
form of scheduled amortization or prepayments (for this purpose, the term
"Prepayment" includes prepayments and liquidations due to default).
S-17
<PAGE>
It is very unlikely that the home equity loans will prepay at rates
consistent with the Prepayment Assumption until maturity or that all of the home
equity loans will prepay at the same rate. There will be discrepancies between
the actual characteristics of the home equity loans included in the Trust and
the assumed characteristics used in preparing the following tables. Any
discrepancy may have an effect upon the percentages of Initial Certificate
Principal Balance outstanding set forth in the table and the weighted average
lives of the Class A Certificates.
Payment Lag Feature of the Class A Certificates
Pursuant to the Pooling and Servicing Agreement, interest on the Class A
Certificates generally accrues during the calendar month immediately preceding
the month in which the related Payment Date occurs. Payment Dates occur on the
fifteenth day of each month (or, if such day is not a Business Day, on the next
Business day). 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 distributions to Owners of the Class A Certificates in respect of
any given month will not be made until on or after the 15th day of the following
month.
Decrement Tables
The decrement tables are set forth in Annex III hereto.
FORMATION OF THE TRUST AND TRUST PROPERTY
ContiMortgage Home Equity Loan Trust 1998-4 (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 Certificates.
The property of the Trust will include (a) the home equity loans (other
than payments received on the home equity loans on or prior to the Cut-Off Date)
together with the related home equity loan documents and the Seller's interest
in any Property which secures a home equity loan and all payments thereon and
proceeds of the conversion, voluntary or involuntary, of the foregoing, (b) such
amounts as may be held by the Trustee in the Certificate Account and any other
accounts held by the Trustee for the benefit of the Certificateholders and the
Certificate Insurer 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 rights of the Trustee under the Certificate Insurance Policy
related to the Class A Certificates, and (d) proceeds of all the foregoing
(including, but not by way of limitation, all proceeds of any hazard insurance
and title insurance policies relating to the home equity loans, cash proceeds,
accounts, accounts receivable, notes, drafts, acceptances, chattel paper,
checks, deposit accounts, rights to payment of any and every kind, and other
forms of obligations and receivables which at any time constitute all or part of
or are included in the proceeds of any of the foregoing) to pay the Certificates
as specified in the Pooling and Servicing Agreement (collectively, the "Trust
Estate").
The Certificates will not represent an interest in or an obligation of, nor
will the home equity loans be guaranteed by, the Depositor, the Sellers, the
Servicer, the Certificate Insurer 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 interest distributions
on the Certificates. As the Trust does not have any operating history and will
not engage in any business activity other than issuing the Certificates and
making distributions thereon, there has not been included any historical or pro
forma ratio of earnings to fixed charges with respect to the Trust.
S-18
<PAGE>
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the home equity loans and
the Properties is based upon the pool as constituted at the close of business on
the Statistical Calculation Date. Prior to the issuance of the Class A
Certificates, home equity loans may be removed from the pool as a result of
incomplete documentation or non-compliance with representations and warranties
set forth in the Pooling and Servicing Agreement, if the Depositor deems such
removal necessary or appropriate. A limited number of other home equity loans
may be included in the pool prior to the issuance of the Certificates.
A current report on Form 8-K will be available to purchasers of the 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 home equity loans are removed from or added
to the pool as set forth in the preceding paragraph, such removal or addition
will be noted in a current report on Form 8-K. A description of the pool of home
equity loans as of the Closing Date will be filed in a current report on Form
8-K within fifteen days after the initial issuance of the Class A Certificates.
DESCRIPTION OF THE CERTIFICATES
General
The Class A Certificates and Class B Certificates (together, the
"Certificates") will each represent certain undivided, fractional ownership
interests in the Trust Estate held pursuant to the Pooling and Servicing
Agreement and subject to the limits and the priority of distribution described
therein.
Payment Dates
On each Payment Date, the Owners of each Class of 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 Certificates is reduced to zero, and to the
extent funds are available therefor, the related Current Interest, any Interest
Carry Forward Amount and the portion of the Principal Distribution Amounts, if
any, allocated therefor as of such Payment Date, allocated among the
Certificates as described below. Distributions will be made in immediately
available funds to Owners of the 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 provides that an Owner, upon receiving
the final distribution on such Owner's Certificate, will be required to send
such Certificate to the Trustee.
Each Owner of record of the 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 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 with respect to the home equity loans (i) the Monthly Remittance Amount,
together with any Substitution Amount and any Loan Purchase Price amount and
Insurance Proceeds and (ii) the proceeds of any liquidation of the Trust Estate.
S-19
<PAGE>
On the 15th day of each month, or, if such day is not a Business Day, then
the next succeeding Business Day, commencing in January, 1999 (each such day
being a "Payment Date"), the Trustee will be required, subject to the
availability of amounts therefor, pursuant to the cashflow priorities
hereinafter described, to distribute to the Owners of record of the Certificates
as of the last day of the calendar month immediately preceding the calendar
month in which such Payment Date occurs (each such date, the "Record Date") the
applicable "Class Distribution Amount" which shall be the sum of (x) the related
Current Interest, (y) the related Interest Carry Forward Amount and (z) the
related Principal Distribution Amount (each as defined below).
For each Payment Date, interest due with respect to the Certificates will
be interest which has accrued on the related Certificate Principal Balance
during the calendar month immediately preceding the month in which such Payment
Date occurs (or the period from the Cut-Off Date to the end of the calendar
month in the case of the first Payment Date). Each period referred to above
relating to the accrual of interest is the "Accrual Period" for the related
Class of Certificates. All calculations of interest on the Certificates will be
made on the basis of a 360-day year assumed to consist of twelve 30-day months.
A "Business Day" is any day other than a Saturday, Sunday or a day on which
the Certificate Insurer or 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.
The Class B Available Funds Cap
The Class B Certificates' Pass-Through Rate may be limited on some Payment
Dates by the Class B Available Funds Cap. The "Class B Available Funds Cap" with
respect to any Payment Date, is the weighted average Coupon Rate of the home
equity loans as of the opening of business on the first day of the related
Remittance Period, less the annualized percentage equivalent of a fraction equal
to (a) the sum of the Premium Amount plus the Trustee Fee plus the Servicing Fee
divided by (b) the Pool Balance of the home equity loans as of the opening of
business on the first day of the related Remittance Period.
Cashflow Priority, Flow of Funds:
On each Monthly Remittance Date the Servicer will be required to cause to
be remitted from the Principal and Interest Account, the related Monthly
Remittance Amount, for deposit into the Certificate Account.
On the following Payment Date, the Monthly Remittance Amount which is then
on deposit in the Certificate Account (such amount, the "Available Funds") will
be applied in the following order of priority:
First, for the payment of certain fees, concurrently, to the Trustee, the
Trustee Fee and to the Certificate Insurer, the Premium Amount;
Second, for the payment of Class A Certificate interest, to the extent of
the Available Funds then remaining in the Certificate Account plus the interest
component of any related Insured Payment, to the Owners of the Class A
Certificates, the related Current Interest plus the Interest Carry Forward
Amount with respect to the Class A Certificates;
Third, for the payment of the Class B Certificate interest, to the extent
of the Available Funds then remaining in the Certificate Account, to the Owners
of the Class B Certificates an amount equal to the Current Interest for the
Class B Certificates;
Fourth, for the payment to the Certificate Insurer, as reimbursement for
prior Insured Payments, if any, then due to the Certificate Insurer, to the
extent of the Available Funds then remaining in the Certificate Account, the
lesser of (x) the payment to the Certificate Insurer, as reimbursement for prior
Insured Payments, then owed to the Certificate Insurer and (y) the Maximum
Certificate Insurer Current Reimbursement Amount with respect to such Payment
Date;
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Fifth, for the payment of Class A Certificate principal, to the extent of
the Available Funds then remaining in the Certificate Account, to the Owners of
the Class A Certificates, an amount necessary to reduce the Class A Certificate
Principal Balance to the Class A Optimal Balance for such Payment Date;
Sixth, for the payment of Class B Certificate principal, to the extent of
the Available Funds then remaining in the Certificate Account, to the Owners of
the Class B Certificates, an amount necessary to reduce the Class B Certificate
Principal Balance to the Class B Optimal Balance for such Payment Date;
Seventh, to fund the Interest Carry Forward Amount, if any, with respect to
the Class B Certificates, to the extent of the Available Funds then remaining in
the Certificate Account, to the Owners of the Class B Certificates, an amount
equal to the Interest Carry Forward Amount for such Class B Certificates;
Eighth, to fund the Class B Realized Loss Amortization Amount, if any, for
such Payment Date, to the extent of the Available Funds then remaining in the
Certificate Account, to the Owners of the Class B Certificates, an amount equal
to the Class B Realized Loss Amortization Amount for such Class B Certificates;
and
Ninth, the remaining amount, if any, on deposit in the Certificate Account
is the "Monthly Excess Cashflow Amount", which shall be applied in the following
order of priority:
(i) to the Servicer to the extent of any unreimbursed Delinquency
Advances or Servicing Advances and any other costs and expenses
incurred by the Trust; and
(ii) to fund a distribution to the Residual Interest.
"Class A Principal Distribution Amount" means, with respect to any Payment
Date, the actual amount distributed as principal to the Owners of the Class A
Certificates in accordance with priority "Fifth" under "Cashflow Priority, Flow
of Funds" above on such Payment Date.
"Class B Principal Distribution Amount" means, with respect to any Payment
Date, the actual amount distributed as principal to the Owners of the Class B
Certificates in accordance with priority "Sixth" under "Cashflow Priority, Flow
of Funds" above on such Payment Date. Since, prior to the related Stepdown Date,
the "Class B Optimal Balance" for the Class of Class B Certificates is set at a
level equal to the Class B Initial Certificate Principal Balance, the Owners of
the Class B Certificates will receive no distributions of principal prior to the
occurrence of the Stepdown Date (unless the Certificate Principal Balance of the
Class A Certificates is reduced to zero earlier).
"Current Interest" with respect to each Class of Certificates means, with
respect to any Payment Date, (i) the interest accrued during the related Accrual
Period on the Certificate Principal Balance of such Class at the related
Pass-Through Rate (in the case of Class B, subject to the Class B Available
Funds Cap), plus (ii) the Preference Amount as it relates to interest previously
paid on such Class prior to such Payment Date.
"Interest Carry Forward Amount" means, with respect to any Class of
Certificates for any Payment Date, the sum of (x) the amount, if any, by which
(i) the sum of the Current Interest and all prior unpaid Interest Carry Forward
Amounts for such Class as of the immediately preceding Payment Date exceeds (ii)
the amount of the actual distribution with respect to interest made to the
Owners of such Class on such immediately preceding Payment Date plus (y)
interest on such amount calculated for the related Accrual Period at the related
Pass-Through Rate in effect with respect to such Class (which, in the case of
the Class B Certificates, is the Class B Pass-Through Rate, as it is subject to
the Class B Available Funds Cap). Assuming that the Certificate Insurance Policy
with respect to the Class A Certificates is timely and properly drawn upon in
the event of an anticipated shortfall, an Interest Carry Forward Amount would
only arise with respect to the Class A Certificates in the event of a
Certificate Insurer Default.
"Maximum Certificate Insurer Current Reimbursement Amount" means, with
respect to any Payment Date, the maximum amount which could be used to repay the
Certificate Insurer with respect to reimbursement of prior Insured Payments by
the Certificate Insurer under the Certificate Insurance Policy rather than used
to pay Class A
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Certificate Principal on such Payment Date, without causing the Class A
Certificate Balance to exceed the Pool Balance (i.e., without causing there to
be a Class A Overcollateralization Deficit). Specifically, the "Maximum
Certificate Insurer Current Reimbursement Amount" for any Payment Date equals
the lesser of (x) the Available Funds remaining in the Certificate Account after
taking into account all distributions described in clauses "First" through
"Third" under "Cashflow Priority, Flow of Funds" above and (y) the excess of (1)
the sum of (a) the Pool Balance plus (b) the amount described in the immediately
preceding clause (x) over (2) the Class A Certificate Principal Balance prior to
taking into account any payment of principal on such Payment Date.
"Pool Balance" means, for any Payment Date, the aggregate outstanding Loan
Balance of the home equity loans as of the last day of the related Remittance
Period.
"Original Pool Balance" means the original aggregate Loan Balance of the
home equity loans as of the Cut-Off Date.
Optimal Balances: The "Class A Optimal Balance" means, as of any Payment Date,
as follows, but in no event less than zero:
I. Prior to the Stepdown Date:
(a) if a Cumulative Realized Loss Trigger Event is not then in
effect, the excess of (x) the Pool Balance over (y) an amount
equal to (i) prior to the 5th Payment Date, 4.70% (i.e.,
$49,317,946.00 of the Original Pool Balance, and (ii) on and
after the 5th Payment Date, 7.00% of the Original Pool Balance
(i.e., $73,452,260.00); or
(b) if a Cumulative Realized Loss Trigger Event is in effect, the
excess of (x) the Pool Balance over (y) an amount equal to 8.30%
of the Original Pool Balance (i.e., $87,093,394.00).
II. On and after the Stepdown Date:
(a) if neither a Delinquency Trigger Event nor a Cumulative Realized
Loss Trigger Event is then in effect, the lesser of:
(i) the product of (x) 86.00% and (y) the Pool Balance; and
(ii) the excess of (x) the Pool Balance over (y) an amount equal
to 0.50% of the Original Pool Balance (i.e., $5,246,590.00);
or
(b) if a Delinquency Trigger Event is then in effect, but as to which
a Cumulative Realized Loss Trigger Event is not in effect, the
lesser of:
(i) the product of (x) 100% minus the product of 85.25% and the
Three-Month Rolling Average 60+ Delinquency Rate and (y) the
Pool Balance; and
(ii) the excess of (x) the Pool Balance over (y) an amount equal
to 0.50% of the Original Pool Balance (i.e., $5,246,590.00);
or
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(c) if a Cumulative Realized Loss Trigger Event is in effect but as
to which a Delinquency Trigger Event is not in effect, the
product of (x) 90.60% minus the percentage equivalent of a
fraction, the numerator of which is 3.60% of the Original Pool
Balance (i.e., $37,775,448.00) and the denominator of which is
the Pool Balance and (y) the Pool Balance;
(d) if both a Delinquency Trigger Event and a Cumulative Realized
Loss Trigger Event are then in effect, the lesser of:
(i) the product of (x) 100% minus the product of 85.25% and the
Three-Month Rolling Average 60+ Delinquency Rate and (y) the
Pool Balance; and
(ii) the product of (x) 90.60% minus the percentage equivalent of
a fraction, the numerator of which is 3.60% of the Original
Pool Balance (i.e., $37,775,448.00) and the denominator of
which is the Pool Balance and (y) the Pool Balance.
The "Class B Optimal Balance", means, as of any Payment
Date:
I. Prior to the Stepdown Date and if the Class A Certificate Principal
Balance is then greater than zero, the Class B Initial Certificate
Principal Balance; and
II. On and after the Stepdown Date, or if the Class A Certificate Principal
Balance then equals zero, the excess of (a) the Pool Balance over (b) the
Class A Certificate Principal Balance (after taking into account any
reduction thereof on such Payment Date) plus the Targeted
Overcollateralization Amount.
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, the nominee
of DTC. Cedel and Euroclear will hold omnibus positions on behalf of their
Participants through customers' securities accounts in Cedel's and Euroclear's
names on the books of their respective depositaries which in turn will hold such
positions in customers' securities accounts in the depositaries' names on the
books of DTC. Citibank will act as depositary for Cedel and Chase will act as
depositary for Euroclear (in such capacities, individually the "Relevant
Depositary" and collectively the "European Depositaries"). Investors may hold
such beneficial interests in the Book-Entry Certificates in minimum
denominations representing principal amounts of $1,000 and in integral multiples
in excess thereof in the case of the Class A Certificates. Except as described
below, no Beneficial Owner will be entitled to receive a physical certificate
representing such Certificate (a "Definitive Certificate"). Unless and until
definitive Certificates are issued, it is anticipated that the only "Owner" of
such Book-Entry Certificates will be Cede, as nominee of DTC. Beneficial Owners
will not be Owners as that term is used in the Pooling and Servicing Agreement.
Beneficial Owners are only permitted to exercise their rights indirectly through
Participants and DTC.
The Beneficial Owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
Beneficial Owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such
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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-
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Entry Certificates will be subject to the rules, regulations and procedures
governing DTC and DTC Participants as in effect from time to time.
Cedelbank ("Cedel") was incorporated in 1970 as a limited company under
Luxembourg law. Cedel is owned by banks, securities dealers and financial
institutions, and currently has about 100 shareholders, including United States
financial institutions or their subsidiaries. No single entity may own more than
five percent of Cedel's stock.
Cedel is registered as a bank in Luxembourg, and as such is subject to
regulation by the Institut Monetaire Luxembourgeois, "IML," the Luxembourg
Monetary Authority, which supervises Luxembourg banks.
Cedel holds securities for its participant organizations ("Cedel
Participants") and facilitates the clearance and settlement of securities
transactions between Cedel Participants through electronic book-entry changes in
accounts of Cedel Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in Cedel in any of 28
currencies, including United States dollars. Cedel provides to its Cedel
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Cedel interfaces with domestic markets in several
countries. As a professional depository, Cedel is subject to regulation by the
Luxembourg Monetary Institute. Cedel Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to Cedel is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Cedel Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 32 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York (the "Euroclear Operator"), under contract
with Euroclear Clearance Systems S.C., a Belgian cooperative corporation (the
"Cooperative"). All operations are conducted by the Euroclear Operator, and all
Euroclear Securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear Operator, not the Cooperative. The Cooperative establishes
policy for Euroclear on behalf of Euroclear Participants. Euroclear Participants
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries. Indirect access to Euroclear is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions on the Book-Entry Certificates will be made on each Payment
Date by the Trustee to DTC. DTC will be responsible for crediting the amount of
such payments to the accounts of the applicable DTC Participants in accordance
with DTC's normal procedures. Each DTC Participant will be responsible for
disbursing such payment to the Beneficial Owners of the Book-Entry Certificates
that it represents and to each Financial
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Intermediary for which it acts as agent. Each such Financial Intermediary will
be responsible for disbursing funds to the Beneficial Owners of the Book-Entry
Certificates that it represents.
Under a book-entry format, Beneficial Owners of the Book-Entry Certificates
may experience some delay in their receipt of payments, since such payments will
be forwarded by the Trustee to Cede. Distributions with respect to Certificates
held through Cedel or Euroclear will be credited to the cash accounts of Cedel
Participants or Euroclear Participants in accordance with the relevant system's
rules and procedures, to the extent received by the Relevant Depositary. Such
distributions will be subject to tax reporting in accordance with relevant
United States tax laws and regulations. Because DTC can only act on behalf of
Financial Intermediaries, the ability of a Beneficial Owner to pledge Book-Entry
Certificates to persons or entities that do not participate in the Depository
system, or otherwise take actions in respect of such Book-Entry Certificates,
may be limited due to the lack of physical certificates for such Book-Entry
Certificates. In addition, issuance of the Book-Entry Certificates in book-entry
form may reduce the liquidity of such Certificates in the secondary market since
certain potential investors may be unwilling to purchase Certificates for which
they cannot obtain physical certificates.
Monthly and annual reports on the Trust provided by the Servicer to Cede,
as nominee of DTC, may be made available to Beneficial Owners upon request, in
accordance with the rules, regulations and procedures creating and affecting the
Depository, and to the Financial Intermediaries to whose DTC accounts the
Book-Entry Certificates of such Beneficial Owners are credited.
DTC has advised the Trustee that, unless and until Definitive Certificates
are issued, DTC will take any action permitted to be taken by the holders of the
Book-Entry Certificates under the Pooling and Servicing Agreement only at the
direction of one or more Financial Intermediaries to whose DTC accounts the
Book-Entry Certificates are credited, to the extent that such actions are taken
on behalf of Financial Intermediaries whose holdings include such Book-Entry
Certificates. Cedel or the Euroclear Operator, as the case may be, will take any
action permitted to be taken by an Owner under the Pooling and Servicing
Agreement on behalf of a Cedel Participant or Euroclear Participant only in
accordance with its relevant rules and procedures and subject to the ability of
the Relevant Depositary to effect such actions on its behalf through DTC. DTC
may take actions, at the direction of the related Participants, with respect to
some Class A Certificates which conflict with actions taken with respect to
other Class A Certificates.
Definitive Certificates will be issued to Beneficial Owners of the
Book-Entry Certificates, or their nominees, rather than to DTC, only if (a) DTC
or the Depositor advises the Trustee in writing that DTC is no longer willing,
qualified or able to discharge properly its responsibilities as a nominee and
depository with respect to the Book-Entry Certificates and the Depositor or the
Trustee is unable to locate a qualified successor, (b) the Depositor, at its
sole option, elects to terminate a book-entry system through DTC or (c) DTC, at
the direction of the Beneficial Owners representing a majority of the
outstanding Percentage Interests of the Class A Certificates, advises the
Trustee in writing that the continuation of a book-entry system through DTC (or
a successor thereto) is no longer in the best interests of Beneficial Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all Beneficial
Owners of the occurrence of such event and the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Certificates and instructions for
re-registration, the Trustee will issue Definitive Certificates, and thereafter
the Trustee will recognize the holders of such Definitive Certificates as Owners
under the Pooling and Servicing Agreement.
Although DTC, Cedel and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Certificates among Participants of DTC,
Cedel and Euroclear, they are under no obligation to perform or continue to
perform such procedures and such procedures may be discontinued at any time.
Assignment of Rights
An Owner may pledge, encumber, hypothecate or assign all or any part of its
right to receive distributions under any Certificate, but such pledge,
encumbrance, hypothecation or assignment shall not constitute a transfer of
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an ownership interest sufficient to render the transferee an Owner of the Trust
without compliance with the provisions of the Pooling and Servicing Agreement
described above.
CREDIT ENHANCEMENT
"First Loss" Overcollateralization. The weighted average net Coupon Rate
for the home equity loans is generally expected to be higher than the weighted
average of the Pass-Through Rates on the Class A Certificates and Class B
Certificates, thus generating certain excess interest collections which, subject
to the priorities described in the next sentence, would be available for
distribution with respect to the Residual Interest. Such distributions are,
however, the most subordinate distributions which may be made by the Trust and
are thus available to fund losses and to make accelerated payments of principal
with respect to the related Class A and Class B Certificates, which results in
the Aggregate Certificate Principal Balance amortizing more rapidly than the
Pool Balance of the home equity loans, resulting in overcollateralization (i.e.,
the maintenance of the Overcollateralization Amount at the level of the Targeted
Overcollateralization Amount).
The Pooling and Servicing Agreement requires that, beginning with the fifth
Payment Date, the Overcollateralization Amount shall be initially increased to,
and thereafter maintained at, the Targeted Overcollateralization Amount.
Subordination. With respect to the Class A Certificates, the paydown rules
require that, on and after the fifth Payment Date and prior to the occurrence of
the Stepdown Date, the Pool Balance exceed the Class A Certificate Principal
Balance by an amount equal to 7.00% of the Original Pool Balance (i.e.,
$73,452,260.00 subject to the occurrence of a Delinquency Trigger Event or a
Cumulative Realized Loss Trigger Event, the 2.30% overcollateralization level is
allowed to reduce or "step down" on and after the Stepdown Date to 4.60% of the
outstanding Pool Balance). The 7.00% subordinate amount is represented by the
Class B Certificate Principal Balance (originally equal to approximately 4.70%
of the Original Pool Balance), together with the Targeted Overcollateralization
Amount. This will result in the application of the amounts that would otherwise
be distributed to the Owners of the Residual Interest being distributed as
principal on the Class A Certificates or Class B Certificates.
"Overcollateralization Amount" as of any Payment Date means the positive
difference, if any, between (x) the Pool Balance and (y) the Aggregate
Certificate Principal Balance (after taking into account all distributions of
principal on such Payment Date). The "Aggregate Certificate Principal Balance"
as of any time is the sum of the then-outstanding Class A Certificate Principal
Balance and the Class B Certificate Principal Balance.
"Stepdown Date" means the later to occur of (x) the Payment Date in January
15, 2002, and (y) the first Payment Date on which the Class A Principal Balance
is less than or equal to the Class A Optimal Balance definition for such Payment
Date.
"Targeted Overcollateralization Amount" as of any Payment Date means:
(i) on or prior to the fourth Payment Date, zero;
(ii) after the fourth Payment Date, but prior to the Stepdown Date:
(A) if no Cumulative Realized Loss Trigger Event is in effect,
2.30% of the Original Pool Balance (i.e., $24,134,314.00); or
(B) if a Cumulative Realized Loss Trigger Event is in effect, an
amount equal to 3.60% of the Original Pool Balance (i.e., ----
$37,775,448.00);
(iii) on and after the Stepdown Date:
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(A) if neither a Delinquency Trigger Event nor a Cumulative
Realized Loss Trigger Event is in effect, the greater of (I)
4.60% of the Pool Balance and (II) 0.50% of the Original
Pool Balance (i.e., $5,246,590.00); or
(B) if a Delinquency Trigger Event is in effect but a Cumulative
Realized Loss Trigger Event is not in effect, the Targeted
Overcollateralization Amount shall be equal to the Targeted
Overcollateralization Amount for the immediately preceding
Payment Date; or
(C) if a Cumulative Realized Loss Trigger Event is in effect
(whether or not a Delinquency Trigger Event is in effect),
an amount equal to 3.60% of the Original Pool Balance (i.e.,
$37,775,448.00).
Trigger Events. A "Cumulative Realized Loss Trigger Event" has occurred on
any date of determination if the amount of Cumulative Realized Losses expressed
as a percentage of the Original Pool Balance, on any date of determination
equals or exceeds the percentage for such date set below:
Date Percentage
January 1999 - December 2000 1.05%
January 2001 - December 2001 1.80%
January 2002 - December 2002 2.40%
January 2003 - December 2003 2.85%
January 2004 and thereafter 3.00%
A "Delinquency Trigger Event" will be deemed to have occurred with respect
to any Payment Date on or after the Stepdown Date if 85.25% of the Three-Month
Rolling Average 60+ Day Delinquency Rate equals or exceeds the Class A
Enhancement Percentage for such Payment Date.
The "Class A Enhancement Percentage" for any Payment Date is the percentage
equivalent of a fraction, the numerator of which is the excess of:
(x) the Pool Balance for such Payment Date over
(y) the Class A Certificate Principal Balance after taking into
account the payment of the Class A Principal Distribution Amount on
such Payment Date, assuming that no Delinquency Trigger Event is in
effect,
and the denominator of which is the Pool Balance with respect to such
Payment Date.
Application of Realized Losses. If a home equity loan becomes a Liquidated
Loan during a Remittance Period, the Net Liquidation Proceeds relating thereto
and allocated to principal may be less than the Loan Balance of such home equity
loan. The amount of such insufficiency is a "Realized Loss." Realized Losses
will, in effect, be absorbed first, by the Residual Interest (both through a
reduction in the amount of the distribution which would otherwise be made to the
Owners of the Residual Interest on the related Payment Date, as well as through
a potential reduction in the Overcollateralization Amount), second, by the
Owners of the Class B Certificates and third, with respect to the Class A
Certificates, to the extent that a Class A Overcollateralization Deficit would
occur, by a payment under the Certificate Insurance Policy.
To the extent that Realized Losses occur, such Realized Losses will reduce
the aggregate outstanding Pool Balance (i.e., a reduction in the collateral
balance will occur). Since the Overcollateralization Amount is the excess, if
any, of the Pool Balance over the Aggregate Certificate Principal Balance (after
taking into account distributions of principal on such Payment Date), Realized
Losses, to the extent experienced and not accounted for by a reduction in the
amount of the distribution which would otherwise be made to the Owners of the
Residual Interest on the related Payment Date, will in the first instance reduce
the Overcollateralization Amount.
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Subordination of Class B Certificates. The rights of the Owners of the
Class B Certificates and the Residual Interest to receive distributions with
respect to the home equity loans will be subordinated, to the extent described
herein, to such rights of the Owners of the Class A Certificates. This
subordination is intended to enhance the likelihood of regular receipt by the
Owners of the Class A Certificates of the full amount of their scheduled monthly
payment of interest and principal and to afford such Owners protection against
Realized Losses.
The protection afforded to the Owners of the Class A Certificates by means
of the subordination of the Class B Certificates will be accomplished by the
preferential right of the Owners of the Class A Certificates to receive, on each
Payment Date, full payment of the interest then due with respect to the Class A
Certificates prior to the payment of related Class B Certificate interest, and
the full payment of the principal then due with respect to the Class A
Certificates prior to the payment of related Class B Certificate principal. The
rights of the Residual Interest to receive distributions are subordinate to the
rights of the Class A Certificates and the Class B Certificates.
In addition, the rights of the Owners of the Residual Interest to receive
distributions will be subordinated, to the extent described herein, to such
rights of the Owners of the Class A Certificates and the Class B Certificates.
This subordination is intended to enhance the likelihood of regular receipt by
the Owners of the Class A Certificates and the Class B Certificates of the
amount of interest due them and principal available for distribution and to
afford such Owners with protection against Realized Losses.
If, on any Payment Date after taking into account all Realized Losses
during the prior Remittance Period and after taking into account the
distribution of principal with respect to the Certificates on such Payment Date,
the Aggregate Certificate Principal Balance exceeds the Pool Balance (i.e., if
the level of overcollateralization is negative), then the Certificate Principal
Balance of the Class B Certificates will be reduced (in effect, "written down")
such that the level of overcollateralization is zero, rather than negative. Such
a negative level of overcollateralization is a "Class B Applied Realized Loss
Amount," which will be applied as a reduction in the Certificate Principal
Balance of the Class B Certificates. The Pooling and Servicing Agreement does
not permit the "write down" of the Certificate Principal Balance of any Class A
Certificate.
Once the Class B Certificate Principal Balance has been "written down," the
amount of such write down will no longer bear interest, nor will such amount
thereafter be "reinstated" or "written up," although the amount of such write
down may, on future Payment Dates be paid to Owners of such Class B Certificates
as a Class B Realized Loss Amortization Amount. The source of funding of such
payments will be the amount, if any, of the Monthly Excess Cashflow Amount
remaining on such future Payment Dates after the payment of the Interest Carry
Forward Amount with respect to the Class B Certificates on such Payment Date.
Certificate Insurance Policy. MBIA Insurance Corporation, 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 obligates the Certificate Insurer to make
Insured Payments to the Trustee.
The Certificate Insurance Policy is noncancellable for any reason.
"Insured Payment" means, with respect to any Payment Date, without
duplication, (A) the excess, if any, of (i) the sum of the Current Interest of
the Class A Certificates and the then existing Class A Overcollateralization
Deficit, if any, over (ii) the Total Available Funds after taking into account
the portion of any Class A 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 the Class A Certificates, plus (C) on the
December 2029 Payment Date only, the excess, if any, of (i) the Class A
Certificate Principal Balance over (ii) the Class A Principal Distribution
Amount for such Payment Date.
"Class A Overcollateralization Deficit" for any Payment Date means the
excess of the Class A Certificate Principal Balance over the outstanding Pool
Balance, calculated after taking into account the reduction on such Payment Date
of the Class A Certificate Principal Balance resulting from all sources other
than the proceeds of any Insured Payment.
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"Total Available Funds", as of any Payment Date, means in the aggregate,
the Monthly Remittance Amount, less the sum of (i) the aggregate amount applied
to the payment of the Trustee Fee and the Premium Amount and (ii) any such
amount that cannot be distributed to the Owners of the Class A Certificates as a
result of proceedings under the United States Bankruptcy Code.
Insured Payments under the Certificate Insurance Policy do not cover
Realized Losses except to the extent that a Class A Overcollateralization
Deficit exists. Insured Payments do not cover the Servicer's failure to make
Delinquency Advances, except to the extent that a Class A Overcollateralization
Deficit would otherwise result therefrom. Nevertheless, the effect of the
Certificate Insurance Policy is to guarantee the timely payment of interest on
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 Class A 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 applicable
Owners of the Class A Certificates. See "Credit Enhancement--The Certificate
Insurance Policy" herein.
The "Certificate Principal Balance" of the Class A Certificates is the
Original Class A Certificate Principal Balance as reduced by all amounts
actually distributed to the Owners of the Class A Certificates as distributions
of principal on all prior Payment Dates.
The "Class B Certificate Principal Balance" of the Class B Certificates
means, as of any date of determination, the Original Class B Certificate
Principal Balance as reduced by the sum of (x) all amounts actually distributed
to the Owners of such Class B Certificates on all prior Payment Dates on account
of principal and (y) the aggregate, cumulative amount of Class B Applied
Realized Loss Amounts on all prior Payment Dates.
The "Class B Realized Loss Amortization Amount" with respect to the Class B
Certificates means, as of any Payment Date, the lesser of (x) the Class B Unpaid
Realized Loss Amount with respect to such Class as of such Payment Date and (y)
the amount of Available Funds remaining after funding priorities "First" through
"Seventh" under "Cashflow Priority -- Flow or Funds" above.
The "Class B Unpaid Realized Loss Amount" with respect to the Class B
Certificates means, as of any Payment Date, the excess of (x) the aggregate
cumulative amount of Class B Applied Realized Loss Amounts for all prior Payment
Dates over (y) the aggregate, cumulative amount of Class B Realized Loss
Amortization Amounts for all prior Payment Dates.
The Certificate Insurance Policy
The Certificate Insurer will issue the Certificate Insurance Policy to the
Trustee with respect to the Class A Certificates.
The Certificate Insurer, in consideration of the payment of the premium and
subject to the terms of the Certificate Guaranty Insurance Policy (the
"Policy"), thereby unconditionally and irrevocably guarantees to any Owner that
an amount equal to each full and complete Insured Payment will be received by
Manufacturer and Traders Trust Company, or its successor, as trustee for the
Owners (the "Trustee"), on behalf of the Owners from the Certificate Insurer,
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
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 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 Policy does not cover
shortfalls, if any, attributable to the liability of the Trust, any REMIC or the
Trustee for withholding taxes, if any (including interest and penalties in
respect of any such liability).
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The Certificate Insurer will pay any Insured Payment that is a Preference
Amount on the Business Day following receipt on a Business Day by the Fiscal
Agent (as described below) of (i) a certified copy of the order requiring the
return of a preference payment, (ii) an opinion of counsel satisfactory to the
Certificate Insurer that such order is final and not subject to appeal, (iii) an
assignment in such form as is reasonably required by the Certificate Insurer,
irrevocably assigning to the Certificate Insurer all rights and claims of the
Owner relating to or arising under the Certificates against the debtor which
made such preference payment or otherwise with respect to such preference
payment and (iv) appropriate instruments to effect the appointment of the
Certificate Insurer as agent for such Owner in any legal proceeding related to
such preference payment, such instruments being in a form satisfactory to the
Certificate Insurer, provided that if such documents are received after 12:00
noon New York City time on such Business Day, they will be deemed to be received
on the following Business Day. Such payments shall be disbursed to the receiver
or trustee in bankruptcy named in the final order of the court exercising
jurisdiction on behalf of the Owner and not to any Owner directly unless such
Owner has returned principal or interest paid on the Class A Certificates to
such receiver or trustee in bankruptcy, in which case such payment shall be
disbursed to such Owner.
The Certificate Insurer will pay any other amount payable under the Policy
no later than 12:00 noon New York City time on the later of the Payment Date on
which the related Insured Payment is due or the second Business Day following
receipt in New York, New York on a Business Day by State Street Bank and Trust
Company, N.A., as Fiscal Agent for the Certificate Insurer or any successor
fiscal agent appointed by the Certificate Insurer (the "Fiscal Agent") of a
Notice (as described below); provided that if such Notice is received after
12:00 noon New York City time on such Business Day, it will be deemed to be
received on the following Business Day. If any such Notice received by the
Fiscal Agent is not in proper form or is otherwise insufficient for the purpose
of making claim under the Policy it shall be deemed not to have been received by
the Fiscal Agent for purposes of this paragraph, and the Certificate Insurer or
the Fiscal Agent, as the case may be, shall promptly so advise the Trustee and
the Trustee may submit an amended Notice.
Insured Payments due under the Policy unless otherwise stated therein will
be disbursed by the Fiscal Agent to the Trustee on behalf of the Owners by wire
transfer of immediately available funds in the amount of the Insured Payment
less, in respect of Insured Payments related to Preference Amounts, any amount
held by the Trustee for the payment of such Insured Payment and legally
available therefor.
The Fiscal Agent is the agent of the Certificate Insurer only and the
Fiscal Agent shall in no event be liable to Owners for any acts of the Fiscal
Agent or any failure of the Certificate Insurer to deposit or cause to be
deposited, sufficient funds to make payments due under the Policy.
As used in the Policy, the following terms shall have the following
meanings:
"Agreement" means the Pooling and Servicing Agreement dated as of December
1, 1998, among ContiSecurities Asset Funding Corp., as Depositor, ContiMortgage
Corporation, as Servicer and a Seller, ContiWest Corporation, as a Seller and
Manufacturers and Traders Trust Company, as Trustee, without regard to any
amendment or supplement thereto unless such amendment or supplement has been
approved in writing by the Certificate Insurer.
"Business Day" means any day other than a Saturday, a Sunday or a day on
which the Certificate Insurer or banking institutions in New York City or in the
city in which the corporate trust office of the Trustee under the Agreement is
located are authorized or obligated by law or executive order to close.
"Insured Payment" means, with respect to any Payment Date, without
duplication, (A) the excess, if any, of (i) the sum of the Current Interest of
the Class A Certificates and the then existing Class A Overcollateralization
Deficit, if any, over (ii) the Total Available Funds after taking into account
the portion of any Class A 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 the Class A Certificates, plus (C) on the
December 2029 Payment Date only, the excess, if any, of (i) the Class A
Certificate Principal Balance over (ii) the Class A Principal Distribution
Amount for such Payment Date.
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"Notice" means the telephonic or telegraphic notice, promptly confirmed in
writing by telecopy substantially in the form of Exhibit A attached to the
Policy, the original of which is subsequently delivered by registered or
certified mail, from the Trustee specifying the Insured Payment which shall be
due and owing on the applicable Payment Date.
"Owner" means each Owner (as defined in the Agreement) who, on the
applicable Payment Date, is entitled under the terms of the applicable Class A
Certificates to payment thereunder.
"Preference Amount" means any amount previously distributed to an Owner on
the Class A Certificates that is recoverable and sought to be recovered as a
voidable preference by a trustee in bankruptcy pursuant to the United States
Bankruptcy Code (11 U.S.C.), as amended from time to time in accordance with a
final nonappealable order of a court having competent jurisdiction.
Capitalized terms used in the Policy and not otherwise defined in the
Policy shall have the respective meanings set forth in the Agreement as of the
date of execution of the Policy, without giving effect to any subsequent
amendment or modification to the Agreement unless such amendment or modification
has been approved in writing by the Certificate Insurer.
Any notice under the Policy or service of process on the Fiscal Agent may
be made at the address listed below for the Fiscal Agent or such other address
as the Certificate Insurer shall specify in writing to the Trustee.
The notice address of the Fiscal Agent is 15th Floor, 61 Broadway, New
York, New York 10006 Attention: Municipal Registrar and Paying Agency or such
other address as the Fiscal Agent shall specify to the Trustee in writing.
The Policy is being issued under and pursuant to, and shall be construed
under, the laws of the State of New York, without giving effect to the conflict
of laws principles thereof.
The insurance provided by 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 not cancelable for any reason. The premium on the Policy is
not refundable for any reason including payment, or provision being made for
payment, prior to the maturity of the Class A Certificates.
THE CERTIFICATE INSURER
The following information has been supplied by the Certificate Insurer for
inclusion in this Prospectus Supplement. No representation is made by the
Underwriters, the Sellers, the Servicer, the Depositor or any of their
affiliates as to the accuracy or completeness of such information.
The Certificate Insurer is the principal operating subsidiary of MBIA Inc.,
a New York Stock Exchange listed company ("MBIA Inc."). MBIA Inc. is not
obligated to pay the debts of or claims against the Certificate Insurer. The
Certificate Insurer is domiciled in the State of New York and licensed to do
business in and is subject to regulation under the laws of all 50 states, the
District of Columbia, the Commonwealth of Puerto Rico, the Commonwealth of the
Northern Mariana Islands, the Virgin Islands of the United States and the
Territory of Guam. The Certificate Insurer has two European branches, one in the
Republic of France and the other in the Kingdom of Spain. New York has laws
prescribing minimum capital requirements, limiting classes and concentrations of
investments and requiring the approval of policy rates and forms. State laws
also regulate the amount of both the aggregate and individual risks that may be
insured, the payment of dividends by the Certificate Insurer, changes in control
and transactions among affiliates. Additionally, the Certificate Insurer is
required to maintain contingency reserves on its liabilities in certain amounts
and for certain periods of time.
Effective February 17, 1998, MBIA Inc. acquired all of the outstanding
stock of Capital Markets Assurance Corporation ("CMAC") through a merger with
its parent CapMAC Holdings Inc. Pursuant to a reinsurance agreement, CMAC has
ceded all of its net insured risks (including any amounts due but unpaid from
third party
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reinsurers), as well as its unearned premiums and contingency reserves, to the
Certificate Insurer. MBIA Inc. is not obligated to pay the debts of or claims
against CMAC.
The consolidated financial statements of the Certificate Insurer, a
wholly-owned subsidiary of MBIA Inc., and its subsidiaries as of December 31,
1997 and December 31, 1996 and for each of the three years in the period ended
December 31, 1997, prepared in accordance with generally accepted accounting
principles, included in the Annual Report on Form 10-K of MBIA Inc. for the year
ended December 31, 1997 and the consolidated financial statements of the
Certificate Insurer and its subsidiaries as of September 30, 1998 and for the
nine-month periods ended September 30, 1998 and September 30, 1997 included in
the Quarterly Report on Form 10-Q of MBIA Inc. for the period ended September
30, 1998 are hereby incorporated by reference into this Prospectus Supplement
and shall be deemed to be a part hereof. Any statement contained in a document
incorporated by reference herein shall be modified or superseded for purposes of
this Prospectus Supplement to the extent that a statement contained herein or in
any other subsequently filed document which also is 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 Supplement.
All financial statements of the Certificate Insurer and its subsidiaries
included in documents filed by MBIA Inc. pursuant to Section 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934, as amended, subsequent to the date
of this Prospectus Supplement and prior to the termination of the offering of
the Class A Certificates shall be deemed to be incorporated by reference into
this Prospectus Supplement and to be a part hereof from the respective dates of
filing such documents.
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The tables below present selected financial information of the Certificate
Insurer determined in accordance with statutory accounting practices prescribed
or permitted by insurance regulatory authorities ("SAP") and generally accepted
accounting principles ("GAAP"):
SAP
----------------------------------------------------
December 31, 1997 September 30, 1998
----------------- ------------------
(Audited) (unaudited)
(In millions)
Admitted Assets............. $5,256 $6,318
Liabilities................. 3,496 4,114
Capital and Surplus......... 1,760 2,204
GAAP
----------------------------------------------------
December 31, 1997 September 30, 1998
----------------- ------------------
(Audited) (unaudited)
(In millions)
Assets...................... $5,988 $7,439
Liabilities................. 2,624 3,268
Shareholder's Equity........ 3,364 4,171
Copies of the financial statements of the Certificate Insurer incorporated
by reference herein and copies of the Certificate Insurer's 1997 year-end
audited financial statements prepared in accordance with statutory accounting
practices are available, without charge, from the Certificate Insurer. The
address of the Certificate Insurer is 113 King Street, Armonk, New York 10504.
The telephone number of the Certificate Insurer is (914) 273-4545.
The Certificate Insurer does not accept any responsibility for the accuracy
or completeness of this Prospectus Supplement or any information or disclosure
contained herein, or omitted herefrom, other than with respect to the accuracy
of the information regarding the Certificate Insurance Policy and Certificate
Insurer set forth under the headings "CREDIT ENHANCEMENT - The Certificate
Insurance Policy" and "THE CERTIFICATE INSURER." Additionally, the Certificate
Insurer makes no representation regarding the Class A Certificates or the
advisability of investing in the Class A Certificates.
Moody's Investors Service, Inc. rates the financial strength of the
Certificate Insurer "Aaa."
Standard & Poor's Ratings Services, a division of The McGraw-Hill
Companies, Inc. rates the financial strength of the Certificate Insurer "AAA."
Fitch IBCA, Inc. (formerly known as Fitch Investors Service, L.P.) rates
the financial strength of the Certificate Insurer "AAA."
Each rating of the Certificate Insurer should be evaluated independently.
The ratings reflect the respective rating agency's current assessment of the
creditworthiness of the Certificate Insurer and its ability to pay claims on its
policies of insurance. Any further explanation as to the significance of the
above ratings may be obtained only from the applicable rating agency.
The above ratings are not recommendations to buy, sell or hold the Class A
Certificates, and such ratings may be subject to revision or withdrawal at any
time by the rating agencies. Any downward revision or withdrawal
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of any of the above ratings may have an adverse effect on the market price of
the Class A Certificates. The Certificate Insurer does not guaranty the market
price of the Class A Certificates nor does it guaranty that the ratings on the
Class A Certificates will not be revised or withdrawn.
YEAR 2000 READINESS DISCLOSURE
An area of potential risk to the Certificate Insurer's financial guarantee
business would be the inability of an issuer or its trustee or paying agent to
make payments on an Insurer insured transaction because of their failure to be
Year 2000 ready. To mitigate this risk, the Certificate Insurer has been
surveying all trustees, all paying agents and selected high volume issuers to
determine their state of readiness. While the survey is not complete, the
results to-date are that all respondents are either ready or planning to be
ready by late 1999. If the Certificate Insurer is asked to pay in those
situations where the issuer's system fails, it will do so and would expect to
recover any such payment in a fairly short time period. It is not possible at
this time to evaluate the extent of such payments. The Certificate Insurer
believes that it has adequate sources of liquidity to cover these payments.
THE POOLING AND SERVICING AGREEMENT
In addition to the provisions of the Pooling and Servicing Agreement
summarized elsewhere in the Prospectus and this Prospectus Supplement, there is
set forth below a summary of certain other provisions of the Pooling and
Servicing Agreement.
Covenant of the Sellers to Take Certain Actions with Respect to the Home Equity
Loans in Certain Situations
Pursuant to the Pooling and Servicing Agreement, upon the discovery by the
Depositor, either Seller, the Servicer, any Sub-Servicer, any Owner, the
Certificate Insurer 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 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 either Seller's discovery, its receipt of
notice of breach from any of the other parties or the Certificate Insurer 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, such Seller will be required promptly to cure such breach in all
material respects or, on the second Monthly Remittance Date next succeeding such
discovery, receipt of notice or such time, such Seller shall (i) substitute in
lieu of each home equity loan which has given rise to the requirement for action
by the Seller a Qualified Replacement Mortgage (as such term is defined in the
Pooling and Servicing Agreement) and deliver the Substitution Amount to the
Trustee on behalf of the Trust as part of the Monthly Remittance Amount remitted
by the Servicer on such Monthly Remittance Date or (ii) purchase such home
equity loan from the Trust at a purchase price equal to the Loan Purchase Price
(as defined below) thereof. Notwithstanding any provision of the Pooling and
Servicing Agreement to the contrary, with respect to any home equity loan which
is not in default or as to which no default is imminent, no such repurchase or
substitution will be made unless such Seller obtains for the Trustee and the
Certificate Insurer an opinion of counsel experienced in federal income tax
matters and acceptable to the Trustee and 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 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, each
of the Sellers has agreed 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 Sellers so to substitute or purchase any
home equity loan as to which such a statement set forth below is untrue in any
material
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respect and has not been remedied constitutes the sole remedy respecting a
discovery of any such statement which is untrue in any material respect
available to the Owners and the Trustee.
"Loan Purchase Price" means the outstanding Loan Balance of the related
home equity loan as of the date of purchase (assuming that the Monthly
Remittance Amount remitted by the Servicer on such Monthly Remittance Date has
already been remitted), plus one month's interest at the Coupon Rate together
with the aggregate amount of all unreimbursed Delinquency Advances and Servicing
Advances theretofore made with respect to such home equity loan, all Delinquency
Advances and Servicing Advances which the Servicer has theretofore failed to
remit with respect to such home equity loan and all reimbursed Delinquency
Advances to the extent that reimbursement is not made from the Mortgagor or from
Liquidation Proceeds from the respective home equity loan.
Assignment of Home Equity Loans
Pursuant to the Pooling and Servicing Agreement, each Seller on the Closing
Date will transfer, assign, set over and otherwise convey without recourse to
the Depositor and the Depositor will transfer, assign, set over and otherwise
convey without recourse to the Trustee in trust all of its respective right,
title and interest in and to each home equity loan and all its respective right,
title and interest in and to principal and interest due on each such home equity
loan after the Cut-Off Date; provided, however, that each Seller will reserve
and retain all of its right, title and interest in and to principal (including
prepayments) and interest due on each home equity loan on or prior to the
Cut-Off Date. Purely as a protective measure and not to be construed as contrary
to the parties' intent that the transfer on the Closing Date is a sale, each
Seller has also been deemed to have granted to the Depositor and the Depositor
has also been deemed to have granted to the Trustee a security interest in the
Trust Estate in the event that the transfer of the Trust Estate is deemed to be
a loan and not a sale.
In connection with the transfer and assignment of the home equity loans on
the Closing Date, each Seller will be required to:
(i) deliver without recourse to the Trustee (A) the original Notes or
certified copies thereof, endorsed in blank or to the order of the Trustee,
(B) the original title insurance policy or a copy certified by the issuer
of the title insurance policy, or the attorney's opinion of title, (C)
originals or certified copies of all intervening assignments, showing a
complete chain of title from origination to the Trustee, if any, including
warehousing assignments, with evidence of recording thereon, (D) originals
of all assumption and modification agreements, if any and (E) either: (1)
the original Mortgage, with evidence of recording thereon (if such original
Mortgage has been returned to such Seller from the applicable recording
office) or (2) a copy of the Mortgage certified by the public recording
office in those instances where the original recorded Mortgage has been
lost;
(ii) cause, within 60 days following the Closing Date, assignments of
the Mortgages to "Manufacturers and Traders Trust Company, as Trustee of
ContiMortgage Home Equity Loan Trust 1998-4 under the Pooling and Servicing
Agreement dated as of December 1, 1998" to be submitted for recording in
the appropriate jurisdictions; provided, however, that a Seller shall not
be required to prepare any assignment of Mortgage for a Mortgage with
respect to which the original recording information is lacking or to record
an assignment of a Mortgage if such Seller furnishes to the Trustee and the
Certificate Insurer, on or before the Closing Date, at its expense an
opinion of counsel with respect to the relevant jurisdiction that such
recording is not required to perfect the Trustee's interests in the related
Mortgages Loans (in form satisfactory to the Rating Agencies and the
Certificate Insurer ); and
(iii) deliver the title insurance policy, the original Mortgages and
such recorded assignments, together with originals or duly certified copies
of any and all prior assignments, to the Trustee within 15 days of receipt
thereof by the related Seller (but in any event, with respect to any
Mortgage as to which original recording information has been made available
to such Seller within one year after the Closing Date).
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The Trustee will agree, for the benefit of the Owners, to review each File
within 45 days after the Closing Date (or the date of receipt of any documents
delivered to the Trustee after such date) to ascertain that all required
documents (or certified copies of documents) have been executed and received.
If the Trustee during such 45-day period finds any document constituting a
part of a File which is not properly executed, has not been received, is
unrelated to the home equity loans or that any home equity loan does not conform
in a material respect to the description thereof as set forth in the Schedule of
home equity loans, the Trustee will be required to promptly notify the
Depositor, the appropriate Seller and the Certificate Insurer . Each Seller will
agree in the Pooling and Servicing Agreement to use reasonable efforts to remedy
a material defect in a document constituting part of a File of which it is so
notified by the Trustee. If, however, within 60 days after the Trustee's notice
to it respecting such defect the Seller shall not have remedied the defect and
the defect materially and adversely affects the interest in the related home
equity loan of the Owners or the Certificate Insurer, such 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 Amount 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 Amount remitted by the
Servicer on such Monthly Remittance Date. However, such substitution or purchase
must occur within 90 days of the Trustee's notice of the defect if the defect
would prevent the home equity loan from being a Qualified Mortgage, as such term
is defined in the Pooling and Servicing Agreement, and no substitution or
purchase of a home equity loan that is not in default or for which no default is
imminent shall be made unless such Seller obtains for the Trustee and
Certificate Insurer a REMIC Opinion, addressed to and acceptable to the Trustee
and Certificate Insurer .
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 the Certificate Insurer no less frequently than monthly, updated
certifications indicating the then current status of exceptions, until all such
exceptions have been eliminated.
Servicing and Sub-Servicing
The Servicer is required to service the home equity loans in accordance
with the Pooling and Servicing Agreement and the servicing standards set forth
in FannieMae's Servicing Guide (the "FannieMae Guide"); provided, however, that
to the extent such standards, such obligations or the FannieMae Guide is amended
by FannieMae 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.
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The Servicer is required to deposit to the Principal and Interest Account,
within one business day following receipt, all principal collections on the home
equity loans received, and interest collections on the home equity loans accrued
after the Cut-Off Date, including any Prepayments, the proceeds of any
liquidation of a home equity loan net of expenses and unreimbursed Delinquency
Advances ("Net Liquidation Proceeds"), any income from REO Properties and
Delinquency Advances, but net of (i) the Servicing Fee with respect to each home
equity loan and other servicing compensation, (ii) principal collected and
interest accrued on any home equity loan prior to the Cut-Off Date, (iii) Net
Liquidation Proceeds to the extent that such Net Liquidation Proceeds exceed the
sum of (I) the Loan Balance of the related home equity loan, plus (II) accrued
and unpaid interest on such home equity loan (net of the Servicing Fee) to the
date of such liquidation, (iv) reimbursements for Delinquency Advances, and (v)
reimbursement for amounts deposited in the Principal and Interest Account
representing payments of principal and/or interest on a Note by a Mortgagor
which are subsequently returned by a depository institution as unpaid (all such
net amounts being referred to herein as the "Daily Collections").
The Servicer may make withdrawals for its own account from the amounts on
deposit in the Principal and Interest Account, in the following order and only
for the following purposes:
(i) to withdraw interest paid with respect to any home equity loans
that had accrued for periods on or prior to the Cut-Off Date;
(ii) to withdraw investment earnings on amounts on deposit in the
Principal and Interest Account;
(iii) to reimburse itself for unrecovered Delinquency Advances and
Servicing Advances;
(iv) to withdraw amounts that have been deposited to the Principal and
Interest Account in error; and
(v) to clear and terminate the Principal and Interest Account
following the termination of the Trust.
The Servicer will remit to the Trustee for deposit in the Certificate
Account the Daily Collections allocable to a Remittance Period not later than
the related Monthly Remittance Date, and Loan Purchase Prices and Substitution
Amounts two Business Days following the related purchase or substitution, as the
case may be.
If the amount on deposit in the Certificate Account as of any Monthly
Remittance Date is less than the sum of (I) the Interest Remittance Amount and
(II) the Principal Remittance Amount on such Monthly Remittance Date, the
Servicer is required to remit to the Trustee for deposit to the Certificate
Account a sufficient amount of its own funds to make the total amount remitted
to the Trustee equal to such sum. Such amounts of the Servicer's own funds so
deposited are "Delinquency Advances," including, but not limited to, any amount
advanced due to the invocation by a Mortgagor of the relief provisions provided
by the Soldiers' and Sailors' Civil Relief Act of 1940, as amended. The Servicer
may reimburse itself for any Delinquency Advances paid from the Servicer's own
funds, from collections on the home equity loans or from Monthly Excess Cashflow
Amount as specified in the Pooling and Servicing Agreement.
Notwithstanding the foregoing, if the Servicer determines that the
aggregate unreimbursed Delinquency Advances exceed the aggregate remaining
scheduled payments due from the Mortgagors 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
Residual Interest; provided, further, that the Servicer shall be entitled to
recover any unreimbursed Delinquency Advances from the Liquidation Proceeds for
the related home equity loans.
"Interest Remittance Amount" means, as of any Monthly Remittance Date, the
sum, without duplication, of (i) all interest due during the related Remittance
Period on the home equity loans (less the related Servicing Fee with
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respect to the home equity loans), (ii) all Compensating Interest paid by the
Servicer on such Monthly Remittance Date and (iii) the portion of any
Substitution Amount, Loan Purchase Price or Net Liquidation Proceeds relating to
interest on the home equity loans.
"Principal Remittance Amount" means, as of any Monthly Remittance Date, the
sum, without duplication, of (i) the principal actually collected by the
Servicer on the home equity loans during the related Remittance Period, (ii) the
Loan Balance of each home equity loan that was repurchased from the Trust during
the related Remittance Period, (iii) any Substitution Amount relating to
principal delivered by the Seller in connection with a substitution of a home
equity loan during the related Remittance Period, (iv) any Insurance Proceeds
actually collected by the Servicer during the related Remittance Period with
respect to a home equity loan (to the extent such Insurance Proceeds relate to
principal) and (v) all Net Liquidation Proceeds actually collected by the
Servicer during the related Remittance Period (to the extent such Net
Liquidation Proceeds relate to principal).
The "Remittance Period" as of any Monthly Remittance Date is the calendar
month immediately preceding the calendar month (or, with respect to the first
Remittance Period, the period from the Cut-Off Date to the end of the calendar
month) in which the Monthly Remittance Date occurs. A "Monthly Remittance Date"
is any date on which the Interest Remittance Amount and the Principal Remittance
Amount (together, the "Monthly Remittance Amount") on deposit in the Principal
and Interest Account are remitted to the Certificate Account, which is the 10th
day of each month or, if such day is not a Business Day, the next succeeding
Business Day, commencing in the month following the month in which the Closing
Date occurs.
The Servicer will be required to pay all "out of pocket" costs and expenses
incurred in the performance of its servicing obligations, including, but not
limited to, (i) expenditures in connection with a foreclosed home equity loan
prior to the liquidation thereof, including, without limitation, expenditures
for real estate property taxes, hazard insurance premiums, property restoration
or preservation ("Preservation Expenses"), (ii) the cost of any enforcement or
judicial proceedings, including foreclosures and (iii) the cost of the
management and liquidation of Property acquired in satisfaction of the related
Mortgage. Such costs will constitute "Servicing Advances." The Servicer may
reimburse itself for a Servicing Advance (x) to the extent permitted by the home
equity loans or, if not theretofore recovered from the Mortgagor on whose behalf
such Servicing Advance was made, from Liquidation Proceeds realized upon the
liquidation of the related home equity loan or (y) from Monthly Excess Cashflow
Amount as specified in the Pooling and Servicing Agreement. Except as provided
above, in no case may the Servicer recover Servicing Advances from the principal
and interest payments on any other home equity loan.
A full month's interest at the related Coupon Rate less the Servicing Fee
will be due to the Trust on the outstanding Loan Balance of each home equity
loan as of the beginning of each Remittance Period. If a Prepayment of a home
equity loan occurs during any calendar month, any difference between the
interest collected from the Mortgagor in connection with such prepayment and the
full month's interest at the Coupon Rate less the Servicing Fee ("Compensating
Interest") plus any Date-of-Payment interest shortfalls (but not in excess of
the aggregate Servicing Fee for the related Accrual Period), will be required to
be deposited to the Principal and Interest Account on the Monthly Remittance
Date by the Servicer and shall be included in the Monthly Remittance Amount to
be made available to the Trustee on the next succeeding Monthly Remittance Date.
The Servicer will have the right and the option, but not the obligation, to
purchase for its own account any home equity loan which becomes delinquent, in
whole or in part, as to four consecutive monthly installments or any home equity
loan as to which enforcement proceedings have been brought by the Servicer;
provided, however, that the Servicer may not purchase any such home equity loan
unless the Servicer has delivered to the Trustee and the Certificate Insurer a
REMIC Opinion, addressed to and acceptable to the Trustee and the Certificate
Insurer . 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 before the
start of the twelfth month of the third taxable year in which such ownership was
effected, 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.
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If so required by the terms of any home equity loan, the Servicer may 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 of Properties and (iii) removal, demolition or
division of Properties. No application for approval may be considered by the
Servicer unless: (i) the provisions of the related Note and Mortgage have been
complied with; (ii) the loan-to-value ratio and debt-to-income ratio after any
release does not exceed the maximum loan-to-value ratio and debt-to-income ratio
established in accordance with the underwriting standards set forth under the
caption "The Sellers and the Servicer--Credit and Underwriting Guidelines"
herein to be applicable to such home equity loan; and (iii) the lien priority of
the related Mortgage is not affected.
The Servicer will be permitted under the Pooling and Servicing Agreement to
enter into Sub-Servicing Agreements for any servicing and administration of home
equity loans with any institution which (i) is a FHLMC or FannieMae approved
Seller-Servicer for second mortgage loans and has equity of at least $5,000,000
or (ii) is an affiliate of the Servicer.
Notwithstanding any Sub-Servicing Agreement, the Servicer will not be
relieved of its obligations under the Pooling and Servicing Agreement and the
Servicer will be obligated to the same extent and under the same terms and
conditions as if it alone were servicing and administering the home equity
loans. The Servicer shall be entitled to enter into any agreement with a
Sub-Servicer for indemnification of the Servicer by such Sub-Servicer and
nothing contained in such Sub-Servicing Agreement shall be deemed to limit or
modify the Pooling and Servicing Agreement.
The Servicer (except Manufacturers and Traders Trust Company if it is
required to succeed the Servicer under the Pooling and Servicing Agreement)
agrees to indemnify and hold the Trustee, 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 Residual Interest 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 2000, an officers' certificate stating, as to each signer thereof,
that (i) a review of the activities of the Servicer during such preceding
calendar year and of performance under the Pooling and Servicing Agreement has
been made under such officers' supervision, and (ii) to the best of such
officers' knowledge, based on such review, the Servicer has fulfilled all its
obligations under the Pooling and Servicing Agreement for such year, or, if
there has been a default in the fulfillment of all such obligation, specifying
each such default known to such officers and the nature and status thereof
including the steps being taken by the Servicer to remedy such default; and (2)
on or before June 30 of any year commencing in 2000, a letter or letters of a
firm of independent, nationally recognized certified public accountants as of
the date of the Servicer's fiscal audit stating that such firm has examined the
Servicer's overall servicing operations in accordance with the requirements of
the Uniform Single Attestation Program for Mortgage Bankers, and stating such
firm's conclusions relating thereto.
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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 if losses exceed certain levels set forth in the
Pooling and Servicing Agreement (the "Servicer Termination Event") or if certain
financial conditions of the Servicer and its parent and its affiliates are not
satisfied.
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 by the Servicer at its expense (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).
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 FannieMae
("FannieMae") having equity of not less than $5,000,000, and acceptable to the
Owners of Residual Interest and the Certificate Insurer, as the successor to
the Servicer in the assumption of all or any part of the responsibilities,
duties or liabilities of the Servicer.
No removal or resignation of the Servicer will become effective until the
Trustee or a successor servicer shall have assumed the Servicer's
responsibilities and obligations in accordance with the Pooling and Servicing
Agreement.
The Trustee
Manufacturers and Traders Trust Company, a New York banking corporation,
having its principal corporate trust office at One M&T Plaza, Buffalo, New York,
14203 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, each Rating Agency and the Certificate Insurer :
(i) the amount of the distribution with respect to the each Class of
Certificates (based on a Certificate in the original principal amount of
$1,000);
(ii) the amount of such distribution allocable to principal on the
home equity loans, separately identifying the aggregate amount of any
Prepayments or other recoveries of principal included therein;
(iii) the amount of such distribution allocable to interest on the
home equity loans (based on a Certificate in the original principal amount
of $1,000);
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(iv) the Interest Carry Forward Amount for each Class;
(v) the principal amount of each Class of the Certificates (based on a
Certificate in the original principal amount of $1,000) which will be
outstanding after giving effect to any payment of principal on such Payment
Date;
(vi) the Pool Balance as of the last day of the related Remittance
Period;
(vii) based upon information furnished by the Seller such information
as may be required by Section 6049(d)(7)(C) of the Code and the regulations
promulgated thereunder to assist the Owners in computing their market
discount;
(viii) the total of any Substitution Amounts or Loan Purchase Price
amounts included in such distribution;
(ix) the weighted average Coupon Rate of the home equity loans;
(x) the weighted average Coupon Rate;
(xi) the weighted average remaining term;
(xii) whether a Delinquency Trigger Event, Cumulative Realized Loss
Trigger Event and/or the Servicer Termination Event has occurred;
(xiii) the Targeted Overcollateralization Amount, Class A Enhancement
Percentage, Overcollateralization Amount, Class A Optimal Balance and Class
B Optimal Balance;
(xiv) the amount of any Class B Applied Realized Loss Amount, Class B
Realized Loss Amortization Amount and Class B Unpaid Realized Loss Amount
for the Class B Certificates as of the close of such Payment Date;
(xv) the Class B Available Funds Cap for such Payment Date, if any
applies;
(xvi) the amount of any Insured Payment included in the distribution
to Owners of Class A Certificates; and
(xvii) any payment to the Certificate Insurer, as reimbursement for
prior Insured Payments paid on such Payment Date and any payment to the
Certificate Insurer, as reimbursement for prior Insured Payments remaining
unpaid;
(xviii) such other information as the Certificate Insurer may
reasonably request with respect to home equity loans that are Delinquent;
and
(xix) the largest Loan Balance of any home equity loan then
outstanding.
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 the Depositor, the Certificate Insurer, each Owner, the
Underwriters and the Rating Agencies, together with the information described
above, the following information prepared by the Servicer and furnished to the
Trustee for such purpose;
(a) the number and aggregate principal balances of all home equity
loans that are: (i) 30-59 days delinquent, (ii) 60-89 days delinquent and
(iii) 90 or more days delinquent, as of the close of business
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on the last business day of the calendar month next preceding the Payment
Date and the aggregate number and Pool Balance of such Loans;
(b) the status and the number and dollar amounts of all home equity
loans, that are 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 for all home equity loans, 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 for all home equity
loans, 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 for all home equity loans, as of the
close of business on the last business day of the calendar month next
preceding the Payment Date;
(f) the amount of cumulative Realized Losses for all home equity
loans;
(g) the aggregate Loan Balance of 60+ Day Delinquent Loan for all home
equity loans;
(h) the Three-Month Rolling Average 60+ Day Delinquency Rate for all
home equity loans and whether a Delinquency Trigger Event or a Cumulative
Realized Loss Trigger Event is in effect; and
(i) the Loan Balance of Optional Buyout Loans.
Removal of Trustee for Cause
The Trustee may be removed upon the occurrence of any one of the following
events (whatever the reason for such event and whether it shall be voluntary or
involuntary or be effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body) on the part of the Trustee: (1) failure to
make distributions of available amounts; (2) certain breaches of covenants and
representations by the Trustee; (3) certain acts of bankruptcy or insolvency on
the part of the Trustee; and (4) failure to meet the standards of Trustee
eligibility as set forth in the Pooling and Servicing Agreement.
If any such event occurs and is continuing, then and in every such case the
Certificate Insurer or with the prior written consent of the Certificate Insurer
(such consent not to be withheld unreasonably) (x) the Sellers or (y) the Owners
of a majority of the Percentage Interests represented by the Certificates or, if
there are no Certificates then Outstanding, by a majority of the Percentage
Interests represented by the Residual Interest, may appoint a successor trustee.
Governing Law
The Pooling and Servicing Agreement and each Certificate will be construed
in accordance with and governed by the laws of the State of New York applicable
to agreements made and to be performed therein.
Amendments
The Trustee, the Depositor, the Sellers and the Servicer 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 and the Certificate Insurer 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 in form
and substance acceptable to the Certificate Insurer, removing the restriction
against the transfer of any portion
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of the Residual Interest to a Disqualified Organization (as such term is defined
in the Code), (ii) complying with the requirements of the Code including any
amendments necessary to maintain REMIC status, (iii) curing any ambiguity, (iv)
correcting or supplementing any provisions therein which are inconsistent with
any other provisions therein or (v) for any other purpose; provided that in the
case of clause (v), such amendment shall not adversely affect in any material
respect any Owner. Any such amendment shall be deemed not to adversely affect in
any material respect any Owner if there is delivered to the Trustee written
notification from each Rating Agency that such amendment will not cause such
Rating Agency to reduce its then current rating assigned to any Class of the
Class A Certificates without regard to the Certificate Insurance Policies.
Notwithstanding anything to the contrary, no such amendment shall (a) change in
any manner the amount of, or delay the timing of, payments which are required to
be distributed to any Owner without the consent of the Owner of such Certificate
or (b) change the percentages of Percentage Interest which are required to
consent to any such amendments, without the consent of the Owners of all
Certificates of the Class or Classes affected then outstanding.
Termination of the Trust
The Pooling and Servicing Agreement provides that the Trust will terminate
upon the payment to the Owners of all Certificates from amounts other than those
available under the Certificate Insurance Policies 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 Trustee and the
Certificate Insurer to the effect that such liquidation constitutes a Qualified
Liquidation.
Optional Termination
By Owners of the Residual Interest. At their option, the Owners of a
majority of the Percentage Interest represented by the Residual Interest may, on
any Monthly Remittance Date in or after the month in which the Pool Balance of
the home equity loans has declined to less than 10% of the Original Pool Balance
(the "Clean-Up Call Date"), purchase from the Trust all (but not fewer than all)
remaining home equity loans, in whole only, and other property acquired by
foreclosure, deed in lieu of foreclosure, or otherwise then constituting the
Trust Estate (i) on terms agreed upon between the Certificate Insurer and such
Owners of the Residual Interest, or (ii) in the absence of such agreement at a
price equal to 100% of the Pool 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 plus any amounts due and owing to the Certificate Insurer under
the Insurance Agreement; provided that any such purchase price pursuant to
clauses (i) or (ii) shall be sufficient to pay the outstanding Certificate
Principal Balances of and accrued and unpaid interest on, all Classes of
outstanding Class A and Class B Certificates plus any amounts due and owing to
MBIA under the Insurance Agreement. Accordingly, the Class B Certificateholders
would not recover Class B Unpaid Applied Realized Losses, if any.
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 Owners of a majority in Percentage
Interests represented by the 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.
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<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion of certain of the material anticipated federal
income tax consequences of the purchase, ownership and disposition of the
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
Class A Certificates.
REMIC Election
The Trust Estate created by the Pooling and Servicing Agreement will
consist of a segregated asset pool with respect to which one or more REMIC
elections will be made for federal income tax purposes. The Class A and Class B
Certificates will be designated as regular interests in a REMIC. See "Formation
of the Trust and Trust Property" herein.
Qualification as a REMIC requires ongoing compliance with certain
conditions. Dewey Ballantine LLP, special tax counsel, is of the opinion that,
for federal income tax purposes, assuming (i) the appropriate REMIC election is
timely made and (ii) compliance with the Pooling and Servicing Agreement, the
REMIC formed pursuant to the Pooling and Servicing Agreement will be treated as
a REMIC and the Certificates will be treated as "regular interests" in a 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 Certificates that otherwise
report income under a cash method of accounting will be required to report
income with respect to such Certificates under an accrual method. See "Certain
Federal Income Tax Consequences" in the Prospectus for a discussion of the
taxation of holders of REMIC regular interests.
It is not anticipated that the Certificates will be issued with original
issue discount. See "Certain Federal Income Tax Consequences - Taxation of
Regular Certificates - Original Issue Discount" in the Prospectus. The
prepayment assumption for calculating original issue discount (if any) is 130%
of the Prepayment Assumption. See "Prepayment and Yield Considerations --
Projected Prepayment and Yield for Class A Certificates" herein.
In general, as a result of the qualification of the Certificates as regular
interests in a REMIC, the 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
and Class B 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
The Employee Retirement Income Security Act of 1974, as amended ("ERISA")
and the Code impose certain restrictions on employee benefit plans subject to
ERISA and other plans or arrangements subject to Section 4975 of the Code
("Plans") and on persons who are parties in interest or disqualified persons
("parties in interest") with respect to such Plans. Certain employee benefit
plans, such as governmental plans and church plans (if no election has been made
under section 410(d) of the Code), are not subject to the restrictions of ERISA,
and assets of such plans may be invested in the Certificates without regard to
the ERISA considerations described below, subject to other applicable federal
and state law. However, any such governmental or church plan which is qualified
under section 401(a) of the Code and exempt from taxation under section 501(a)
of the Code is subject to the prohibited transaction rules set forth in section
503 of the Code.
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<PAGE>
Investments by Plans are subject to ERISA's general fiduciary requirements,
including the requirement of investment prudence and diversification and the
requirement that a Plan's investments be made in accordance with the documents
governing the Plan.
Section 406 of ERISA prohibits parties in interest with respect to a Plan
from engaging in certain transactions ("prohibited transactions") involving a
Plan and its assets unless a statutory or administrative exemption applies to
the transaction. Section 4975 of the Code imposes certain excise taxes (or, in
some cases, a civil penalty may be assessed pursuant to section 502(i) of ERISA)
on parties in interest which engage in non-exempt prohibited transactions.
The United States Department of Labor ("DOL") has issued a final regulation
(29 C.F.R. Section 2510.3-101) containing rules for determining what constitutes
the assets of a Plan. This regulation provides that, as a general rule, the
underlying assets and properties of corporations, partnerships, trusts and
certain other entities in which a Plan makes an "equity investment" will be
deemed for purposes of ERISA to be assets of the Plan unless certain exceptions
apply.
Under the terms of the regulation, the Trust may be deemed to hold plan
assets by reason of a Plan's investment in a Certificate; such plan assets would
include an undivided interest in the home equity loans and any other assets held
by the Trust. In such an event, persons providing services with respect to the
assets of the Trust, may be parties in interest, subject to the fiduciary
responsibility provisions of Title I of ERISA, including the prohibited
transaction provisions of Section 406 of ERISA (and of Section 4975 of the
Code), with respect to transactions involving such assets unless such
transactions are subject to a statutory or administrative exemption.
The Class A Certificates
The DOL has granted an administrative exemption to each Underwriter
separate "Prohibited Transaction Exemptions" (collectively, the "Exemption"),
which exempt from the application of certain of the prohibited transaction rules
of ERISA transactions relating to (i) the initial purchase, the holding and the
subsequent resale by Plans of certificates representing interests in certain
asset-backed pass-through trusts with respect to such any Underwriter or any of
its affiliates is the sole underwriter or the manager or co-manager of the
underwriting syndicate; and (ii) the servicing, operation and management of such
asset-backed pass-through trusts, provided that the general conditions and
certain other conditions set forth in the Exemption is satisfied.
The general conditions which must be satisfied for the Exemption to apply
to the Class A Certificates are the following:
(i) the acquisition of the Class A Certificates by a Plan is on terms
(including the price for the Class A Certificates) that are at least as
favorable to the Plan as they would be in an arm's length transaction with
an unrelated party;
(ii) the rights and interests evidenced by the Class A Certificates
acquired by the Plan are not subordinated to the rights and interests
evidenced by other certificates of the Trust;
(iii) the Class A Certificates acquired by the Plan have received a
rating at the time of such acquisition that is in one of the three highest
generic rating categories from any of Standard & Poor's, Moody's, Fitch or
Duff & Phelps Credit Rating Co. (the "Rating Agencies");
(iv) assets of the type included in the Trust have been included in
other investment pools, certificates evidencing interests in such other
investment pools have been both rated in one of the highest three generic
rating categories by one of the Rating Agencies and have been purchased by
investors, other than Plans, for at least one year prior to a Plan's
acquisition of the Class A Certificates in reliance upon the Exemption.
(v) the Trustee is not an affiliate of the Underwriters, the
Depositor, the Sellers, the Servicer, any Sub-Servicer, the Certificate
Insurer, any borrower whose obligations under one or more home equity
S-46
<PAGE>
loans constitute more than 5% of the aggregate unamortized principal
balance of the assets in the Trust, or any of their respective affiliates
(the "Restricted Group");
(vi) the sum of all payments made to, and retained by, the
Underwriters in connection with the distribution of the Class A
Certificates represents not more than reasonable compensation for
underwriting the Class A Certificates; the sum of all payments made to and
retained by the Depositor pursuant to the sale of the home equity loans to
the Trust represents not more than the fair market value of such home
equity loans; and the sum of all payments made to and retained by the
Servicer represents not more than reasonable compensation for the
Servicer's services under the Pooling and Servicing Agreement and
reimbursement of the Servicer's reasonable expenses in connection
therewith; and
(vii) the Plan investing in the Class A Certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the Securities
and Exchange Commission under the Securities Act of 1933, as amended.
Section I.A of the 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 Exemption 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 50% of each Class of Class A Certificates is acquired by
persons independent of the Restricted Group and at least 50% of the aggregate
interest in the Trust is acquired by persons independent of the Restricted
Group; (iii) the total investment of such Plan in each Class of Class A
Certificates does not exceed 25% of all such Class of Class A Certificates
outstanding at the time of the acquisition; and (iv) immediately after such
investment, no more than 25% of the assets of such Plan are invested in
certificates representing an interest in a trust containing assets sold or
serviced by the same entity.
Section I.C of the 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.
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 Class A
Certificates.
Before purchasing a Class A Certificate, a fiduciary of a Plan should make
its own determination as to the availability of the exemptive relief provided in
the Exemption, and whether the conditions of the Exemption will be applicable to
such Class A Certificate.
The sale of Class A Certificates to a Plan is in no respect a
representation by the Issuer or the Underwriters that this investment meets all
relevant legal requirements with respect to investments by Plans generally or
any particular Plan, or that this investment is appropriate for Plans generally
or any particular Plan.
S-47
<PAGE>
RATINGS
It is a condition of the issuance of the Certificates that the Certificates
receive at least the ratings from the Rating Agencies as follows:
Class Moody's Standard & Poor's Fitch
- ----- ------- ----------------- -----
Class A Certificates Aaa AAA AAA
Class B Certificates Baa2 BBB- BBB
Explanations of the significance of such ratings may be obtained from
Moody's, 99 Church Street, New York, New York 10007, Standard & Poor's, 26
Broadway, New York, New York 10004 and Fitch, One State Street Plaza, 33rd
Floor, New York, New York 10004. Such ratings will be the views only of such
rating agencies. There is no assurance that such ratings will continue for any
period of time or that such ratings will not be revised or withdrawn. Any such
revision or withdrawal of such ratings may have an adverse effect on the market
price of the Certificates. A security rating is not a recommendation to buy,
sell or hold securities.
The ratings assigned by Fitch to pass-through certificates address the
likelihood of the receipt by the Owners of all distributions to which such
Owners are entitled. Fitch's ratings address the structural and legal aspects
associated with the Certificates, including the nature of the underlying loans
and the credit quality of the credit support provider. Fitch's ratings on home
equity pass-through Certificates do not represent any assessment of the
likelihood or rate of principal prepayments. The ratings do not address the
possibility that Owners might suffer a lower than anticipated yield.
The ratings of Moody's on home equity pass-through certificates address the
likelihood of the receipt by the Owners of all distributions to which such
Owners are entitled. Moody's rating opinions address the structural and legal
issues and tax-related aspects associated with the Certificates, including the
nature of the underlying home equity loans and the credit quality of the credit
support provider, if any. Moody's ratings on pass-through certificates do not
represent any assessment of the likelihood that principal prepayments may differ
from those originally anticipated.
The ratings of Moody's, Standard & Poor's and Fitch do not address the
possibility that, as a result of principal prepayments, certificateholders may
receive a lower than anticipated yield.
The ratings of the Certificates should be evaluated independently from
similar ratings on other types of securities. A security rating is not a
recommendation to buy, sell or hold securities and may be subject to revision or
withdrawal at any time by the assigning rating agency.
The Depositor has not requested a rating of the Certificates by any rating
agency other than Moody's, Standard & Poor's and Fitch and the Depositor has not
provided information relating to the Class A Certificates or the home equity
loans to any rating agency other than Moody's, Standard & Poor's and Fitch.
However, there can be no assurance as to whether any other rating agency will
rate the Class A Certificates or, if another rating agency rates such
Certificates, what rating would be assigned to such Certificates by such rating
agency. Any such unsolicited rating assigned by another rating agency to the
Class A Certificates may be lower than the rating assigned to such Certificates
by any of Moody's, Standard & Poor's and Fitch.
LEGAL INVESTMENT CONSIDERATIONS
The Class A Certificates will not constitute "mortgage related securities"
for purpose of SMMEA. The appropriate characterization of the Class A
Certificates under various legal investment restrictions, and thus the
S-48
<PAGE>
ability of investors subject to these restrictions to purchase the Class A
Certificates, may be subject to significant interpretive uncertainties. All
investors whose investment authority is subject to legal restrictions should
consult their own legal advisors to determine whether and to what extent the
Class A Certificates offered hereby will constitute legal investments for them.
The Depositor makes no representation as to the proper characterization of
the Certificates offered hereby for legal investment of financial institution
regulatory purposes, or as to the ability of particular investors to purchase
the Class A Certificates under applicable legal investment restrictions. The
uncertainties described above (and any unfavorable future determinations
concerning legal investment or financial institution regulatory characteristics
of the Class A Certificates offered hereby) may adversely affect the liquidity
of the Class A Certificates.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
relating to the Class A Certificates (the "Underwriting Agreement"), the
Depositor has agreed to sell to each of the Underwriters named below (the
"Underwriters"), and each of the Underwriters has severally agreed to purchase,
the principal amount of the Class A Certificates set forth opposite its name
below:
Class A Certificates
--------------------
Credit Suisse First Boston Corporation $986,190,000
ContiFinancial Services Corporation $ 13,810,000
In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase all of the Class A
Certificates offered hereby, if any are purchased. The Depositor has been
advised by the Underwriters that they propose initially to offer the Class A
Certificates to the public at the respective offering prices set forth on the
cover page hereof and to certain dealers at such price less a concession not in
excess of the respective amounts set forth in the table below (expressed as a
percentage of the Class A Certificate Principal Balance). The Underwriters may
allow and such dealers may reallow a discount not in excess of the respective
amounts set forth in the table below to certain other dealers. After the initial
public offering of the Class A Certificates, the public offering price and such
concessions and reallowances may be changed.
Selling Reallowance
Class Concession Discount
----- ---------- --------
Class A 0.1086% 0.05%
In connection with this offering and in compliance with applicable law and
industry practice, the Underwriters may over-allot or effect transactions which
stabilize, maintain or otherwise affect the market price of the Class A
Certificates at a level above that which might otherwise prevail in the open
market, including stabilizing bids, effecting syndicate covering transactions or
imposting penalty bids. A stabilizing bid means the placing of any bid, or the
effecting of any purchase, for the purpose of pegging, fixing or maintaining the
price of a security. A syndicate covering transaction means the placing of any
bid on behalf of the underwriting syndicate or the effecting of any purchase to
reduce a short position created in connection with the offering. A penalty bid
means an arrangement that permits Credit Suisse First Boston, as managing
underwriter, to reclaim a selling concession from a syndicate member in
connection with the offering when Certificates originally sold by the syndicate
member are purchased in syndicate covering transactions. The Underwriters are
not required to engage in any of these activities. Any such activities, if
commenced, may be discontinued at any time.
The Depositor has agreed to indemnify the Underwriters against certain
liabilities, including civil liabilities under the Securities Act of 1934, or
contribute to payments which the Underwriters may be required to make in respect
thereof.
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<PAGE>
The Depositor or its affiliates may apply all or any portion of the net
proceeds or this offering to the repayment of debt, including "warehouse" debt
secured by the home equity loans (prior to their sale to the Trust). One or more
of the Underwriters (or their respective affiliates) may have acted as a
"warehouse lender" to the Depositor or its affiliates, and may receive a portion
of such proceeds as repayment of such "warehouse" debt.
The Depositor is an affiliate of ContiFinancial Services Corporation.
EXPERTS
The consolidated balance sheets of MBIA Insurance Corporation and
Subsidiaries as of December 31, 1997 and December 31, 1996 and the related
consolidated statements of income, changes in shareholder's equity and cash
flows for each of the three years in the period ended December 31, 1997
incorporated by reference in this Prospectus Supplement, have been incorporated
herein in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
CERTAIN LEGAL MATTERS
Certain legal matters relating to the validity of the issuance of the
Certificates will be passed upon for the Sellers by Dewey Ballantine LLP, New
York, New York and by Michael R. Mayberry, Esquire, 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. Certain legal matters relating to the issuance of the
Certificates will be passed upon for the Underwriters by Stroock & Stroock &
Lavan LLP, New York, New York.
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<PAGE>
INDEX OF PRINCIPAL DEFINED TERMS
Page
Accrual Period..............................................................S-20
Appraised Values............................................................S-16
Average Amount Outstanding..................................................S-15
Beneficial Owners...........................................................S-23
Book-Entry Certificates.....................................................S-23
Business Day................................................................S-20
Cedel Participants..........................................................S-25
Certificate Account.........................................................S-19
Certificate Insurer.........................................................S-29
Class A Optimal Balance.....................................................S-22
Class A Overcollateralization Deficit.......................................S-29
Class A Principal Distribution Amount.......................................S-21
Class B Applied Realized Loss Amount........................................S-29
Class B Certificate Principal Balance.......................................S-30
Class B Optimal Balance.....................................................S-23
Class B Principal Distribution Amount.......................................S-21
Class B Realized Loss Amortization Amount...................................S-30
Class B Unpaid Realized Loss Amount.........................................S-30
Class Distribution Amount...................................................S-20
Clean-Up Call Date..........................................................S-44
Code .......................................................................S-45
Combined Loan-to-Value Ratios...............................................II-4
Compensating Interest.......................................................S-39
Cooperative.................................................................S-25
Cumulative Realized Loss Trigger Event......................................S-28
Current Interest............................................................S-21
Daily Collections...........................................................S-38
Definitive Certificate......................................................S-23
Delinquency Advances........................................................S-38
Delinquency Trigger Event...................................................S-28
Depositor....................................................................S-3
DOL ........................................................................S-46
DTC Participants............................................................S-24
ERISA ......................................................................S-45
Euroclear Operator..........................................................S-25
Euroclear Participants......................................................S-25
European Depositaries.......................................................S-23
Exemptions..................................................................S-46
FannieMae...................................................................S-41
FannieMae Guide.............................................................S-37
FHLMC ......................................................................S-41
Final Certification.........................................................S-37
Final Determination.........................................................S-44
Financial Intermediary......................................................S-23
Global Securities............................................................I-1
Gross Losses................................................................S-15
Group I Loan Balance........................................................S-22
IML ........................................................................S-25
Interest Carry Forward Amount...............................................S-21
Interest Remittance Amount..................................................S-38
Loan Purchase Price.........................................................S-36
Loan-to-Value Ratios........................................................II-3
Maximum Certificate Insurer Current Reimbursement Amount....................S-21
Monthly Excess Cashflow Amount..............................................S-21
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<PAGE>
Monthly Remittance Amount...................................................S-39
Monthly Remittance Date.....................................................S-39
Mortgages...................................................................S-16
Net Liquidation Proceeds....................................................S-37
Net Losses..................................................................S-15
Non-U.S. Person..............................................................I-3
Notes ......................................................................S-16
Original Group I Loan Balance...............................................S-22
Originator...................................................................S-4
Overcollateralization Amount................................................S-27
Participants................................................................S-23
Payment Date................................................................S-20
Percentage Interest.........................................................S-19
Plans ......................................................................S-45
Prepayment Assumption......................................................III-1
Preservation Expenses.......................................................S-39
Principal and Interest Account..............................................S-37
Principal Remittance Amount.................................................S-39
Qualified Replacement Mortgage..............................................S-37
Rating Agencies.............................................................S-46
Realized Loss...............................................................S-28
Record Date.................................................................S-20
Recoveries..................................................................S-15
Register....................................................................S-19
Registrar...................................................................S-19
Relevant Depositary.........................................................S-23
REMIC Opinion...............................................................S-35
Remittance Period...........................................................S-39
Restricted Group............................................................S-46
Rules ......................................................................S-24
Servicer Termination Event..................................................S-41
Stepdown Date...............................................................S-27
Sub-Servicers...............................................................S-10
Sub-Servicing Agreements....................................................S-10
Substitution Amount.........................................................S-37
Targeted Overcollateralization Amount.......................................S-27
Terms and Conditions........................................................S-25
Trust Estate................................................................S-18
U.S. Person..................................................................I-3
Weighted average life.......................................................S-17
S-52
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX
DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered ContiMortgage
Home Equity Loan Trust 1998-4 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 home
equity loan asset-backed certificates issues in same-day funds.
Trading between Cedel and/or Euroclear Participants. Secondary market
trading between Cedel Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
Trading between DTC, Seller and Cedel or Euroclear Participants. When
Global Securities are to be transferred from the account of a DTC Participant to
the account of a Cedel Participant or a Euroclear Participant, the purchaser
will send instructions to Cedel or Euroclear through a Cedel Participant or
Euroclear Participant at 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
I-1
<PAGE>
against payment. Payment will include interest accrued on the Global Securities
from and including the last coupon payment date to and excluding the settlement
date, on the basis of the actual number of days in such accrual period and a
year assumed to consist of 360 days. For transactions settling on the 31st of
the month, payment will include interest accrued to and excluding the first day
of the following month. Payment will then be made by the Relevant Depositary to
the DTC Participant's account against delivery of the Global Securities. After
settlement has been completed, the Global Securities will be credited to the
respective clearing system and by the clearing system, in accordance with its
usual procedures, to the Cedel Participant's or Euroclear Participant's account.
The securities credit will appear the next day (European time) and the cash debt
will be back-valued to, and the interest on the Global Securities will accrue
from, the value date (which would be the preceding day when settlement occurred
in New York). If settlement is not completed on the intended value date (i.e.,
the trade fails), the Cedel or Euroclear cash debt will be valued instead as of
the actual settlement date.
Cedel Participants and Euroclear Participants will need to make available
to the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within Cedel or Euroclear. Under this approach,
they may take on credit exposure to Cedel or Euroclear until the Global
Securities are credited to their account one day later.
As an alternative, if Cedel or Euroclear has extended a line of credit to
them, Cedel Participants or Euroclear Participants can elect not to preposition
funds and allow that credit line to be drawn upon to finance settlement. Under
this procedure, Cedel Participants or Euroclear Participants purchasing Global
Securities would incur overdraft charges for one day, assuming they cleared the
overdraft when the Global Securities were credited to their accounts. However,
interest on the Global Securities would accrue from the value date. Therefore,
in many cases the investment income on the Global Securities earned during that
one-day period may substantially reduce or offset the amount of such overdraft
charges, although the result will depend on each Cedel Participant's or
Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for crediting Global Securities
to the respective European Depositary for the benefit of Cedel Participants or
Euroclear Participants. The sale proceeds will be available to the DTC seller on
the settlement date. Thus, to the DTC Participants a cross-market transaction
will settle no differently than a trade between two DTC Participants.
Trading between Cedel or Euroclear Seller and DTC Purchaser. Due to time
zone differences in their favor, Cedel Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Securities are to be transferred by the respective clearing system, through the
respective Depositary, to a DTC Participant. The seller will send instructions
to Cedel or Euroclear through a Cedel Participant or Euroclear Participant at
least one business day prior to settlement. In these cases Cedel or Euroclear
will instruct the respective Depositary, as appropriate, to credit the Global
Securities to the DTC Participant's account against payment. Payment will
include interest accrued on the Global Securities from and including the last
coupon payment to and excluding the settlement date on the basis of the actual
number of days in such accrual period and a year assumed to consist to 360 days.
For transactions settling on the 31st of the month, payment will include
interest accrued to and excluding the first day of the following month. The
payment will then be reflected in the account of Cedel Participant or Euroclear
Participant the following day, and receipt of the cash proceeds in the Cedel
Participant's or Euroclear Participant's account would be back-valued to the
value date (which would be the preceding day, when settlement occurred in New
York). Should the Cedel Participant or Euroclear Participant have a line of
credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the back-valuation
will extinguish any overdraft incurred over that one-day period. If settlement
is not completed on the intended value date (i.e., the trade fails), receipt of
the cash proceeds in the Cedel Participant's or Euroclear Participant's account
would instead be valued as of the actual settlement date.
Finally, day traders that use Cedel or Euroclear and that purchase Global
Securities from DTC Participants for delivery to Cedel Participants or Euroclear
Participants should note that these trades would automatically fail on the sale
side unless affirmative action is taken. At least three techniques should be
readily available to eliminate this potential problem:
(a) borrowing through Cedel or Euroclear for one day (until the purchase
side of the trade is reflected in their Cedel or Euroclear accounts) in
accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant no
later than one day prior to settlement, which would give the Global Securities
sufficient time to be reflected in their Cedel or Euroclear account in order to
settle the sale side of the trade; or
I-2
<PAGE>
(c) staggering the value dates for the buy and sell sides of the trade so
that the value date for the purchase from the DTC Participant is at least one
day prior to the value date for the sale to the Cedel Participant or Euroclear
Participant.
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Global Securities holding securities through Cedel or
Euroclear (or through DTC if the holder has an address outside the U.S.) will be
subject to the 30% U.S. withholding tax that generally applies to payments of
interest (including original issue discount) on registered debt issued by U.S.
Persons (as defined below), unless (i) each clearing system, bank or other
financial institution that holds customers' securities in the ordinary course of
its trade or business in the chain of intermediaries between such beneficial
owner and the U.S. entity required to withhold tax complies with applicable
certification requirements and (ii) such beneficial owner takes one of the
following steps to obtain an exemption or reduced tax rate:
Exemption for Non-U.S. Persons (Form W-8). Beneficial Owners of Global
Securities that are Non-U.S. Persons (as defined below) can obtain a complete
exemption from the withholding tax by filing a signed Form W-8 (Certificate of
Foreign Status). If the information shown on Form W-8 changes, a new Form W-8
must be filed within 30 days of such change.
Exemption for Non-U.S. Persons with effectively connected income (Form
4224). A Non-U.S. Person (as defined below), including a non-U.S. corporation or
bank with a U.S. branch, for which the interest income is effectively connected
with its conduct of a trade or business in the United States, can obtain an
exemption from the withholding tax by filing Form 4224 (Exemption from
Withholding of Tax on Income Effectively Connected with the Conduct of a Trade
or Business in the United States).
Exemption or reduced rate for Non-U.S. Persons resident in treaty countries
(Form 1001). Non-U.S. Persons residing in a country that has a tax treaty with
the United States can obtain an exemption or reduced tax rate (depending on the
treaty terms) by filing Form 1001 (Ownership, Exemption or Reduced Rate
Certificate). If the treaty provides only for a reduced rate, withholding tax
will be imposed at that rate unless the filer alternatively files Form W-8. Form
1001 may be filed by Certificate Owners or their agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Owner of a Global Security
or, in the case of a Form 1001 or a Form 4224 filer, his agent, files by
submitting the appropriate form to the person through whom it holds the security
(the clearing agency, in the case of persons holding directly on the books of
the clearing agency). Form W-8 and Form 1001 are effective for three calendar
years and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation, partnership or other entity, taxable as such for
federal income tax purposes, organized in or under the laws of the United States
or any state thereof (including the District of Columbia) (iii) an estate that
is subject to U.S. federal income tax regardless of the source of its income or
(iv) a trust other than a "foreign trust" as defined in Section 7701(a)(31) of
the Internal Revenue Code of 1986, as amended. 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 as well as the application of recently issued Treasury
regulations relating to tax documentation requirements that are generally
effective with respect to payments made after December 31, 1999. 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>
ANNEX II
THE HOME EQUITY LOAN POOL-STATISTICAL INFORMATION
Home Equity Loans
As of the Statistical Calculation Date, the average Loan Balance was
$64,365.25; the Coupon Rates of such home equity loans ranged from 6.25% to
17.75%; the weighted average Loan-to-Value Ratio was 76.44%; the weighted
average Combined Loan-to-Value Ratio was 79.29%; the weighted average Coupon
Rate was 10.35%; the weighted average remaining term to maturity was 270.90
months; and the weighted average original term to maturity was 271.66 months.
The remaining terms to maturity as of the Statistical Calculation Date ranged
from 58 months to 360 months. The minimum and maximum Loan Balances as of the
Statistical Calculation Date were $1,946.32 and $275,036.63 respectively. No
home equity loans will mature later than November 15, 2028. 11,085 of the home
equity loans are secured by first mortgages representing 94.82% of the Loan
Balance of the home equity loans and 1,385 of the home equity loans are secured
by second lien mortgages representing in the 5.18% of the Loan Balance Loans.
II-1
<PAGE>
Geographic Distribution of Mortgaged Properties
The geographic distribution of the home equity loans by state, as of the
Statistical Calculation Date, was as follows:
Number of Home Aggregate Loan % of Aggregate
State Equity Loans Balance Loan Balance
- --------------------------------------------------------------------------------
Alaska 1 $ 40,000.00 0.00%
Arizona 251 17,329,018.56 2.16
Arkansas 80 4,221,650.24 0.53
California 433 40,426,277.35 5.04
Colorado 155 14,034,844.52 1.75
Connecticut 66 5,054,150.61 0.63
Delaware 18 1,208,379.58 0.15
Florida 779 49,125,181.93 6.12
Georgia 426 27,581,530.79 3.44
Idaho 29 1,960,304.59 0.24
Illinois 890 59,864,867.47 7.46
Indiana 636 34,816,412.19 4.34
Iowa 81 4,526,728.16 0.56
Kansas 58 3,056,930.93 0.38
Kentucky 305 18,192,429.30 2.27
Louisiana 207 10,462,974.44 1.30
Maine 30 1,791,946.35 0.22
Maryland 261 19,764,741.12 2.46
Massachusetts 170 13,983,984.30 1.74
Michigan 1,528 80,041,506.20 9.97
Minnesota 144 10,994,556.67 1.37
Mississippi 121 6,476,046.37 0.81
Missouri 289 14,485,873.01 1.80
Montana 24 1,264,150.58 0.16
Nebraska 59 3,445,562.49 0.43
Nevada 59 5,211,448.36 0.65
New Hampshire 41 2,773,954.44 0.35
New Jersey 190 16,754,895.49 2.09
New Mexico 170 12,325,259.25 1.54
New York 455 35,672,461.88 4.44
North Carolina 594 37,061,919.38 4.62
North Dakota 3 92,061.55 0.01
Ohio 1,240 76,312,331.72 9.51
Oklahoma 74 3,718,310.53 0.46
Oregon 60 4,735,128.05 0.59
Pennsylvania 850 51,916,764.25 6.47
Rhode Island 59 3,925,538.05 0.49
South Carolina 264 16,193,644.63 2.02
South Dakota 10 637,451.09 0.08
Tennessee 258 16,438,700.12 2.05
Texas 466 29,429,466.18 3.67
Utah 121 10,277,656.37 1.28
Vermont 7 519,403.91 0.06
Virginia 171 11,353,720.57 1.41
Washington 97 8,139,245.51 1.01
Washington DC 42 3,298,919.34 0.41
West Virginia 76 4,452,233.57 0.55
Wisconsin 114 6,762,661.55 0.84
Wyoming 8 481,455.46 0.06
- --------------------------------------------------------------------------------
Total: 12,470 $802,634,679.00 100.00%
================================================================================
II-2
<PAGE>
Original Loan-to-Value Ratios
The original loan-to-value ratios as of the date of origination of the home
equity loans (based upon appraisals made at the time of origination thereof)
(the "Loan-to-Value Ratios") as of the Statistical Calculation Date were
distributed as follows:
Range of Number of Aggregate % of Aggregate
Original LTV's Home Equity Loans Loan Balance Loan Balance
- --------------------------------------------------------------------------------
0.01 - 10.00 53 $ 857,060.41 0.11%
10.01 - 15.00 270 5,561,109.03 0.69
15.01 - 20.00 354 8,686,012.41 1.08
20.01 - 25.00 298 8,890,990.48 1.11
25.01 - 30.00 224 7,578,854.13 0.94
30.01 - 35.00 172 6,114,266.36 0.76
35.01 - 40.00 178 6,744,167.74 0.84
40.01 - 45.00 170 7,268,210.80 0.91
45.01 - 50.00 301 12,123,056.20 1.51
50.01 - 55.00 221 10,779,462.04 1.34
55.01 - 60.00 345 17,859,949.44 2.23
60.01 - 65.00 500 27,614,523.00 3.44
65.01 - 70.00 803 46,206,106.15 5.76
70.01 - 75.00 1,334 84,852,894.17 10.57
75.01 - 80.00 2,943 204,649,543.77 25.50
80.01 - 85.00 2,208 170,665,988.58 21.26
85.01 - 90.00 2,008 168,526,780.24 21.00
90.01 - 95.00 88 7,655,704.05 0.95
- --------------------------------------------------------------------------------
Total: 12,470 $802,634,679.00 100.00%
================================================================================
II-3
<PAGE>
Combined Loan-to-Value Ratios
The original combined loan-to-value ratios as of the dates of origination
of the home equity loans (based upon appraisals made at the time of origination
thereof) (the "Combined Loan-to-Value Ratios") as of the Statistical Calculation
Date were distributed as follows:
Range of Number of Aggregate % of Aggregate
Original CLTV's Home Equity Loans Loan Balance Loan Balance
- --------------------------------------------------------------------------------
0.01 - 10.00 2 $ 33,400.55 0.00%
10.01 - 15.00 11 259,185.07 0.03
15.01 - 20.00 25 676,464.49 0.08
20.01 - 25.00 34 994,730.48 0.12
25.01 - 30.00 34 1,090,295.48 0.14
30.01 - 35.00 81 2,413,593.97 0.30
35.01 - 40.00 105 3,769,705.72 0.47
40.01 - 45.00 136 5,591,149.29 0.70
45.01 - 50.00 283 10,974,847.54 1.37
50.01 - 55.00 222 10,593,661.93 1.32
55.01 - 60.00 351 17,844,375.47 2.22
60.01 - 65.00 524 28,114,105.81 3.50
65.01 - 70.00 856 47,721,602.08 5.95
70.01 - 75.00 1,420 87,370,891.56 10.89
75.01 - 80.00 3,091 209,017,178.82 26.04
80.01 - 85.00 2,547 180,596,769.34 22.50
85.01 - 90.00 2,579 185,251,941.11 23.08
90.01 - 95.00 161 10,028,064.82 1.25
95.01 - 100.00 8 292,715.47 0.04
- --------------------------------------------------------------------------------
Total: 12,470 $802,634,679.00 100.00%
================================================================================
II-4
<PAGE>
Distribution of Coupon Rates
The Coupon Rates borne by the Notes were distributed as follows as of the
Statistical Calculation Date:
Range of Number of Aggregate % of Aggregate
Coupon Rates Home Equity Loans Loan Balance Loan Balance
- --------------------------------------------------------------------------------
6.01 - 6.50 1 $ 99,905.11 0.01%
6.51 - 7.00 1 62,294.32 0.01
7.01 - 7.50 36 3,337,191.38 0.42
7.51 - 8.00 157 13,559,275.72 1.69
8.01 - 8.50 428 36,285,718.13 4.52
8.51 - 9.00 1,079 87,345,519.85 10.88
9.01 - 9.50 1,133 85,777,374.98 10.69
9.51 - 10.00 2,121 153,060,450.53 19.07
10.01 - 10.50 1,646 107,539,563.36 13.40
10.51 - 11.00 1,816 113,038,873.58 14.08
11.01 - 11.50 1,050 61,170,121.48 7.62
11.51 - 12.00 1,089 58,883,216.64 7.34
12.01 - 12.50 608 28,439,670.78 3.54
12.51 - 13.00 551 24,875,464.62 3.10
13.01 - 13.50 262 10,757,613.29 1.34
13.51 - 14.00 234 9,278,101.07 1.16
14.01 - 14.50 92 3,364,120.08 0.42
14.51 - 15.00 70 2,784,939.96 0.35
15.01 - 15.50 18 565,524.38 0.07
15.51 - 16.00 45 1,515,168.94 0.19
16.01 - 16.50 19 513,105.80 0.06
16.51 - 17.00 11 293,246.47 0.04
17.01 - 17.50 2 43,053.90 0.01
17.51 - 18.00 1 45,164.63 0.01
- --------------------------------------------------------------------------------
Total: 12,470 $802,634,679.00 100.00%
================================================================================
Distribution of Loan Balances
The distribution of the outstanding principal amounts of the home equity
loans as of the Statistical Calculation Date was as follows:
Range of Number of Aggregate % of Aggregate
Loan Balances Home Equity Loans Loan Balance Loan Balance
- --------------------------------------------------------------------------------
0.01 - 25,000.00 1,267 $ 24,507,968.80 3.05%
25,000.01 - 50,000.00 4,120 157,704,141.15 19.65
50,000.01 - 75,000.00 3,426 210,152,723.73 26.18
75,000.01 - 100,000.00 1,738 150,089,166.09 18.70
100,000.01 - 125,000.00 962 107,148,678.10 13.35
125,000.01 - 150,000.00 459 62,805,225.06 7.82
150,000.01 - 175,000.00 237 38,207,122.16 4.76
175,000.01 - 200,000.00 155 29,073,486.76 3.62
200,000.01 - 225,000.00 96 20,557,511.17 2.56
225,000.01 - 250,000.00 8 1,853,619.35 0.23
250,000.01 - 300,000.00 2 535,036.63 0.07
- --------------------------------------------------------------------------------
Total: 12,470 $802,634,679.00 100.00%
================================================================================
II-5
<PAGE>
Types of Mortgaged Properties
The Properties securing the home equity loans as of the Statistical
Calculation Date were of the property types as follows:
Number of Aggregate % of Aggregate
Property Types Home Equity Loans Loan Balance Loan Balance
- --------------------------------------------------------------------------------
Single Family Attached 287 $ 14,969,713.18 1.87%
Single Family Detached 10,874 694,945,756.60 86.58
Condominium 102 5,992,088.82 0.75
Two to Four-Family Residence 595 46,299,775.77 5.77
Planned Unit Development 158 12,977,784.98 1.62
Manufactured Housing 436 25,475,034.16 3.17
Mixed Use 18 1,974,525.49 0.25
- --------------------------------------------------------------------------------
Total: 12,470 $802,634,679.00 100.00%
================================================================================
Distribution of Months of Seasoning
The distribution of the number of months of seasoning of the home equity
loans as of the Statistical Calculation Date was as follows:
Range of Number of Aggregate % of Aggregate
Months of Seasoning Home Equity Loans Loan Balance Loan Balance
- --------------------------------------------------------------------------------
0-6 12,330 $794,589,526.69 99.00%
7-12 96 5,694,009.45 0.71
13-24 30 1,653,346.75 0.21
25-36 2 198,473.62 0.02
36+ 12 499,592.49 0.06
- --------------------------------------------------------------------------------
Total: 12,470 $802,634,679.00 100.00%
================================================================================
Distribution of Remaining Terms to Maturity
The distribution of the number of months remaining to maturity of the home
equity loans as of the Statistical Calculation Date was as follows:
Range of Months Number of Aggregate % of Aggregate
Remaining to Maturity Home Equity Loans Loan Balance Loan Balance
- --------------------------------------------------------------------------------
49 - 60 16 $ 321,463.02 0.04%
61 - 120 395 12,755,825.29 1.59
121 - 180 5,592 326,184,210.37 40.64
181 - 240 1,290 70,402,337.36 8.77
241 - 300 146 8,995,946.94 1.12
301 - 360 5,031 383,974,896.02 47.84
- --------------------------------------------------------------------------------
Total: 12,470 $802,634,679.00 100.00%
================================================================================
II-6
<PAGE>
Occupancy Status
The occupancy status of the Properties securing the home equity loans as of
the Statistical Calculation Date was as follows:
Number of Aggregate % of Aggregate
Occupancy Status Home Equity Loans Loan Balance Loan Balance
- --------------------------------------------------------------------------------
Owner Occupied 11,587 $755,427,070.01 94.12%
Investor Owned 883 47,207,608.99 5.88
- --------------------------------------------------------------------------------
Total: 12,470 $802,634,679.00 100.00%
================================================================================
II-7
<PAGE>
ContiMortgage Corporation
The following chart generally outlines certain parameters of the credit grades
of ContiMortgage's current underwriting guidelines:
Description of Credit Grades
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
"A1 CREDIT GRADE "A2" CREDIT GRADE "B" CREDIT GRADE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
General Repayment Has a good credit but might Has a good credit but might Pays the majority of
have some minor delinquency. have some minor delinquency. accounts on time but has
some 30-and/or 60-day
delinquency.
- ------------------------------------------------------------------------------------------------------------------------------------
Existing Mortgage Loans Current at time of Current at application time and Current at application time
application. Cannot exceed a maximum of two 30-day and a maximum of three
1 x 30 in last 12 months. delinquencies in the past 12 30-day delinquencies in the
months. past 12 months.
- ------------------------------------------------------------------------------------------------------------------------------------
Non-Mortgage Credit Should be paid as agreed. Major credit and installment Major credit and installment
Minor delinquencies debt should be current but may debt can exhibit some minor
acceptable. exhibit some minor 30-day 30-and/or 60-day
delinquency. Minor credit may delinquency. Minor credit
exhibit some minor delinquency. may exhibit up to 90-day
delinquency.
- ------------------------------------------------------------------------------------------------------------------------------------
Bankruptcy Filings. None Charge-offs, judgements, liens, Discharged more than two
and former bankruptcies are years with reestablished
generally unacceptable. credit.
- ------------------------------------------------------------------------------------------------------------------------------------
Debt Service-to Income Ratio Generally not to exceed 45%. Generally not to exceed 45%. Generally not to exceed 45%.
- ------------------------------------------------------------------------------------------------------------------------------------
Maximum Loan-to-Value Ratio:
- ------------------------------------------------------------------------------------------------------------------------------------
Owner-Occupied Generally 80% (or 90%) for Generally 80% (or 90%) for Generally 80% (or 85%) for a
dwelling residence; 80% for a dwelling residence; 75% for a 1 to 4 family dwelling
condominium. condominium. residence.
- ------------------------------------------------------------------------------------------------------------------------------------
Non-Owner Occupied N/A Generally 70% for a 1 to 2 Generally 65% for a 1 to 2
family dwelling, 65% for a family dwelling, 60% for a
3 to 4 family. 3 to 4 family.
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
"C" CREDIT GRADE "D" CREDIT GRADE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
General Repayment Marginal credit history Designed to provide a
which is offset by other borrower with poor credit
positive attributes. history an opportunity to
correct past credit problems
through lower monthly
payments.
- ------------------------------------------------------------------------------------------------------------
Existing Mortgage Loans Cannot exceed four 30-day Must be paid in full from
delinquencies or one 60-day loan proceeds and no more
delinquency in the past 12 than 119 days of delinquency.
months.
- ------------------------------------------------------------------------------------------------------------
Non-Mortgage Credit Major credit and installment Major and minor credit
can exhibit some minor delinquency is acceptable,
30-and/or 90-day but must demonstrate some
delinquency. Minor credit payment regularity.
may exhibit more serious
delinquency.
- ------------------------------------------------------------------------------------------------------------
Bankruptcy Filings. Discharged more than two Discharged prior to closing.
years with re-established
credit.
- ------------------------------------------------------------------------------------------------------------
Debt Service-to Income Ratio Generally not to exceed 45%. Generally not to exceed 50%.
- ------------------------------------------------------------------------------------------------------------
Maximum Loan-to-Value Ratio:
- ------------------------------------------------------------------------------------------------------------
Owner-Occupied Generally 75% (or 80%) for a Generally 65% (or 70%) for a
1 to 4 family dwelling 1 to 4 family dwelling
residence. residence.
- ------------------------------------------------------------------------------------------------------------
Non-Owner Occupied Generally 65% for a 1 to 2 N/A
family dwelling, 65% for a 3
to 4 family.
- ------------------------------------------------------------------------------------------------------------
</TABLE>
II-8
<PAGE>
Distribution of Credit Grades
Loan
Number of Aggregate % of Aggregate
Credit Grade Home Equity Loans Loan Balance Loan Balance
- --------------------------------------------------------------------------------
A 7,644 $530,242,182.28 66.06%
B 2,835 172,346,976.64 21.47
C 1,600 85,079,113.20 10.60
D 391 14,966,406.88 1.86
- --------------------------------------------------------------------------------
Total: 12,470 $802,634,679.00 100.00%
================================================================================
II-9
<PAGE>
ANNEX III
DECREMENT TABLES
The model used in this Prospectus Supplement is the prepayment assumption
(the "Prepayment Assumption") which represents an assumed rate of prepayment
each month relative to the then outstanding principal balance of a pool of
mortgage loans for the life of such mortgage loans. A 100% Prepayment Assumption
assumes constant prepayment rates of 4% per annum of the then outstanding
principal balance of the home equity loans in the first month of the life of the
mortgage loans and an additional approximate 1.455% per annum in each month
thereafter until the twelfth month. Beginning in the twelfth month and in each
month thereafter during the life of the mortgage loans, 100% Prepayment
Assumption assumes a constant prepayment rate of 20% per annum each month. As
used in the table below, 0% Prepayment Assumption assumes prepayment rates equal
to 0% of the Prepayment Assumption i.e., no prepayments. Correspondingly, 130%
Prepayment Assumption assumes prepayment rates equal to 130% of the 100%
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 the 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 (the "Modeling Assumptions"), 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 Class A
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 consist of pools of loans with level-pay and balloon amortization
methodologies, principal balances, mortgage rates, net mortgage rates, original
and remaining terms to maturity, and original amortization terms as applicable,
as set forth in the "Representative Loan Pools" table below; (ii) the Closing
Date for the Certificates occurs on December 17, 1998; (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 January 15, 1999, in
accordance with the priorities described herein; (iv) the difference between the
Gross Coupon Rate and the Net Coupon Rate is equal to the Servicing Fee and the
Net Coupon Rate is further reduced by the Trustee Fee and the Premium Amount;
(v) the prepayment rates with respect to the home equity loans are a multiple of
the applicable Prepayment Assumption as stated in the "Prepayment Scenarios"
table below; (vi) prepayments include 30 days' interest thereon; (vii) except as
otherwise indicated with respect to certain tables, no optional termination or
mandatory termination is exercised; (viii) the Targeted Overcollateralization
Amount is set initially as specified in this Prospectus Supplement and the
Pooling and Servicing Agreement and thereafter decreases in accordance with its
provisions; and (ix) no Delinquency Trigger Event or Cumulative Realized Loss
Trigger Event occurs.
PREPAYMENT SCENARIOS(1)
<TABLE>
<CAPTION>
Scenario Scenario Scenario Scenario Scenario Scenario Scenario Scenario
I II III IV V VI VII VIII
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
0% 35% 65% 100% 130% 150% 175% 200%
</TABLE>
(1) As a percentage of the Prepayment Assumption.
III-1
<PAGE>
REPRESENTATIVE LOAN POOLS
<TABLE>
<CAPTION>
Original Remaining Orig.
Gross Coupon Net Coupon Term to Term to Amortization
Pool# Principal Balance Rate Rate Maturity Maturity Term Amort. Method
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $420,262.10 11.159% 10.659% 60 58 60 Fully Amortizing
2 15,462,991.34 10.631 10.131 118 116 118 Fully Amortizing
3 119,703,577.17 10.369 9.869 180 178 180 Fully Amortizing
4 92,039,930.20 10.179 9.679 240 238 240 Fully Amortizing
5 11,760,778.97 10.024 9.524 300 299 300 Fully Amortizing
6 501,986,495.83 10.147 9.647 360 359 360 Fully Amortizing
7 307,943,964.39 10.711 10.211 180 178 360 Balloon
-----------------
Total $1,049,318,000.00
</TABLE>
III-2
<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 prepayment scenarios described in the table entitled
"Prepayment Scenarios." The percentages have been rounded to the nearest 1%.
<TABLE>
<CAPTION>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
Class A (To Call)
Scenario
-----------------------------------------------------------------------------
Payment Date I II III IV V VI VII VIII
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percent 100% 100% 100% 100% 100% 100% 100% 100%
December-1999 97% 92% 87% 82% 78% 75% 71% 68%
December-2000 95% 84% 74% 63% 55% 49% 43% 37%
December-2001 94% 76% 62% 49% 38% 32% 25% 19%
December-2002 93% 69% 53% 38% 29% 23% 18% 13%
December-2003 91% 63% 44% 30% 21% 16% 11% 0%
December-2004 89% 57% 38% 23% 15% 11% 0% 0%
December-2005 87% 51% 32% 18% 11% 0% 0% 0%
December-2006 85% 46% 27% 14% 0% 0% 0% 0%
December-2007 83% 41% 23% 11% 0% 0% 0% 0%
December-2008 80% 37% 20% 0% 0% 0% 0% 0%
December-2009 78% 34% 17% 0% 0% 0% 0% 0%
December-2010 75% 30% 14% 0% 0% 0% 0% 0%
December-2011 72% 27% 12% 0% 0% 0% 0% 0%
December-2012 68% 24% 10% 0% 0% 0% 0% 0%
December-2013 40% 14% 0% 0% 0% 0% 0% 0%
December-2014 38% 12% 0% 0% 0% 0% 0% 0%
December-2015 36% 11% 0% 0% 0% 0% 0% 0%
December-2016 34% 9% 0% 0% 0% 0% 0% 0%
December-2017 32% 0% 0% 0% 0% 0% 0% 0%
December-2018 29% 0% 0% 0% 0% 0% 0% 0%
December-2019 27% 0% 0% 0% 0% 0% 0% 0%
December-2020 25% 0% 0% 0% 0% 0% 0% 0%
December-2021 23% 0% 0% 0% 0% 0% 0% 0%
December-2022 21% 0% 0% 0% 0% 0% 0% 0%
December-2023 18% 0% 0% 0% 0% 0% 0% 0%
December-2024 15% 0% 0% 0% 0% 0% 0% 0%
December-2025 12% 0% 0% 0% 0% 0% 0% 0%
December-2026 0% 0% 0% 0% 0% 0% 0% 0%
December-2027 0% 0% 0% 0% 0% 0% 0% 0%
December-2028 0% 0% 0% 0% 0% 0% 0% 0%
Weighted
Average
LifeYears (1) 15.98 8.30 5.65 3.86 3.01 2.61 2.23 1.93
<CAPTION>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
Class A (To Maturity)
Scenario
-------------------------------------------------------------------------------
Payment Date I II III IV V VI VII VIII
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percent 100% 100% 100% 100% 100% 100% 100% 100%
December-1999 97% 92% 87% 82% 78% 75% 71% 68%
December-2000 95% 84% 74% 63% 55% 49% 43% 37%
December-2001 94% 76% 62% 49% 38% 32% 25% 19%
December-2002 93% 69% 53% 38% 29% 23% 18% 13%
December-2003 91% 63% 44% 30% 21% 16% 11% 8%
December-2004 89% 57% 38% 23% 15% 11% 7% 5%
December-2005 87% 51% 32% 18% 11% 8% 5% 3%
December-2006 85% 46% 27% 14% 8% 5% 3% 1%
December-2007 83% 41% 23% 11% 6% 4% 2% 1%
December-2008 80% 37% 20% 9% 4% 2% 1% 0%
December-2009 78% 34% 17% 7% 3% 1% 0% 0%
December-2010 75% 30% 14% 5% 2% 1% 0% 0%
December-2011 72% 27% 12% 4% 1% 0% 0% 0%
December-2012 68% 24% 10% 3% 1% 0% 0% 0%
December-2013 40% 14% 5% 1% 0% 0% 0% 0%
December-2014 38% 12% 4% 1% 0% 0% 0% 0%
December-2015 36% 11% 4% 0% 0% 0% 0% 0%
December-2016 34% 9% 3% 0% 0% 0% 0% 0%
December-2017 32% 8% 2% 0% 0% 0% 0% 0%
December-2018 29% 7% 2% 0% 0% 0% 0% 0%
December-2019 27% 6% 1% 0% 0% 0% 0% 0%
December-2020 25% 5% 1% 0% 0% 0% 0% 0%
December-2021 23% 4% 1% 0% 0% 0% 0% 0%
December-2022 21% 4% 0% 0% 0% 0% 0% 0%
December-2023 18% 3% 0% 0% 0% 0% 0% 0%
December-2024 15% 2% 0% 0% 0% 0% 0% 0%
December-2025 12% 1% 0% 0% 0% 0% 0% 0%
December-2026 8% 1% 0% 0% 0% 0% 0% 0%
December-2027 4% 0% 0% 0% 0% 0% 0% 0%
December-2028 0% 0% 0% 0% 0% 0% 0% 0%
Weighted
Average
LifeYears (1) 16.08 8.74 5.90 4.14 3.25 2.82 2.41 2.08
</TABLE>
- -----------------------------
(1) The weighted average life of the Class A Certificates is determined by (i)
multiplying the amount of each principal payment by the number of years
from the date of issuance to the related Payment Date, (ii) adding the
results, and (iii) dividing the sum by the initial respective Certificate
Principal Balance for such Class of Class A Certificates.
III-3
<PAGE>
PROSPECTUS
Asset Backed Certificates
(Issuable in Series)
ContiSecurities Asset Funding Corp.
(Depositor)
This Prospectus relates to Asset Backed Certificates to be issued from time
to time in one or more series (and one or more classes within a series), certain
classes of which may be offered on terms determined at the time of sale and
described in this Prospectus and the related Prospectus Supplement. Each series
of Certificates will be issued by a separate trust (each, a "Trust") and will
evidence either a beneficial ownership interest in, such Trust. The assets of a
Trust will include one or more of the following: (i) one-to-four family and/or
multifamily residential mortgage loans, including mortgage loans secured by
junior liens on the related mortgaged properties and Title I loans and other
types of home improvement retail installment contracts, (ii) conditional sales
contracts and installment sales or loan agreements or participation interests
therein secured by manufactured housing, (iii) mortgage-backed securities, (iv)
other mortgage-related assets and securities and (v) reinvestment income,
reserve funds, cash accounts, insurance policies, guaranties, letters of credit
or other assets as described in the related Prospectus Supplement.
One or more classes of Certificates of a series may be (i) entitled to
receive distributions allocable to principal, principal prepayments, interest or
any combination thereof prior to one or more other classes of Certificates of
such series or after the occurrence of certain events or (ii) subordinated in
the right to receive such distributions to one or more senior classes of
Certificates of such series, in each case as specified in the related Prospectus
Supplement. Interest on each class of Certificates entitled to distributions
allocable to interest may accrue at a fixed rate or at a rate that is subject to
change from time to time as specified in the related Prospectus Supplement. The
Depositor or its affiliates may retain or hold for sale from time to time one or
more classes of a series of Certificates.
Distributions on the Certificates will be made at the intervals and on the
dates specified in the related Prospectus Supplement from the assets of the
related Trust and any other assets pledged for the benefit of the Certificates.
An affiliate of the Depositor may make or obtain for the benefit of the
Certificates limited representations and warranties with respect to mortgage
assets assigned to the related Trust. Neither the Depositor nor any affiliates
will have any other obligation with respect to the Certificates.
The yield on Certificates will be affected by the rate of payment of
principal (including prepayments) of mortgage assets in the related Trust. Each
series of Certificates will be subject to early termination under the
circumstances described herein and in the related Prospectus Supplement.
If specified in a Prospectus Supplement, one or more separate elections may
be made to treat the Trust for the related series or specified portions thereof
as a "real estate mortgage investment conduit" ("REMIC") for federal income tax
purposes. See "Certain Federal Income Tax Consequences" herein and in the
related Prospectus Supplement.
It is a condition to the issuance of the Certificates that the Certificates
be rated in not less than the fourth highest rating category by a nationally
recognized rating organization.
See "Risk Factors" beginning on page 6 herein and in the related Prospectus
Supplement for a discussion of significant matters affecting investments in the
Certificates.
See "ERISA Considerations" herein and in the related Prospectus Supplement
for a discussion of restrictions on the acquisition of Certificates by "plan
fiduciaries."
THE ASSETS OF A TRUST ARE THE SOLE SOURCE OF PAYMENTS ON THE RELATED
CERTIFICATES. THE CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF
THE DEPOSITOR, ANY SERVICER, ANY MASTER SERVICER, ANY ORIGINATOR, ANY TRUSTEE OR
ANY OF THEIR AFFILIATES, EXCEPT AS SET FORTH HEREIN AND IN THE RELATED
PROSPECTUS SUPPLEMENT. NEITHER THE CERTIFICATES NOR THE UNDERLYING MORTGAGE
ASSETS WILL BE GUARANTEED OR INSURED BY ANY GOVERNMENTAL AGENCY OR
INSTRUMENTALITY OR BY THE DEPOSITOR, ANY SERVICER, ANY MASTER SERVICER, ANY
ORIGINATOR, ANY TRUSTEE OR ANY OF THEIR AFFILIATES, EXCEPT AS SET FORTH IN THE
RELATED PROSPECTUS SUPPLEMENT.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS OR ANY RELATED PROSPECTUS SUPPLEMENT.
ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
Offers of the Certificates may be made through one or more different
methods, including offerings through underwriters, as more fully described
herein and in the related Prospectus Supplement. See "Plan of Distribution"
herein and in the related Prospectus Supplement.
Prior to their issuance there will have been no market for the Certificates
nor can there by any assurance that one will develop or if it does develop, that
it will provide the Owners of the Certificates with liquidity or will continue
for the life of the Certificates.
Retain this Prospectus for future reference. This Prospectus may not be
used to consummate sales of Certificates unless accompanied by a Prospectus
Supplement.
- --------------------------------------------------------------------------------
The date of this Prospectus is September 17, 1998
<PAGE>
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and any Prospectus
Supplement with respect hereto and, if given or made, such information or
representations must not be relied upon. This Prospectus and any Prospectus
Supplement with respect hereto do not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the Certificates
offered hereby and thereby or an offer of such Certificates to any person in any
state or other jurisdiction in which such offer would be unlawful. The delivery
of this Prospectus at any time does not imply that information herein is correct
as of any time subsequent to its date; however, if any material change occurs
while this Prospectus is required by law to be delivered, this Prospectus will
be amended or supplemented accordingly.
TABLE OF CONTENTS
Page
SUMMARY OF PROSPECTUS..................................................1
RISK FACTORS...........................................................6
DESCRIPTION OF THE CERTIFICATES........................................9
General..........................................................9
Classes of Certificates.........................................10
Distributions of Principal and Interest.........................11
Book Entry Registration.........................................13
List of Owners of Certificates..................................13
THE TRUSTS............................................................13
Mortgage Loans..................................................14
Contracts.......................................................17
Mortgage-Backed Securities......................................17
Other Mortgage Securities.......................................18
CREDIT ENHANCEMENT....................................................18
SERVICING OF MORTGAGE LOANS AND CONTRACTS.............................23
Payments on Mortgage Loans......................................23
Advances........................................................24
Collection and Other Servicing Procedures.......................24
Primary Mortgage Insurance......................................26
Standard Hazard Insurance.......................................26
Title Insurance Policies........................................28
Claims Under Primary Mortgage Insurance Policies
and Standard Hazard Insurance Policies; Other
Realization Upon Defaulted Loan ................................28
Realization Upon or Sale of Defaulted Multifamily
Loans ..........................................................28
Servicing Compensation and Payment of Expenses..................29
Master Servicer.................................................29
ADMINISTRATION........................................................29
Assignment of Mortgage Assets...................................30
Evidence as to Compliance.......................................32
The Trustee.....................................................32
Administration of the Certificate Account.......................32
Reports.........................................................33
Forward Commitments; Pre-Funding................................34
Servicer Events of Default......................................34
Rights Upon Servicer Event of Default...........................34
Amendment.......................................................35
Termination.....................................................35
USE OF PROCEEDS.......................................................36
THE DEPOSITOR.........................................................36
CERTAIN LEGAL ASPECTS OF THE MORTGAGE ASSETS..........................36
General.........................................................36
Foreclosure.....................................................37
Soldiers' and Sailors' Civil Relief Act.........................42
The Contracts...................................................42
The Title I Program.............................................44
LEGAL INVESTMENT MATTERS..............................................48
ERISA CONSIDERATIONS..................................................49
CERTAIN FEDERAL INCOME TAX CONSEQUENCES...............................51
Federal Income Tax Consequences For REMIC Certificates..........51
Taxation of Regular Certificates................................52
Taxation of Residual Certificates...............................57
Treatment of Certain Items of REMIC Income and Expense..........58
Tax-Related Restrictions on Transfer of Residual Certificates...60
Sale or Exchange of a Residual Certificate......................62
Taxes That May Be Imposed on the REMIC Pool.....................62
Liquidation of the REMIC Pool...................................63
Administrative Matters..........................................63
Limitations on Deduction of Certain Expenses....................63
Taxation of Certain Foreign Investors...........................64
Backup Withholding..............................................65
Reporting Requirements..........................................65
Federal Income Tax Consequences for Certificates
as to Which No REMIC Election Is Made ..........................65
Standard Certificates...........................................66
Premium and Discount............................................67
Stripped Certificates...........................................68
Reporting Requirements and Backup Withholding...................70
Taxation of Certain Foreign Investors...........................71
Taxation of Securities Classified as Partnership Interests......71
PLAN OF DISTRIBUTION..................................................71
LEGAL MATTERS.........................................................72
FINANCIAL INFORMATION.................................................72
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS..........................73
Until 90 days after the date of each Prospectus Supplement, all dealers
effecting transactions in the related Certificates, whether or not participating
in the distribution thereof, may be required to deliver this Prospectus and the
related Prospectus Supplement. This delivery requirement is in addition to the
obligation of dealers to deliver a Prospectus Supplement and Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
AVAILABLE INFORMATION
The Depositor is subject to the informational requirements of the
Securities Exchange Act of 1934 (the "Exchange Act") and in accordance therewith
files reports and other information with the Securities and Exchange Commission
(the "Commission"). Such reports and other information filed by the Depositor
can be inspected and copied at the public reference facilities maintained by the
Commission at its Public Reference Section, 450 Fifth Street, N.W., Washington,
D.C. 20549, and its Regional Offices located as follows: Chicago Regional
Office, 500 West Madison, 14th Floor, Chicago, Illinois 60661; New York Regional
Office, Seven World Trade Center, New York, New York 10048. Copies of such
material can also be obtained at prescribed rates from the Public Reference
Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and
electronically through the Commission's
<PAGE>
Electronic Data Gathering, Analysis and Retrieval System at the Commission's web
site (http:\\www.sec.gov). The Depositor does not intend to send any financial
reports to Owners.
This Prospectus does not contain all of the information set forth in the
Registration Statement (of which this Prospectus forms a part) and exhibits
thereto which the Depositor has filed with the Commission under the Securities
act of 1933 (the "Securities Act") and to which reference is hereby made.
REPORTS TO OWNERS
The Trustee or other designated person will be required to provide periodic
unaudited reports concerning the Certificates and the Trust to all registered
holders of Certificates of the related series. See "Administration-Reports."
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed with respect to each respective Trust pursuant to
Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act subsequent to the date
of this Prospectus and prior to the termination of the offering of the
securities of such Trust offered hereby shall be deemed to be incorporated by
reference into this Prospectus when delivered with respect to such Trust. Any
statement contained in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
Any person receiving a copy of this Prospectus may obtain, without charge,
upon written or oral request, a copy of any of the documents incorporated by
reference herein, except for the exhibits to such documents (other than the
documents expressly incorporated therein by reference). Requests should be
directed to ContiSecurities Asset Funding Corp., 277 Park Avenue, 38th Floor,
New York, New York 10172 (telephone number (212) 207-2840).
<PAGE>
SUMMARY OF PROSPECTUS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the Prospectus Supplement relating to a particular series of Certificates and to
the related Agreement which will be prepared in connection with each series of
Certificates. Unless otherwise specified, capitalized terms used and not defined
in this Summary of Prospectus have the meanings given to them in this
Prospectus. An index indicating where certain capitalized terms used herein are
defined appears in Appendix A hereto.
Securities.................. Asset Backed Certificates, issuable from time to
time in series, in fully registered form or book
entry only form, in authorized denominations, as
described in the Prospectus Supplement (the
"Certificates"). Each Certificate will represent a
beneficial ownership interest in a trust (a
"Trust") created from time to time pursuant to a
pooling and servicing agreement or trust agreement
(each, an "Agreement").
The Depositor............... ContiSecurities Asset Funding Corp. (the
"Depositor") is a Delaware corporation. The
Depositor's principal executive offices are
located at 277 Park Avenue, 38th Floor, New York,
New York, 10172; telephone number (212) 207-2840.
See "The Depositor" herein. The Depositor or its
affiliates may retain or hold for sale from time
to time one or more classes of a series of
Certificates.
The Servicer................ The entity or entities named as the Servicer in
the Prospectus Supplement (the "Servicer"), will
act as servicer, with respect to the Mortgage
Loans and Contracts included in the related Trust.
The Servicer may be an affiliate of the Depositor
and may be a seller of Mortgage Assets to the
Depositor (each, a "Seller").
The Master Servicer......... A "Master Servicer" may be specified in the
related Prospectus Supplement for the related
series of Certificates.
The Trustee................. The trustee (the "Trustee") for each series of
Certificates will be specified in the related
Prospectus Supplement.
Trust Assets................ The assets of a Trust will be mortgage-related
assets (the "Mortgage Assets") consisting of one
or more of the following types of assets:
A. The Mortgage Loans...... "Mortgage Loans" may include: (i) conventional
(i.e., not insured or guaranteed by any
governmental agency) Mortgage Loans secured by
one-to-four family residential properties; (ii)
conventional multifamily mortgage loans
("Conventional Multifamily Loans") or mortgages
insured by the Federal Housing Administration (the
"FHA") ("FHA-Insured Multifamily Loans" and
together with the Conventional Multifamily Loans,
the "Multifamily Loans"); (iii) Mortgage Loans
secured by security interests in shares issued by
private, non-profit, cooperative housing
corporations ("Cooperatives") and in the related
proprietary leases or occupancy agreements
granting exclusive rights to occupy specific
dwelling units in such Cooperatives' buildings;
and, (iv) Mortgage Loans secured by junior liens
on the related mortgaged properties, including
Title I Loans and other types of home improvement
retail installment contracts. The Mortgage Loans
may be located in any one of the 50 states,
1
<PAGE>
the District of Columbia or the Commonwealth of
Puerto Rico. See "The Trusts - Mortgage Loans"
herein.
B. Contracts............... Contracts may include conditional sales contracts
and installment sales or loan agreements or
participation interests therein secured by new or
used Manufactured Homes (as defined herein).
Contracts may be conventional (i.e., not insured
or guaranteed by any government agency) or insured
by the FHA, including Title I Contracts, or
partially guaranteed by the Veterans
Administration ("VA"), as specified in the related
Prospectus Supplement. See "The Trusts -
Contracts" herein.
C. Mortgage-
Backed Securities....... "Mortgage-Backed Securities" (or "MBS") may
include (i) private (that is, not guaranteed or
insured by the United States or any agency or
instrumentality thereof) mortgage participations,
mortgage pass-through certificates or other
mortgage-backed securities or (ii) certificates
insured or guaranteed by Federal Home Loan
Mortgage Corporation ("FHLMC") or Federal National
Mortgage Association ("FNMA") or Government
National Mortgage Association ("GNMA"). See "The
Trusts - Mortgage-Backed Securities" herein.
D. Other Mortgage
Securities.............. Other Mortgage Securities may include other
securities that directly or indirectly represent
an ownership interest in, or are secured by and
payable from, mortgage loans on real property or
mortgage-backed securities, such as residual
interests in issuances of collateralized mortgage
obligations or mortgage pass-through certificates.
See "The Trusts - Other Mortgage Securities"
herein.
Trust assets may also include reinvestment income,
reserve funds, cash accounts, insurance policies,
guaranties, letters of credit or other assets as
described in the related Prospectus Supplement.
The related Prospectus Supplement for a series of
Certificates will describe the Mortgage Assets to
be included in the Trust for such series.
The Certificates............ The Certificates of any series may be issued in
one or more classes, as specified in the
Prospectus Supplement. One or more classes of
Certificates of each series (i) may be entitled to
receive distributions allocable only to principal,
only to interest or to any combination thereof;
(ii) may be entitled to receive distributions only
of prepayments of principal throughout the lives
of the Certificates or during specified periods;
(iii) may be subordinated in the right to receive
distributions of scheduled payments of principal,
prepayments of principal, interest or any
combination thereof to one or more other classes
of Certificates of such series throughout the
lives of the Certificates or during specified
periods; (iv) may be entitled to receive such
distributions only after the occurrence of events
specified in the Prospectus Supplement; (v) may be
entitled to receive distributions in accordance
with a schedule or formula or on the basis of
collections from designated portions of the assets
in the related Trust; (vi) as to Certificates
entitled to distributions allocable to interest,
may be entitled to receive interest at a fixed
rate or a rate that is subject to change from time
to time; (vii) may accrue interest, with such
accrued interest added to the principal or
notional amount of the Certificates, and no
payments being made thereon until certain other
classes of the series
2
<PAGE>
have been paid in full; and (viii) as to
Certificates entitled to distributions allocable
to interest, may be entitled to distributions
allocable to interest only after the occurrence of
events specified in the Prospectus Supplement and
may accrue interest until such events occur, in
each case as specified in the related Prospectus
Supplement. The timing and amounts of such
distributions may vary among classes, over time,
or otherwise as specified in the related
Prospectus Supplement.
Distributions on
the Certificates....... The related Prospectus Supplement will specify (i)
whether distributions on the Certificates entitled
thereto will be made monthly, quarterly,
semi-annually or at other intervals and dates out
of the payments received in respect of the
Mortgage Assets included in the related Trust and
other assets, if any, pledged for the benefit of
the related Owners of Certificates; (ii) the
amount allocable to payments of principal and
interest on any Distribution Date; and (iii)
whether all distributions will be made pro rata to
Owners of Certificates of the class entitled
thereto.
The aggregate original principal balance of the
Certificates will equal the aggregate
distributions allocable to principal that such
Certificates will be entitled to receive; the
Certificates will have an aggregate original
principal balance equal to or less than the
aggregate unpaid principal balance of the related
Mortgage Assets (plus amounts held in a
Pre-Funding Account, if any) as of the first day
of the month of creation of the Trust; and the
Certificates will bear interest in the aggregate
at a rate (the "Pass-Through Rate") equal to the
interest rate borne by the related Mortgage Assets
net of servicing fees and any other specified
amounts.
Pre-Funding Account......... A Trust may enter into an agreement (each, a
"Pre-Funding Agreement") with the Depositor
whereby the Depositor will agree to transfer
additional Mortgage Assets to such Trust following
the date on which such Trust is established and
the related Certificates are issued. Any
Pre-Funding Agreement will require that any
Mortgage Loans so transferred conform to the
requirements specified in such Pre-Funding
Agreement. If a Pre-Funding Agreement is to be
utilized, the related Trustee will be required to
deposit in a segregated account (each, a
"Pre-Funding Account") all or a portion of the
proceeds received by the Trustee in connection
with the sale of one or more classes of
Certificates of the related series; subsequently,
the additional Mortgage Assets will be transferred
to the related Trust in exchange for money
released to the Depositor from the related
Pre-Funding Account. Each Pre-Funding Agreement
will set a specified period during which any such
transfers must occur. If all moneys originally
deposited to such Pre-Funding Account are not used
by the end of such specified period, then any
remaining moneys will be applied as a mandatory
prepayment of a class or classes of Certificates
as specified in the related Prospectus Supplement.
The specified period for the acquisition by a
Trust of additional Mortgage Loans will generally
not exceed three months from the date such Trust
is established.
Optional Termination........ The Servicer, the Seller, the Depositor, or, if
specified in the related Prospectus Supplement,
the Owners of a related class of Certificates or a
credit enhancer may at their respective options
effect early retirement of a series of
Certificates through the purchase of the Mortgage
Assets in the related Trust. See "Administration -
Termination" herein.
3
<PAGE>
Mandatory Termination....... The Trustee, the Servicer or certain other
entities specified in the related Prospectus
Supplement may be required to effect early
retirement of a series of Certificates by
soliciting competitive bids for the purchase of
the assets of the related Trust or otherwise. See
"Administration - Termination" herein.
Advances.................... The Servicer of the Mortgage Loans and Contracts
will be obligated (but only to the extent set
forth in the related Prospectus Supplement) to
advance delinquent installments of principal
and/or interest (less applicable servicing fees)
on the Mortgage Loans and Contracts in a Trust.
Any such obligation to make advances may be
limited to amounts due to the Owners of
Certificates of the related series, to amounts
deemed to be recoverable from late payments or
liquidation proceeds, to specified periods or to
any combination thereof, in each case as specified
in the related Prospectus Supplement. Any such
advance will be recoverable as specified in the
related Prospectus Supplement. See "Servicing of
Mortgage Loans and Contracts" herein.
Credit Enhancement.......... If specified in the related Prospectus Supplement,
a series of Certificates, or certain classes
within such series, may have the benefit of one or
more types of credit enhancement ("Credit
Enhancement"), including, but not limited to,
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
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no REMIC election is made, whether the
Certificates are considered to be Standard
Certificates, Stripped Certificates or Partnership
Interests. The related Prospectus Supplement for
each series of Certificates will specify whether
one or more REMIC elections will be made. See
"Certain Federal Income Tax Consequences" herein
and in the related Prospectus Supplement.
ERISA Considerations........ A fiduciary of any employee benefit plan subject
to the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), or the Code should
carefully review with its own legal advisors
whether the purchase or holding of Certificates
could give rise to a transaction prohibited or
otherwise impermissible under ERISA or the Code.
Certain classes of Certificates may not be
transferred unless the Trustee and the Depositor
are furnished with a letter of representation or
an opinion of counsel to the effect that such
transfer will not result in a violation of the
prohibited transaction provisions of ERISA and the
Code and will not subject the Trustee, the
Depositor or the Servicer to additional
obligations. See "Description of the Certificates
- General" herein and "ERISA Considerations"
herein and in the related Prospectus Supplement.
Legal Investment Matters.... Certificates that constitute "mortgage related
securities" under the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA") will be so
described in the related Prospectus Supplement.
Certificates that are not so qualified may not be
legal investments for certain types of
institutional investors, subject, in any case, to
any other regulations which may govern investments
by such institutional investors. See "Legal
Investment Matters" herein and in the related
Prospectus Supplement.
Use of Proceeds............. Substantially all the net proceeds from the sale
of a series of Certificates will be applied to the
simultaneous purchase of the Mortgage Assets
included in the related Trust (or to reimburse the
amounts previously used to effect such purchase),
the costs of carrying the Mortgage Assets until
sale of the Certificates and to pay other
expenses. See "Use of Proceeds" herein.
Rating...................... Each class of Certificates offered by a Prospectus
Supplement will be rated in one of the four
highest rating categories of a nationally
recognized statistical rating agency; provided,
however, that one or more classes of Subordinated
Certificates and Residual Certificates, which will
not be so offered, need not be so rated.
Risk Factors................ Investment in the Certificates will be subject to
one or more risk factors, including declines in
the value of Mortgaged Properties, prepayment of
Mortgage Loans, higher risks of defaults on
particular types of Mortgage Loans, limitations on
security for the Mortgage Loans, limitations on
credit enhancement and various other factors. See
"Risk Factors" herein and in the related
Prospectus Supplement.
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RISK FACTORS
Prospective investors should consider, among other things, the following
risk factors in connection with the purchase of the Certificates:
General. If the residential real estate market in general or a regional or
local area where Mortgage Assets for a Trust are concentrated should experience
an overall decline in property values, or a significant downturn in economic
conditions, rates of delinquencies, foreclosures and losses could be higher than
those now generally experienced in the mortgage lending industry. See "The
Trusts - Mortgage Loans" herein.
Limited Obligations. The Certificates will not represent an interest in or
obligation of the Depositor. The Certificates of each series will not be insured
or guaranteed by any government agency or instrumentality, the Depositor, any
Servicer or the Seller.
Prepayment Considerations. The prepayment experience on Mortgage Loans or
Contracts constituting or underlying the Mortgage Assets will affect the average
life of each class of Certificates relating to a Trust. Prepayments may be
influenced by a variety of economic, geographic, social and other factors,
including changes in interest rate levels. In general, if mortgage interest
rates fall, the rate of prepayment would be expected to increase. Conversely, if
mortgage interest rates rise, the rate of prepayment would be expected to
decrease. Other factors affecting prepayment of mortgage loans include changes
in housing needs, job transfers, unemployment and servicing decisions. See
"Prepayment and Yield Considerations" in the related Prospectus Supplement.
Risk of Higher Default Rates for Mortgage Loans with Balloon Payments. A
portion of the aggregate principal balance of the Mortgage Loans at any time may
be "balloon loans" that provide for the payment of the unamortized principal
balance of such Mortgage Loan in a single payment at maturity ("Balloon Loans").
Such Balloon Loans provide for equal monthly payments, consisting of principal
and interest, generally based on a 30-year amortization schedule, and a single
payment of the remaining balance of the Balloon Loan generally 5, 7, 10, or 15
years after origination. Amortization of a Balloon Loan based on a scheduled
period that is longer than the term of the loan results in a remaining principal
balance at maturity that is substantially larger than the regular scheduled
payments. The Depositor does not have any information regarding the default
history or prepayment history of payments on Balloon Loans. Because borrowers of
Balloon Loans are required to make substantial single payments upon maturity, it
is possible that the default risk associated with the Balloon Loans is greater
than that associated with fully-amortizing Mortgage Loans.
Security Interests and Other Aspects of the Contracts. Contracts may be
secured by a security interest in a Manufactured Home. Perfection of security
interests in the Manufactured Homes and enforcement of rights to realize upon
the value of the Manufactured Homes as collateral for the Contracts are subject
to a number of Federal and state laws, including the Uniform Commercial Code as
adopted in each state and each state's certificate of title statutes. The steps
necessary to perfect the security interest in a Manufactured Home will vary from
state to state. Because of the expense and administrative inconvenience
involved, no party will be required to amend any certificates of title to change
the lienholder specified therein to the Trustee and no party will be required to
deliver any certificate of title to the Trustee or note thereon the Trustee's
interest. Consequently, in some states, in the absence of such an amendment, the
assignment to the Trustee of the security interest in the Manufactured Home may
not be effective or such security interest may not be perfected and, in the
absence of such notation or delivery to the Trustee, the assignment of the
security interest in the Manufactured Home may not be effective against
creditors of the previous owner of the related Contract or a trustee in
bankruptcy of such previous owner. In addition, numerous Federal and state
consumer protection laws impose requirements on lending under conditional sales
contracts and installment loan agreements such as the Contracts, and the failure
by the lender or seller of goods to comply with such requirements could give
rise to liabilities of assignees for amounts due under such agreements and
claims by such assignees may be subject to set-off as a result of such lender's
or seller's noncompliance. These laws would apply to the Trustee as assignee of
the Contracts. Each Seller of Contracts will warrant that each Contract sold by
it complies with all requirements of law and will make certain warranties
relating to the validity, subsistence, perfection and priority of the security
interest in each Manufactured Home securing a Contract. A breach of any
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such warranty that materially adversely affects any Contract would create an
obligation of the Seller to repurchase such Contract unless such breach is
cured. If any related Credit Enhancement is exhausted and recovery of amounts
due on the Contracts is dependent on repossession and resale of Manufactured
Homes securing Contracts that are in default, certain other factors may limit
the ability of the Trust to realize upon the Manufactured Homes or may limit the
amount realized to less than the amount due. See "Certain Legal Aspects of the
Mortgage Assets - The Contracts" herein.
Limited Liquidity. There will be no market for the Certificates of any
series prior to the issuance thereof, and there can be no assurance that a
secondary market will develop or, if it does develop, that it will provide
liquidity of investment or will continue for the life of the Certificates of
such series. The market value of the Certificates will fluctuate with changes in
prevailing rates of interest. Consequently, the sale of Certificates in any
market that may develop may be at a discount from the Certificates' par value or
purchase price. Owners of Certificates generally have no right to request
redemption of Certificates, and the Certificates are subject to redemption only
under the limited circumstances described in the related Prospectus Supplement.
In addition, the Certificates will not be listed on any securities exchange.
Limited Assets. Owners of Certificates of each series must rely upon
distributions on the related Mortgage Assets, together with the other specific
assets pledged for the benefit of such series (which assets may be subject to
release from such pledge prior to payment in full of the Certificates), for the
payment of principal of, and interest on, that series of Certificates. If the
assets comprising the Trust are insufficient to make payments on such
Certificates, no other assets of the Depositor will be available for payment of
the deficiency. Because payments of principal will be applied to classes of
outstanding Certificates of a series in the priority specified in the related
Prospectus Supplement, a deficiency may have a disproportionately greater effect
on the Certificates of classes having lower priority in payment. In addition,
due to the priority of payments and the allocation of losses, defaults
experienced on the assets comprising a Trust may have a disproportionate effect
on a specified class or classes within such series.
Certain of the Mortgage Loans included in a Trust, particularly those
secured by Multifamily Properties, may not be fully amortizing (or may not
amortize at all) over their terms to maturity and, thus, will require
substantial payments of principal and interest (that is, balloon payments) at
their stated maturity. Mortgage Loans of this type involve a greater degree of
risk than self-amortizing loans because the ability of a Mortgagor to make a
balloon payment typically will depend upon its ability either to fully refinance
the loan or to sell the related Mortgaged Property at a price sufficient to
permit the Mortgagor to make the balloon payment. The ability of a Mortgagor to
accomplish either of these goals will be affected by a number of factors,
including the value of the related Mortgaged Property, the level of available
mortgage rates at the time of sale or refinancing, the Mortgagor's equity in the
related Mortgaged Property, prevailing general economic conditions, the
availability of credit for loans secured by comparable real properties and, in
the case of Multifamily Properties, the financial condition and operating
history of the Mortgagor and the related Mortgaged Property, tax laws and rent
control laws.
It is anticipated that some or all of the Mortgage Loans included in any
Trust, particularly Mortgage Loans secured by Multifamily Properties, will be
nonrecourse loans or loans for which recourse may be restricted or
unenforceable. As to those Mortgage Loans, recourse in the event of Mortgagor
default will be limited to the specific real property and other assets, if any,
that were pledged to secure the Mortgage Loan. However, even with respect to
those Mortgage Loans that provide for recourse against the Mortgagor and its
assets generally, there can be no assurance that enforcement of such recourse
provisions will be practicable, or that the other assets of the Mortgagor will
be sufficient to permit a recovery in respect of a defaulted Mortgage Loan in
excess of the liquidation value of the related Mortgaged Property.
Limitations, Reduction and Substitution of Credit Enhancement. Credit
Enhancement may be provided in one or more of the forms described in the related
Prospectus Supplement, including, but not limited to, prioritization as to
payments of one or more classes of such series, a Mortgage Pool Insurance
Policy, a Special Hazard Insurance Policy, a bankruptcy bond, one or more
Reserve Funds, other insurance, guaranties and similar instruments and
agreements, or any combination thereof. See "Credit Enhancement" herein.
Regardless of the Credit Enhancement provided, the amount of coverage may be
limited in amount and in most cases will be subject to periodic reduction in
accordance with a schedule or formula. Furthermore, such Credit Enhancement may
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
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may be permitted to reduce, terminate or substitute all or a portion of the
Credit Enhancement for any series of Certificates, if the applicable rating
agencies indicate that the then-current rating thereof will not be adversely
affected.
Original Issue Discount. All the Compound Interest Certificates and
Stripped Certificates that are entitled only to interest distributions will be,
and certain of the other Certificates may be, issued with original issue
discount for federal income tax purposes. An Owner of a Certificate issued with
original issue discount will be required to include original issue discount in
ordinary gross income for federal income tax purposes as it accrues, in advance
of receipt of the cash attributable to such income. Accrued but unpaid interest
on such Certificates generally will be treated as original issue discount for
this purpose. See "Certain Federal Income Tax Consequences - Federal Income Tax
Consequences for REMIC Certificates," "- Taxation of Regular Certificates -
Variable Rate Regular Certificates," "Certain Federal Income Tax Consequences -
Federal Income Tax Consequences for Certificates as to Which No REMIC Election
Is Made - Standard Certificates," and "Certain Federal Income Tax Consequences -
Premium and Discount" and "- Stripped Certificates" herein.
Book Entry Registration. Because transfers and pledges of Book Entry
Certificates may be effected only through book entries at a Clearing Agency
through Clearing Agency Participants, the liquidity of the secondary market for
Book Entry Certificates may be reduced to the extent that some investors are
unwilling to hold Certificates in book entry form in the name of Clearing Agency
Participants and the ability to pledge Book Entry Certificates may be limited
due to lack of a physical certificate. Beneficial Owners of Book Entry
Certificates may, in certain cases, experience delay in the receipt of payments
of principal and interest because such payments will be forwarded by the Trustee
to the Clearing Agency who will then forward payment to the Clearing Agency
Participants who will thereafter forward payment to Beneficial Owners. In the
event of the insolvency of the Clearing Agency or of a Clearing Agency
Participant in whose name Certificates are recorded, the ability of Beneficial
Owners to obtain timely payment and (if the limits of applicable insurance
coverage by the Securities Investor Protection Corporation are exceeded, or if
such coverage is otherwise unavailable) ultimate payment of principal and
interest on Book Entry Certificates may be impaired.
Certain Matters Relating to Insolvency. The Sellers of the Mortgage Assets
to the Depositor and the Depositor intend that the transfers of such Mortgage
Assets to the Depositor, and in turn to the applicable Trust, constitute sales
rather than pledges to secure indebtedness for insolvency purposes. If, however,
a seller of Mortgage Assets were to become a debtor under the federal bankruptcy
code, it is possible that a creditor, trustee-in-bankruptcy or receiver of such
seller may argue that the sale thereof by such Seller is a pledge rather than a
sale. This position, if argued or accepted by a court, could result in a delay
in or reduction of distributions on the related Certificates.
Junior Lien Mortgage Loans. Because Mortgage Loans secured by junior (i.e.,
second, third, etc.) liens are subordinate to the rights of the beneficiaries
under the related senior deeds of trust or senior mortgages, a decline in the
residential real estate market would adversely affect the position of the
related Trust as a junior beneficiary or junior mortgagee before having such an
effect on the position of the related senior beneficiaries or senior mortgagees.
A rise in interest rates over a period of time, the general condition of a
Mortgaged Property and other factors may also have the effect of reducing the
value of the Mortgaged Property from the value at the time the junior lien
Mortgage Loan was originated and, as a result, may reduce the likelihood that,
in the event of a default by the borrower, liquidation or other proceeds will be
sufficient to satisfy the junior lien Mortgage Loan after satisfaction of any
senior liens and the payment of any liquidation expenses.
Liquidation expenses with respect to defaulted Mortgage Loans do not vary
directly with the outstanding principal balance of the Mortgage Loans at the
time of default. Therefore, assuming that a Servicer took the same steps in
realizing upon defaulted Mortgage Loans having small remaining principal
balances as in the case of defaulted Mortgage Loans having larger principal
balances, the amount realized after expenses of liquidation would be smaller as
a percentage of the outstanding principal balance of the smaller Mortgage Loans.
To the extent the average outstanding principal balances of the Mortgage Loans
in a Trust are relatively small, realizations net of liquidation expenses may
also be relatively small as a percentage of the principal amount of the Mortgage
Loans.
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Limitations on Interest Payments and Foreclosures. Generally, under the
terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as amended (the
"Relief Act"), or similar state legislation, a Mortgagor who enters military
service after the origination of the related Mortgage Loan (including a
Mortgagor who is a member of the National Guard or is in reserve status at the
time of the origination of the Mortgage Loan and is later called to active duty)
may not be charged interest (including fees and charges) above an annual rate of
6% during the period of such Mortgagor's active duty status, unless a court
orders otherwise upon application of the lender. It is possible that such action
could have an effect, for an indeterminate period of time, on the ability of the
related Servicer to collect full amounts of interest on certain of the Mortgage
Loans. In addition, the Relief Act imposes limitations that would impair the
ability of the related Servicer to foreclose on an affected Mortgage Loan during
the Mortgagor's period of active duty status. Thus, in the event that such a
Mortgage Loan goes into default, there may be delays and losses occasioned by
the inability to realize upon the Mortgaged Property in a timely fashion.
Security Ratings. The rating of Certificates credit enhanced through
external credit enhancement such as a letter of credit, financial guaranty
insurance policy or mortgage pool insurance will depend primarily on the
creditworthiness of the issuer of such external credit enhancement device (a
"Credit Enhancer"). Any reduction in the rating assigned to the claims-paying
ability of the related Credit Enhancer below the rating initially given to the
related Certificates would likely result in a reduction in the rating of the
Certificates. See "Ratings" in the Prospectus Supplement.
Other Legal Considerations. Applicable federal and state laws generally
regulate interest rates and other charges, require certain disclosures, prohibit
unfair and deceptive practices, regulate debt collection, and require licensing
of the originators of the mortgage loans and contracts. Depending on the
provisions of the applicable law and the specified facts and circumstances
involved, violations of those laws, policies and principles may limit the
ability to collect all or part of the principal of or interest on the Mortgage
Loans and Contracts and may entitle the borrower to a refund of amounts
previously paid. See "Certain Legal Aspects of the Mortgage Assets" herein.
DESCRIPTION OF THE CERTIFICATES
Each Trust will be created pursuant to an Agreement entered into among the
Depositor, the Trustee, the Master Servicer, if any, and the Servicer. The
provisions of each Agreement will vary depending upon the nature of the
Certificates to be issued thereunder and the nature of the related Trust.
Certificates which represent beneficial interests in the Trust will be issued
pursuant to the Agreement similar to the form filed as an Exhibit to the
Registration Statement of which this Prospectus is a part. The following
summaries and the summaries set forth under "Administration" describe certain
provisions relating to each series of Certificates. The Prospectus Supplement
for a series of Certificates will describe the specific provisions relating to
such series. The Depositor will provide Owners of Certificates, without charge,
on written request a copy of the Agreement for the related series. Requests
should be addressed to ContiSecurities Asset Funding Corp., 277 Park Avenue,
38th Floor, New York, New York 10172. The Agreement relating to a series of
Certificates will be filed with the Securities and Exchange Commission within 15
days after the date of issuance of such series of Certificates (the "Delivery
Date").
The Certificates of a series will be entitled to payment only from the
assets of the Trust and any other assets pledged for the benefit of the
Certificates and will not be entitled to payments in respect of the assets
included in any other trust fund established by the Depositor. The Certificates
will not represent obligations of the Depositor, the Trustee, the Master
Servicer, if any, any Servicer or any affiliate thereof and will not be
guaranteed by any governmental agency. See "The Trusts" herein.
The Mortgage Assets relating to a series of Certificates, other than Title
I Loans and GNMA MBS, will not be insured or guaranteed by any governmental
entity and, to the extent that delinquent payments on or losses in respect of
defaulted Mortgage Assets, are not advanced or paid from any applicable Credit
Enhancement, such delinquencies may result in delays in the distribution of
payments on, or losses allocated to one or more classes of Certificates of such
series.
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General
The Certificates of each series will be issued either in book entry form or
in fully registered form. The minimum original denomination of each class of
Certificates will be specified in the related Prospectus Supplement. The
original "Certificate Principal Balance" of each Certificate will equal the
aggregate distributions or payments allocable to principal to which such
Certificate is entitled and distributions allocable to interest on each
Certificate that is not entitled to distributions allocable to principal will be
calculated based on the "Notional Principal Balance" of such Certificate. The
Notional Principal Balance of a Certificate will not evidence an interest in or
entitlement to distributions allocable to principal but will be used solely for
convenience in expressing the calculation of interest and for certain other
purposes.
Except as described below under "Book Entry Registration" with respect to
Book Entry Certificates, the Certificates of each series will be transferable
and exchangeable on a "Certificate Register" to be maintained at the corporate
trust office or such other office or agency maintained for such purposes by the
Trustee. The Trustee will be appointed initially as the "Certificate Registrar"
and no service charge will be made for any registration of transfer or exchange
of Certificates, but payment of a sum sufficient to cover any tax or other
governmental charge may be required.
Under current law the purchase and holding of certain classes of
Certificates may result in "prohibited transactions" within the meaning of ERISA
and the Code. See "ERISA Considerations" herein and in the related Prospectus
Supplement. Transfer of Certificates of such a class will not be registered
unless the transferee (i) executes a representation letter stating that it is
not, and is not purchasing on behalf of, any such plan, account or arrangement
or (ii) provides an opinion of counsel satisfactory to the Trustee and the
Depositor that the purchase of Certificates of such a class by or on behalf of
such plan, account or arrangement is permissible under applicable law and will
not subject the Trustee, the Servicer or the Depositor to any obligation or
liability in addition to those undertaken in the Agreement.
As to each series, one or more elections may be made to treat the related
Trust or designated portions thereof as a REMIC for federal income tax purposes.
The related Prospectus Supplement will specify whether a REMIC election is to be
made. Alternatively, the Agreement for a series may provide that a REMIC
election may be made at the discretion of the Depositor or the Servicer and may
only be made if certain conditions are satisfied. See "Certain Federal Income
Tax Considerations" herein. As to any such series, the terms and provisions
applicable to the making of a REMIC election, as well as any material federal
income tax consequences to Owners of Certificates not otherwise described
herein, will be set forth in the related Prospectus Supplement. If such an
election is made with respect to a series, one of the classes will be designated
as evidencing the "residual interests" in the related REMIC, as defined in the
Code. All other classes of Certificates in such a series will constitute
"regular interests" in the related REMIC, as defined in the Code. As to each
series with respect to which a REMIC election is to be made, the Servicer, the
Trustee, an Owner of Residual Certificates or another person as specified in the
related Prospectus Supplement will be obligated to take all actions required in
order to comply with applicable laws and regulations and will be obligated to
pay any prohibited transaction taxes. The person so specified will be entitled
to reimbursement for any such payment.
Classes of Certificates
Each series of Certificates will be issued in one or more classes which
will evidence the beneficial ownership in the assets of the Trust that are
allocable to (i) principal of such class of Certificates and (ii) interest on
such Certificates. If specified in the Prospectus Supplement, one or more
classes of a series of Certificates may evidence beneficial ownership interests
in separate groups of assets included in the related Trust.
The Certificates will have an aggregate original Certificate Principal
Balance equal to the aggregate unpaid principal balance of the Mortgage Assets
(plus, amounts held in a Pre-Funding Account, if any) as of the time and day
prior to creation of the Trust specified in the related Prospectus Supplement
(the "Cut-Off Date") after deducting payments of principal due before the
Cut-Off Date and will bear interest at rates which, on a weighted basis, will be
equal to the Pass-Through Rate. The Pass-Through Rate will equal the weighted
average rate of interest borne by
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the related Mortgage Assets, net of the aggregate servicing fees, amounts
allocated to the residual interests and any other amounts as are specified in
the Prospectus Supplement. The original Certificate Principal Balance (or
Notional Principal Balance) of the Certificates of a series and the interest
rate on the classes of such Certificates will be determined in the manner
specified in the Prospectus Supplement.
Each class of Certificates that is entitled to distributions allocable to
interest will bear interest at a fixed rate or a rate that is subject to change
from time to time (a) in accordance with a schedule, (b) by reference to an
index, or (c) otherwise (each, a "Certificate Interest Rate"). One or more
classes of Certificates may provide for interest that accrues but is not
currently payable ("Compound Interest Certificates"). With respect to any class
of Compound Interest Certificates, any interest that has accrued but is not paid
on a given Distribution Date will be added to the aggregate Certificate
Principal Balance of such class of Certificates on that Distribution Date.
A series of Certificates may include one or more classes entitled only to
distributions or payments (i) allocable to interest, (ii) allocable to principal
(and allocable as between scheduled payments of principal and Principal
Prepayments, as defined below), or (iii) allocable to both principal (and
allocable as between scheduled payments of principal and Principal Prepayments)
and interest. A series of Certificates may consist of one or more classes as to
which distributions or payments will be allocated (i) on the basis of
collections from designated portions of the assets of the Trust, (ii) in
accordance with a schedule or formula, (iii) in relation to the occurrence of
events, or (iv) otherwise. The timing and amounts of such distributions or
payments may vary among classes, over time or otherwise.
A series of Certificates may include one or more Classes of Scheduled
Amortization Certificates and Companion Certificates. "Scheduled Amortization
Certificates" are Certificates with respect to which payments of principal are
to be made in specified amounts on specified Distribution Dates, to the extent
of funds available on such Distribution Date. "Companion Certificates" are
Certificates which receive payments of all or a portion of any funds available
on a given Distribution Date which are in excess of amounts required to be
applied to payments on Scheduled Amortization Certificates on such Distribution
Date. Because of the manner of application of payments of principal to Companion
Certificates, the weighted average lives of Companion Certificates of a series
may be expected to be more sensitive to the actual rate of prepayments on the
Mortgage Assets in the related Trust than will the Scheduled Amortization
Certificates of such series.
One or more series of Certificates may constitute series of "Special
Allocation Certificates", which may include Senior Certificates, Subordinated
Certificates, Priority Certificates and Non-Priority Certificates. As specified
in the related Prospectus Supplement for a series of Special Allocation
Certificates, the timing and/or priority of payments of principal and/or
interest may favor one or more classes of Certificates over one or more other
classes of Certificates. Such timing and/or priority may be modified or
reordered upon the occurrence of one or more specified events. Losses on Trust
assets for such series may be disproportionately borne by one or more classes of
such series, and the proceeds and distributions from such assets may be applied
to the payment in full of one or more classes within such series before the
balance, if any, of such proceeds are applied to one or more other classes
within such series. For example, Special Allocation Certificates in a series may
be comprised of one or more classes of Senior Certificates having a priority in
right to distributions of principal and interest over one or more classes of
Subordinated Certificates, as a form of Credit Enhancement. See "Credit
Enhancement - Subordination" herein. Typically, the Subordinated Certificates
will carry a rating by the rating agencies lower than that of the Senior
Certificates. In addition, one or more classes of Certificates ("Priority
Certificates") may be entitled to a priority of distributions of principal or
interest from assets in the Trust over another class of Certificates
("Non-Priority Certificates"), but only after the exhaustion of other Credit
Enhancement applicable to such series. The Priority Certificates and
Non-Priority Certificates nonetheless may be within the same rating category.
Distributions of Principal and Interest
General. Distributions of principal and interest will be made to the extent
of funds available therefor, on the dates specified in the Prospectus Supplement
(each, a "Distribution Date") to the persons in whose names the Certificates are
registered (the "Owners") at the close of business on the dates specified in the
Prospectus Supplement (each, a "Record Date"). With respect to Certificates
other than Book Entry Certificates, distributions
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will be made by check or money order mailed to the person entitled thereto at
the address appearing in the Certificate Register or, if specified in the
Prospectus Supplement, in the case of Certificates that are of a certain minimum
denomination as specified in the Prospectus Supplement, upon written request by
the Owner of a Certificate, by wire transfer or by such other means as are
agreed upon with the person entitled thereto; provided, however, that the final
distribution in retirement of the Certificates (other than Book Entry
Certificates) will be made only upon presentation and surrender of the
Certificates at the office or agency of the Trustee specified in the notice of
such final distribution. With respect to Book Entry Certificates, such payments
will be made as described below under "Book Entry Registration".
Distributions will be made out of, and only to the extent of, funds in a
separate account established and maintained for the benefit of the Certificates
of the related series (the "Certificate Account" with respect to such series),
including any funds transferred from any related Reserve Fund. Amounts may be
invested in the Eligible Investments specified herein and in the Prospectus
Supplement, and all income or other gain from such investments will be deposited
in the related Certificate Account and may be available to make payments on the
Certificates of the applicable series on the next succeeding Distribution Date
or pay after amounts owed by the Trust.
Distributions of Interest. Interest will accrue on the aggregate
Certificate Principal Balance (or, in the case of Certificates entitled only to
distributions allocable to interest, the aggregate Notional Principal Balance
(as defined below)) of each class of Certificates entitled to interest from the
date, at the applicable Certificate Interest Rate and for the periods (each, an
"Interest Accrual Period") specified in the Prospectus Supplement. The aggregate
Certificate Principal Balance of any class of Certificates entitled to
distributions of principal will be the aggregate original Certificate Principal
Balance of such class of Certificates, reduced by all distributions allocable to
principal, and, in the case of Compound Interest Certificates, increased by all
interest accrued but not then distributable on such Compound Interest
Certificates. With respect to a class of Certificates entitled only to
distributions allocable to interest, such interest will accrue on a notional
principal balance (the "Notional Principal Balance") of such class, computed
solely for purposes of determining the amount of interest accrued and payable on
such class of Certificates.
To the extent funds are available therefor, interest accrued during each
Interest Accrual Period on each class of Certificates entitled to interest
(other than a class of Compound Interest Certificates) will be distributable on
the Distribution Dates specified in the Prospectus Supplement until the
aggregate Certificate Principal Balance of the Certificates of such class has
been distributed in full or, in the case of Certificates entitled only to
distributions allocable to interest, until the aggregate Notional Principal
Balance of such Certificates is reduced to zero or for the period of time
designated in the Prospectus Supplement. Distributions of interest on each class
of Compound Interest Certificates will commence only after the occurrence of the
events specified in the Prospectus Supplement and, prior to such time, the
aggregate Certificate Principal Balance (or Notional Principal Balance) of such
class of Compound Interest Certificates, will increase on each Distribution Date
by the amount of interest that accrued on such class of Compound Interest
Certificates during the preceding Interest Accrual Period but that was not
required to be distributed to such class on such Distribution Date. Any such
class of Compound Interest Certificates will thereafter accrue interest on its
outstanding Certificate Principal Balance (or Notional Principal Balance) as so
adjusted.
Distributions of Principal. The Prospectus Supplement will specify the
method by which the amount of principal to be distributed on the Certificates on
each Distribution Date will be calculated and the manner in which such amount
will be allocated among the classes of Certificates entitled to distributions of
principal.
One or more classes of Certificates may be entitled to receive all or a
disproportionate percentage of the payments of principal which are received on
the related Mortgage Assets in advance of their scheduled due dates and are not
accompanied by amounts representing scheduled interest due after the month of
such payments ("Principal Prepayments"). Any such allocation may have the effect
of accelerating the amortization of such Certificates relative to the interests
evidenced by the other Certificates.
Unscheduled Distributions. The Certificates of a series may be subject to
receipt of distributions before the next scheduled Distribution Date under the
circumstances and in the manner described below and in the related
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Prospectus Supplement. If applicable, such unscheduled distributions will be
made on the Certificates of a series on the date and in the amount specified in
the related Prospectus Supplement if, due to substantial payments of principal
(including Principal Prepayments) on the related Mortgage Assets, low rates then
available for reinvestment of such payments or both, it is determined, based on
specified assumptions, that the amount anticipated to be on deposit in the
Certificate Account for such series on the next related Distribution Date,
together with, if applicable, any amounts available to be withdrawn from any
related Reserve Fund or from any other Credit Enhancement provided for such
series, may be insufficient to make required distributions on the Certificates
on such Distribution Date. The amount of any such unscheduled distribution that
is allocable to principal will not exceed the amount that would otherwise have
been required to be distributed as principal on the Certificates on the next
Distribution Date and will include interest at the applicable Certificate
Interest Rate (if any) on the amount of the unscheduled distribution allocable
to principal for the period and to the date specified in the Prospectus
Supplement.
All distributions allocable to principal in any unscheduled distribution
will be made in the same priority and manner as distributions of principal on
the Certificates would have been made on the next Distribution Date except as
otherwise stated in the related Prospectus Supplement, and, with respect to
Certificates of the same class, unscheduled distributions of principal will be
made on a pro rata basis. Notice of any unscheduled distribution will be given
by the Trustee prior to the date of such distribution.
Book Entry Registration
Certificates may be issued as Book Entry Certificates and held in the name
of a Clearing Agency registered with the Securities and Exchange Commission or
its nominee. Transfers and pledges of Book Entry Certificates may be made only
through entries on the books of the Clearing Agency in the name of Clearing
Agency Participants or their nominees. Clearing Agency Participants may also be
Beneficial Owners of Book Entry Certificates.
Purchasers and other Beneficial Owners may not hold Book Entry Certificates
directly but may hold, transfer or pledge their ownership interest in the
Certificates only through Clearing Agency Participants. Furthermore, Beneficial
Owners will receive all payments of principal and interest with respect to the
Certificates and, if applicable, may request redemption of Certificates, only
through the Clearing Agency and the Clearing Agency Participants. Beneficial
Owners will not be registered Owners of Certificates or be entitled to receive
definitive certificates representing their ownership interest in the
Certificates except under the limited circumstances, if any, described in the
related Prospectus Supplement. See "Risk Factors - Book Entry Registration"
herein.
If Certificates of a series are issued as Book Entry Certificates, the
Clearing Agency will be required to make book entry transfers among Clearing
Agency Participants, to receive and transmit payments of principal and interest
with respect to the Certificates of such series, and to receive and transmit
requests for redemption with respect to such Certificates. Clearing Agency
Participants with whom Beneficial Owners have accounts with respect to such Book
Entry Certificates will be similarly required to make book entry transfers and
receive and transmit payments and redemption requests on behalf of their
respective Beneficial Owners. Accordingly, although Beneficial Owners will not
be registered Owners of Certificates and will not possess physical certificates,
a method will be provided whereby Beneficial Owners may receive payments,
transfer their interests, and submit redemption requests.
List of Owners of Certificates
Upon written request of a specified number or percentage interests of
Owners of Certificates of record of a series of Certificates for purposes of
communicating with other Owners of Certificates with respect to their rights as
Owners of Certificates, the Trustee will afford such Owners access during
business hours to the most recent list of Owners of Certificates of that series
held by the Trustee. With respect to Book Entry Certificates, the only named
Owner on the Certificate Register will be the Clearing Agency.
The Agreement will not provide for the holding of any annual or other
meetings of Owners of Certificates.
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THE TRUSTS
The Trust for a series of Certificates will consist of: (i) the Mortgage
Assets (subject, if specified in the Prospectus Supplement, to certain
exclusions) received on and after the related Cut-Off Date; (ii) all payments
(subject, if specified in the Prospectus Supplement, to certain exclusions) in
respect of such Mortgage Assets, which may be adjusted, to the extent specified
in the related Prospectus Supplement, in the case of interest payments on
Mortgage Assets, to the Pass-Through Rate; (iii) if specified in the Prospectus
Supplement, reinvestment income on such payments; (iv) with respect to a Trust
that includes Mortgage Loans, or Contracts, all property acquired by foreclosure
or deed in lieu of foreclosure with respect to any such Mortgage Loan or
Contract; (v) certain rights of the Trustee, the Depositor and the Servicer
under any policies required to be maintained in respect of the related Mortgage
Assets; (vi) certain rights of the Depositor or one of its affiliates under any
Mortgage Loan purchase agreement, including in respect of any representations
and warranties therein; and (vii) if so specified in the Prospectus Supplement,
one or more forms of Credit Enhancement.
The Certificates of each series will be entitled to payment only from the
assets of the related Trust and any other assets pledged therefor and will not
be entitled to payments in respect of the assets of any other trust established
by the Depositor.
Mortgage Assets may be acquired by the Depositor from affiliated or
unaffiliated originators. The following is a brief description of the Mortgage
Assets expected to be included in the Trusts. If specific information respecting
the Mortgage Assets is not known at the time the related series of Certificates
initially are offered, more general information of the nature described below
will be provided in the related Prospectus Supplement, and specific information
will be set forth in a report on Form 8-K to be filed with the Securities and
Exchange Commission within fifteen days after the initial issuance of such
Certificates. A copy of the Agreement with respect to each series of
Certificates will be attached to the Form 8-K and will be available for
inspection at the corporate trust office of the Trustee specified in the related
Prospectus Supplement. A schedule of the Mortgage Assets relating to each series
of Certificates, will be attached to the related Agreement delivered to the
Trustee upon delivery of such Certificates.
Mortgage Loans
The Mortgage Loans will be evidenced by promissory notes (the "Mortgage
Notes") secured by mortgages or deeds of trust (the "Mortgages") creating liens
on residential properties (the "Mortgaged Properties"). Such Mortgage Loans will
be within the broad classifications of single family mortgage loans, defined
generally as loans on residences containing one-to-four dwelling units or
multifamily loans. If specified in the Prospectus Supplement, the Mortgage Loans
may include cooperative apartment loans ("Cooperative Loans") secured by
security interests in shares issued by Cooperatives and in the related
proprietary leases or occupancy agreements granting exclusive rights to occupy
specific dwelling units in such Cooperatives' buildings, or the Mortgage Loans
may be secured by junior liens on the related mortgaged properties, including
Title I Loans and other types of home improvement retail installment contracts.
The Mortgaged Properties securing the Mortgage Loans may include investment
properties and vacation and second homes. The Mortgaged Property for such loans
may also consist of residential properties consisting of five or more rental or
cooperatively-owned dwelling units in high-rise, mid-rise or garden apartment
buildings or projects ("Multifamily Properties"). Each Mortgage Loan will be
selected by the Depositor for inclusion in the Trust from among those acquired
by the Depositor or originated or acquired by one or more affiliated or
unaffiliated originators, including newly originated loans. Mortgaged Properties
may be located in any one of the 50 states, the District of Columbia or the
Commonwealth of Puerto Rico.
The Mortgage Loans will be "conventional" mortgage loans, that is they will
not be insured or guaranteed by any governmental agency, the principal and
interest on the Mortgage Loans included in the Trust for a series of
Certificates will be payable either on the first day of each month or on
different scheduled days throughout each month, and the interest will be
calculated either on a simple-interest or accrual method as described in the
related Prospectus Supplement. When a full principal amount is paid on a
Mortgage Loan during a month, the mortgagor is generally charged interest only
on the days of the month actually elapsed up to the date of such prepayment, at
a daily interest rate that is applied to the principal amount of the Mortgage
Loan so prepaid.
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The payment terms of the Mortgage Loans to be included in a Trust for a
series will be described in the related Prospectus Supplement and may include
any of the following features or combinations thereof or other features
described in the related Prospectus Supplement:
(a) Interest may be payable at a fixed rate, a rate adjustable from
time to time in relation to an index, a rate that is fixed for a period of
time or under certain circumstances and followed by an adjustable rate, a
rate that otherwise varies from time to time, or a rate that is convertible
from an adjustable rate to a fixed rate. Changes to an adjustable rate may
be subject to periodic limitations, maximum rates, minimum rates or a
combination of such limitations. Accrued interest may be deferred and added
to the principal of a Mortgage Loan for such periods and under such
circumstances as may be specified in the related Prospectus Supplement.
Mortgage Loans may provide for the payment of interest at a rate lower than
the specified mortgage rate for a period of time or for the life of the
Mortgage Loan with the amount of any difference contributed from funds
supplied by the seller of the Mortgaged Property or another source.
(b) Principal may be payable on a level debt service basis to fully
amortize the Mortgage Loan over its term, may be calculated on the basis of
an amortization schedule that is longer than the original term to maturity
or on an interest rate that is different from the interest rate on the
Mortgage Loan or may not be amortized during all or a portion of the
original term. Payment of all or a substantial portion of the principal may
be due on maturity. Principal may include interest that has been deferred
and added to the principal balance of the Mortgage Loan.
(c) Monthly payments of principal and interest may be fixed for the
life of the Mortgage Loan, may increase over a specified period of time or
may change from period to period. Mortgage Loans may include limits on
periodic increases or decreases in the amount of monthly payments and may
include maximum or minimum amounts of monthly payments.
(d) Prepayments of principal may be subject to a prepayment fee, which
may be fixed for the life of the Mortgage Loan or may decline over time,
and may be prohibited for the life of the Mortgage Loan or for certain
periods ("lockout periods"). Certain Mortgage Loans may permit prepayments
after expiration of the applicable lockout period and may require the
payment of a prepayment fee in connection with any such subsequent
prepayment. Other Mortgage Loans may permit prepayments without payment of
a fee unless the prepayment occurs during specified time periods. The
Mortgage Loans may include "due-on-sale" clauses which permit the mortgagee
to demand payment of the entire Mortgage Loan in connection with the sale
or certain transfers of the related mortgaged property. Other Mortgage
Loans may be assumable by persons meeting the then applicable underwriting
standards of the Servicer, or as may be required by any applicable
government program.
(e) Another type of mortgage loan described in the Prospectus
Supplement.
With respect to a series for which the related Trust includes Mortgage
Loans, the related Prospectus Supplement may specify, among other things,
information regarding the interest rates (the "Mortgage Rates"), the average
Principal Balance and the aggregate Principal Balance, the years of origination
and original principal balances and the original loan-to-value ratios. The
"Principal Balance" of any Mortgage Loan will be the unpaid principal balance of
such Mortgage Loan as of the Cut-Off Date, after deducting any principal
payments due before the Cut-Off Date, reduced by all principal payments,
including principal payments advanced pursuant to the related Agreement,
previously distributed with respect to such Mortgage Loan and reported as
allocable to principal.
The "Loan-to-Value Ratio" of any Mortgage Loan will be determined by
dividing the amount of the Mortgage Loan by the Original Value (defined below)
of the related Mortgaged Property. The "principal amount" of the Mortgage Loan,
for purposes of computation of the Loan-to-Value Ratio of any Mortgage Loan,
will include any part of an origination fee that has been financed. In some
instances, it may also include amounts which the seller or some other party to
the transaction has paid to the mortgagee, such as minor reductions in the
purchase price made at the closing. The "Original Value" of a Mortgage Loan is
(a) in the case of any purchase money Mortgage Loan, the
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lesser of (i) the value of the mortgaged property, based on an appraisal thereof
and (ii) the selling price, and (b) otherwise the value of the mortgaged
property, based on an appraisal thereof.
There can be no assurance that the Original Value will reflect actual real
estate values during the term of a Mortgage Loan. If the residential real estate
market should experience an overall decline in property values such that the
outstanding principal balances of the Mortgage Loans become equal to or greater
than the values of the Mortgaged Properties, the actual rates of delinquencies,
foreclosures and losses could be significantly higher than those now generally
experienced in the mortgage lending industry. In addition, adverse economic
conditions (which may or may not affect real estate values) may affect the
timely and ultimate payment by mortgagors of scheduled payments of principal and
interest on the Mortgage Loans and, accordingly, the actual rates of
delinquencies, foreclosures and losses with respect to the Mortgage Loans.
Multifamily Loans will consist of Multifamily Loans consisting of either
Conventional Multifamily Loans or FHA-Insured Multifamily Loans secured by
mortgages or deeds of trust or other similar security instruments creating a
lien on rental apartment buildings or projects containing five or more units,
including, but not limited to, high-rise, mid-rise and garden apartments or
secured by apartment buildings owned by cooperative housing corporations. The
Multifamily Properties may include mixed commercial and residential structures.
Unless otherwise specified in the related Prospectus Supplement, each Mortgage
Loan will create a first priority mortgage lien on a Mortgaged Property. A
Multifamily Loan may create a lien on a borrower's leasehold estate in a
property; however, unless otherwise specified in the related Prospectus
Supplement, the term of any such leasehold will exceed the term of the Mortgage
Loan by at least two years. The Depositor expects that Mortgage Loans will have
been originated by mortgagees in the ordinary course of their real estate
lending activities. Each Multifamily Loan will bear interest at an annual fixed
rate or adjustable rate of interest specified in the Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, all of the
Multifamily Loans will have had original terms to maturity of not more than 40
years and will provide for scheduled payments of principal, interest or both, to
be made on specified dates ("Due Dates") that occur monthly, quarterly or
semi-annually. A Multifamily Loan (i) may provide for accrual of interest
thereon at an interest rate (a "Mortgage Loan Rate") that is fixed over its term
of that adjusts from time to time, or that may be converted at the borrower's
election from an adjustable to a fixed Mortgage Loan Rate, or from a fixed to an
adjustable Mortgage Loan Rate, (ii) may provide for level payments to maturity
or for payments that adjust from time to time to accommodate changes in the
Mortgage Loan Rate or to reflect the occurrence of certain events, and may
permit negative amortization, (iii) may be fully amortizing over its term to
maturity, or may provide for little or no amortization over its term and thus
require a balloon payment on its stated maturity date, and (iv) may contain a
prohibition on prepayment (the period of such prohibition, a "Lock-out Period"
and its date of expiration, a "Lock-out Expiration Date") or require payment of
a premium or a yield maintenance penalty (a "Prepayment Premium") in connection
with a prepayment, in each case as described in the related Prospectus
Supplement. A Multifamily Loan may also contain a provision that entitles the
lender to a share of profits realized from the operation or disposition of the
Mortgaged Property (an "Equity Participation"), as described in the related
Prospectus Supplement. If holders of any class or classes of Certificates of a
series will be entitled to all or a portion of an Equity Participation, the
related Prospectus Supplement will describe the Equity Participation and the
method or methods by which distributions in respect thereof will be made to such
holders.
Lenders typically look to the Debt Service Coverage Ratio of a loan secured
by income-producing property as an important measure of the risk of default on
such loan. Unless otherwise defined in the related Prospectus Supplement, the
"Debt Service Coverage Ratio" of a Multifamily Loan at any given time is the
ratio of (i) the Net Operating Income of the related Mortgaged Property for a
twelve-month period to (ii) the annualized scheduled payments on the Multifamily
Loan and on any other loan that is secured by a lien on the Mortgaged Property
prior to the lien of the related Mortgage. Unless otherwise defined in the
related Prospectus Supplement, "Net Operating Income" means, for any given
period, the total operating revenues derived from a Mortgaged Property during
such period, minus the total operating expenses incurred in respect of such
Mortgaged Property during such period other than (i) non-cash items such as
depreciation and amortization, (ii) capital expenditures and (iii) debt service
on loans (including the related Multifamily Loan) secured by liens on the
Mortgaged Property. The Net Operating Income of a Mortgage Property will
fluctuate over time and may or may not be sufficient to cover debt service on
the related Multifamily Loan at any given time. As the primary source of the
operating revenues of a non-owner occupied
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income-producing property, rental income (and maintenance payments from
tenant-stockholders of a Cooperative) may be affected by the condition of the
applicable real estate market and/or area economy.
Increases in operating expenses due to the general economic climate or
economic conditions in a locality or industry segment, such as increases in
interest rates, real estate tax rates, energy costs, labor costs and other
operating expenses and/or to changes in governmental rules, regulations and
fiscal policies, may also affect the risk of default on a Multifamily Loan. As
may be further described in the related Prospectus Supplement, in some cases
leases of Mortgaged Properties may provide that the lessee, rather than the
borrower/landlord, is responsible for payment of operating expenses ("Net
Leases"). However, the existence of such "net of expense" provisions will result
in stable Net Operating Income to the borrower/landlord only to the extent that
the lessee is able to absorb operating expense increases while continuing to
make rent payments.
Contracts
Each pool of Contracts included in the Trust with respect to a series of
Certificates (the "Contract Pool") will consist of manufactured housing
conditional sales contracts and installment loan agreements or participation
interests therein (collectively, "Contracts"). The Contracts may be conventional
manufactured housing contracts or contracts insured by the FHA, including Title
I Contracts, or partially guaranteed by the VA. Each Contract is secured by a
Manufactured Home. The Prospectus Supplement will specify whether the Contracts
will be fully amortizing or have a balloon payment and whether they will bear
interest at a fixed or variable rate.
The Manufactured Homes securing the Contracts consist of manufactured homes
within the meaning of 42 United States Code, Section 5402(6), which defines a
"Manufactured Home" as "a structure, transportable in one or more sections,
which in the traveling mode, is eight body feet or more in width or forty body
feet or more in length, or, when erected on site, is three hundred twenty or
more square feet, and which is built on a permanent chassis and designed to be
used as a dwelling with or without permanent foundation when connected to the
required utilities, and includes the plumbing, heating, air-conditioning, and
electrical systems contained therein; except that such term shall include any
structure which meets all the requirements of this paragraph except the size
requirements and with respect to which the manufacturer voluntarily files a
certification required by the Secretary of Housing and Urban Development and
complies with the standards established under [this] chapter." Moreover, if an
election is made to treat the Trust as a REMIC as described in "Certain Federal
Income Tax Consequences - Federal Income Tax Consequences for REMIC
Certificates" herein, Manufactured Homes will have a minimum of 400 square feet
of living space and a minimum width in excess of 102 inches.
For purposes of calculating the loan-to- value ratio of a Contract relating
to a new Manufactured Home, the "Collateral Value" is no greater than the sum of
a fixed percentage of the list price of the unit actually billed by the
manufacturer to the dealer (exclusive of freight to the dealer site) including
"accessories" identified in the invoice (the "Manufacturer's Invoice Price"),
plus the actual cost of any accessories purchased from the dealer, a delivery
and set-up allowance, depending on the size of the unit and the cost of state
and local taxes, filing fees and up to three years prepaid hazard insurance
premiums. The Collateral Value of a used Manufactured Home is the least of the
sales price, the appraised value, and the National Automobile Dealer's
Association book value plus prepaid taxes and hazard insurance premiums. The
appraised value of a Manufactured Home is based upon the age and condition of
the manufactured housing unit and the quality and condition of the mobile home
park in which it is situated, if applicable.
The related Prospectus Supplement may specify for the Contracts contained
in the related Contract Pool, among other things, the date of origination of the
Contracts; the annual percentage rates on the Contracts; the loan-to-value
ratios; the minimum and maximum outstanding principal balance as of the Cut-Off
Date and the average outstanding principal balance; the outstanding principal
balances of the Contracts included in the Contract Pool; the original maturities
of the Contracts; and the last maturity date of any Contract.
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Mortgage-Backed Securities
"Mortgage-Backed Securities" (or "MBS") may include (i) private (that is,
not guaranteed or insured by the United States or any agency or instrumentality
thereof) mortgage participations, mortgage pass-through certificates or other
mortgage-backed securities or (ii) certificates insured or guaranteed by FHLMC
or FNMA or GNMA.
Any MBS will have been issued pursuant to a participation and servicing
agreement, a pooling and servicing agreement, an indenture or similar agreement
(an "MBS Agreement"). A seller (the "MBS Issuer") and/or servicer (the "MBS
Servicer") of the underlying mortgage loans will have entered into the MBS
Agreement with a trustee or a custodian under the MBS Agreement (the "MBS
Trustee"), if any, or with the original purchaser or purchasers of the MBS.
The MBS may have been issued in one or more classes with characteristics
similar to the classes of Certificates described herein. Distributions in
respect of the MBS will be made by the MBS Servicer or the MBS Trustee on the
dates specified in the related Prospectus Supplement. The MBS Issuer or the MBS
Servicer or another person specified in the related Prospectus Supplement may
have the right or obligation to repurchase or substitute assets underlying the
MBS after a certain date or under other circumstances specified in the related
Prospectus Supplement.
Reserve funds, subordination, cross-support or other credit enhancement
similar to that described for the Certificates under "Credit Enhancement" may
have been provided with respect to the MBS. The type, characteristics and amount
of such credit enhancement, if any, will be a function of the characteristics of
the underlying mortgage loans and other factors and generally will have been
established on the basis of the requirements of any rating agency that may have
assigned a rating to the MBS, or by the initial purchasers of the MBS.
The Prospectus Supplement for a series of Certificates that evidence
interests in MBS will specify, to the extent available, (i) the aggregate
approximate initial and outstanding principal amount and type of the MBS to be
included in the Trust, (ii) the original and remaining term to stated maturity
of the MBS, if applicable, (iii) the pass-through or bond rate of the MBS or the
formula for determining such rates, (iv) the payment characteristics of the MBS,
(v) the MBS Issuer, MBS Servicer and MBS Trustee, as applicable, (vi) a
description of the credit support, if any, (vii) the circumstances under which
the stated underlying mortgage loans, or the MBS themselves may be purchased
prior to their maturity, (viii) the terms on which mortgage loans may be
substituted for those originally underlying the MBS, (ix) the servicing fees
payable under the MBS Agreement, (x) to the extent available to the Depositor,
information in respect of the underlying mortgage loans, and (xi) the
characteristics of any cash flow agreements that relate to the MBS.
Other Mortgage Securities
Other Mortgage Securities include other securities that directly or
indirectly represent an ownership interest in, or are secured by and payable
from, mortgage loans on real property or mortgage-backed securities, including
residual interests in issuances of collateralized mortgage obligations or
mortgage pass-through certificates. Any Other Mortgage Securities that are
privately placed securities will not be included in a Trust until such time as
such privately placed securities would be freely transferable pursuant to Rule
144A of the Securities Act of 1933, as amended. Further (i) such privately
placed securities will have been acquired in the secondary market and not
pursuant to an initial offering thereof and (ii) the underlying issuer of such
securities will not be affiliated with the Depositor and will not have an
interest in the Trust. The Prospectus Supplement for a series of Certificates
will describe any Other Mortgage Securities to be included in the Trust for such
series.
CREDIT ENHANCEMENT
General. Various forms of Credit Enhancement may be provided with respect
to one or more classes of a series of Certificates or with respect to the assets
in the related Trust. Credit Enhancement may be in the form of the subordination
of one or more classes of the Certificates of such series, the establishment of
one or more Reserve
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Funds, the use of a cross-support feature, use of a Mortgage Pool Insurance
Policy, Special Hazard Insurance Policy, bankruptcy bond, or another form of
Credit Enhancement described in the related Prospectus Supplement, or any
combination of the foregoing. Credit Enhancement may not provide protection
against all risks of loss and may not guarantee repayment of the entire
principal balance of the Certificates and interest thereon. If losses occur
which exceed the amount covered by Credit Enhancement or which are not covered
by the Credit Enhancement, Owners of Certificates will bear their allocable
share of deficiencies.
Financial Guaranty Insurance Policies. If so specified in the related
Prospectus Supplement, a financial guaranty insurance policy or surety bond
("Financial Guaranty Insurance Policy") may be obtained and maintained for each
class or series of Certificates. The issuer of any Financial Guaranty Insurance
Policy (a "Financial Guaranty Insurer") will be described in the related
Prospectus Supplement. Such description will include financial information on
the Financial Guaranty Insurer. In addition, the audited financial statements of
a Financial Guaranty Insurer and an auditors consent to use such financial
statements will be filed with the Securities and Exchange Commission on Form 8-K
or will be incorporated by reference to financial statements already on file
with the Securities and Exchange Commission.
Unless otherwise specified in the related Prospectus Supplement, a
Financial Guaranty Insurance Policy will unconditionally and irrevocably
guarantee to Certificateholders that an amount equal to each full and completed
insured payment will be received by an agent of the Trustee (an "Insurance
Paying Agent") on behalf of Certificateholders, for distribution by the Trustee
to each Certificateholder. The "insured payment" will be defined in the related
Prospectus Supplement, and will generally equal the full amount of the
distributions of principal and interest to which Certificateholders are entitled
under the related Agreement plus any other amounts specified therein or in the
related Prospectus Supplement (the "Insured Payment").
Financial Guaranty Insurance Policies may apply only to certain specified
classes, or may apply at the Mortgage Asset level and only to specified Mortgage
Assets.
The specific terms of any Financial Guaranty Insurance Policy will be as
set forth in the related Prospectus Supplement. Financial Guaranty Insurance
Policies may have limitations, including (but not limited to) limitations on the
insurer's obligation to guarantee the obligations of the Seller or Depositor to
repurchase or substitute for any Mortgage Loans, Financial Guaranty Insurance
Policies will not guarantee any specified rate of prepayments and/or to provide
funds to redeem Certificates on any specified date.
Subject to the terms of the related Agreement, the Financial Guaranty
Insurer may be subrogated to the rights of Certificateholder to receive payments
under the Certificates to the extent of any payment by such Financial Guaranty
Insurer under the related Financial Guaranty Insurance Policy.
Subordination. Distributions in respect of scheduled principal, interest or
any combination thereof otherwise payable to one or more classes of Certificates
of a series (the "Subordinated Certificates") may be paid to one or more other
classes of such series (the "Senior Certificates") under the circumstances and
to the extent provided in the Prospectus Supplement. If specified in the
Prospectus Supplement, delays in receipt of scheduled payments on the Mortgage
Assets and losses on defaulted Mortgage Assets will be borne first by the
various classes of Subordinated Certificates and thereafter by the various
classes of Senior Certificates, in each case under the circumstances and subject
to the limitations specified in the Prospectus Supplement. The aggregate
distributions in respect of delinquent payments on the Mortgage Assets over the
lives of the Certificates or at any time, the aggregate losses in respect of
defaulted Mortgage Assets which must be borne by the Subordinated Certificates
by virtue of subordination and the amount of the distributions otherwise
distributable to the Subordinated Certificates that will be distributable to
Owners of Senior Certificates on any Distribution Date may be limited as
specified in the Prospectus Supplement. If aggregate distributions in respect of
delinquent payments on the Mortgage Assets or aggregate losses in respect of
such Mortgage Assets were to exceed the total amounts payable and available for
distribution to Owners of Subordinated Certificates or, if applicable, were to
exceed the specified maximum amount, Owners of Senior Certificates could
experience losses on the Certificates.
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In addition to or in lieu of the foregoing, all or any portion of
distributions otherwise payable to Subordinated Certificates on any Distribution
Date may instead be deposited into one or more Reserve Funds (as defined below)
established by the Trustee. If so specified in the Prospectus Supplement, such
deposits may be made on each Distribution Date, on each Distribution Date for
specified periods, or on each Distribution Date until the balance in the Reserve
Fund has reached a specified amount and, following payments from the Reserve
Fund to Owners of Senior Certificates or otherwise, thereafter to the extent
necessary to restore the balance in the Reserve Fund to required levels, in each
case as specified in the Prospectus Supplement. If so specified in the
Prospectus Supplement, amounts on deposit in the Reserve Fund may be released to
the Depositor or the Owners of any class of Certificates at the times and under
the circumstances specified in the Prospectus Supplement.
If specified in the Prospectus Supplement, various classes of Subordinate
Certificates and Subordinated Certificates may themselves be subordinate in
their right to receive certain distributions to other classes of Senior and
Subordinated Certificates, respectively, through a cross-support mechanism or
otherwise.
As between classes of Senior Certificates and as between classes of
Subordinated Certificates, distributions may be allocated among such classes (i)
in the order of their scheduled final distribution dates, (ii) in accordance
with a schedule or formula, (iii) in relation to the occurrence of events, or
(iv) otherwise, in each case as specified in the Prospectus Supplement. As
between classes of Subordinated Certificates, payments with respect to Senior
Certificates on account of delinquencies or losses and payments to any Reserve
Fund will be allocated as specified in the Prospectus Supplement.
Overcollateralization. If specified in the Prospectus Supplement,
subordination provisions of a Trust may be used to accelerate to a limited
extent the amortization of one or more classes of Certificates relative to the
amortization of the related Mortgage Loans. The accelerated amortization is
achieved by the application of certain excess interest to the payment of
principal of one or more classes of Certificates. This acceleration feature
creates, with respect to the Mortgage Loans or groups thereof,
overcollateralization which results from the excess of the aggregate principal
balance of the related Mortgage Loans, or a group thereof, over the principal
balance of the related class of Certificates. Such acceleration may continue for
the life of the related Certificates, or may be limited. In the case of limited
acceleration, once the required level of overcollateralization is reached, and
subject to certain provisions specified in the related Prospectus Supplement,
such limited acceleration feature may cease, unless necessary to maintain the
required level of overcollateralization.
Cross-Support. If specified in the related Prospectus Supplement, the
beneficial ownership of separate groups of assets included in the Trust for a
series may be evidenced by separate classes of related series of Certificates.
In such case, Credit Enhancement may be provided by a cross-support feature
which may require that distributions be made with respect to Certificates
evidencing beneficial ownership of one or more asset groups prior to
distributions to Subordinated Certificates evidencing a beneficial ownership
interest in other asset groups within the same Trust. The Prospectus Supplement
for a series which includes a cross-support feature will describe the manner and
conditions for applying such cross-support feature.
If specified in the Prospectus Supplement, the coverage provided by one or
more forms of Credit Enhancement may apply concurrently to two or more separate
Trusts for a separate series of Certificates. If applicable, the Prospectus
Supplement will identify the Trusts to which such credit support relates and the
manner of determining the amount of the coverage provided thereby and of the
application of such coverage to the identified Trusts.
Pool Insurance. If specified in the related Prospectus Supplement, one or
more mortgage pool insurance policies (each, a "Mortgage Pool Insurance Policy")
will be obtained.
Any such Mortgage Pool Insurance Policy will, subject to the limitations
described below and in the Prospectus Supplement, cover loss by reason of
default in payments on such Mortgage Loans up to the amounts specified in the
Prospectus Supplement or report on Form 8-K and for the periods specified in the
Prospectus Supplement. The Trustee under the related Agreement will agree to use
its best reasonable efforts to cause to be maintained in effect any such
Mortgage Pool Insurance Policy and to supervise the filing of claims thereunder
to the
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issuer of such Mortgage Pool Insurance Policy (the "Pool Insurer") for the
period of time specified in the related Prospectus Supplement. A Mortgage Pool
Insurance Policy, however, is not a blanket policy against loss, because claims
thereunder may only be made respecting particular defaulted Mortgage Loans and
only upon satisfaction of certain conditions precedent set forth in such policy
as described in the related Prospectus Supplement. The Mortgage Pool Insurance
Policies, if any, will not cover loss due to a failure to pay or denial of a
claim under a primary mortgage insurance policy, irrespective of the reason
therefor. The related Prospectus Supplement will describe the terms of any
applicable Mortgage Pool Insurance Policy and will set forth certain information
with respect to the related Pool Insurer.
In general, a Mortgage Pool Insurance Policy may not insure against loss
sustained by reason of a default arising from, among other things, (i) fraud or
negligence in the origination or servicing of a Mortgage Loan, including
misrepresentation by the Mortgagor or persons involved in the origination
thereof or (ii) failure to construct a Mortgaged Property in accordance with
plans and specifications. If so specified in the related Prospectus Supplement,
a failure of coverage attributable to one of the foregoing events might result
in a breach of a representation of the Seller and in such event might give rise
to an obligation on the part of the Seller to purchase the defaulted Mortgage
Loan if the breach materially and adversely affects the interests of the Owners
of the Certificates and cannot be cured by the Seller.
The original amount of coverage under any Mortgage Pool Insurance Policy
will be reduced over the life of such Certificates by the aggregate dollar
amount of claims paid less the aggregate of the net amounts realized by the Pool
Insurer upon disposition of all foreclosed properties. The amount of claims paid
will generally include certain expenses incurred with respect to the applicable
Mortgage Loans as well as accrued interest on delinquent Mortgage Loans to the
date of payment of the claim. See "Certain Legal Aspects of the Mortgage Assets
- - Foreclosure" herein. Accordingly, if aggregate net claims paid under any
Mortgage Pool Insurance Policy reach the original policy limit, coverage under
that Mortgage Pool Insurance Policy will be exhausted and any further losses
will be borne by one or more classes of Certificates unless otherwise covered by
another form of Credit Enhancement, as specified in the Prospectus Supplement.
Since any Mortgage Pool Insurance Policy may require that the Mortgaged
Property subject to a defaulted Mortgage Loan be restored to its original
condition prior to claiming against the Pool Insurer, such policy may not
provide coverage against hazard losses. As set forth under "Servicing of
Mortgage Loans and Contracts C Standard Hazard Insurance", the hazard policies
concerning the Mortgage Loans typically exclude from coverage physical damage
resulting from a number of causes and even when the damage is covered, may
afford recoveries which are significantly less than the full replacement cost of
such losses. Even if special hazard insurance is applicable as specified in the
Prospectus Supplement, no coverage in respect of special hazard losses will
cover all risks, and the amount of any such coverage will be limited. See
"Special Hazard Insurance" below. As a result, certain hazard risks will not be
insured against and will therefore be borne by Owners of the Certificates,
unless otherwise covered by another form of Credit Enhancement, as specified in
the Prospectus Supplement.
The terms of any Mortgage Pool Insurance Policy relating to a Contract Pool
will be described in the related Prospectus Supplement.
Special Hazard Insurance. If specified in the related Prospectus
Supplement, one or more special hazard insurance policies (each, a "Special
Hazard Insurance Policy") will be obtained.
Any such Special Hazard Insurance Policy will, subject to limitations
described below and in the Prospectus Supplement, cover (i) loss by reason of
damage to Mortgaged Properties caused by certain hazards (including earthquakes
and, to a limited extent, tidal waves and related water damage) not covered by
the standard form of hazard insurance policy for the respective states in which
the Mortgaged Properties are located or under flood insurance policies, if any,
covering the Mortgaged Properties, and (ii) loss caused by reason of the
application of the coinsurance clause contained in hazard insurance policies.
See "Servicing of Mortgage Loans and Contracts C Standard Hazard Insurance." Any
Special Hazard Insurance Policy may not cover losses occasioned by war, civil
insurrection, certain governmental actions, errors in design, faulty workmanship
or materials (except under certain circumstances), nuclear reaction, flood (if
the Mortgaged Property is located in a federally designated flood are"-,
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chemical contamination and certain other risks. Aggregate claims under each
Special Hazard Insurance Policy will be limited as described in the related
Prospectus Supplement. Any Special Hazard Insurance Policy may also provide that
no claim may be paid unless hazard and, if applicable, flood insurance on the
Mortgaged Property has been kept in force and other protection and preservation
expenses have been paid.
Subject to the foregoing limitations, any Special Hazard Insurance Policy
generally will provide that, where there has been damage to property securing a
foreclosed Mortgage Loan (title to which has been acquired by the insured) and
to the extent such damage is not covered by the hazard insurance policy or flood
insurance policy, if any, maintained with respect to such Mortgage Loan, the
issuer of the Special Hazard Insurance Policy (the "Special Hazard Insurer")
will pay the lesser of (i) the cost of repair or replacement of such property or
(ii) upon transfer of the property to the special hazard insurer, the unpaid
principal balance of such Mortgage Loan at the time of acquisition of such
property by foreclosure or deed in lieu of foreclosure, plus accrued interest to
the date of claim settlement and certain expenses incurred with respect to such
property. If the unpaid principal balance plus accrued interest and certain
expenses is paid by the Special Hazard Insurer, the amount of further coverage
under the related Special Hazard Insurance Policy will be reduced by such amount
less any net proceeds from the sale of the property. Any amount paid as the cost
of repair or replacement of the property will also reduce coverage by such
amount. Restoration of the property with the proceeds described under (i) above
will satisfy the condition under any applicable Mortgage Pool Insurance Policy
that the property be restored before a claim under such Mortgage Pool Insurance
Policy may be validly presented with respect to the defaulted Mortgage Loan
secured by such property. The payment described under (ii) above will render
unnecessary presentation of a claim in respect of such Mortgage Loan under any
related Mortgage Pool Insurance Policy. Therefore, so long as a Mortgage Pool
Insurance Policy remains in effect, the payment by the Special Hazard Insurer
under a Special Hazard Insurance Policy of the cost of repair or replacement or
the unpaid principal balance of the Mortgage Loan plus accrued interest and
certain expenses will not affect the total insurance proceeds but will affect
the relative amounts of coverage remaining under any related Special Hazard
Insurance Policy and any related Mortgage Pool Insurance Policy.
The terms of any Special Hazard Insurance Policy relating to a Contract
Pool will be described in the related Prospectus Supplement.
Bankruptcy Bond. In the event of a bankruptcy of a borrower, the bankruptcy
court may establish the value of the property securing the related Mortgage Loan
at an amount less than the then outstanding principal balance of such Mortgage
Loan. The amount of the secured debt could be reduced to such value and the
holder of such Mortgage Loan thus would become an unsecured creditor to the
extent the outstanding principal balance of such Mortgage Loan exceeds the value
so assigned to the property by the bankruptcy court. In addition, certain other
modifications of the terms of a Mortgage Loan can result from a bankruptcy
proceeding, including the reduction in monthly payments required to be made by
the borrower. See "Certain Legal Aspects of the Mortgage Assets" herein. If so
provided in the related Prospectus Supplement, the Depositor will obtain a
bankruptcy bond or similar insurance contract (the "bankruptcy bond") for
proceedings with respect to borrowers under the Bankruptcy Code. The bankruptcy
bond will cover certain losses resulting from a reduction by a bankruptcy court
of scheduled payments of principal of and interest on a Mortgage Loan or a
reduction by such court of the principal amount of a Mortgage Loan and will
cover certain unpaid interest on the amount of such a principal reduction from
the date of the filing of a bankruptcy petition.
The bankruptcy bond will provide coverage in the aggregate amount specified
in the related Prospectus Supplement. Such amount will be reduced by payments
made under such bankruptcy bond in respect of the related Mortgage Loans and
will not be restored.
If specified in the related Prospectus Supplement, other forms of Credit
Enhancement may be provided to cover such bankruptcy-related losses. Any
bankruptcy bond or other form of Credit Enhancement provided to cover
bankruptcy-related losses will be described in the related Prospectus
Supplement.
Reserve Funds. If specified in the Prospectus Supplement, cash, U.S.
Treasury securities, instruments evidencing ownership of principal or interest
payments thereon, letters of credit, surety bonds, demand notes, certificates of
deposit or a combination thereof in the aggregate amount specified in the
Prospectus Supplement will
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be deposited by the Depositor on the Delivery Date in one or more accounts
(each, a "Reserve Fund") established and maintained with the Trustee. Such cash
and the principal and interest payments on such other investments will be used
to enhance the likelihood of timely payment of principal of, and interest on,
or, if so specified in the Prospectus Supplement, to provide additional
protection against losses in respect of, the assets in the related Trust, to pay
the expenses of the Trust or for such other purposes specified in the Prospectus
Supplement. Whether or not the Depositor has any obligation to make such a
deposit, certain amounts to which the Owners of Subordinated Certificates, if
any, would otherwise be entitled may instead be deposited into the Reserve Fund
from time to time and in the amounts as specified in the Prospectus Supplement.
Any cash in any Reserve Fund and the proceeds of any other instrument upon
maturity will be invested in Eligible Investments. If a letter of credit is
deposited with the Trustee, such letter of credit will be irrevocable. Any
instrument deposited therein will name the Trustee as a beneficiary and will be
issued by an entity acceptable to each rating agency that rates the
Certificates. Additional information with respect to such instruments deposited
in the Reserve Funds may be set forth in the Prospectus Supplement.
Any amounts so deposited and payments on instruments so deposited will be
available for withdrawal from the Reserve Fund for distribution with respect to
the Certificates for the purposes, in the manner and at the times specified in
the Prospectus Supplement.
Other Insurance, Guaranties and Similar Instruments or Agreements. If
specified in the Prospectus Supplement, the related Trust may also include
insurance, guaranties, surety bonds, letters of credit, guaranteed investment
contracts or similar arrangements for the purpose of (i) maintaining timely
payments or providing additional protection against losses on the assets
included in such Trust, (ii) paying administrative expenses, (iii) establishing
a minimum reinvestment rate on the payments made in respect of such assets or
principal payment rate on such assets, (iv) guaranteeing timely payment of
principal and interest under the Certificates, or for such other purpose as is
specified in such Prospectus Supplement. Such arrangements may include
agreements under which Owners of Certificates are entitled to receive amounts
deposited in various accounts held by the Trustee upon the terms specified in
the Prospectus Supplement. Such arrangements may be in lieu of any obligation of
the Servicers or the Seller to advance delinquent installments in respect of the
Mortgage Loans. See "Servicing of Mortgage Loans and Contracts - Advances"
herein.
SERVICING OF MORTGAGE LOANS AND CONTRACTS
With respect to each series of Certificates, the related Mortgage Loans and
Contracts will be serviced by a sole servicer or by a master servicer with
various sub-servicers pursuant to, or as provided for in, the Agreement. The
Prospectus Supplement for each series will specify the servicer and the master
servicer, if any, for such series.
The related Prospectus Supplement will specify whether the Servicer is a
FNMA- or FHLMC-approved servicer of conventional mortgage loans. In addition,
the Depositor will require adequate servicing experience, where appropriate, and
financial stability, generally including a net worth requirement (to be
specified in the Agreement) as well as satisfaction of certain other criteria.
Each Servicer will be required to perform the customary functions of a
mortgage loan servicer, including collection of payments from borrowers (the
"Mortgagors") and remittance of such collections to the Trustee, maintenance of
applicable standard hazard insurance or primary mortgage insurance policies,
attempting to cure delinquencies, supervising foreclosures, management of
Mortgaged Properties under certain circumstances, and maintaining accounting
records relating to the Mortgage Loans and Contracts, as applicable, and, if
specified in the related Prospectus Supplement, maintenance of escrow or
impoundment accounts of Mortgagors for payment of taxes, insurance, and other
items required to be paid by the Mortgagor pursuant to the Mortgage Loan or
Contract. Each Servicer will also be obligated to make advances in respect of
delinquent installments on Mortgage Loans and Contracts, as applicable, as
described more fully under "- Payments on Mortgage Loans" and "- Advances" below
and in respect of certain taxes and insurance premiums not paid on a timely
basis by Mortgagors.
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Each Servicer will be entitled to a monthly servicing fee as specified in
the related Prospectus Supplement. Each Servicer will also generally be entitled
to collect and retain, as part of its servicing compensation, late payment
charges and assumption underwriting fees. Each Servicer will be reimbursed from
proceeds of one or more of the insurance policies described herein ("Insurance
Proceeds") or from proceeds received in connection with the liquidation of
defaulted Mortgage Loans ("Liquidation Proceeds") for certain expenditures
pursuant to the Agreement. See "- Advances" and "- Servicing Compensation and
Payment of Expenses" below.
Each Servicer will be required to service each Mortgage Loan and Contract,
as applicable, pursuant to the terms of the Agreement for the entire term of
such Mortgage Loan and Contract, as applicable, unless such Agreement is earlier
terminated. Upon termination, a replacement for the Servicer will be appointed.
Payments on Mortgage Loans
Each Servicer will establish and maintain a separate account (each, a
"Custodial Account"). Subject to the following paragraph, each Custodial Account
must be an account the deposits in which are fully insured by either the Federal
Deposit Insurance Corporation ("FDIC") or the National Credit Union
Administration ("NCUA") or are, to the extent such deposits are in excess of the
coverage provided by such insurance, continuously secured by certain obligations
issued or guaranteed by the United States of America. If at any time the amount
on deposit in such Custodial Account shall exceed the amount so insured or
secured, the applicable Servicer must remit to the Trustee the amount on deposit
in such Custodial Account which exceeds the amount so insured or secured, less
any amount such Servicer may retain for its own account pursuant to its
Servicing Agreement.
Notwithstanding the foregoing, the deposits in a Servicer's Custodial
Account will not be required to be fully insured or secured as described above,
and such Servicer will not be required to remit amounts on deposit therein in
excess of the amount so insured or secured, so long as such Servicer meets
certain requirements established by the rating agencies requested to rate the
Certificates.
Each Servicer is required to deposit into its Custodial Account on a daily
basis all amounts in respect of each Mortgage Loan received by such Servicer,
with interest adjusted to a rate (the "Remittance Rate") equal to the related
Mortgage Rate less the Servicer's servicing fee rate. On the day of each month
specified in the related Prospectus Supplement (the "Remittance Date"), each
Servicer of the Mortgage Loans will remit to the Trustee all funds held in its
Custodial Account with respect to each Mortgage Loan; provided, however, that
Principal Prepayments may be remitted on the Remittance Date in the month
following the month of such prepayment. Each Servicer will be required pursuant
to the terms of the Agreement and as specified in the related Prospectus
Supplement, to remit with each Principal Prepayment interest thereon at the
Remittance Rate through the last day of the month in which such Principal
Prepayment is made. Each Servicer may also be required to advance its own funds
as described below.
Advances
With respect to a delinquent Mortgage Loan or Contract, the related
Servicer may be obligated (but only to the extent set forth in the related
Prospectus Supplement) to advance its own funds or funds from its Custodial
Account equal to the aggregate amount of payments of principal and interest
(adjusted to the applicable Remittance Rate) which were due on a due date and
which are delinquent as of the close of business on the business day preceding
the Remittance Date ("Monthly Advance"). Generally, such advances will be
required to be made by the Servicer unless the Servicer determines that such
advances ultimately would not be recoverable under any applicable insurance
policy, from the proceeds of liquidation of the related Mortgaged Properties, or
from any other source (any amount not so reimbursable being referred to herein
as a "Nonrecoverable Advance"). Such advance obligation generally will continue
through the month following the month of final liquidation of such Mortgage Loan
or Contract. Any Servicer funds thus advanced will be reimbursable to such
Servicer out of recoveries on the Mortgage Loans or Contracts with respect to
which such amounts were advanced. Each Servicer will also be obligated to make
advances with respect to certain taxes and insurance premiums not paid by
Mortgagors on a timely basis. Funds so advanced are reimbursable to the
Servicers out of recoveries on the related Mortgage Loans or Contracts. Each
Servicer's right of reimbursement for any advance will be prior to the rights of
the Trust to receive any related
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Insurance Proceeds or Liquidation Proceeds. Failure by a Servicer to make a
required Monthly Advance will be grounds for termination under the related
Agreement.
Collection and Other Servicing Procedures
Each Servicer will service the Mortgage Loans and Contracts pursuant to
guidelines established in the related Agreement.
Mortgage Loans. The Servicer will be responsible for making reasonable
efforts to collect all payments called for under the Mortgage Loans. The
Servicer will be obligated to follow such normal practices and procedures as it
deems necessary or advisable to realize upon a defaulted Mortgage Loan. In this
regard, the Servicer may (directly or through a local assignee) sell the
property at a foreclosure or trustee's sale, negotiate with the Mortgagor for a
deed in lieu of foreclosure or, in the event a deficiency judgment is available
against the Mortgagor or other person (see "Certain Legal Aspects of the
Mortgage Assets C Foreclosure - Anti-Deficiency Legislation and Other
Limitations on Lenders" for a description of the limited availability of
deficiency judgments), foreclose against such property and proceed for the
deficiency against the appropriate person. The amount of the ultimate net
recovery (including the proceeds of any Mortgage Pool Insurance Policy or other
applicable Credit Enhancement), after reimbursement to the Servicer of its
expenses incurred in connection with the liquidation of any such defaulted
Mortgage Loan and prior unreimbursed advances of principal and interest with
respect thereto will be deposited in the Certificate Account when realized and
will be distributed to Owners of Certificates on the next Distribution Date
following the month of receipt.
With respect to Cooperative Loans, any prospective purchaser will generally
have to obtain the approval of the board of directors of the relevant
Cooperative before purchasing the shares and acquiring rights under the related
proprietary lease or occupancy agreement. See "Certain Legal Aspects of the
Mortgage Assets" herein. This approval is usually based on the purchaser's
income and net worth and numerous other factors. Although the Cooperative's
approval is unlikely to be unreasonably withheld or delayed, the necessity of
acquiring such approval could limit the number of potential purchasers for those
shares and otherwise limit the Trust's ability to sell and realize the value of
those shares.
In general, a "tenant-stockholder" (as defined in Code Section 216(b) (2))
of a corporation that qualifies as a "cooperative housing corporation" within
the meaning of Code Section 216(b)(1) is allowed a deduction for amounts paid or
accrued within his taxable year to the corporation representing his
proportionate share of certain interest expenses and certain real estate taxes
allowable as a deduction under Code Section 216(a) to the corporation under Code
Sections 163 and 164. In order for a corporation to qualify under Code Section
216(b)(1) for its taxable year in which such items are allowable as a deduction
to the corporation, such Section requires, among other things, that at least 80%
of the gross income of the corporation be derived from its tenant-stockholders.
By virtue of this requirement, the status of a corporation for purposes of Code
Section 216(b)(1) must be determined on a year-to-year basis. Consequently,
there can be no assurance that Cooperatives relating to the Cooperative Loans
will qualify under such Section for any particular year. In the event that such
a Cooperative fails to qualify for one or more years, the value of the
collateral securing any related Cooperative Loans could be significantly
impaired because no deduction would be allowable to its tenant-stockholders
under Code Section 216(a) with respect to those years. In view of the
significance of the tax benefits accorded tenant-stockholders of a corporation
that qualifies as a cooperative housing corporation, however, the likelihood
that such a failure would be permitted to continue over a period of years
appears remote.
The Servicer will expend its own funds to restore property securing a
Mortgage Loan which has sustained uninsured damage only if it determines that
such restoration will increase the proceeds to the Trust of liquidation of the
Mortgage Loan after the reimbursement to the Servicer of its expenses.
If a Mortgaged Property has been or is about to be conveyed by the
Mortgagor, the Servicer will be obligated (to the extent it has knowledge of
such conveyance) to accelerate the maturity of the Mortgage Loan, unless it
reasonably believes it is unable to enforce that Mortgage Loan's "due-on-sale"
clause under the applicable law. If it reasonably believes it may be restricted
by law, for any reason, from enforcing such a "due-on-sale" clause,
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the Servicer may enter into an assumption and modification agreement with the
person to whom such property has been or is about to be conveyed, pursuant to
which such person becomes liable under the Mortgage Note, provided such person
satisfies the criteria required to maintain the coverage provided by applicable
insurance policies (unless otherwise restricted by applicable law). Any fee
collected by the Servicer for entering into an assumption agreement will be
retained by the Servicer as additional servicing compensation. For a description
of circumstances in which the Servicer may be unable to enforce "due-on-sale"
clauses, see "Certain Legal Aspects of the Mortgage Assets - Foreclosure -
Enforceability of Certain Provisions" herein. In connection with any such
assumption, the Mortgage Rate borne by the related Mortgage Note may not be
decreased.
If specified in the related Prospectus Supplement, the Servicer will
maintain with one or more depository institutions one or more accounts into
which it will deposit all payments of taxes, insurance premiums, assessments or
comparable items received for the account of the Mortgagors. Withdrawals from
such account or accounts may be made only to effect payment of taxes, insurance
premiums, assessments or comparable items, to reimburse the Servicer out of
related collections for any cost incurred in paying taxes, insurance premiums
and assessments or otherwise preserving or protecting the value of the
Mortgages, to refund to mortgagors any amounts determined to be overages and to
pay interest to Mortgagors on balances in such account or accounts to the extent
required by law.
So long as it acts as servicer of the Mortgage Loans, the Servicer will be
required to maintain certain insurance covering errors and omissions in the
performance of its obligations as servicer and certain fidelity bond coverage
ensuring against losses through wrongdoing of its officers, employees and
agents.
In the case of Multifamily Loans, a Mortgagor's failure to make required
Mortgage Loan payments may mean that operating income is insufficient to service
the mortgage debt, or may reflect the diversion of that income from the
servicing of the mortgage debt. In addition, a Mortgagor under a Multifamily
Loan that is unable to make Mortgage Loan payments may also be unable to make
timely payment of taxes and otherwise to maintain and insure the related
Mortgaged Property. In general, the Servicer will be required to monitor any
Multifamily Loan that is in default, evaluate whether the causes of the default
can be corrected over a reasonable period without significant impairment of the
value of the related Mortgaged Property, initiate corrective action in
cooperation with the Mortgagor if cure is likely, inspect the related Mortgaged
Property and take such other actions as are consistent with the Agreement. A
significant period of time may elapse before the Servicer is able to assess the
success of any such corrective action or the need for additional in initiatives.
The time within which the Servicer can make the initial determination of
appropriate action, evaluate the success of corrective action, develop
additional initiatives, institute foreclosure proceedings and actually foreclose
(or accept a deed to a Mortgaged Property in lieu of foreclosure) on behalf of
the Owners of the related series may vary considerably depending on the
particular Multifamily Loan, the Mortgaged Property, the Mortgagor, the presence
of an acceptable party to assume the Multifamily Loan and the laws of the
jurisdiction in which the Mortgaged Property is located. If a Mortgagor files a
bankruptcy petition, the Servicer may not be permitted to accelerate the
maturity of the related Multifamily Loan or to foreclose on the Mortgaged
Property for a considerable period of time. See "Certain Legal Aspects of
Mortgage Loans."
Contracts. Pursuant to the Agreement, the Servicer will service and
administer the Contracts assigned to the Trustee as more fully set forth below.
The Servicer, either directly or through sub-servicers subject to general
supervision by the Servicer, will perform diligently all services and duties
required to be performed under the Agreement, in the same manner as performed by
prudent lending institutions of manufactured housing installment sales contracts
of the same type as the Contracts in those jurisdictions where the related
Manufactured Homes are located. The duties to be performed by the Servicer will
include collection and remittance of principal and interest payments, collection
of insurance claims and, if necessary, repossession.
Each Agreement will provide that when any Manufactured Home securing a
Contract is about to be conveyed by the borrower, the Servicer (to the extent it
has knowledge of such prospective conveyance and prior to the time of the
consummation of such conveyance) may exercise its rights to accelerate the
maturity of such Contract under the applicable "due-on-sale" clause, if any,
unless the Servicer reasonably believes it is unable to enforce such
"due-on-sale" clause under applicable law. In such case the Servicer is
authorized to take or enter into an assumption agreement from or with the person
to whom such Manufactured Home has been or is about to be conveyed, pursuant to
which such person becomes liable under the Contract, provided such person
satisfies the criteria required to maintain the coverage provided by applicable
insurance policies (unless otherwise restricted by
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applicable law). Where authorized by the Contract, the annual percentage rate
may be increased, upon assumption, to the then-prevailing market rate but will
not be decreased.
Under each Agreement the Servicer will repossess or otherwise comparably
convert the ownership of properties securing such of the related Contracts as
come into and continue in default and as to which no satisfactory arrangements
can be made for collection of delinquent payments. In connection with such
repossession or other conversion, the Servicer will follow such practices and
procedures as it deems necessary or advisable and as shall be normal and usual
in its general servicing activities. The Servicer, however, will not be required
to expend its own funds in connection with any repossession or towards the
restoration of any property unless it determines (i) that such restoration or
repossession will increase the proceeds of liquidation of the related Contract
to the Trust after reimbursement to itself for such expenses and (ii) that such
expenses will be recoverable to it either through Liquidation Proceeds or
through Insurance Proceeds.
Primary Mortgage Insurance
Mortgage Loans that the Depositor acquires will generally not have primary
mortgage insurance. If obtained, the primary mortgage insurance policies will
not insure against certain losses which may be sustained in the event of a
personal bankruptcy of the mortgagor under a Mortgage Loan.
Standard Hazard Insurance
Mortgage Loans. The Servicer will be required to cause to be maintained for
each Mortgage Loan a standard hazard insurance policy. The coverage of such
policy is required to be in an amount not less than the maximum insurable value
of the improvements securing such Mortgage Loan from time to time or the
principal balance owing on such Mortgage Loan from time to time, whichever is
less. In all events, such coverage shall be in an amount sufficient to ensure
avoidance of the applicability of the co-insurance provisions under the terms
and conditions of the applicable policy. The ability of each Servicer to assure
that hazard insurance proceeds are appropriately applied may be dependent on its
being named as an additional insured under any standard hazard insurance policy
and under any flood insurance policy referred to below, or upon the extent to
which information in this regard is furnished to such Servicer by Mortgagors.
Each Agreement may provide that the related Servicer may satisfy its obligation
to cause hazard insurance policies to be maintained by maintaining a blanket
policy insuring against hazard losses on the Mortgage Loans serviced by such
Servicer.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements on the property by fire,
lightning, explosion, smoke, wind-storm and hail, riot, strike and civil
commotion, subject to the conditions and exclusions particularized in each
policy. Although the policies relating to the Mortgage Loans will be
underwritten by different insurers and, therefore, will not contain identical
terms and conditions, the basic terms thereof are dictated by state law. Such
policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other water-related
causes, earth movement (including earthquakes, landslides and mud flow), nuclear
reactions, wet or dry rot, vermin, rodents, insects or domestic animals, theft
and, in certain cases, vandalism. The foregoing list is merely indicative of
certain kinds of uninsured risks and is not intended to be all-inclusive. If the
property securing a Mortgage Loan is located in a federally designated flood
area, flood insurance will be required to be maintained in such amounts as would
be required by FNMA in connection with its mortgage loan purchase program. The
Depositor may also purchase special hazard insurance against certain of the
uninsured risks described above. See "Credit Enhancement - Special Hazard
Insurance".
Since the amount of hazard insurance the Servicer is required to cause to
be maintained on the improvements securing the Mortgage Loans declines as the
principal balances owing thereon decrease, if the residential properties
securing the Mortgage Loans appreciate in value over time, the effect of
coinsurance in the event of partial loss may be that hazard insurance proceeds
will be insufficient to restore fully the damaged property.
The Depositor will not require that a standard hazard or flood insurance
policy be maintained on the cooperative dwelling relating to any Cooperative
Loan. Generally, the Cooperative itself is responsible for
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maintenance of hazard insurance for the property owned by the Cooperative and
the tenant-stockholders of that Cooperative do not maintain individual hazard
insurance policies. To the extent, however, that a Cooperative and the related
borrower on a Cooperative Loan do not maintain such insurance or do not maintain
adequate coverage or any insurance proceeds are not applied to the restoration
of damaged property, any damage to such borrower's cooperative dwelling or such
Cooperative's building could significantly reduce the value of the collateral
securing such Cooperative Loan to the extent not covered by other credit
support.
Contracts. The Servicer will generally be required to cause to be
maintained with respect to each Contract one or more hazard insurance policies
which provide, at a minimum, the same coverage as a standard form fire and
extended coverage insurance policy that is customary for manufactured housing,
issued by a company authorized to issue such policies in the state in which the
Manufactured Home is located and in an amount which is not less than the maximum
insurable value of such Manufactured Home or the principal balance due from the
borrower on the related Contract, whichever is less. When a Manufactured Home's
location was, at the time of origination of the related Contract, within a
federally designated special flood hazard area, the Servicer also shall cause
such flood insurance to be maintained, which coverage shall be at least equal to
the minimum amount specified in the preceding sentence or such lesser amount as
may be available under the federal flood insurance program.
The Servicer may maintain, in lieu of causing individual hazard insurance
policies to be maintained with respect to each Manufactured Home, and shall
maintain, to the extent that the related Contract does not require the borrower
to maintain a hazard insurance policy with respect to the related Manufactured
Home, one or more blanket insurance policies covering losses on the borrowers'
interests in the Contracts resulting from the absence or insufficiency of
individual hazard insurance policies.
The Servicer, to the extent practicable, will cause the borrowers to pay
all taxes and similar governmental charges when and as due. To the extent that
nonpayment of any taxes or charges would result in the creation of a lien upon
any Manufactured Home having a priority equal or senior to the lien of the
related Contract, the Servicer will pay any such delinquent tax or charge.
If the Servicer repossesses a Manufactured Home on behalf of the Trustee,
the Servicer will either (i) maintain at its expense hazard insurance with
respect to such Manufactured Home or (ii) indemnify the Trustee against any
damage to such Manufactured Home prior to resale or other disposition.
Title Insurance Policies
The Agreements will generally require that a title insurance policy be in
effect on each of the Mortgaged Properties and that such title insurance policy
contain no coverage exceptions, except customary exceptions generally accepted
in the mortgage banking industry.
Claims Under Primary Mortgage Insurance Policies and Standard Hazard Insurance
Policies; Other Realization Upon Defaulted Loan
Each Servicer will present claims to any primary insurer under any related
primary mortgage insurance policy and to the hazard insurer under any related
standard hazard insurance policy. All collections under any related primary
mortgage insurance policy or any related standard hazard insurance policy (less
any proceeds to be applied to the restoration or repair of the related Mortgaged
Property or to the reimbursement of Advances by the Servicer) will be remitted
to the Trustee.
If any Mortgaged Property securing a defaulted Mortgage Loan is damaged and
proceeds, if any, from the related standard hazard insurance policy are
insufficient to restore the damaged property to a condition sufficient to permit
recovery under any applicable Mortgage Pool Insurance Policy or any related
primary mortgage insurance policy, each Servicer may be required to expend its
own finds to restore the damaged property to the extent specified in the related
Prospectus Supplement, but only to the extent it determines such expenditures
are recoverable from Insurance Proceeds or Liquidation Proceeds.
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If recovery under any applicable Mortgage Pool Insurance Policy or any
related primary mortgage insurance policy is not available, the Servicer will
nevertheless be obligated to attempt to realize upon the defaulted Mortgage
Loan. Foreclosure proceedings will be conducted by the Servicer in accordance
with the Agreement. If the proceeds of any liquidation of the Mortgaged Property
securing the defaulted Mortgage Loan are less than the Principal Balance of the
defaulted Mortgage Loan plus interest accrued thereon, a loss will be realized
on such Mortgage Loan, to the extent the applicable Credit Enhancement is not
sufficient, in the amount of such difference plus the aggregate of expenses
which are incurred by the Servicer in connection with such proceedings and are
reimbursable under the Agreement. In such case there will be a reduction in the
value of the Mortgage Loans and Trust may be unable to recover the full amount
of principal and interest due thereon.
In addition, where a Mortgaged Property securing a defaulted Mortgage Loan
can be resold for an amount exceeding the principal balance of the related
Mortgage Loan together with accrued interest and expenses, it may be expected
that, where retention of any such amount is legally permissible, the Pool
Insurer will exercise its right under the related Mortgage Pool Insurance
Policy, if any, to purchase such Mortgaged Property and realize for itself any
excess proceeds. Any amounts remaining in the Certificate Account after such
foreclosure or liquidation and attributable to such Mortgage Loan will be
distributed to Owners of the Certificates.
Realization Upon or Sale of Defaulted Multifamily Loans
Unless otherwise specified in the related Prospectus Supplement, the
Servicer may not acquire title to any Multifamily Property securing a Mortgage
Loan or take any other action that would cause the related Trustee, for the
benefit of Owners of the related series, or any other specified person to be
considered to hold title to, to be a "mortgagee-in-possession" of, or to be an
"owner" or an "operator" of such Mortgaged Property within the meaning of
certain federal environmental laws, unless the Servicer has previously
determined, based on a report prepared by a person who regularly conducts
environmental audits, that either:
(i) the Mortgaged Property is in compliance with applicable
environmental laws and regulations or, if not, that taking such actions are
necessary to bring the Mortgaged Property into compliance therewith is
reasonably likely to produce a greater recovery on a present value basis
than not taking such actions; and
(ii) there are no circumstances or conditions present at the Mortgaged
Property that have resulted in any contamination for which investigation,
testing, monitoring, containment, clean-up or remediation could be required
under any applicable environmental laws and regulations or, if such
circumstances or conditions are present for which any such action could be
required, taking such actions with respect to the Mortgaged Property is
reasonably likely to produce a greater recovery on a present value basis
than not taking such actions. See "Certain Legal Aspects of Mortgage
Loans)Foreclosure - Environmental Legislation."
In addition, unless otherwise specified in the related Prospectus
Supplement, the Servicer will not be obligated to foreclose upon or otherwise
convert the ownership of any Mortgaged Property securing a single family
Mortgage Loan if it has received notice or has actual knowledge that such
property may be contaminated with or affected by hazardous wastes or hazardous
substances; however, no environmental testing will generally be required. The
Servicer will not be liable to the Owners of the related series if, based on its
belief that no such contamination or affect exists, the Servicer forecloses on a
Mortgaged Property and takes title to such Mortgaged Property, and thereafter
such Mortgaged Property is determined to be so contaminated or affected.
Servicing Compensation and Payment of Expenses
As compensation for its servicing duties, each Servicer will be entitled to
a monthly servicing fee in the amount specified in the related Prospectus
Supplement. In addition to the primary compensation, a Servicer may be permitted
to retain all assumption underwriting fees and late payment charges, to the
extent collected from Mortgagors.
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As set forth above, each Servicer will be entitled to reimbursement for
certain expenses incurred by it in connection with the liquidation of defaulted
Mortgage Loans and Contracts and in connection with advancing delinquent
payments. No loss will be suffered on the Certificates by reason of such
expenses to the extent claims for such expenses are paid directly under any
applicable Mortgage Pool Insurance Policy, a primary mortgage insurance policy,
the special hazard insurance policy or from other forms of Credit Enhancement.
In the event, however, that the defaulted Mortgage Loans are not covered by a
Mortgage Pool Insurance Policy, primary mortgage insurance policies, the Special
Hazard Insurance Policy or another form of Credit Enhancement, or claims are
either not made or paid under such policies or Credit Enhancement, or if
coverage thereunder has ceased, such a loss will occur to the extent that the
proceeds from the liquidation of a defaulted Mortgage Loan or Contract, after
reimbursement of the Servicer's expenses, are less than the Principal Balance of
such defaulted Mortgage Loan or Contract.
Master Servicer
A Master Servicer may be specified in the related Prospectus Supplement for
the related series of Certificates. Customary servicing functions with respect
to Mortgage Loans constituting the Mortgage Pool will be provided by the
Servicer directly or through one or more Sub-Servicers subject to supervision by
the Master Servicer. If the Master Servicer is not directly servicing the
Mortgage Loans, then the Master Servicer will (i) administer and supervise the
performance by the Servicer of its servicing responsibilities under the
Agreement with the Master Servicer, (ii) maintain a current data base with the
payment histories of each Mortgagor, (iii) review monthly servicing reports and
data relating to the Mortgage Pool for discrepancies and errors, and (iv) act as
back-up Servicer during the term of the transaction unless the Servicer is
terminated or resigns in such case the Master Servicer shall assume the
obligations of the Servicer.
The Master Servicer will be a party to the Agreement for any series for
which Mortgage Loans comprise the assets of a Trust. The Master Servicer will be
required to satisfy the standard established for the qualification of the Master
Servicer in the related Agreement. The Master Servicer will be compensated for
the performance of its services and duties under each Agreement as specified in
the related Prospectus Supplement.
ADMINISTRATION
The following summary describes certain provisions which will be common to
each Agreement. The summary does not purport to be complete and is subject to
the provisions of a particular Agreement.
Assignment of Mortgage Assets
Assignment of the Mortgage Loans. At the time of issuance of the
Certificates, the Depositor will assign the Mortgage Loans to the Trustee,
together with all principal and interest adjusted to the Remittance Rate,
subject to exclusions specified in the Prospectus Supplement, due on or with
respect to such Mortgage Loans on or after the Cut-Off Date. The Trustee will,
concurrently with such assignment, execute, countersign and deliver the
Certificates to the Depositor in exchange for the Mortgage Loans. Each Mortgage
Loan will be identified in a schedule appearing as an exhibit to the Agreement.
Such schedule may include information as to the Principal Balance of each
Mortgage Loan as of the Cut-Off Date, as well as information respecting the
Mortgage Rate, the scheduled monthly payment of principal and interest as of the
Cut-Off Date and the maturity date of each Mortgage Note.
In addition, as to each Mortgage Loan, the Depositor will deliver to the
Trustee the Mortgage Note and Mortgage, any assumption and modification
agreement, an assignment of the Mortgage in recordable form (but not necessarily
recorded), evidence of title insurance, if obtained, and, if applicable, the
certificate of private mortgage insurance. In instances where recorded documents
cannot be delivered due to delays in connection with recording, the Depositor
may deliver copies thereof and deliver the original recorded documents promptly
upon receipt.
With respect to any Mortgage Loans which are Cooperative Loans, the
Depositor will cause to be delivered to the Trustee, the related original
Cooperative note endorsed to the order of the Trustee, the original security
agreement, the proprietary lease or occupancy agreement, the recognition
agreement, an executed financing
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agreement and the relevant stock certificate and related blank stock powers. The
Depositor will file in the appropriate office an assignment and a financing
statement evidencing the Trustee's security interest in each Cooperative Loan.
Each Seller generally will represent and warrant to the Depositor with
respect to the Mortgage Loans sold by it, among other things, that (i) the
information set forth in the schedule of Mortgage Loans attached thereto is
correct in all material respects: (ii) a lender's title insurance policy or
binder for each Mortgage Loan subject to the Agreement was issued on the date of
origination thereof and each such policy or binder assurance is valid and
remains in full force and effect or a legal opinion concerning title or title
search was obtained or conducted in connection with the origination of the
Mortgage Loans; (iii) at the date of initial issuance of the Certificates, the
Seller has good title to the Mortgage Loans and the Mortgage Loans are free of
offsets, defenses or counterclaims; (iv) at the date of initial issuance of the
Certificates, each Mortgage is a valid first lien on the property securing the
Mortgage Note (subject only to (a) the lien of current real property taxes and
assessments, (b) covenants, conditions, and restrictions, rights of way,
easements and other matters of public record as of the date of the recording of
such Mortgage, such exceptions appearing of record being acceptable to mortgage
lending institutions generally in the area wherein the property subject to the
Mortgage is located or specifically reflected in the appraisal obtained by the
Depositor and (c) other matters to which like properties are commonly subject
which do not materially interfere with the benefits of the security intended to
be provided by such Mortgage) and such property is free of material damage and
is in good repair or, with respect to a junior lien Mortgage Loan, that such
Mortgage is a valid junior lien Mortgage, as the case may be and specifying the
percentage of the Mortgage Loan Pool comprised of junior lien Mortgage Loans;
(v) at the date of initial issuance of the Certificates, no Mortgage Loan is 31
or more days delinquent (with such exceptions as may be specified in the related
Prospectus Supplement) and there are no delinquent tax or assessment liens
against the property covered by the related Mortgage; (vi) at the date of
initial issuance of the Certificates, the portion of each Mortgage Loan, if any,
which in the circumstances set forth below under "Servicing of Mortgage Loans
and Contracts - Primary Mortgage Insurance" should be insured with a private
mortgage insurer is so insured; and (vii) each Mortgage Loan at the time it was
made complied in all material respects with applicable state and federal laws,
including, with out limitation, usury, equal credit opportunity and disclosure
laws. The Depositor's rights against the Seller in the event of a breach of its
representations will be assigned to the Trustee for the benefit of the
Certificates of such series.
Assignment of Contracts. The Depositor will cause the Contracts to be
assigned to the Trustee, together with principal and interest due on or with
respect to the Contracts on and after the Cut-Off Date. Each Contract will be
identified in a loan schedule ("Contract Loan Schedule") appearing as an exhibit
to the related Agreement. Such Contract Loan Schedule may specify, with respect
to each Contract, among other things: the original principal balance and the
outstanding Principal Balance as of the Cut-Off Date; the interest rate; the
current scheduled payment of principal and interest; and the maturity date.
In addition, with respect to each Contract, the Depositor will deliver or
cause to be delivered to the Trustee, the original Contract and copies of
documents and instruments related to each Contract and the security interest in
the Manufactured Home securing each Contract. To give notice of the right, title
and interest of the Trust to the Contracts, the Depositor will cause a UCC-1
financing statement to be filed identifying the Trustee as the secured party and
identifying all Contracts as collateral. The Contracts will not be stamped or
otherwise marked to reflect their assignment from the Depositor to the Trustee.
Therefore, if a subsequent purchaser were able to take physical possession of
the Contracts without notice of such assignment, the interest of the Trust in
the Contracts could be defeated. See "Certain Legal Aspects of the Mortgage
Assets" herein.
The Depositor or the related Seller, as the case may be, may provide
limited representations and warranties to the Trustee concerning the Contracts.
Such representations and warranties may include: (i) that the information
contained in the Contract Loan Schedule provides an accurate listing of the
Contracts and that the information respecting such Contracts set forth in such
Contract Loan Schedule is true and correct in all material respects at the date
or dates respecting which such information is furnished; (ii) that, immediately
prior to the conveyance of the Contracts, the Depositor had good title to and
was sole owner of, each such Contract; and (iii) that there has been no other
sale by it of such Contract and that the Contract is not subject to any lien,
charge, security interest or other encumbrance.
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Assignment of Mortgage-Backed Securities and Other Mortgage Securities.
With respect to each series, the Depositor will cause any Mortgage-Backed
Securities and Other Mortgage Securities included in the related Trust to be
registered in the name of the Trustee (directly or through a participant in a
depository). The Trustee (or its custodian) will have possession of any
certificated Mortgage-Backed Securities and Other Mortgage Securities. The
Trustee will not be in possession of or be assignee of record of any underlying
assets for a Mortgage-Backed Security or Other Mortgage Security. Each
Mortgage-Backed Security and Other Mortgage Security will be identified in a
schedule appearing as an exhibit to the related Agreement which may specify
certain information with respect to such security, including, as applicable, the
original principal amount, outstanding principal balance as of the Cut-Off Date,
annual pass-through rate or interest rate and maturity date and certain other
pertinent information for each such security. The Depositor will represent and
warrant to the Trustee, among other things, the information contained in such
schedule is true and correct and that immediately prior to the transfer of the
related securities to the Trustee, the Depositor had good title to, and was the
sole owner of, each such security.
Repurchase or Substitution of Mortgage Loans and Contracts. The Trustee
will review the documents delivered to it with respect to the Mortgage Loans and
Contracts included in the related Trust. If any document is not delivered or is
found to be defective in any material respect and the Depositor or the related
Seller, if so required cannot deliver such document or cure such defect within
the period specified in the related Prospectus Supplement after notice thereof
(which the Trustee will undertake to give within the period specified in the
related Prospectus Supplement), and if any other party obligated to deliver such
document or cure such defect has not done so and has not substituted or
repurchased the affected Mortgage Loan or Contract then the Depositor will cause
the Seller, not later than the first date designated for the deposit of payments
into the Certificate Account (a "Deposit Date") which is more than a specified
number of days after such period, (a) if so provided in the Prospectus
Supplement to remove the affected Mortgage Loan or Contract from the Trust and
substitute one or more other Mortgage Loans or Contracts therefor or (b)
repurchase the Mortgage Loan or Contract from the Trustee for a price equal to
100% of its Principal Balance plus one month's interest thereon at the
applicable Remittance Rate. This repurchase and, if applicable, substitution
obligation will generally constitute the sole remedy available to the Trustee
for a material defect in a document relating to a Mortgage Loan or Contract.
The Depositor is required to cause the Seller to do either of the following
(a) cure any breach of any representation or warranty that materially and
adversely affects the interests of the Owners of the Certificates in a Mortgage
Loan (each, a "Defective Mortgage Loan") or Contract within a specified number
of days of its discovery by the Depositor or its receipt of notice thereof from
the Trustee, (b) repurchase such Defective Mortgage Loan or Contract not later
than the first Deposit Date which is more than a specified number of days after
such period for a price equal to 100% of its Principal Balance plus one month's
interest thereon at the applicable Remittance Rate, or (c) if so specified in
the Prospectus Supplement, remove the affected Mortgage Loan or Contract from
the Trust and substitute one or more other mortgage loans or contracts therefor.
This repurchase and, if applicable, substitution obligation will generally
constitute the sole remedies available to the Trustee for any such breach.
If the related Prospectus Supplement so provides, the Depositor or a
designated affiliate may be obligated to repurchase or substitute Mortgage Loans
or Contracts as described above, whether or not the Depositor obtains such an
agreement from the Seller which sold such Mortgage Loans or Contracts.
If a REMIC election is to be made with respect to all or a portion of a
Trust, there may be federal income tax limitations on the right to substitute
Mortgage Loans or Contracts.
Evidence as to Compliance
The Agreement will provide that on or before a specified date in each year,
beginning the first such date that is at least a specified number of months on
and after the Cut-Off Date, a firm of independent public accountants will
furnish a statement to the Trustee to the effect that, based on an examination
of certain specified documents and records relating to the servicing of the
Depositor's mortgage loan portfolio conducted substantially in compliance with
the audit program for mortgages serviced for FNMA or FHLMC, the United States
Department of Housing and Urban Development Mortgage Audit Standards or the
Uniform Single Audit Program for Mortgage Bankers or in accordance with other
standards specified in the Agreement (the "Applicable Accounting Standards"),
such firm is of
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the opinion that such servicing has been conducted in compliance with the
Applicable Accounting Standards except for (a) such exceptions as such firm
shall believe to be immaterial and (b) such other exceptions as shall be set
forth in such statement.
The Trustee
Any commercial bank or trust company serving as Trustee may have normal
banking relationships with the Depositor. In addition, the Depositor and the
Trustee acting jointly will have the power and the responsibility for appointing
co-trustees or separate trustees of all or any part of the Trust relating to a
particular series of Certificates. In the event of such appointment, all rights,
powers, duties and obligations conferred or imposed upon the Trustee by the
Agreement shall be conferred or imposed upon the Trustee and such separate
trustee or co-trustee jointly, or, in any jurisdiction in which the Trustee
shall be incompetent or unqualified to perform certain acts, singly upon such
separate trustee or co-trustee who shall exercise and perform such rights,
powers, duties and obligations solely at the direction of the Trustee.
The Trustee will make no representations as to the validity or sufficiency
of the Agreement, the Certificates or of any Mortgage Asset or related document,
and will not be accountable for the use or application by the Depositor of any
funds paid to the Depositor in respect of the Certificates or the related
assets, or amounts deposited in the Certificate Account or deposited into the
Distribution Account. If no Event of Default has occurred, the Trustee will be
required to perform only those duties specifically required of it under the
Agreement. However, upon receipt of the various certificates, reports or other
instruments required to be furnished to it, the Trustee will be required to
examine them to determine whether they conform to the requirements of the
Agreement.
The Trustee may resign at any time, and the Depositor may remove the
Trustee if the Trustee ceases to be eligible to continue as such under the
Agreement, if the Trustee becomes insolvent or in such other instances, if any,
as are set forth in the Agreement. Following any resignation or removal of the
Trustee, the Depositor will be obligated to appoint a successor Trustee. Any
resignation or removal of the Trustee and appointment of a successor Trustee
will not become effective until acceptance of the appointment by the successor
Trustee.
Administration of the Certificate Account
The Agreement will require that the Certificate Account be either (i)
maintained with a depository institution the debt obligations of which (or, in
the case of a depository institution which is a part of a holding company
structure, the debt obligations of the holding company of which) have a rating
acceptable to each rating agency that was requested to rate the Certificates, or
(ii) an account or accounts the deposits in which are fully insured by either
the Bank Insurance Fund (the "BIF") of the FDIC or the Savings Association
Insurance Fund (as successor to the Federal Savings and Loan Insurance
Corporation) ("SAIF") of the FDIC. The collateral eligible to secure amounts in
the Certificate Account is limited to United States government securities and
other investments acceptable to the rating agencies rating such series of
Certificates, and may include one or more Certificates of a series ("Eligible
Investments"). If so specified in the related Prospectus Supplement, a
Certificate Account may be maintained as an interest bearing account, or the
funds held therein may be invested pending each succeeding Payment Date in
Eligible Investments. If so specified in the related Prospectus Supplement, the
Servicer or its designee will be entitled to receive any such interest or other
income earned on funds in the Certificate Account as additional compensation.
The Servicer will deposit in the Certificate Account from amounts previously
deposited by it into the Servicer's Custodial Account on the related Remittance
Date the following payments and collections received or made by it on and after
the Cut-Off Date (including scheduled payments of principal and interest due on
and after the Cut-Off Date but received before the Cut-Off Date):
(i) all Mortgagor payments on account of principal, including
Principal Prepayments and, if specified in the related Prospectus
Supplement, prepayment penalties;
(ii) all Mortgagor payments on account of interest, adjusted to the
Remittance Rate;
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(iii) all Liquidation Proceeds net of certain amounts reimbursed to
the Servicer or other person entitled thereto, as described above;
(iv) all Insurance Proceeds, other than proceeds to be applied to the
restoration or repair of the related property or released to the Mortgagor
and net of certain amounts reimbursed to the Servicer or other person
entitled thereto, as described above;
(v) all condemnation awards or settlements which are not released to
the Mortgagor in accordance with normal servicing procedures;
(vi) any Advances made as described under "Servicing of Mortgage Loans
and Contracts - Advances" herein and certain other amounts required under
the Agreement to be deposited in the Certificate Account;
(vii) all proceeds of any Mortgage Loan or Contract or property
acquired in respect thereof repurchased by the Depositor, the Seller or
otherwise as described above or under "Termination" below;
(viii) all amounts, if any, required to be deposited in the
Certificate Account from any Credit Enhancement for the related series; and
(ix) all other amounts required to be deposited in the Certificate
Account pursuant to the related Agreement.
Reports
Concurrently with each distribution on the Certificates, there will be
mailed to Owners a statement generally setting forth, to the extent applicable
to any series, among other things:
(i) the aggregate amount of such distribution allocable to principal,
separately identifying the amount allocable to each class;
(ii) the amount of such distribution allocable to interest, separately
identifying the amount allocable to each class;
(iii) the aggregate Certificate Principal Balance of each class of the
Certificates after giving effect to distributions on such Distribution
Date;
(iv) the aggregate Certificate Principal Balance of any class of
Compound Interest Certificates after giving effect to any increase in such
Principal Balance that results from the accrual of interest that is not yet
distributable thereon;
(v) if applicable, the amount otherwise distributable to any class of
Certificates that was distributed to other classes of Certificates;
(vi) if any class of Certificates has priority in the right to receive
Principal Prepayments, the amount of Principal Prepayments in respect of
the related Mortgage Assets;
(vii) the aggregate Principal Balance and number of Mortgage Loans and
Contracts which were delinquent as to a total of two installments of
principal and interest; and
(viii) the aggregate Principal Balances of Mortgage Loans and
Contracts which (a) were delinquent 30-59 days, 60-89 days, and 90 days or
more, and (b) were in foreclosure.
Customary information deemed necessary for Owners to prepare their tax
returns will be furnished annually.
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Forward Commitments; Pre-Funding
The Trustee of a Trust may enter into a Pre-Funding Agreement for the
transfer of additional Mortgage Loans to such Trust following the date on which
such Trust is established and the related Certificates are issued. The Trustee
of a Trust may enter into Pre-Funding Agreements to permit the acquisition of
additional Mortgage Loans that could not be delivered by the Depositor or have
not formally completed the origination process, in each case prior to the
Delivery Date. Any Pre-Funding Agreement will require that any Mortgage Loans so
transferred to a Trust conform to the requirements specified in such Pre-Funding
Agreement. If a Pre-Funding Agreement is to be utilized, the related Trustee
will be required to deposit in the Purchase Account all or a portion of the
proceeds received by the Trustee in connection with the sale of one or more
classes of Certificates of the related series; the additional Mortgage Loans
will be transferred to the related Trust in exchange for money released from the
related Pre-Funding Account. Each Pre-Funding Agreement will set a specified
period during which any such transfers must occur. The Pre-Funding Agreement or
the related Agreement will require that, if all moneys originally deposited to
such Pre-Funding Account are not so used by the end of such specified period,
then any remaining moneys will be applied as a mandatory prepayment of the
related class or classes of Certificates as specified in the related Prospectus
Supplement. The specified period for the acquisition by a Trust of additional
Mortgage Loans is not expected to exceed three months from the date such Trust
is established.
Servicer Events of Default
"Events of Default" under the Agreement will consist of (i) any failure by
the Servicer to duly observe or perform in any material respect any other of its
covenants or agreements in the Agreement materially affecting the rights of
Owners which continues unremedied for a specified number of days after the
giving of written notice of such failure to the Depositor by the Trustee or to
the Servicer and the Trustee by the Owners of Certificates evidencing interests
aggregating not less than 25% of the affected class of Certificates; and (ii)
certain events of insolvency, readjustment of debt, marshaling of assets and
liabilities or similar proceedings and certain actions by the Servicer
indicating its insolvency, reorganization or inability to pay its obligations.
Rights Upon Servicer Event of Default
As long as an Event of Default under the Agreement remains unremedied by
the Servicer, the Trustee, or Owners of Certificates may terminate all the
rights and obligations of the Servicer under the Agreement, whereupon the
Trustee or Master Servicer, if any, or a new Servicer appointed pursuant to the
Agreement, will succeed to all the responsibilities, duties and liabilities of
the Servicer under the Agreement and will be entitled to similar compensation
arrangements. Following such termination, the Depositor shall appoint any
established mortgage loan servicer satisfying the qualification standards
established in the Agreement to act as successor to the Servicer under the
Agreement. If no such successor shall have been appointed within a specified
number of days following such termination, then either the Depositor or the
Trustee may petition a court of competent jurisdiction for the appointment of a
successor Servicer. Pending the appointment of a successor Servicer, the Trustee
or the Master Servicer, if any, shall act as Servicer.
The Owners of Certificates will not have any right under the Agreement to
institute any proceeding with respect to the Agreement, unless they previously
have given to the Trustee written notice of default and unless the Owners of the
percentage of the Certificates specified in the Prospectus Supplement have made
written request to the Trustee to institute such proceeding in its own name as
Trustee thereunder and have offered to the Trustee reasonable indemnity and the
Trustee for a specified number of days has neglected or refused to institute any
such proceedings. However, the Trustee is under no obligation to exercise any of
the trusts or powers vested in it by the Agreement or to make any investigation
of matters arising thereunder or to institute, conduct or defend any litigation
thereunder or in relation thereto at the request, order or direction of any of
the Owners, unless such Owners have offered to the Trustee reasonable security
or indemnity against the costs, expenses and liabilities which may be incurred
therein or thereby.
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Amendment
An Agreement generally may be amended by the Depositor, the Servicer and
the Trustee, without the consent of the Owners of the Certificates, to cure any
ambiguity, to correct or supplement any provision therein which may be defective
or inconsistent with any other provision therein, to take any action necessary
to maintain REMIC status of any Trust as to which a REMIC election has been
made, to add any other provisions with respect to matters or questions arising
under the Agreement which are not materially inconsistent with the provisions of
the Agreement or for any other purpose, provided that with respect to amendments
for any other purpose (a) the Depositor shall deliver an opinion of counsel
satisfactory to the Trustee, that such amendment will not adversely affect in
any material respect the interests of any Owners of Certificates of that series
and (B) such amendment will not result in a withdrawal or reduction of the
rating of any rated Certificate. Notwithstanding the foregoing, no such
amendment may (i) reduce in any manner the amount of, or delay the timing of,
collections of payments received on the related Mortgage Assets or distributions
which are required to be made on any Certificate without the consent of the
Owner of such Certificate, (ii) adversely affect in any material respect the
interests of the Owners of any class of Certificates in any manner other than as
described in (i), without the consent of the Owners of Certificates of such
class evidencing not less than a majority of the interests of such class or
(iii) reduce the aforesaid percentage of Certificates of any class required to
consent to any such amendment, without the consent of the Owners of all
Certificates of such class then outstanding. Any other amendment provisions
inconsistent with the foregoing shall be specified in the related Prospectus
Supplement.
Termination
The obligations of the Depositor, the Servicer, and the Trustee created by
the Agreement will terminate upon the payment as required by the Agreement of
all amounts held by the Servicer or in the Certificate Account and required to
be paid to them pursuant to the Agreement after the later of (i) the maturity or
other liquidation of the last Mortgage Asset subject thereto or the disposition
of all property acquired upon foreclosure of any such Mortgage Loan or Contract
or (ii) the repurchase by the Depositor from the Trust of all the outstanding
Certificates or all remaining assets in the Trust. The Agreement will establish
the repurchase price for the assets in the Trust and the allocation of such
purchase price among the classes of Certificates. The exercise of such right
will effect early retirement of the Certificates of that series, but the
Depositor's right so to repurchase will be subject to the conditions described
in the related Prospectus Supplement. If a REMIC election is to be made with
respect to all or a portion of a Trust, there may be additional conditions to
the termination of such Trust which will be described in the related Prospectus
Supplement. In no event, however, will the trust created by the Agreement
continue beyond the expiration of 21 years from the death of the survivor of
certain persons named in the Agreement. The Trustee will give written notice of
termination of the Agreement to each Owner, and the final distribution will be
made only upon surrender and cancellation of the Certificates at an office or
agency of the Trustee specified in such notice of termination.
USE OF PROCEEDS
Substantially all the net proceeds to be received from the sale of each
series of Certificates will be applied to the simultaneous purchase of the
Mortgage Assets related to such series (or to reimburse the amounts previously
used to effect such a purchase), the costs of carrying such Mortgage Assets
until sale of the Certificates and to pay other expenses.
THE DEPOSITOR
The Depositor will have no ongoing servicing obligations or
responsibilities with respect to any Mortgage Pool or Contract Pool. The
Depositor does not have, nor is it expected in the future to have, any
significant net worth.
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The Depositor anticipates that it will acquire Mortgage Assets in the open
market or in privately negotiated transactions, which may be through or from an
affiliate.
Neither the Depositor nor any of its affiliates will insure or guarantee
the Certificates of any series.
CERTAIN LEGAL ASPECTS OF THE MORTGAGE ASSETS
The following discussion contains summaries of certain legal aspects of
mortgage loans and manufactured housing contracts which are general in nature.
Because such legal aspects are governed primarily by applicable state law (which
laws may differ substantially), the summaries do not purport to be complete nor
to reflect the laws of any particular state, nor to encompass the laws of all
states in which the security for the Mortgage Loans and Contracts is situated.
The summaries are qualified by reference to the applicable federal and state
laws governing the Mortgage Loans and Contracts.
General
Mortgages. The Mortgage Loans will be secured either by deeds of trust or
mortgages. A mortgage creates a lien upon the real property encumbered by the
mortgage. It is not prior to liens for real estate taxes and assessments.
Priority between mortgages depends on their terms and generally on the order of
filing with a state or county office. There are two parties to a mortgage: the
mortgagor, who is the borrower and homeowner or the land trustee (as described
below), and the mortgagee, who is the lender. Under the mortgage instrument, the
mortgagor delivers to the mortgagee a note or bond and the mortgage. Although a
deed of trust is similar to a mortgage, a deed of trust formally has three
parties, the borrower-homeowner called the trustor (similar to a mortgager), a
lender (similar to a mortgagee) called the beneficiary, and a third-party
grantee called the trustee. Under a deed of trust, the borrower grants the
property, irrevocably until the debt is paid, in trust and generally with a
power of sale, to the trustee to secure payment of the obligation. The trustee's
authority under a deed of trust and the mortgagee's authority under a mortgage
are governed by law, the express provisions of the deed of trust or mortgage
and, in some cases, the directions of the beneficiary.
Cooperatives. Certain of the Mortgage Loans may be Cooperative Loans. The
private, non-profit, cooperative apartment corporation owns all the real
property that comprises the project, including the land, separate dwelling units
and all common areas. The cooperative is directly responsible for project
management and, in most cases, payment of real estate taxes and hazard and
liability insurance. If there is a blanket mortgage on the cooperative apartment
building and or underlying land, as is generally the case, the cooperative, as
project mortgagor, is also responsible for meeting these mortgage obligations. A
blanket mortgage is ordinarily incurred by the cooperative in connection with
the construction or purchase of the cooperative's apartment building. The
interest of the occupant under proprietary leases or occupancy agreements to
which that cooperative is a party are generally subordinate to the interest of
the holder of the blanket mortgage in that building. If the cooperative is
unable to meet the payment obligations arising under its blanket mortgage, the
mortgagee holding the blanket mortgage could foreclose on that mortgage and
terminate all subordinate proprietary leases and occupancy agreements. In
addition, the blanket mortgage on a cooperative may provide financing in the
form of a mortgage that does not fully amortize with a significant portion of
principal being due in one lump sum at final maturity. The inability of the
cooperative to refinance this mortgage and its consequent inability to make such
final payment could lead to foreclosure by the mortgagee providing the
financing. A foreclosure in either event by the holder of the blanket mortgage
could eliminate or significantly diminish the value of any collateral held by
the lender who financed the purchase by an individual tenant-stockholder of
cooperative shares or in the case of a Trust including Cooperative Loans, the
collateral securing the Cooperative Loans.
The cooperative is owned by tenant-stockholders who, through ownership of
stock shares or membership certificates in the corporation, receive proprietary
leases or occupancy agreements which confer exclusive rights to occupy specific
units. Generally, a tenant-stockholder of a cooperative must make a monthly
payment to the cooperative representing such tenant-stockholder's pro rata share
of the cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest
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in a cooperative and accompanying occupancy rights is financed through a
cooperative share loan evidenced by a promissory note and secured by a security
interest in the occupancy agreement or proprietary lease and in the related
cooperative shares. The lender takes possession of the share certificate and a
counterpart of the proprietary lease or occupancy agreement and a financing
statement covering the proprietary lease or occupancy agreement and the
cooperative shares is filed in the appropriate state and local offices to
perfect the lenders interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant-stockholder, the lender may sue for
judgment on the promissory note, dispose of the collateral at a public or
private sale or otherwise proceed against the collateral or tenant-stockholder
as an individual as provided in the security agreement covering the assignment
of the proprietary lease or occupancy agreement and the pledge of cooperative
shares.
Foreclosure
Mortgages. Foreclosure of a deed of trust is generally accomplished by a
non-judicial trustee's sale under a specific provision in the deed of trust that
authorizes the trustee to sell the property to a third party upon any default by
the borrower under the terms of the note or deed of trust. In some states, the
trustee must record a notice of default and send a copy to the borrower-trustor
or and any person who has recorded a request for a copy of a notice of default
and notice of sale. In addition, the trustee must provide notice in some states
to any other individual having an interest in the real property, including any
junior lienholders. The borrower, or any other person having a junior
encumbrance on the real estate, may, during a reinstatement period, cure the
default by paying the entire amount in arrears plus the costs and expenses
incurred in enforcing the obligation. Generally, state law controls the amount
of foreclosure expenses and costs, including attorney's fees' which may be
recovered by a lender. If the deed of trust is not reinstated, a notice of sale
must be posted in a public place and, in most states, published for a specific
period of time in one or more newspapers. In addition, some state laws require
that a copy of the notice of sale be posted on the property and sent to all
parties having an interest in the real property.
Foreclosure of a mortgage is generally accomplished by judicial action. The
action is initiated by the service of legal pleadings upon all parties having an
interest in the real property. Delays in completion of the foreclosure may
occasionally result from difficulties in locating necessary parties defendant.
Judicial foreclosure proceedings are often not protested by any of the parties
defendant. However, when the mortgagee's right to foreclose is contested, the
legal proceedings necessary to resolve the issue can be time consuming. After
the completion of judicial foreclosure, the court generally issues a judgment of
foreclosure and appoints a referee or other court officer to conduct the sale of
the property.
In case of foreclosure under either a mortgage or a deed of trust, the sale
by the referee or other designated officer or by the trustee is a public sale.
However, because of the difficulty a potential buyer at the sale would have in
determining the exact status of title and because the physical condition of the
property may have deteriorated during foreclosure proceedings, it is uncommon
for a third party to purchase the property at the foreclosure sale. Rather it is
common for the lender to purchase the property from the trustee or referee for
an amount equal to the principal amount of the mortgage or deed of trust,
accrued and unpaid interest and expenses of foreclosure. Thereafter, the lender
will assume the burdens of ownership, including paying real estate taxes,
obtaining casualty insurance and making such repairs at its own expense as are
necessary to render the property suitable for sale. The lender will commonly
obtain the services of a real estate broker and pay the broker's commission in
connection with the sale of the property. Depending upon market conditions, the
ultimate proceeds of the sale of the property may not equal the lender's
investment in the property. Any loss may be reduced by the receipt of any
mortgage insurance proceeds.
When the junior mortgagee or beneficiary under a junior deed of trust cures
the default and state law allows it to reinstate or redeem by paying the full
amount of the senior mortgage or deed of trust, then in those states the amount
paid so to cure or redeem generally becomes a part of the indebtedness secured
by the junior mortgage or deed of trust. See "Junior Liens; Rights of Senior
Mortgagors or Beneficiaries" below.
A sale conducted in accordance with the terms of the power of sale
contained in a mortgage or deed of trust is generally presumed to be conducted
regularly and fairly, and a conveyance of the real property by the trustee
confers, in most states, legal title to the real property to the purchaser, free
of all junior mortgages or deeds of trust and free of all other liens and claims
subordinate to the mortgage or deed of trust
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under which the sale is made (with the exception of certain governmental liens).
The purchaser's title is, however, subject to all senior liens, encumbrances and
mortgages and may be subject to mechanic's and materialman's liens in some
states. Thus, if the mortgage or deed of trust being foreclosed is a junior
mortgage or deed of trust, the sheriff or trustee will convey title to the
purchaser of the real property, subject to any existing first mortgage or deed
of trust and any other prior liens and claims. The foreclosure of a junior
mortgage or deed of trust, generally, will have an effect on the first mortgage
or deed of trust, if the senior mortgage or deed of trust grants to the senior
mortgagee or beneficiary the right to accelerate its indebtedness under a
"due-on-sale" clause or "due on further encumbrance" clause contained in the
senior mortgage or deed of trust. See "Anti-Deficiency Legislation and Other
Limitations on Lenders" below.
The proceeds received by the sheriff or trustee from the sale are applied
pursuant to the terms of the deed of trust, which may require application first
to the costs, fees and expenses of sale and then in satisfaction of the
indebtedness secured by the mortgage or deed of trust under which the sale was
conducted. In some states, any surplus money remaining may be available to
satisfy claims of the holders of junior mortgages or deeds of trust and other
junior liens and claims in order of their priority, whether or not the mortgagor
or trustee is in default, while in some states, any surplus money remaining may
be payable directly to the mortgagor or trustor. Any balance remaining is
generally payable to the mortgagor or trustor. Following the sale, in some
states the mortgagee or beneficiary following a foreclosure of a mortgage or
deed of trust may not obtain a deficiency judgment against the mortgagor or
trustor. A junior lienholder whose rights in the property are terminated by the
foreclosure by a senior lienholder will not share in the proceeds from the
subsequent disposition of the property.
Cooperative Loans. The cooperative shares owned by the tenant-stockholder
and pledged to the lender are, in almost all cases, subject to restrictions on
transfer as set forth in the cooperative's Certificate of Incorporation and
Bylaws, as well as the proprietary lease or occupancy agreement, and may be
canceled by the cooperative for failure by the tenant-stockholder to pay rent or
other obligations or charges owned by such tenant-stockholder, including
mechanics' liens against the cooperative apartment building incurred by such
tenant-stockholder. The proprietary lease or occupancy agreement generally
permits the cooperative to terminate such lease or agreement in the event an
obligor fails to make payments or defaults in the performance of covenants
required thereunder. Typically, the lender and the cooperative enter into a
recognition agreement which establishes the rights and obligations of both
parties in the event of a default by the tenant-stockholder on its obligations
under the proprietary lease or occupancy agreement. A default by the
tenant-stockholder under the proprietary lease or occupancy agreement will
usually constitute a default under the security agreement between the lender and
the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the cooperative will recognize the
lender's lien against proceeds from a sale of the cooperative apartment,
subject, however, to the cooperative's right to sums due under such proprietary
lease or occupancy agreement. The total amount owed to the cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the cooperative loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that in the event of a foreclosure on a
cooperative loan, the lender must obtain the approval or consent of the
cooperative as required by the proprietary lease before transferring the
cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited in any rights it may have to dispossess the tenant-stockholders.
In some states, foreclosure on the cooperative shares is accomplished by a
sale in accordance with the provisions of Article 9 of the Uniform Commercial
Code (the "UCC") and the security agreement relating to those shares. Article 9
of the UCC requires that a sale be conducted in a "commercially reasonable"
manner. Whether a foreclosure sale has been conducted in a "commercially
reasonable" manner will depend on the facts in each case. In determining
commercial reasonableness, a court will look to the notice given the debtor and
the method, manner, time, place and terms of the foreclosure. Generally, a sale
conducted according to the usual practice of banks selling similar collateral
will be considered reasonably conducted. Article 9 of the UCC provides that the
proceeds of the
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sale will be applied first to pay the costs and expenses of the sale and then to
satisfy the indebtedness secured by the lender's security interest. The
recognition agreement, however, generally provides that the lender's right to
reimbursement is subject to the right of the cooperative corporation to receive
sums due under the proprietary lease or occupancy agreement. If there are
proceeds remaining, the lender must account to the tenant-stockholder for the
surplus. Conversely, if a portion of the indebtedness remains unpaid, the
tenant-stockholder is generally responsible for the deficiency. See
"Anti-Deficiency Legislation and Other Limitations on Lenders" below.
Junior Liens; Rights of Senior Mortgagees or Beneficiaries. Certain of the
Mortgage Loans, including Title I Loans, may be secured by mortgages or deeds of
trust providing for junior (i.e., second, third, etc.) liens on the related
Mortgaged Properties which are junior to the other mortgages or deeds of trust
held by other lenders or institutional investors. The rights of the beneficiary
under a junior deed of trust or as mortgagee under a junior mortgage are
subordinate to those of the mortgagee or beneficiary under the senior mortgage
or deed of trust, including the prior rights of the senior mortgagee or
beneficiary to receive hazard insurance and condemnation proceeds and to cause
the property securing the Mortgage Loans to be sold upon default of the
mortgagor or trustor. As discussed more fully below, a junior mortgagee or
beneficiary in some states may satisfy a defaulted senior loan in full and in
some states may cure such default and bring the senior loan current, in either
event adding the amounts expended to the balance due on the junior loan. In most
states, absent a provision in the senior mortgage or deed of trust, no notice of
default is required to be given to a junior mortgagee or beneficiary.
The forms of the mortgage or deed of trust used by most institutional
lenders generally confer on the mortgagee or beneficiary the right both to
receive all proceeds collected under any hazard insurance policy and all awards
made in connection with any condemnation proceedings, and to apply such proceeds
and awards to any indebtedness secured by the mortgage or deed of trust, in such
order as the mortgagee or beneficiary may determine. Thus, in the event
improvements on the property are damaged or destroyed by fire or other casualty,
or in the event the bankruptcy is taken by condemnation, the mortgagee or
beneficiary under the underlying first mortgage or deed of trust may have the
prior right to collect any insurance proceeds payable under a hazard insurance
policy and any award of damages in connection with the condemnation and to apply
the same to the indebtedness secured by the first mortgage or deed of trust. In
those situations, proceeds in excess of the amount of first mortgage
indebtedness generally may be applied to the indebtedness of a junior mortgage
or trust deed.
Other provisions typically found in the form of the mortgagee or deed of
trust generally used by most institutional lenders obligate the mortgagor or
trustor to pay before delinquency all taxes and assessments on the property and,
when due, all encumbrances, charges and liens on the property which appear prior
to the mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee or beneficiary under the
mortgage or deed of trust. Upon a failure of the mortgagor or trustor to perform
any of these obligations, the mortgagee or beneficiary typically is given the
right under the mortgage or deed of trust to perform the obligation itself at
its election, with the mortgagor or trustor agreeing to reimburse the mortgagee
or beneficiary for any sums expended by the mortgagee or beneficiary on behalf
of the trustor. All sums so expended by the mortgagee or beneficiary generally
become part of the indebtedness secured by the mortgage or deed of trust
Right of Redemption. In some states, after sale pursuant to a deed of trust
or foreclosure of a mortgage, the borrower and foreclosed junior lienors are
given a statutory period in which to redeem the property following foreclosure.
In some states, redemption may occur only upon payment of the entire principal
balance of the loan, accrued interest and expenses of foreclosure. In other
states, redemption may be authorized if the former borrower pays only a portion
of the sums due. The effect of a statutory right of redemption is to diminish
the ability of the lender to sell the foreclosed property. The rights of
redemption would defeat the title of any purchaser from the lender subsequent to
foreclosure or sale under a deed of trust. Consequently, the practical effect of
the redemption right is to force the lender to retain the property and pay the
expenses of ownership until the redemption period has run.
Anti-Deficiency Legislation and Other Limitations on Lenders. Certain
states have imposed statutory prohibitions that limit the remedies of a
beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower
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following foreclosure or sale under a deed of trust. A deficiency judgment would
be a personal judgment against the former borrower equal in most cases to the
difference between the net amount realized upon the public sale of the real
property and the amount due to the lender. Other statutes require the
beneficiary or mortgagee to exhaust the security afforded under a deed of trust
or mortgage by foreclosure in an attempt to satisfy the full debt before
bringing a personal action against the borrower. Finally, other statutory
provisions limit any deficiency judgment against the former borrower following a
judicial sale to the excess of the outstanding debt over the fair market value
of the property at the time of the public sale. The purpose of these statutes is
generally to prevent a beneficiary or a mortgagee from obtaining a large
deficiency judgment against the former borrower as a result of low or no bids at
the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other statutory provisions, including the federal bankruptcy laws and state laws
affording relief to debtors, may interfere with or affect the ability of the
secured mortgage lender to realize upon collateral and/or enforce a deficiency
judgment. For example, with respect to federal bankruptcy law, a court with
federal bankruptcy jurisdiction may permit a debtor through his or her Chapter
11 or Chapter 13 rehabilitative plan to cure a monetary default in respect of a
mortgage loan on a debtor's residence by paying arrearages within a reasonable
time period and reinstating the original mortgage loan payment schedule even
though the lender accelerated the mortgage loan and final judgment of
foreclosure had been entered in state court (provided no sale of the residence
had yet occurred) prior to the filing of the debtor's petition. Some courts with
federal bankruptcy jurisdiction have approved plans, based on the particular
fact of the reorganization case, that effected the curing of a mortgage loan
default by paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan secured by property of the debtor may be modified.
These courts have suggested that such modifications may include reducing the
amount of each monthly payment, changing the rate of interest, altering the
repayment schedule and reducing the lender's security interest to the value of
the residence, thus leaving the lender a general unsecured creditor for the
difference between the value of the residence and the outstanding balance of the
loan. Federal bankruptcy law and limited case law indicate that the foregoing
modifications could not be applied to the terms of a loan secured by property
that is the principal residence of the debtor.
The Code provides priority to certain tax liens over the lien of the
mortgage. In addition, substantive requirements are imposed upon mortgage
lenders in connection with the origination and the servicing of mortgage loans
by numerous federal and some state consumer protection laws. These laws include
the federal Truth-in-Lending Act, Real Estate Settlement Procedures Act, Equal
Credit Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act and
related statutes. These federal laws impose specific statutory liabilities upon
lenders who originate mortgage loans and who fail to comply with the provisions
of the law. In some cases, this liability may affect assignees of the mortgage
loans.
Generally, Article 9 of the UCC governs foreclosure on cooperative shares
and the related proprietary lease or occupancy agreement. Some courts have
interpreted section 9-504 of the UCC to prohibit a deficiency award unless the
creditor establishes that the sale of the collateral (which, in the case of a
Cooperative Loan, would be the shares of the cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner.
Enforceability of Certain Provisions. Certain of the Mortgage Loans will
contain due-on-sale clauses. These clauses permit the lender to accelerate the
maturity of a loan if the borrower sells, transfers, or conveys the property.
The enforceability of these clauses was the subject of legislation or litigation
in many states, and in some cases the enforceability of these clauses was
limited or denied. However, the Garn-St. Germain Depository Institutions Act of
1982 (the "Garn-St. Germain Act") preempts state constitutional, statutory and
case law prohibiting the enforcement of due-on-sale clauses and permits lenders
to enforce these clauses in accordance with their terms, subject to certain
limited exceptions. The Garn-St. Germain Act does "encourage" lenders to permit
assumption of loans at the original rate of interest or at some other rate less
than the average of the original rate and the market rate.
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The Garn-St. Germain Act also sets forth nine specific instances in which a
mortgage lender covered by the Garn-St. Germain Act (including federal savings
and loan associations and federal savings banks) may not exercise a due-on-sale
clause, notwithstanding the fact that a transfer of the property may have
occurred. These include intra-family transfers, certain transfers by operation
of law, leases of fewer than three years and the creation of a junior
encumbrance. Regulations promulgated under the Garn-St. Germain Act by the
Federal Home Loan Bank Board as succeeded by the Office of Thrift Supervision
(the "OTS"), also prohibit the imposition of a prepayment penalty upon the
acceleration of a loan pursuant to a due-on-sale clause. Any inability of the
Depositor to enforce due-on-sale clauses may affect the average life of the
Mortgage Loans and the number of Mortgage Loans that may be outstanding until
maturity.
Upon foreclosure, courts have imposed general equitable principles. These
equitable principles are generally designed to relieve the borrower from the
legal effect of his defaults under the loan documents. Examples of judicial
remedies that have been fashioned include requirements that the lender undertake
affirmative and expensive actions to determine the causes for the borrower's
default and the likelihood that the borrower will be able to reinstate the loan.
In some cases, courts have substituted their judgment for the lender's judgment
and have required that lenders reinstate loans or recast payment schedules in
order to accommodate borrowers who are suffering from temporary financial
disability. In other cases, courts have limited the right of the lender to
foreclose if the default under the mortgage instrument is not monetary, such as
the borrower falling to adequately maintain the property or the borrower
executing a second mortgage or deed of trust affecting the property. Finally,
some courts have been faced with the issue of whether or not federal or state
constitutional provisions reflecting due process concerns for adequate notice
require that borrowers under deeds of trust or mortgages receive notices in
addition to the statutory-prescribed minimum. For the most part, these cases
have upheld the notice provisions as being reasonable or have found that the
sale by a trustee under a deed of trust, or under a mortgage having a power of
sale, does not involve sufficient state action to afford constitutional
protections to the borrower.
The standard forms of note, mortgage and deed of trust generally contain
provisions obligating the borrower to pay a late charge if payments are not
timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations upon late charges which a lender may collect
from a borrower for delinquent payments. Certain states also limit the amounts
that a lender may collect from a borrower as an additional charge if the loan is
prepaid. Under the Agreement, late charges (to the extent permitted by law and
not waived by the Servicer) will be retained by the Servicer as additional
servicing compensation.
Adjustable Rate Loans. The laws of certain states may provide that mortgage
notes relating to adjustable rate loans are not negotiable instruments under the
UCC. In such event, the Trustee will not be deemed to be a "holder in due
course," within the meaning of the UCC and may take such a mortgage note subject
to certain restrictions on its ability to foreclose and to certain contractual
defenses available to a mortgagor.
Environmental Legislation. Certain states impose a statutory lien for
associated costs on property that is the subject of a cleanup action by the
state on account of hazardous wastes or hazardous substances released or
disposed of on the property. Such a lien will generally have priority over all
subsequent liens on the property and, in certain of these states, will have
priority over prior recorded liens including the lien of a mortgage. In
addition, under federal environmental legislation and under state law in a
number of states, a secured party which takes a deed in lieu of foreclosure or
acquires a mortgaged property at a foreclosure sale or assumes active control
over the operation or management of a property so as to be deemed an "owner" or
"operator" of the property may be liable for the costs of cleaning up a
contaminated site. Although such costs could be substantial, it is unclear
whether they would be imposed on a secured lender (such as a Trust) to
homeowners. In the event that title to a Mortgaged Property securing a Mortgage
Loan in a Trust was acquired by the Trust and cleanup costs were incurred in
respect of the Mortgaged Property, the Trust might realize a loss if such costs
were required to be paid by the Trust.
Soldiers' and Sailors' Civil Relief Act
Generally, under the terms of the Relief Act, a borrower who enters
military service after the origination of a Mortgage Loan or Contract by such
borrower (including a borrower who is a member of the National Guard or is
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in reserve status at the time of the origination of the Mortgage Loan and is
later called to active duty) may not be charged interest above an annual rate of
6% during the period of such borrower's active duty status, unless a court
orders otherwise upon application of the lender. It is possible that such
interest rate limitation or similar limitations under state law could have an
effect, for an indeterminate period of time, on the ability of the Servicer to
collect full amounts of interest on certain of the Mortgage Loans. In addition,
the Relief Act imposes limitations which would impair the ability of the
Servicer to foreclose on an affected Mortgage Loan during the borrower's period
of active duty status. Thus, in the event that such a Mortgage Loan goes into
default there may be delays and losses occasioned by the inability to realize
upon the Mortgaged Property in a timely fashion.
Any shortfalls in interest collections resulting from application of the
Relief Act could adversely affect Certificates.
The Contracts
General. As a result of the Depositor's assignment of the Contracts to the
Trustee, the Owners of Certificates will succeed collectively to all the rights
(including the right to receive payment on the Contracts) and will assume
certain obligations of the Depositor. Each Contract evidences both (a) the
obligation of the obligor to repay the loan evidenced thereby, and (b) the grant
of a security interest in the Manufactured Home to secure repayment of such
loans. Certain aspects of both features of the Contracts are described more
fully below.
The Contracts generally are "chattel paper" as defined in the UCC in effect
in the states which the Manufactured Homes initially were registered. Pursuant
to the UCC, the sale of chattel paper is treated in a manner similar to
perfection of a security interest in chattel paper. Under the Agreement, the
Depositor will transfer physical possession of the Contracts to the Trustee or
its custodians. In addition, the Depositor will make an appropriate filing of a
UCC-1 financing statement in the appropriate states to give notice of the
Trustee's ownership of the Contracts. The Contracts will not be stamped or
marked otherwise to reflect their assignment from the Depositor to the Trustee.
Therefore, if a subsequent purchaser were able to take physical possession of
the Contracts without notice of such assignment the Trustee's interest in
Contracts could be defeated.
Security Interests in the Manufactured Homes. The Manufactured Homes
securing the Contracts may be located in all 50 states. Security interests in
manufactured homes may be perfected either by notation of the secured party's
lien on the certificate of title or by delivery of the required documents and
payment of a fee to the state motor vehicle authority, depending on state law.
In some nontitle states, perfection pursuant to the provisions of the UCC is
required. The Depositor may effect such notation or delivery of the required
documents and fees, and obtain possession of the certificate of title, as
appropriate under the laws of the state in which any manufactured home securing
a manufactured housing conditional sales contract is registered. In the event
the Depositor fails, due to clerical errors, to effect such notation or
delivery, or files the security interest under the wrong law (for example, under
a motor vehicle title statute rather than under the UCC, in a few states), the
Trustee may not have a first priority security interest in the Manufactured Home
securing a Contract. As manufactured homes have become larger and often have
been attached to their sites without any apparent intention to move them, courts
in many states have held that manufactured homes, under certain circumstances,
may become subject to real estate title and recording laws. As a result, a
security interest in a manufactured home could be rendered subordinate to the
interests of other parties claiming an interest in the home under applicable
state real estate law. In order to perfect a security interest in a manufactured
home under real estate law, the holder of the security interest must file either
a "fixture filing" under the provisions of the UCC or a real estate mortgage
under the real estate laws of the state where the home is located. These filings
must be made in the real state records office of the county where the home is
located. So long as the borrower does not violate this agreement, a security
interest in the Manufactured Home will be governed by the certificate of title
laws or the UCC, and the notation of the security interest on the certificate of
title or the filing of a UCC financing statement will be effective to maintain
the priority of the security interest in the Manufactured Home. If, however, a
Manufactured Home is permanently attached to this site, other parties could
obtain an interest in the Manufactured Home which is prior to the security
interest transferred to the Trustee. With respect to a series of Certificates
and as described in the related Prospectus Supplement, the Depositor may be
required to perfect a security interest in the Manufactured Home under
applicable real estate laws. If such real estate
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filings are not required and if any of the foregoing events were to occur, the
only recourse would be to pursue the Trust's rights to require repurchase for
breach of warranties.
The Depositor will assign its security interest in the Manufactured Homes
to the Trustee. Neither the Depositor nor the Trustee will amend the
certificates of title to identify the Trust as the new secured party.
Accordingly, the Depositor will continue to be named as the secured party on the
certificates of title relating to the Manufactured Homes. In most states, such
assignment is an effective conveyance of such security interest without
amendment of any lien noted on the related certificate of title and the new
secured party succeeds to the Depositor's rights as the secured party. However,
in some states there exists a risk that, in the absence of an amendment to the
certificate of title, such assignment of the security interest might not be held
effective against creditors of the Depositor.
In the absence of fraud, forgery or permanent affixation of the
Manufactured Home to its site by the Manufactured Home owner, or administrative
error by state recording officials, the notation of the lien of the Depositor on
the certificate of title or delivery of the required documents and fees will be
sufficient to protect the Trust against the rights of subsequent purchasers of a
Manufactured Home or subsequent lenders who take a security interest in the
Manufactured Home. If there are any Manufactured Homes as to which the security
interest is not perfected, such security interest would be subordinate to, among
others, subsequent purchasers for value of Manufactured Homes and holders of
perfected security interests. There also exists a risk in not identifying the
Trust as the new secured party on the certificate of title that, through fraud
or negligence, the security interest of the Trust could be released.
Enforcement of Security Interests in Manufactured Homes. The Servicer on
behalf of the Trustee, to the extent required by the related Agreement, may take
action to enforce the Trustee's security interest with respect to Contracts in
default by repossession and resale of the Manufactured Homes securing such
Contracts in default. So long as the Manufactured Home has not become subject to
the real estate law, a creditor can repossess a Manufactured Home securing a
Contract by voluntary surrender, by "self-help" repossession that is "peaceful"
(i.e., without breach of the peace) or in the absence of voluntary surrender and
the ability to repossess without breach of the peace, by judicial process. The
holder of a Contract must give the debtor a number of days' notice, which varies
from 10 to 30 days depending on the state, prior to commencement of any
repossession. The UCC and consumer protection laws in most states place
restrictions on repossession sales, including requiring prior notice to the
debtor and commercial reasonableness in effecting such a sale. The law in most
states also requires that the debtor be given notice of any sale prior to resale
of the unit so that the debtor may redeem at or before such resale. In the event
of such repossession and resale of a Manufactured Home, the Trustee would be
entitled to be paid out of the sale proceeds before such proceeds could be
applied to the payment of the claims of unsecured creditors or the holders of
subsequently perfected security interests or, thereafter, to the debtor.
If the owner of a Manufactured Home moves it to a state other than the
state in which such Manufactured Home initially is registered, under the laws of
most states the perfected security interest in the Manufactured Home would
continue for four months after such relocation and thereafter only if and after
the owner registers the Manufactured Home in such state. If the owner were to
relocate a Manufactured Home to another state and not re-register the
Manufactured Home in such state, and if steps are not taken to re-perfect the
Trustee's security interest in such state, the security interest in the
Manufactured Home would cease to be perfected. A majority of states generally
requires surrender of a certificate of title to re-register a Manufactured Home;
accordingly, the Trustee must surrender possession if it holds the certificate
of title to such Manufactured Home or, in the case of Manufactured Homes
registered in states which provide for notation of lien, the Trustee would
receive notice of surrender if the security interest in the Manufactured Home is
noted on the certificate of title. Accordingly, the Trustee would have the
opportunity to re-perfect its security interest in the Manufactured Home in the
state of relocation. In states which do not require a certificate of title for
registration of a manufactured home, re-registration could defeat perfection. In
the ordinary course of servicing the manufactured housing conditional sales
contracts, the Servicer will be required to take steps to effect such
re-perfection upon receipt of notice of re-registration or information from the
obligor as to relocation. Similarly, when an obligor under a manufactured
housing conditional sales contract sells a manufactured home, the Trustee must
surrender possession of the certificate of title or will receive notice as a
result of its lien noted thereon and accordingly will have an opportunity to
require satisfaction of the related manufactured housing conditional sales
contract before release of the lien. Under each Agreement the
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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
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("Manufactured Home Loans" or "Title I Contracts"). A Property Improvement Loan
or Title I Loan means a loan made to finance actions or items that substantially
protect or improve the basic livability or utility of a property and includes:
(1) single family, multifamily and nonresidential property improvement loans;
(2) manufactured home improvement loans, where the home is classified as
personalty; (3) historic preservation loans; and (4) fire safety equipment loans
in existing health care facilities. A Manufactured Home Loan or Title I Contract
means a loan for the purchase or refinancing of a manufactured home and/or the
lot on which to place such home and includes: (1) manufactured home purchase
loans; (2) manufactured home lot loans; and (3) combination loans.
In addition to these types of loans, there are two basic methods of lending
or originating loans which include a "direct loan" or a "dealer loan". With
respect to a direct loan, the borrower makes application directly to a lender
without any assistance from a dealer, which application may be filled out by the
borrower or by a person acting at the direction of the borrower who does not
have a financial interest in the loan transaction, and the lender may disburse
the loan proceeds solely to the borrower or jointly to the borrower and other
parties to the transaction. With respect to a dealer loan, the dealer, who has a
direct or indirect financial interest in the loan transaction, assists the
borrower in preparing the loan application or otherwise assists the borrower in
obtaining the loan from the lender and the lender may disburse proceeds solely
to the dealer or the borrower or jointly to the borrower and the dealer or other
parties. With respect to a dealer Title I Loan, a dealer may include a seller, a
contractor or supplier of goods or services' and with respect to a dealer Title
I Contract, a dealer is a person engaged in the business of manufactured home
retail sales.
Loans insured under the Title I Program are required to have fixed interest
rates and, generally, provide for equal installment payments due weekly,
biweekly, semi-monthly, or monthly, except that a loan may be payable quarterly
or semi-annually in order to correspond with the borrower's irregular flow of
income The first or last payments (or both) may vary in amount but may not
exceed 150% of the regular installment payment, and the first payment may be due
no later than two months from the date of the loan. The note must contain a
provision permitting full or partial prepayment of the loan. The interest rate
may be established by the lender and must be fixed for the term of the loan and
recited in the note. Interest on an insured loan must accrue from the date of
the loan and be calculated according to the actuarial method. The lender must
assure that the note and all other documents evidencing the loan are in
compliance with applicable Federal, state and local laws.
Each insured lender is required to use prudent lending standards in
underwriting individual loans and to satisfy the applicable loan underwriting
requirements under the Title I Program prior to its approval of the loan and
disbursement of loan proceeds. Generally, the lender must exercise prudence and
diligence to determine whether the borrower and any co-maker are solvent and
acceptable credit risks, with a reasonable ability to make payments on the loan
obligation. The lender's credit application and review must determine whether
the borrower's income will be adequate to meet the periodic payments required by
the loan, as well as the borrower's other housing and recurring expenses, which
determination must be made in accordance with the expense-to-income ratios
published by the Secretary of the United States Department of Housing and Urban
Development ("HUD").
Under the Title I Program, the FHA does not review or approve for
qualification for insurance the individual loans insured thereunder at the time
of approval by the lending institution. If, after a loan has been made and
reported for insurance under the Title I Program, the lender discovers any
material misstatement of fact or that the loan proceeds have been misused by the
borrower, dealer or any other party, it shall promptly report this to the FHA.
In such case, provided that the validity of any lien on the property has not
been impaired, the insurance of the loan under the Title I Program will not be
affected unless such material misstatement of fact or misuse of loan proceeds
was caused by (or was knowingly sanctioned by) the lender or its employees.
Requirements for Title I Loans. The maximum principal amounts for Title I
Loans must not exceed the actual cost of the project plus any applicable fees
and charges allowed under the Title I Program; provided that such maximum amount
does not exceed the following loan amounts: (i) $25,000 for a single family
property improvement loan and nonresidential property improvement loans; (ii)
the lesser of $60,000 or an average of $12,000 per dwelling unit for multifamily
property improvement loans; and (iii) $17,500 for a manufactured home
improvement loan. Generally, the term of a Title I Loan may not be less than six
months nor greater than 20 years and 32 days, except that the maximum term of a
single family property improvement loan on a manufactured home is limited to 15
years and 32 days and the maximum term of a manufactured home improvement loan
is limited to 12 years and 32 days. A
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borrower may obtain multiple Title I Loans with respect to multiple properties,
and a borrower may obtain more than one Title I Loan with respect to a single
property, in each case as long as the total outstanding balance of all Title I
Loans on the same property does not exceed the maximum loan amount for the type
of Title I Loan thereon having the highest permissible loan amount
Borrower eligibility for a Title I Loan requires that the borrower have at
least a one-half interest in either fee simple title to the real property, a
lease thereof for a term expiring at least six months after the final maturity
of the Title I Loan or a recorded land installment contract for the purchase of
the real property, and that the borrower have equity in the property being
improved at least equal to the amount of the Title I Loan if such loan amount
exceeds $15,000. Any Title I Loan in excess of $5,000 must be secured by a
recorded lien on the improved property which is evidenced by a mortgage or deed
of trust executed by the borrower and all other owners in fee simple.
The proceeds from a Title I Loan may be used only to finance property
improvements which substantially protect or improve the basic livability or
utility of the property as disclosed in the loan application. The Secretary of
HUD has published a list of items and activities which cannot be financed with
proceeds from any Title I Loan and from time to time the Secretary of HUD may
amend such list of items and activities. With respect to any dealer Title I
Loan, before the lender may disburse funds, the lender must have in its
possession a completion certificate on a HUD-approved form, signed by the
borrower and the dealer. With respect to any direct Title I Loan the lender is
required to obtain, promptly upon completion of the improvements but not later
than 6 months after disbursement of the loan proceeds with one 6 month extension
if necessary, a completion certificate, signed by the borrower. The lender is
required to conduct an on-site inspection on any Title I Loan where the
principal obligation is $7,500 or more, and or any direct Title I Loan where the
borrower fails to submit a completion certificate.
Requirements for Title I Contracts. The maximum principal amount for any
Title I Contract must not exceed the sum of certain itemized amounts, which
include a specified percentage of the purchase price of the manufactured home
depending on whether it is a new or existing home; provided that such maximum
amount does not exceed the following loan amounts: (i) $40,500 for a new or
existing manufactured home purchase loan; (ii) $13,500 for a manufactured home
lot purchase; and (iii) $54,000 for a combination loan (i.e., a loan to purchase
a new or existing manufactured home and the lot for such home). Generally, the
term of a Title I Contract may not be less than six months nor greater than 20
years and 32 days, except that the maximum term of a manufactured home lot loan
is limited to 15 years and 32 days and the maximum term of a multimodule
manufactured home and lot in combination is limited to 25 years and 32 days.
Borrower eligibility for a Title I Contract requires that the borrower
become the owner of the property to be financed with such loan and occupy the
manufactured home as the borrower's principal residence, except for a
manufactured home lot loan which allows six months to occupy the home as the
borrower's principal residence. If a manufactured home is classified as realty,
then ownership of the home must be in fee simple, and also, the ownership of the
manufactured home lot must be in fee simple, except for a lot which consists of
a share in a cooperative association that owns the manufactured home park. The
borrower's minimum cash down payment requirement to obtain financing through a
Title I Contract is as follows: (i) at least 5% of the first $5,000 and 10% of
the balance of the purchase price of a new manufactured home and at least 10% of
the purchase price of an existing manufactured home for a manufactured home
purchase loan, or in lieu of a full or partial cash down payment, the trade-in
of the borrower's equity in an existing manufactured home; (ii) at least 10% of
the purchase price and development costs of a lot for a manufactured home lot
loan; and (iii) at least 5% of the first $5,000 and 10% of the balance of the
purchase price of the manufactured home and lot for a combination loan.
Any manufactured home financed by a Title I Contract must be certified by
the manufacturer to have been constructed in compliance with the National
Manufactured Housing Construction and Safety Standards Act of 1974 (42 U.S.C.
5401-5426), so as to conform to all applicable Federal construction and safety
standards, and with respect to the purchase of a new manufactured home, the
manufacture must furnish the borrower with a one year written warranty on a HUD
approved form which obligates the manufacturer to correct any nonconformity with
all applicable Federal construction and safety standards or any defects in
materials or workmanship for the one year period after the date of delivery. The
proceeds from a Title I Contract may be used as follows: the purchase or
refinancing of a manufactured home, a suitably developed lot for a manufactured
home already owned by the borrower, or a manufactured home and suitably
developed lot for the home in combination; or the refinancing of an
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existing manufactured home already owned by the borrower in connection with the
purchase of a manufactured home lot or an existing lot already owned by the
borrower in connection with the purchase of a manufactured home. In addition,
the proceeds for a Title I Contract which is a manufactured home purchase loan
or a combination loan may be used for the purchase, construction or installation
of a garage, carport, patio or other comparable appurtenance to the home. The
proceeds from a Title I Contract cannot be used for the purchase of furniture or
the financing of any items and activities which are set forth on the list
published by the Secretary of HUD as amended from time to time.
Any Title I Contract must be secured by a recorded lien on the manufactured
home, its furnishings, equipment, accessories and appurtenance, which lien must
be a first lien, superior to any other lien on the property. With respect to any
Title I Contract involving a manufactured home purchase loan or combination loan
and the sale of the manufactured home by a dealer, the lender or its agent
(other than the dealer) must conduct a site-of-placement inspection within 60
days after the date of the loan to verify that the terms and conditions of the
purchase contract have been met, the manufactured home and any options and
appurtenances included in the purchase price or financed with the loan have been
delivered and installed, and the placement certificate executed by the borrower
and the dealer is in order.
FHA Insurance Coverage. Under the Title I Program the FHA establishes an
insurance coverage reserve account for each lender which has been granted a
Title I insurance contract. The amount of insurance coverage in this account is
10% of the amount disbursed, advanced or expended by the lender in originating
or purchasing eligible loans registered with the FHA for Title I insurance, with
certain adjustments. The balance in the insurance coverage reserve account is
the maximum amount of insurance claims the FHA is required to pay. Loans to be
insured under the Title I Program will be registered for insurance by the FHA
and the insurance coverage attributable to such loans will be included in the
insurance coverage reserve account for the originating or purchasing lender
following the receipt and acknowledgment by the FHA of a loan report on the
prescribed form pursuant to the Title I regulations. The FHA charges a fee of
0.50% per annum of the net proceeds (the original balance) of any eligible loan
so reported and acknowledged for insurance by the originating lender. The FHA
bills the lender for the insurance premium on each insured loan annually, on
approximately the anniversary date of the loan's origination. If an insured loan
is prepaid during the year, the FHA will not refund or abate the insurance
premium.
Under the Title I Program the FHA will reduce the insurance coverage
available in the lender's FHA insurance coverage reserve account with respect to
loans insured under the lender's contract of insurance by (i) the amount of the
FHA insurance claims approved for payment relating to such insured loans, (ii)
the amount of the Annual Reductions attributable to such insured loans and (iii)
the amount of insurance coverage attributable to insured loans sold by the
lender, and such insurance coverage may be reduced for any FHA insurance claims
rejected by the FHA. After a lender has held its Title I contract of insurance
for five years, the lender's FHA insurance coverage reserve account is subject
to an annual reduction (the "Annual Reduction") on each October in an amount
equal to 10% of the insurance coverage reserves available on such date with
respect to such contract of insurance; provided that such Annual Reduction shall
not reduce the insurance coverage to an amount less than $50,000. The balance of
the lender's FHA insurance coverage reserve account will be further adjusted as
required under Title I or by the FHA, and the insurance coverage therein may be
earmarked with respect to each or any eligible loans insured thereunder, if a
determination is made by the Secretary of HUD that it is in its interest to do
so. Originations and acquisitions of new eligible loans will continue to
increase a lender's insurance coverage reserve account balance by 10% of the
amount disbursed, advanced or expended in originating or acquiring such eligible
loans registered with the FHA for insurance under the Title I Program. The
Secretary of HUD may transfer insurance coverage between insurance coverage
reserve accounts with earmarking with respect to a particular insured loan or
group of insured loans when a determination is made that it is in the
Secretary's interest to do so.
The lender may transfer (except as collateral in a bona fide loan
transaction) insured loans and loans reported for insurance only to another
qualified lender under a valid Title I contract of insurance. Unless an insured
loan is transferred with recourse or with a guarantee or repurchase agreement,
the FHA, upon receipt of written notification of the transfer of such loan in
accordance with the Title I regulations, will transfer from the transferor's
insurance coverage reserve account to the transferee's insurance coverage
reserve account an amount, if available, equal to 10% of the actual purchase
price or the net unpaid principal balance of such loan (whichever is less).
However, under the Title I Program not more than $5,000 in insurance coverage
shall be transferred to or from a
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lender's insurance coverage reserve account during any October 1 to September 30
period without the prior approval of the Secretary of HUD.
Claims Procedures Under Title I. Under the Title I Program the lender may
accelerate an insured loan following a default on such loan only after the
lender or its agent has contacted the borrower in a face-to-face meeting or by
telephone to discuss the reasons for the default and to seek its cure. If the
borrower does not cure the default or agree to a modification agreement or
repayment plan, the lender will notify the borrower in writing that, unless
within 30 days the default is cured or the borrower enters into a modification
agreement or repayment plan, the loan will be accelerated and that, if the
default persists, the lender will report the default to an appropriate credit
agency. The lender may rescind the acceleration of maturity after full payment
is due and reinstate the loan only if the borrower brings the loan current,
executes a modification agreement or agrees to an acceptable repayment plan.
Following acceleration of maturity upon a secured Title I Loan, the lender
may either (a) proceed against the Mortgaged Property under any security
instrument or (b) make a claim under the lender's contract of insurance. If the
lender chooses to proceed against the Mortgaged Property under a security
instrument (or if it accepts a voluntary conveyance or surrender of the
Mortgaged Property), the lender may file an insurance claim only with the prior
approval of the Secretary of HUD. After acceleration of maturity on a defaulted
Title I Contract, the lender must proceed against the loan security by
foreclosure or repossession, as appropriate, and acquire good, marketable title
to the property securing the loan. The lender must take all actions necessary
under applicable law to preserve its rights, if any, to obtain a deficiency
judgment against the borrower. Before filing a claim for insurance with the FHA,
the lender must sell for the best price obtainable any property which the lender
acquired by the foreclosure or repossession of such property securing a
defaulted Title I Contract.
When a lender files an insurance claim with the FHA under the Title I
Program, the FHA reviews the claim, the complete loan file and documentation of
the lender's efforts to obtain recourse against any dealer who has agreed
thereto, certification of compliance with applicable state and local laws in
carrying out any foreclosure or repossession, and evidence that the lender has
properly filed proofs of claims, where the borrower is bankrupt or deceased.
Generally, a claim for reimbursement for loss on any eligible loan must be filed
with the FHA no later than (i) for any Title I Loan, 9 months after the date of
default of such loan, or (ii) for any Title I Contract, 3 months after the date
of sale of the property securing such loan, but not to exceed 18 months after
the date of default. Concurrently with filing the insurance claim, the lender
shall assign to the United States of America the lender's entire interest in the
loan note (or a judgment in lieu of the note), in any security held and in any
claim filed in any legal proceedings. If, at the time the note is assigned the
Secretary has reason to believe that the note is not valid or enforceable
against the borrower, the FHA may deny the claim and reassign the note to the
lender. If either such defect is discovered after the FHA has paid a claim, the
FHA may require the lender to repurchase the paid claim and to accept a
reassignment of the loan note. If the lender subsequently obtains a valid and
enforceable judgment against the borrower, the lender may resubmit a new
insurance claim with an assignment of the judgment. The FHA may contest any
insurance claim and make a demand for repurchase of the loan at any time up to
two years from the date the claim was certified for payment and may do so
thereafter in the event of fraud or misrepresentation on the part of the lender.
Under the Title I Program the amount of an FHA insurance claim payment,
when made, is equal to the Claimable Amount, up to the amount of insurance
coverage in the lender's insurance coverage reserve account. The "Claimable
Amount" is equal to 90% of the sum of: (a) the unpaid loan obligation (net
unpaid principal and the uncollected interest earned to the date of default)
with adjustments thereto if the lender has proceeded against property securing
such loan; (b) the interest on the unpaid amount of the loan obligation from the
date of default to the date of the claim's initial submission for payment plus
15 calendar days (but not to exceed 9 months from the date of default),
calculated at the rate of 7% per annum; (c) the uncollected court costs; (d) the
attorneys fees not to exceed $500; (e) the expenses for recording the assignment
of the security to the United States; and (f) if the loan is a Title I Contract,
certain costs incurred in connection with the foreclosure or repossession of the
manufactured home and/or lot.
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LEGAL INVESTMENT MATTERS
The Certificates may constitute "mortgage related securities" for purposes
of SMMEA, so long as they are rated in one of the two highest rating categories
by the Rating Agency or Agencies identified in the related Prospectus Supplement
and, as such, would be legal investments for persons, trusts, corporations,
partnerships, associations, business trusts and business entities (including,
but not limited to, state-chartered savings banks, commercial banks, saving and
loan associations and insurance companies, as well as trustees and state
government employee retirement systems) created pursuant to or existing under
the laws of the United States or any State (including the District of Columbia
and Puerto Rico) whose authorized investments are subject to State regulation to
the same extent that, under applicable law, obligations issued by or guaranteed
as to principal and interest by the United States or any agency or
instrumentality thereof constitute legal investments for such entities. Under
SMMEA, in all States which enacted legislation prior to October 4, 1991
specifically limiting the legal investment authority of any of such entities
with respect to "mortgage related securities," the Certificates will constitute
legal investments for entities subject to such legislation only to the extent
provided in such legislation SMMEA provides, however, that in no event will the
enactment of any such legislation affect the validity of any contractual
commitment to purchase, bold or invest in any securities or require the sale or
over disposition of any securities, so long as such contractual commitment was
made or such securities were acquired prior to the enactment of such
legislation. Alaska, Arkansas, Colorado, Connecticut, Delaware, Florida,
Georgia, Illinois, Kansas, Louisiana, Maryland, Michigan, Missouri, Nebraska,
New Hampshire, New York, North Carolina, Ohio, South Dakota, Utah, Virginia and
West Virginia each enacted legislation overriding the exemption afforded by
SMMEA prior to the October 4, 1991 deadline.
Institutions whose investment activities are subject to legal investment
laws or regulations or review by certain regulatory authorities may be subject
to restrictions on investment in certain classes of the Certificates. Any
financial institution which is subject to the jurisdiction of the Comptroller of
the Currency, the Board of Governors of the Federal Reserve System, the FDIC,
the OTS, the NCUA or other federal or state agencies with similar authority
should review any applicable rules, guidelines and regulations prior to
purchasing the certificates. The Federal Financial Institutions Examination
Council, for example, has issued a Supervisory Policy Statement on Securities
Activities effective February 10, 1992 (the "Policy Statement"). The Policy
Statement has been adopted by the Comptroller of the Currency, the Federal
Reserve Board, the FDIC and the OTS with respect to the depository institutions
that they regulate. The Policy Statement prohibits depository institutions from
investing in certain "high-risk mortgage securities" except under limited
circumstances, and sets forth certain investment practices deemed to be
unsuitable for regulated institutions. The NCUA issued final regulations
effective December 2, 1991 that restrict and in some instances prohibit the
investment by federal credit unions in certain types of mortgage related
securities.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, "prudent investor" provisions, percentage-of-assets limits and provisions
which may restrict or prohibit investment in securities which are not "interest
bearing" or "income paying," or in securities which are issued in book-entry
form.
Investors should consult their own legal advisors in determining whether
and to what extent the Certificates constitute legal investments for such
investors.
ERISA CONSIDERATIONS
ERISA imposes requirements on employee benefit plans (and on certain other
retirement plans and arrangements, including individual retirement accounts and
annuities, Keogh plans and collective investment funds and separate accounts in
which such plans, accounts or arrangements are invested) (collectively, "Plans")
subject to ERISA and on persons who are fiduciaries with respect to such Plans.
Among other things, ERISA requires that the assets of Plans be held in trust and
that the trustee, or other duly authorized fiduciary, have exclusive authority
and discretion to manage and control the assets of such Plans. ERISA also
imposes certain duties on persons who are
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fiduciaries of Plans. Under ERISA, any person who exercises any authority or
control respecting the management or disposition of the assets of a Plan is
considered to be a fiduciary of such Plan (subject to certain exceptions not
here relevant). In addition to the imposition of general fiduciary standards of
investment prudence and diversification, ERISA prohibits a broad range of
transactions involving Plan assets and persons ("Parties in Interest") having
certain specified relationships to a Plan and imposes additional prohibitions
where Parties in Interest are fiduciaries with respect to such Plan.
The United States Department of Labor (the "DOL") has issued regulations
concerning the definition of what constitutes the assets of a Plan. (DOL Reg
Section 2510.3-101). Under this regulation, the underlying assets and properties
of corporations, partnerships and certain other entities in which a Plan makes
an "equity" investment could be deemed for purposes of ERISA to be assets of the
investing Plan in certain circumstances. In such case, the fiduciary making such
an investment for the Plan could be deemed to have delegated his or her asset
management responsibility, and the underlying assets and properties could be
subject to ERISA reporting and disclosure. Certain exceptions to the regulation
may apply in the case of a Plan's investment in the Certificates, but the
Depositor cannot predict in advance whether such exceptions apply due to the
factual nature of the conditions to be met. Accordingly, because the Mortgage
Loans may be deemed Plan assets of each Plan that purchases Certificates, an
investment in the Certificates by a Plan might give rise to a prohibited
transaction under ERISA Sections 406 and 407 and be subject to an excise tax
under Code Section 4975 unless a statutory or administrative exemption applies.
DOL Prohibited Transaction Exemption 83-1 ("PTE 83-1") exempts from ERISA's
prohibited transaction rules certain transactions relating to the operation of
residential mortgage investment trusts and the purchase, sale and holding of
"mortgage pool pass-through certificates" in the initial issuance of such
certificates. PTE 83-1 permits, subject to certain conditions, transactions
which might otherwise be prohibited between Plans and Parties in Interest with
respect to those Plans involving the origination, maintenance and termination of
mortgage pools consisting of mortgage loans secured by first or second mortgages
or deeds of trust on single-family residential property, and the acquisition and
holding of certain mortgage pool pass-through certificates representing an
interest in such mortgage pools by PTE.
PTE 83-1 sets forth three general conditions which must be satisfied for
any transaction to be eligible for exemption: (i) the maintenance of a system of
insurance or other protection for the pooled mortgage loans and property
securing such loans, and for indemnifying Owners against reductions in
pass-through payments due to property damage or defaults in loan payments in an
amount not less than the greater of one percent of the aggregate principal
balance of all covered pooled mortgage loans or the principal balance of the
largest covered pooled mortgage loan, (ii) the existence of a pool trustee who
is not an affiliate of the sponsor, and (iii) a limitation on the amount of the
payments retained by the pool sponsor, together with other funds inuring to its
benefit, to not more than adequate consideration for selling the mortgage loans
plus reasonable compensation for services provided by the pool sponsor.
Although the Trustee for any series of Certificates will be unaffiliated
with the Depositor, there can be no assurance that the system of insurance or
subordination will meet the general or specific conditions referred to above. In
addition, the nature of a Trust's assets or the characteristics of one or more
classes of the related series of Certificates may not be included within the
scope of PTE 83-1 or any other class exemption under ERISA. The Prospectus
Supplement will provide additional information with respect to the application
of ERISA and the Code to the related Certificates.
Several underwriters of mortgage-backed securities have applied for and
obtained ERISA prohibited transactions exemptions which are in some respects
broader than PTE 83-1. Such exemptions can only apply to mortgage-backed
securities which, among other conditions, are sold in an offering with respect
to which such underwriter serves as the sole or a managing underwriter, or as a
selling or placement agent. Several other underwriters have applied for similar
exemptions. If such an exemption might be applicable to a series of
Certificates, the related Prospectus Supplement will refer to such possibility.
Each Plan fiduciary who is responsible for making the investment decisions
whether to purchase or commit to purchase and to hold Certificates must make its
own determination as to whether the general and the specific
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conditions of PTE 83-1 have been satisfied or as to the availability of any
other prohibited transaction exemptions Each Plan fiduciary should also
determine whether, under the general fiduciary standards of investment prudence
and diversification, an investment in the Certificates is appropriate for the
Plan, taking into account the overall investment policy of the Plan and the
composition of the Plan's investment portfolio.
Any Plan proposing to invest in Certificates should consult with its
counsel to confirm that such investment will not result in a prohibited
transaction and will satisfy the other requirements of ERISA and the Code.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is based upon the opinion of Dewey Ballantine LLP, special
counsel to the Depositor with respect to the material federal income tax
consequences of the purchase, ownership and disposition of Certificates. The
discussion below does not purport to address all federal income tax consequences
that may be applicable to particular categories of investors, some of which may
be subject to special rules. The authorities on which this discussion is based
are subject to change or differing interpretations, and any such change or
interpretation could apply retroactively. This discussion reflects the
applicable provisions of the Code, as well as final regulations concerning
REMICs (the "REMIC Regulations") and final regulations under Sections 1271
through 1273 and 1275 of the Code concerning debt instruments (the "OID
Regulations"). The Depositor intends to rely on the OID Regulations for all
Certificates offered pursuant to this Prospectus; however, investors should be
aware that the OID Regulations do not adequately address certain issues relevant
to prepayable securities, such as the Certificates. Investors should consult
their own tax advisors in determining the federal, state, local and any other
tax consequences to them of the purchase, ownership and disposition of
Certificates. The Prospectus Supplement for each series of Certificates will
discuss any special tax 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
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property" within the meaning of Code Section 7701(a)(19)(C)(v) or as other
assets described in Code Section 7701(a)(19)(C). REMIC Certificates held by a
real estate investment trust (a "REIT") will constitute "real estate assets"
within the meaning of Code Section 856(c)(5)(a), and interest on the REMIC
Certificates will be considered "interest on obligations secured by mortgages on
real property or on interests in real property" within the meaning of Code
Section 856(c) in the same proportion that, for both purposes, the assets of the
REMIC Pool would be so treated. If at all times 95% or more of the assets of the
REMIC Pool constitute qualifying assets for domestic building and loan
associations and REITs, the REMIC Certificates will be treated entirely as
qualifying assets for such entities. Moreover, the REMIC Regulations provide
that, for purposes of Code Sections 856(c), payments of principal and interest
on the Mortgage Assets that are reinvested pending distribution to holders of
REMIC Certificates, constitute qualifying assets for REIT. Where two REMIC Pools
are part of a tiered structure they will be treated as one REMIC for purposes of
the tests described above respecting asset ownership of more or less than 95%.
Notwithstanding the foregoing, however, REMIC income received by a REIT owning a
residual interest in a REMIC Pool could be treated in part as non-qualifying
REIT income if the REMIC Pool holds Mortgage Assets with respect to which income
is contingent on mortgagor profits or property appreciation. In addition, if the
assets of the REMIC include buy-down Mortgage Assets, it is possible that the
percentage of such assets constituting "qualifying real property loans" or
"loans secured by an interest in real property" for purposes of Code Sections
593(d)(1) and 7701(a)(19)(C)(v), respectively, may be required to be reduced by
the amount of the related buy-down funds. REMIC Certificates held by a regulated
investment company will not constitute "government securities" within the
meaning of Code Section 851(b)(4)(a)(i). REMIC Certificates held by certain
financial institutions will constitute an "evidence of indebtedness" within the
meaning of Code Section 582(c)(i). REMIC Certificates representing interests in
obligations secured by manufactured housing treated as single family residences
under Code Section 25(e)(10) will be considered interests in "qualified
mortgages" as defined in Code Section 860E(a)(3).
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.
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Original Issue Discount. Regular Certificates may be issued with "original
issue discount" within the meaning of Code Section 1273(a). Holders of any class
of Regular Certificates having original issue discount generally must include
original issue discount in ordinary income for federal income tax purposes as it
accrues, in accordance with a constant interest method that takes into account
the compounding of interest, in advance of receipt of the cash attributable to
such income. The Depositor anticipates that the amount of original issue
discount required to be included in a Regular Certificateholder's income in any
taxable year will be computed as described below.
Each Regular Certificate (except to the extent described below with respect
to a Regular Certificate on which distributions of principal are made in a
single installment or upon an earlier distribution by lot of a specified
principal amount upon the request of a Regular Certificateholder or by random
lot (a "Retail Class Certificate")) will be treated as a single installment
obligation for purposes of determining the original issue discount includible in
a Regular Certificateholder's income. The total amount of original issue
discount on a Regular Certificate is the excess of the "stated redemption price
at maturity" of the Regular Certificate over its "issue price." The issue price
of a Regular Certificate is the first price at which a substantial amount of
Regular Certificates of that class are first sold to the public. The Depositor
will determine original issue discount by including the amount paid by an
initial Regular Certificateholder for accrued interest that relates to a period
prior to the issue date of the Regular Certificate in the issue price of a
Regular Certificate and will include in the stated redemption price at maturity
any interest paid on the first Distribution Date to the extent such interest is
attributable to a period in excess of the number of days between the issue date
and such first Distribution Date. The stated redemption price at maturity of a
Regular Certificate always includes the original principal amount of the Regular
Certificate, but generally will not include distributions of stated interest if
such interest distributions constitute "qualified stated interest." Qualified
stated interest generally means stated interest that is unconditionally payable
in cash or in property (other than debt instruments of the issuer) at least
annually at (i) a single fixed rate, (ii) one or more qualified floating rates
(as described below), (iii) a fixed rate followed by one or more qualified
floating rates, (iv) a single objective rate (as described below) or (v) a fixed
rate and an objective rate that is a qualified inverse floating rate. The OID
Regulations state that interest payments are unconditionally payable only if
reasonable remedies exist to compel payment or late payment and nonpayment are
remote. Because the debt securities will generally not provide the holders 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
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and the anticipated reinvestment rate, if any, relating to the Regular
Certificates (the "Prepayment Assumption"). The Prepayment Assumption with
respect to a series of Regular Certificates will be set forth in the related
Prospectus Supplement. The holder of a debt instrument includes any de minimis
original issue discount in income pro rata as stated principal payments are
received.
Of the total amount of original issue discount on a Regular Certificate,
the Regular Certificateholder generally must include in gross income for any
taxable year the sum of the "daily portions," as defined below, of the original
issue discount on the Regular Certificate accrued during an accrual period for
each day on which he holds the Regular Certificate, including the date of
purchase but excluding the date of disposition. Although not free from doubt,
the Depositor intends to treat the monthly period ending on the day before each
Distribution Date as the accrual period, rather than the monthly period
corresponding to the prior calendar month. With respect to each Regular
Certificate, a calculation will be made of the original issue discount that
accrues during each successive full accrual period (or shorter period from the
date of original issue) that ends on the day before the related Distribution
Date on the Regular Certificate. For a Regular Certificate, original issue
discount is to be calculated initially based on a schedule of maturity dates
that takes into account the level of prepayments and an anticipated reinvestment
rate that are most likely to occur, which is expected to be based on the
Prepayment Assumption. The original issue discount accruing in a full accrual
period would be the excess, if any, of (i) the sum of (a) the present value of
all of the remaining distributions to be made on the Regular Certificate as of
the end of that accrual period that are included in the Regular Certificate's
stated redemption price at maturity and (b) the distributions made on the
Regular Certificate during the accrual period that are included in the Regular
Certificate's stated redemption price at maturity over (ii) the adjusted issue
price of the Regular Certificate at the beginning of the accrual period. The
present value of the remaining distributions referred to in the preceding
sentence is calculated based on (i) the yield to maturity of the Regular
Certificate at the issue date, (ii) events (including actual prepayments) that
have occurred prior to the end of the accrual period and (iii) the Prepayment
Assumption. For these purposes, the adjusted issue price of a Regular
Certificate at the beginning of any accrual period equals the issue price of the
Regular Certificate, increased by the aggregate amount of original issue
discount with respect to the Regular Certificate that accrued in all prior
accrual periods and reduced by the amount of distributions included in the
Regular Certificate's stated redemption price at maturity that were made on the
Regular Certificate in such prior period. The original issue discount accruing
during any accrual period (as determined in this paragraph) will then be divided
by the number of days in the period to determine the daily portion of original
issue discount for each day in the period.
Under the method described above, the daily portions of original issue
discount required to be included in income by a Regular Certificateholder
generally will increase to take into account prepayments on the Regular
Certificates as a result of prepayments on the Mortgage Assets or that exceed
the Prepayment Assumption, and generally will decrease (but not below zero for
any period) if the prepayments are slower than the Prepayment Assumption. 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)
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currently as it accrues using the constant yield to maturity method. If this
election is made, the holder is treated as satisfying the requirements for
making the elections with respect to amortization of premium and current
inclusion of market discount, each as described under "Premium" and "Market
Discount" below.
Variable Rate Regular Certificates. Regular Certificates may provide for
interest based on a variable rate. The OID Regulations provide special rules for
variable rate instruments that meet three requirements. First, the noncontingent
principal payments may not exceed the instrument's issue price by more than a
specified amount equal to the lesser of (i) .015 multiplied by the product of
the total noncontingent payments and the weighted average maturity or (ii) 15%
of the total noncontingent principal payments. Second, the instrument must
provide for stated interest (compounded or paid at least annually) at (i) one or
more qualified floating rates, (ii) a single fixed rate followed by one or more
qualified floating rates, (iii) a single objective rate or (iv) a single fixed
rate and a single objective rate that is a qualified inverse floating rate.
Third, the instrument must provide that each qualified floating rate or
objective rate in effect during an accrual period is set at a current value of
that rate (one occurring in the interval beginning three months before and
ending one year after the rate is first in effect on the Regular Certificate). A
rate is a qualified floating rate if variations in the rate can reasonably be
expected to measure contemporaneous variations in the cost of newly borrowed
funds. Generally, neither (i) a multiple of a qualified floating rate in excess
of a fixed multiple that is greater than 0.65 but not more than 1.35 (and
increased or decreased by a fixed rate) nor (ii) a cap or floor that is likely
to cause the interest rate on a Regular Certificate to be significantly less or
more than the overall expected return on the Regular Certificate is considered a
qualified floating rate. An objective rate generally is a rate based on a single
fixed 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.
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Market Discount. A purchaser of a Regular Certificate also may be subject
to the market discount rules of Code Sections 1276 through 1278. Under these
sections and the principles applied by the OID Regulations in the context of
original issue discount, "market discount" is the amount by which a subsequent
purchaser's initial basis in the Regular Certificate (i) is exceeded by the
stated redemption price at maturity of the Regular Certificate or (ii) in the
case of a Regular Certificate having original issue discount, is exceed by the
sum of the issue price of such Regular Certificate plus any original issue
discount that would have previously accrued thereon if held by an original
Regular Certificateholder (who purchased the Regular Certificate at its issue
price), in either case less any prior distributions included in the stated
redemption price at maturity of such Regular Certificate. Such purchaser
generally will be required to recognize accrued market discount as ordinary
income as distributions includible in the stated redemption price at maturity of
such Regular Certificate are received in an amount not exceeding any such
distribution. That recognition rule would apply regardless of whether the
purchaser is a cash-basis or accrual-basis taxpayer. Such market discount would
accrue in a manner to be provided in Treasury regulations and should take into
account the Prepayment Assumption. The Conference Committee Report to the 1986
Act provides that until such regulations are issued, such market discount would
accrue either (i) on the basis of a constant interest rate or (ii) in the ratio
of stated interest allocable to the relevant period to the sum of the interest
for such period plus the remaining interest as of the end of such period, or in
the case of a Regular Certificate issued with original issue discount, in the
ratio of original issue discount accrued for the relevant period to the sum of
the original issue discount accrued for such period plus the remaining original
issue discount as of the end of such period. Such purchaser also generally will
be required to treat a portion of any gain on a sale or exchange of the Regular
Certificate as ordinary income to the extent of the market discount accrued to
the date of disposition under one of the foregoing methods, less any accrued
market discount previously reported as ordinary income as partial distributions
in reduction of the stated redemption price at maturity were received. Such
purchaser will be required to defer deduction of a portion of the excess of the
interest paid or accrued on indebtedness incurred to purchase or carry a Regular
Certificate over the interest distributable thereon. The deferred portion of
such interest expense in any taxable year generally will not exceed the accrued
market discount on the Regular Certificate for such year. Any such deferred
interest expense is, in general, allowed as a deduction not later than the year
in which the related market discount income is recognized or the Regular
Certificate is disposed of. As an alternative to the inclusion of market
discount in income on the foregoing basis, the Regular Certificateholder may
elect to include market discount in income currently as it accrues in all market
discount instruments acquired by such Regular Certificateholder in that taxable
year or thereafter, in which case the interest deferral rule will not apply. In
Revenue Procedure 92-67, the Internal Revenue Service set forth procedures for
taxpayers (1) electing under Code Section 1278(b) to include market discount in
income currently, (2) electing under rules of Code Section 1276(b) to use a
constant interest rate to determine accrued market discount on a bond where the
holder of the bond is required to determine the amount of accrued market
discount at a time prior to the holder's disposition of the bond, and (3)
requesting consent to revoke an election under Code Section 1278(b).
By analogy to the OID Regulations, market discount with respect to a
Regular Certificate will be considered to be zero if such market discount is
less than 0.25% of the remaining stated redemption price at maturity of such
Regular Certificate multiplied by the weighted average maturity of the Regular
Certificate (determined as described above under "Original Issue Discount")
remaining after the date of purchase. Treasury regulations implementing the
market discount rules have not yet been issued, and therefore investors should
consult their own tax advisors regarding the application of these rules as well
as the advisability of making any of the elections with respect thereto.
Premium. A Regular Certificate purchased at a cost greater than its
remaining stated redemption price at maturity generally is considered to be
purchased at a premium. If the Regular Certificateholder holds such Regular
Certificate as a "capital asset" within the meaning of Code Section 1221, the
Regular Certificateholder may elect under Code Section 171 to amortize such
premium as an offset to interest income under a constant yield method that
reflects compounding based on the interval between payments on the Regular
Certificates. This election, once made, applies to all obligations held by the
taxpayer at the beginning of the first taxable year to which such section
applies and to all taxable debt obligations thereafter acquired and is binding
on such taxpayer in all subsequent years. The Conference Committee Report to the
1986 Act indicates a Congressional intent that the same rules that apply to the
accrual of market discount on installment obligations will also apply to
amortizing bond premium under Code Section 171 on installment obligations such
as the Regular Certificates.
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Sale or Exchange of Regular Certificates. If a Regular Certificateholder
sells or exchanges a Regular Certificate, the Regular Certificateholder will
recognize gain or loss equal to the difference, if any, between the amount
received and his adjusted basis in the Regular Certificate. The adjusted basis
of a Regular Certificate generally will equal the cost of the Regular
Certificate to the seller, increased by any original issue discount or market
discount previously included in the seller's gross income with respect to the
Regular Certificate and reduced by amounts included in the stated redemption
price at maturity of the Regular Certificate that were previously received by
the seller and by any amortized premium.
Except as described above with respect to market discount, and except as
provided in this paragraph, any gain or loss on the sale or exchange of a
Regular Certificate realized by an investor who holds the Regular Certificate as
a capital asset will be capital gain or loss and will be long-term or short-term
depending on whether the Regular Certificate has been held for the long-term
capital gain holding period (currently more than one year). Gain from the
disposition of a Regular Certificate that might otherwise be capital gain will
be treated as ordinary income to the extent that such gain does not exceed the
excess, if any, of (i) the amount that would have been includible in the gross
income of the holder if his yield on such Regular Certificate were 110% of the
applicable Federal rate under Code Section 1274(d) as of the date of purchase
over (ii) the amount of income actually includible in the gross income of such
holder with respect to the Regular Certificate. In addition, gain or loss
recognized from the sale of a Regular Certificate by certain banks or thrift
institutions will be treated as ordinary income or loss pursuant to Code Section
582(c).
Taxation of Residual Certificates
Taxation of REMIC Income. Generally, the "daily portions" of REMIC taxable
income or net loss will be includible as ordinary income or loss in determining
the federal taxable income of holders of Residual Certificates ("Residual
Certificateholders") and will not be taxed separately to the REMIC Pool. The
daily portions of REMIC taxable income or net loss of a Residual
Certificateholder are determined by allocating the REMIC Pool's taxable income
or net loss for each calendar quarter ratably to each day in such quarter and by
allocating such daily portion among the Residual Certificateholders in
proportion to their respective holdings of Residual Certificates in the REMIC
Pool on such day. REMIC taxable income is generally determined in the same
manner as the taxable income of an individual using a calendar year and the
accrual method of accounting, except that (i) the limitation on deductibility of
investment interest expense and expenses for the production of income do not
apply, (ii) all bad loans will be deductible as business bad debts and (iii) the
limitation on the deductibility of interest and expenses related to tax-exempt
income will apply. REMIC taxable income generally means the REMIC Pool's gross
income, including interest, original issue discount income and market discount
income, if any, on the Mortgage Assets, plus income on reinvestment of cashflows
and reserve assets, minus deductions, including interest and original issue
discount expense on the Regular Certificates, servicing fees on the Mortgage
Assets and other administrative expenses of the REMIC Pool, amortization of
premium, if any, with respect to the Mortgage Assets, and any tax imposed on the
REMIC's income from foreclosure property. The requirement that Residual
Certificateholders report their pro rata share of taxable income or net loss of
the REMIC Pool will continue until there are no Certificates of any class of the
related series outstanding.
The taxable income recognized by a Residual Certificateholder in any
taxable year will be affected by, among other factors, the relationship between
the timing of recognition of interest and original issue discount or market
discount income or amortization of premium with respect to the Mortgage Assets,
on the one hand, and the timing of deductions for interest (including original
issue discount) on the Regular Certificates, on the other hand. Because of the
way REMIC taxable income is calculated, a Residual Certificateholder may
recognize "phantom" income (i.e., income recognized for tax purposes in excess
of income as determined under financial accounting or economic principles) which
will be matched in later years by a corresponding tax loss or reduction in
taxable income, but which could lower the yield to Residual Certificateholders
due to the lower present value of such future loss or reduction. For example, if
an interest in the Mortgage Assets is acquired by the REMIC Pool at a discount,
and one or more of such Mortgage Assets is prepaid, the Residual
Certificateholder may recognize taxable income without being entitled to receive
a corresponding amount of cash because (i) the prepayment may be used in whole
or in part to make distributions in reduction of principal on the Regular
Certificates and (ii) the discount income on the Mortgage Loan which is
includible in the REMIC's taxable income may exceed the discount deduction
allowed to the REMIC upon such distributions on the Regular Certificates. When
there is more than one class of Regular
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Certificates that distribute principal sequentially, this mismatching of income
and deductions is particularly likely to occur in the early years following
issuance of the Regular Certificates when distributions in reduction of
principal are being made in respect of earlier maturing classes of Certificates.
If taxable income attributable to such a mismatching is realized in general,
losses would be allowed in later years as distributions on the later classes of
Regular Certificates are made. Taxable income may also be greater in earlier
years than in later years as a result of the fact that interest expense
deductions, expressed as a percentage of the outstanding principal amount of
such a series of Regular Certificates, may increase over time as distributions
in reduction of principal are made on the lower yielding classes of Regular
Certificates, where interest income with respect to any given Mortgage Loan will
remain constant over time as a percentage of the outstanding principal amount of
that loan. Consequently, Residual Certificateholders must have sufficient other
sources of cash to pay any federal, state or local income taxes due as a result
of such mismatching or unrelated deductions against which to offset such income.
Prospective investors should be aware, however, that a portion of such income
may be ineligible for offset by such investor's unrelated deductions. See the
discussion of "excess inclusions" below under "Limitations on Offset or
Exemption of REMIC Income; Excess Inclusions." The timing of such mismatching of
income and deductions described in this paragraph, if present with respect to a
series of Certificates, may have a significant adverse effect upon the Residual
Certificateholder's after-tax rate of return. In addition, a Residual
Certificateholder's taxable income during certain periods may exceed the income
reflected by such Certificateholder for such periods in accordance with
generally accepted accounting principles.
Basis and Losses. The amount of any net loss of the REMIC Pool that may be
taken into account by the Residual Certificateholder is limited to the adjusted
basis of the Residual Certificate as of the close of the quarter (or time of
disposition of the Residual Certificate if earlier), determined without taking
into account the net loss for the quarter. The initial adjusted basis of a
purchaser of a Residual Certificate is the amount paid for such Residual
Certificate. Such adjusted basis will be increased by the amount of taxable
income of the REMIC Pool reportable by the Residual Certificateholder and
decreased by the amount of loss of the REMIC Pool reportable by the Residual
Certificateholder. A cash distribution from the REMIC Pool also will reduce such
adjusted basis (but not below zero). Any loss that is disallowed on account of
this limitation may be carried over indefinitely with respect to the Residual
Certificateholder as to whom such loss was disallowed and may be used by such
Residual Certificateholder only to offset any income generated by the residual
from such REMIC Pool. Residual Certificateholders should consult their tax
advisors about other limitations on the deductibility of net losses that may
apply to them.
A Residual Certificateholder will not be permitted to amortize directly the
cost of its Residual Certificate as an offset to its share of the taxable income
of the related REMIC Pool. However, such taxable income will not include cash
received by the REMIC Pool that represents a recovery of the REMIC Pool's basis
in its assets. Such recovery of basis by the REMIC Pool will have the effect of
amortization of the issue price of the Residual Certificates over their life.
However, in view of the possible acceleration of the income of Residual
Certificateholders described above under "Taxation of REMIC Income," the period
of time over which such issue price is effectively amortized may be longer than
the economic life of the Residual Certificates.
If a Residual Certificate has a negative value, it is not clear whether its
issue price would be considered to be zero or such negative amount for purposes
of determining the REMIC Pool's basis in its assets. The REMIC Regulations do
not address whether residual interests could have a negative basis and a
negative issue price. The Depositor does not intend to treat a class of Residual
Certificates as having a value of less than zero for purposes of determining the
bases of the related REMIC Pool in its assets.
Further, to the extent that the initial adjusted basis of a Residual
Certificateholder (other than an original holder) in the Residual Certificate is
greater than the corresponding portion of the REMIC Pool's basis in the Mortgage
Assets, the Residual Certificateholder will not recover a portion of such basis
until termination of the REMIC Pool unless Treasury regulations yet to be issued
provide for periodic adjustments to the REMIC income otherwise reportable by
such holder. The REMIC Regulations do not so provide. See "Treatment of Certain
Items of REMIC Income and Expense - Market Discount" below regarding the basis
of Mortgage Assets to the REMIC Pool and "Sale or Exchange of Residual
Certificates" below regarding possible treatment of a loss upon termination of
the REMIC Pool as a capital loss.
Mark to Market Rules
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Prospective purchasers of a Residual Certificate should be aware that on
December 24, 1996, the Internal Revenue Service issued final regulations (the
"Mark to Market Regulations") relating to the requirement that a securities
dealer mark to market securities held for sale to customers. This mark-to-market
requirement applies to all securities of a dealer, except to the extent that the
dealer has specifically identified a security as held for investment. The Mark
to Market Regulations provide that for purposes of this mark-to-market
requirement, a Residual Certificate acquired after January 4, 1995, is not
treated as a security and thus may not be marked to market.
Treatment of Certain Items of REMIC Income and Expense
Original Issue Discount. Generally, the REMIC Pool's deductions for
original issue discount will be determined in the same manner as original issue
discount income on Regular Certificates as described above under "Taxation of
Regular Certificates - Original Issue Discount" and "Variable Rate Regular
Certificates," without regard to the de minimis rule described therein.
Market Discount. The REMIC Pool will have market discount income in respect
of Mortgage Assets if, in general, the basis of the REMIC Pool in such Mortgage
Assets is exceeded by their unpaid principal balances. The REMIC Pool's basis in
such Mortgage Assets is generally the fair market value of the Mortgage Assets
immediately after the transfer thereof to the REMIC Pool. The REMIC Regulations
provide that such basis is equal in the aggregate to the issue prices of all
regular and residual interests in the REMIC Pool. In respect of Mortgage Assets
that have market discount to which Code Section 1276 applies, the accrued
portion of such market discount would be recognized currently by the REMIC as an
item of ordinary income. Market discount income generally should accrue in the
manner described above under "Taxation of Regular Certificates - Market
Discount."
Premium. Generally, if the basis of the REMIC Pool in the Mortgage Assets
exceeds the unpaid principal balances thereof, the REMIC Pool will be considered
to have acquired such Mortgage Assets at a premium equal to the amount of such
excess. As stated above, the REMIC Pool's basis in the Mortgage Assets is the
fair market value of the Mortgage Assets, based on the aggregate of the issue
prices of the regular and residual interests in the REMIC Pool immediately after
the transfer thereof to the REMIC Pool. In a manner analogous to the discussion
above under "Taxation of Regular Certificates - Premium," a person that holds a
Mortgage Loan as a capital asset under Code Section 1221 may elect under Code
Section 171 to amortize premium on Mortgage Assets originated after September
27, 1985 under a constant yield method. Amortizable bond premium will be treated
as an offset to interest income on the Mortgage Assets, rather than as a
separate deduction item. Premium on Mortgage Assets may be deductible in
accordance with a reasonable method regularly employed by the holder thereof.
The allocation of such premium pro rata among principal payments should be
considered a reasonable method; however, the Internal Revenue Service may argue
that such premium should be allocated in a different manner, such as allocating
such premium entirely to the final payment of principal.
Limitations on Offset or Exemption of REMIC Income; Excess Inclusions. A
portion of the income allocable to a Residual Certificate (referred to in the
Code as an "excess inclusion") for any calendar quarter, 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.
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These new rules are effective for tax years beginning after December 31, 1986,
unless a Residual Certificateholder elects to have the rules apply only to tax
years ending after August 20, 1996.
Except as discussed in the following paragraph, with respect to excess
inclusions from Residual Certificates without "significant value," for any
Residual Certificateholder, the excess inclusion for any calendar quarter is the
excess, if any, of (i) the income of such Residual Certificateholder for that
calendar quarter from its Residual Certificate over (ii) the sum of the "daily
accruals" (as defined below) for all days during the calendar quarter on which
the Residual Certificateholder holds such Residual Certificate. For this
purpose, the daily accruals with respect to a Residual Certificate are
determined by allocating to each day in the calendar quarter its ratable portion
of the product of the "adjusted issue price" (as defined below) of the Residual
Certificate at the beginning of the calendar quarter and 120 percent of the
"Federal long-term rate" in effect at the time the Residual Certificate is
issued. For this purposes the "adjusted issue price" of a Residual Certificate
at the beginning of any calendar quarter equals the issue price of the Residual
Certificate (adjusted for contributions), increased by the amount of daily
accruals for all prior quarters, and decreased (but not below zero) by the
aggregate amount of payments made on the Residual Certificate before the
beginning of such quarter. The Federal long-term rate is an average of current
yields on Treasury securities with a remaining term of greater than nine years,
computed and published monthly by the IRS.
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
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ordinary gross income of the Pass-Through Entity for the taxable year. The
Pass-Through Entity would not be liable for such tax if it has received an
affidavit from such record holder that (i) states under penalty of perjury that
it is not a Disqualified Organization or (ii) furnishes a social security number
and states under penalties of perjury that the social security number is that of
the transferee, provided that during the period such person is the record holder
of the Residual Certificate, the Pass-Through Entity does not have actual
knowledge that such affidavit is false. Excess inclusion income of a Residual
Certificate held by an electing large partnership (as defined in Code section
775) is subject to tax in the hands of the partnership.
For these purposes, (i) "Disqualified Organization" means the United
States, any state or political subdivision thereof, any foreign government, any
international organization, any agency or instrumentality of any of the
foregoing (provided, that such term does not include an instrumentality if all
its activities are subject to tax and a majority of its board of directors is
not selected by any such governmental entity), any cooperative organization
furnishing electric energy or providing telephone service to persons in rural
areas as described in Code Section 1381(a)(2)(C), and any organization (other
than a farmers' cooperative described in Code Section 521) that is exempt from
taxation under the Code unless such organization is subject to the tax on
unrelated business income imposed by Code Section 511 and (ii) "Pass-Through
Entity" means any regulated investment company, real estate investment trust,
common trust fund, partnership, trust or estate and certain corporations
operating on a cooperative basis. Except as may be provided in Treasury
regulations yet to be issued, any person holding an interest in a Pass-Through
Entity as a nominee for another will, with respect to such interest, be treated
as a Pass-Through Entity.
The Agreement with respect to a series of Certificates will provide that
neither legal title nor beneficial interest in a Residual Certificate may be
transferred or registered unless (i) the proposed transferee provides to the
Depositor and the Trustee an affidavit to the effect that such transferee is not
a Disqualified Organization, is not purchasing such Residual Certificates on
behalf of a Disqualified Organization (i.e., as a broker, nominee or middleman
thereof) and is not an entity that holds REMIC residual securities as nominee to
facilitate the clearance and settlement of such securities through electronic
book-entry changes in accounts of participating organizations and (ii) the
transferor provides a statement in writing to the Depositor and the Trustee that
it has no actual knowledge that such affidavit is false. Moreover, the Agreement
will provide that any attempted or purported transfer in violation of these
transfer restrictions will be null and void and will vest no rights in any
purported transferee. Each Residual Certificate with respect to a series will
have a legend referring to such restrictions on transfer, and each Residual
Certificateholder will be deemed to have agreed, as a condition of ownership
thereof, to any amendments to the related Agreement required under the Code or
applicable Treasury regulations to effectuate the foregoing restrictions.
Information necessary to compute an applicable excise tax must be furnished to
the Internal Revenue Service and to the requesting party within 60 days of the
request, and the Depositor or the Trustee may charge a fee for computing and
providing such information.
Noneconomic Residual Interests. Under the REMIC Regulations certain
transfers of Residual Certificates are disregarded, in which case the transferor
continues to be treated as the owner of the Residual Certificates and thus
continues to be subject to tax on its allocable portion of the net income of the
REMIC Pool. Under the Final REMIC Regulations, a transfer of a Noneconomic
Residual Interest (defined below) to a Residual Certificateholder (other than a
Residual Certificateholder who is not a U.S. Person, as defined below under
"Foreign Investors") is disregarded for all federal income tax purposes unless
no significant purpose of the transfer is to impede the assessment or collection
of tax. A residual interest in a REMIC (including a residual interest with a
positive value at issuance) is a "Noneconomic Residual Interest" unless, at the
time of the transfer, (i) the present value of the expected future distributions
on the residual interest at least equals the product of the present value of the
anticipated excess inclusions and the highest federal corporate income tax rate
in effect for the year in which the transfer occurs, and (ii) the transferor
reasonably expects that the transferee will receive distributions from the REMIC
at or after the time at which taxes accrue on the anticipated excess inclusions
in an amount sufficient to satisfy the accrued taxes. The anticipated excess
inclusions and the present value rate are determined in the same manner as set
forth above under "Disqualified Organizations." A significant purpose to impede
the assessment or collection of tax exists if the transferor, at the time of the
transfer, either knew or should have known (had "improper knowledge") that the
transferor would be unwilling or unable to pay taxes due on its share of the
taxable income of the REMIC. Under the REMIC Regulations, a transferor is
presumed not to have improper knowledge if (i) the transferor conducted, at the
time of the transfer, a reasonable investigation of the financial condition of
the transferee and, as a result of the investigation, the transferor found that
the transferee had historically paid its debts as they came due and found no
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significant evidence to indicate that the transferor will not continue to pay
its debts as they come due in the future; and (ii) the transferee represents to
the transferor that it understands that, as the holder of the Noneconomic
Residual Interest, the transferee may incur tax liabilities in excess of any
cash flows generated by the residual interest and that the transferee intends to
pay taxes associated with holding of residual interest as they become due. The
Agreement will require the transferee of a Residual Certificate to state as part
of the affidavit described above under the heading "Disqualified Organizations"
that such transferee (i) has historically paid its debts as they come due, (ii)
intends to continue to pay its debts as they come due in the future, (iii)
understands that, as the holder of a Noneconomic Residual Interest, it may incur
tax liabilities in excess of any cash flows generated by the Residual
Certificate, and (iv) intends to pay any and all taxes associated with holding
the Residual Certificate as they become due. The transferor must have no reason
to believe that such statement is untrue.
Foreign Investors. The REMIC Regulations provide that the transfer of a
Residual Certificate that has "tax avoidance potential" to a "foreign person"
will be disregarded for all federal tax purposes. A Residual Certificate is
deemed to have tax avoidance potential unless, at the time of the transfer, the
transferor reasonably expects that, for each excess inclusion, (i) the REMIC
Pool will distribute to the transferee residual interest holder an amount that
will 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
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years of the Startup Day for a defective (including a defaulted) obligation (or
repurchase in lieu of substitution of a defective (including a defaulted)
obligation at any time) or for any qualified mortgage within three months of the
Startup Day, (b) foreclosure, default or imminent default of a qualified
mortgage, (c) bankruptcy or insolvency of the REMIC Pool or (d) a qualified
(complete) liquidation, (ii) the receipt of income from assets that are not the
type of mortgages or investments that the REMIC Pool is permitted to hold, (iii)
the receipt of compensation for services or (iv) the receipt of gain from
disposition of cash flow investments other than pursuant to a qualified
liquidation. Notwithstanding (i) and (iv), it is not a prohibited transaction to
sell REMIC Pool property to prevent a default on Regular Certificates as a
result of a default on qualified mortgages or to facilitate a clean-up call
(generally, an optional termination to save administrative costs when no more
than a small percentage of the Certificates is outstanding). The REMIC
Regulations indicate that the modification of a Mortgage Loan generally will not
be treated as a disposition if it is occasioned by a default or reasonably
foreseeable default, an assumption of the Mortgage Loan, the waiver of a
due-on-sale or encumbrance clause or the conversion of an interest rate by a
mortgagor pursuant to the terms of a convertible adjustable rate Mortgage Loan.
The REMIC Regulations also provide that the modification of mortgage loans
underlying Mortgage-Backed Securities will not be treated as a modification of
the Mortgage-Backed Securities, provided that the trust issuing the
Mortgage-Backed Securities was not created to avoid prohibited transaction
rules.
Contributions to the REMIC Pool After the Startup Day. In general, the
REMIC Pool will be subject to a tax at a 100% rate on the value of any property
contributed to the REMIC Pool after the Startup Day. Exceptions are provided for
cash contributions to the REMIC Pool (i) during the three months following the
Startup Day, (ii) made to a qualified reserve fund by a Residual
Certificateholder, (iii) in the nature of a guarantee, (iv) made to facilitate a
qualified liquidation or clean-up call and (v) as otherwise permitted in
Treasury regulations yet to be issued.
Net Income from Foreclosure Property. The REMIC Pool will be subject to
federal income tax at the highest corporate rate on "net income from foreclosure
property," determined by reference to the rules applicable to real estate
investment trusts. Generally, property acquired by the REMIC Pool through
foreclosure or deed in lieu of foreclosure would be treated as "foreclosure
property" for a period of three years, with 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.
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Treasury regulations provide that a holder of a Residual Certificate is not
required to treat items on its return consistently with their treatment on the
REMIC Pool's return if a holder owns 100% of the Residual Certificates for the
entire calendar year. Otherwise, each holder of a Residual Certificate is
required to treat items on its return consistently with their treatment on the
REMIC Pool's return, unless the holder of a Residual Certificate either files a
statement identifying the inconsistency or establishes that the inconsistency
resulted from incorrect information received from the REMIC Pool. The Service
may assess a deficiency resulting from a failure to comply with the consistency
requirement without instituting an administrative proceeding at the REMIC Pool
level.
Limitations on Deduction of Certain Expenses
An investor who is an individual, estate or trust will be subject to
limitation with respect to certain itemized deductions described in Code Section
67, to the extent that such itemized deductions, in the aggregate, do not exceed
2% of the investor's adjusted gross income. In addition, Code Section 68
provides that itemized deductions otherwise allowable for a taxable year of an
individual taxpayer will be reduced by the lesser of (i) 3% of the excess, if
any, of adjusted gross income over $100,000, adjusted yearly for inflation
($50,000, adjusted yearly for inflation, in the case of a married individual
filing a separate return), or (ii) 80% of the amount of itemized deductions
otherwise allowable for such year. In the case of a REMIC Pool, such deductions
may include deductions under Code Section 212 for servicing fees and all
administrative and other expenses relating to the REMIC Pool or any similar
expenses allocated to the REMIC Pool with respect to a regular interest it holds
in another REMIC. Such investors who hold REMIC Certificates either directly or
indirectly through certain pass-through entities may have their pro rata share
of such expenses allocated to them as additional gross income, but may be
subject to such limitation on deductions. In addition, such expenses are not
deductible at all for purposes of computing the alternative minimum tax, and may
cause such investors to be subject to significant additional tax liability.
Treasury regulations provide that the additional gross income and corresponding
amount of expenses generally are to be allocated entirely to the holders of
Residual Certificates in the case of a REMIC Pool that would not qualify as a
fixed investment trust in the absence of a REMIC election. However, such
additional gross income and limitation on deductions will apply to the allocable
portion of such expenses to holders of Regular Certificates, as well as holders
of Residual Certificates, where such Regular Certificates are issued in a manner
that is similar to pass-through certificates in a fixed investment trust. In
general, such allocable portion will be determined based on the ratio that a
REMIC Certificateholder's income, determined on a daily basis, bears to the
income of all holders of Regular Certificates and Residual Certificates with
respect to a REMIC Pool. As a result, individuals, estates or trusts holding
REMIC Certificates (either directly or indirectly through a grantor trust,
partnership, S corporation, REMIC, or certain other pass-through entities
described in the foregoing Treasury regulations) may have taxable income in
excess of the interest income at the pass-through rate on Regular Certificates
that are issued in a single class or otherwise consistently with fixed
investment trust status or in excess of cash distributions for the related
period on Residual Certificates.
Taxation of Certain Foreign Investors
Regular Certificates. Interest, including original issue discount,
distributable to Regular Certificateholders who are nonresident aliens, foreign
corporations, or other Non-U.S. Persons (as defined below), will be considered
"portfolio interest" and therefore, generally will not be subject to 30% United
States withholding tax, provided that such Non-U.S. Person (i) is not a
"10-percent shareholder" within the meaning of Code Section 871(h)(3)(B) or a
controlled foreign corporation described in Code Section 881(c)(3)(C) and (ii)
provides the Trustee, or the person who would otherwise be required to withhold
tax from such distributions under Code Sections 1441 or 1442, with an
appropriate statement, signed under penalties of perjury, identifying the
beneficial owner and stating, among other things, that the beneficial owner of
the Regular Certificate is a Non-U.S. Person. If such statement, or any other
required statement, is not provided, 30% withholding will apply unless reduced
or eliminated pursuant to an applicable tax treaty or unless the interest on the
Regular Certificate is effectively connected with the conduct of a trade or
business within the United States by such Non-U.S. Person. In the latter case,
such Non-U.S. Person will be subject to United States federal income tax at
regular rates. Investors who are Non-U.S. Persons should consult their own tax
advisors regarding the specific tax consequences to them of owning a Regular
Certificate. The term "Non-U.S. Person" means any person who is not a U.S.
Person.
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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 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.
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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.
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.
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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 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
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original principal amount of such Mortgage Assets (i.e., points) will be
includible by such holder. Section 1272(a)(6) provides for the use of a
prepayment assumption in determining original issue discount for any pool of
debt instruments the yield on which may be affected by reason of prepayments.
Market Discount. Certificateholders also will be subject to the market
discount rules to the extent that the conditions for application of those
sections are met. Market discount on the Mortgage Assets will be determined and
will be reported as ordinary income generally in the manner described above
under "- Taxation of Regular Certificates - Market Discount."
Recharacterization of Servicing Fees. If the servicing fees paid to
Servicers were deemed to exceed reasonable servicing compensation, the amount of
such excess would be nondeductible under Code Section 162 or 212. In this
regard, there are no authoritative guidelines for federal income tax purposes as
to either the maximum amount of servicing compensation that may be considered
reasonable in the context of this or similar transactions or whether, in the
case of the Certificates, the reasonableness of servicing compensation should be
determined on a weighted average or loan-by-loan basis. If a loan-by-loan basis
is appropriate, the likelihood that such amount would exceed reasonable
servicing compensation as to some of the Mortgage Assets would be increased.
Recently issued Internal Revenue Service guidance indicates that a servicing fee
in excess of reasonable compensation ("excess servicing") will cause the
Mortgage Assets to be treated under the "stripped bond" rules. Such guidance
provides safe harbors for servicing deemed to be reasonable and requires
taxpayers to demonstrate that the value of servicing fees in excess of such
amounts is not greater than the value of the services provided.
Accordingly, if the Internal Revenue Service's approach is upheld, a
servicer that receives excess servicing fees would be viewed as retaining an
ownership interest in a portion of the interest payments on the Mortgage Assets.
Under the rules of Code Section 1286, the separation of the right to receive
some or all of the interest payments on an obligation from the right to receive
some or all of the principal payments on the obligation would result in
treatment of such Mortgage Assets as "stripped coupons" and "stripped bonds."
While Certificateholders would still be treated as owners of beneficial
interests in a grantor trust for federal income tax purposes, the corpus of such
trust could be viewed as excluding the portion of the Mortgage Assets the
ownership of which is attributed to a servicer, or as including such portion as
a second class of equitable interest. Applicable Treasury regulations treat such
an arrangement as a fixed investment trust, since the multiple classes of trust
interests should be treated as merely facilitating direct investments in the
trust assets and the existence of multiple classes of ownership interests is
incidental to that purpose. In general, such a recharacterization should not
have any significant effect upon the timing or amount of income reported by a
Certificateholder. See "Stripped Certificates" below for a further description
of the federal income tax treatment of stripped bonds and stripped coupons.
In the alternative, the amount, if any, by which the servicing fees paid to
the servicers are deemed to exceed reasonable compensation for servicing could
be treated as deferred payments of purchase price by the Certificateholders to
purchase an undivided interest in the Mortgage Assets. In such event, the
present value of such additional payments might be included in the
Certificateholder's basis in such undivided interests for purposes of
determining whether the Certificate was acquired at a discount, at par, or at a
premium. Under this alternative, Certificateholders may also be entitled to a
deduction for unstated interest with respect to each deferred payment. The
Internal Revenue Service may take the position that the specific statutory
provisions of Code Section 1286 described above override the alternative
described in this paragraph. Certificateholders are advised to consult their tax
advisors as to the proper treatment of the amounts paid to the servicers as set
forth herein as servicing compensation or under either of the alternatives set
forth above.
Sale or Exchange of Certificates. Upon sale or exchange of a Certificate, a
Certificateholder will recognize gain or loss equal to the difference between
the amount realized on the sale and its aggregate adjusted basis in the Mortgage
Assets and other assets represented by the Certificate. In general, the
aggregate adjusted basis will equal the Certificateholder's cost for the
Certificate, increased by the amount of any income previously reported with
respect to the Certificate and decreased by the amount of any losses previously
reported with respect to the Certificate and the amount of any distributions
received thereon. Except as provided above with respect to market discount on
any Mortgage Assets, and except for certain financial institutions subject to
the provisions of Code Section 582(c), any such gain or loss would be capital
gain or loss if the Certificate was held as a capital asset.
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Stripped Certificates
General. Pursuant to Code Section 1286, the separation of ownership of the
right to receive some or all of the principal payments on an obligation from
ownership of the right to receive some or all of the interest payments results
in the creation of "stripped bonds" with respect to principal payments and
"stripped coupons" with respect to interest payments. For purposes of this
discussion, Certificates that are subject to those rules will be referred to as
"Stripped Certificates." The Certificates will be subject to those rules if (i)
the Depositor or any of its affiliates retains (for its own account or for
purposes of resale), in the form of fixed retained yield or otherwise, an
ownership interest in a portion of the payments on the Mortgage Assets, (ii) the
Depositor, any of its affiliates or a servicer is treated as having an ownership
interest in the Mortgage Assets to the extent it is paid (or retains) servicing
compensation in an amount greater than reasonable consideration for servicing
the Mortgage Assets (see "Standard Certificates - Recharacterization of the
Servicing Fees" above) and (iii) Certificates are issued in two or more classes
or subclasses representing the right to non pro rata percentages of the interest
and principal payments on the Mortgage Assets.
In general, a holder of a Stripped Certificate (a "Stripped
Certificateholder") will be considered to own "stripped bonds" with respect to
its pro rata share of all or a portion of the principal payments on each
Mortgage Loan and/or "stripped coupons" with respect to its pro rata share of
all or a portion of the interest payments on each Mortgage Loan, including the
Stripped Certificate's allocable share of the servicing fees paid, to the extent
that such fees represent reasonable compensation for services rendered. See
discussion above under "Standard Certificates - Recharacterization of Servicing
Fees." For this purpose the Trust intends to allocate the servicing fees to the
Stripped Certificates in proportion to the respective offering price of each
class (or subclass) of Stripped Certificates. The holder of a Stripped
Certificate generally will be entitled to a deduction each year in respect of
the servicing fees, as described above under "- Federal Income Tax Consequences
for Certificates as to Which No REMIC Election is Made - Standard Certificates -
General," subject to the limitations described therein.
Code Section 1286 treats a stripped bond or a stripped coupon generally as
a new obligation issued (i) on the date that the stripped interest is purchased
and (ii) at a price equal to its purchase price or, if more than one stripped
interest is purchased, the share of the purchase price allocable to such
stripped interest. Each stripped interest generally will have original issue
discount equal to the excess of its stated redemption price at maturity (or, in
the case of a stripped coupon, the amount payable on the due date of such
coupon) over its issue price. Although the treatment of Stripped Certificates
for federal income tax purposes is not clear in certain respects at this time,
particularly where such Stripped Certificates are issued with respect to a Trust
containing variable-rate Mortgage Assets, the Depositor has been advised by
counsel that (i) the Trust will be treated as a grantor trust under subpart E,
Part 1 of subchapter J of the Code and not as an association taxable as a
corporation, and (ii) each Stripped Certificate should be treated as a single
installment obligation for purposes of calculating original issue discount and
gain or loss on disposition. This treatment is based on the interrelationship of
Code Section 1286 and the regulations thereunder, Code Sections 1272 through
1275, and the OID Regulations. While under Code Section 1286 computations with
respect to Stripped Certificates arguably should be made in one of the ways
described below, the OID Regulations state, in general, that all debt
instruments issued in connection with the same transaction must be treated as a
single debt instrument. The Trustee will make and report all computations
described below using this aggregate approach, unless substantial legal
authority requires otherwise.
Furthermore, the regulations under Code Section 1286 support the treatment
of a Stripped Certificate as a single debt instrument issued on the date it is
originated for purposes of calculating any original issue discount. The preamble
to such regulations state that such regulations are premised on the assumption
that an aggregation approach is appropriate in determining whether original
issue discount on a stripped bond or stripped coupon is de minimis. In addition,
under these regulations, a Stripped Certificate that represents a right to
payments of both interest and principal may be viewed either as issued with
original issue discount or market discount (as described below), at a de minimis
original issue discount, or presumably, at a premium. The preamble to such
regulations also provide that such regulations are premised on the assumption
that generally the interest component of such a Stripped Certificate would be
treated as stated interest under the original issue discount rules. Further, the
regulations provide that the purchaser of such a Stripped Certificate may be
required to account for any discount as market discount rather than original
issue discount if either (i) the initial discount with respect to the Strip
Certificate was treated as zero under the de minimis rule or (ii) no more than
100 basis points in excess of reasonable servicing is stripped off the related
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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 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.
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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."
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,
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including the public offering or purchase price of each class of Certificates of
such series being offered thereby or the method by which such price will be
determined and the net proceeds to the Depositor from the sale of each such
class. Such Certificates will be acquired by the Underwriters for their own
account or may be offered by the Underwriters on a best efforts basis. The
Underwriters may resell such Certificates from time to time in one or more
transactions including negotiated transactions, at fixed public offering prices
or at varying prices to be determined at the time of sale or at the time of
commitment therefor. The managing Underwriter or Underwriters with respect to
the offer and sale of a particular series of Certificates will be set forth on
the cover of the Prospectus Supplement relating to such series and the members
of the underwriting syndicate, if any, will be named in such Prospectus
Supplement
In connection with the sale of the Certificates, Underwriters may receive
compensation from the Depositor or from purchasers of the Certificates in the
form of discounts, concessions or commissions. Underwriters and dealers
participating in the distribution of the Certificates may be deemed to be
underwriters in connection with such Certificates, and any discounts or
commissions received by them from the Depositor and any profit on the resale of
Certificates by them may be deemed to be underwriting discounts and commissions
under the Securities Act of 1933, as amended. The Prospectus Supplement will
describe any such compensation paid by the Depositor.
It is anticipated that the underwriting agreement pertaining to the sale of
any series of Certificates will provide that the obligations of the Underwriters
will be subject to certain conditions precedent, that the Underwriters will be
obligated to purchase all such Certificates if any are purchased and that the
Depositor will indemnify the Underwriters against certain civil liabilities,
including liabilities under the Securities Act of 1933, as amended.
LEGAL MATTERS
Certain legal matters relating to the validity of the issuance of the
Certificates will be passed upon for the Depositor by Dewey Ballantine LLP, New
York, NY and by Alan L. Langus, Chief Counsel for the Depositor. Certain legal
matters relating to insolvency issues and certain federal income tax matters
concerning the Certificates will be passed upon for the Depositor by Dewey
Ballantine LLP.
FINANCIAL INFORMATION
A Trust will be formed with respect to each series of Certificates. No
Trust will have any assets or obligations prior to the issuance of the related
series of Certificates. No Trust will engage in any activities other than those
described herein or in the Prospectus Supplement. Accordingly, no financial
statement with respect to any Trust is included in this Prospectus or will be
included in the Prospectus Supplement.
The Depositor has determined that its financial statements are not material
to the offering made hereby.
A Prospectus Supplement and the related Form 8-K (which will be
incorporated by reference to the Registration Statement) may contain financial
statements of the related Credit Enhancer, if any.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
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APPENDIX
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS
Page
1986 Act....................................................53
1996 Act....................................................60
Agreement....................................................1
AMTI........................................................60
Annual Reduction............................................48
Applicable Accounting Standards.............................32
Balloon Loans................................................6
Beneficial Owners............................................4
BIF.........................................................33
Book Entry Certificates......................................4
Certificate Account.........................................12
Certificate Interest Rate...................................11
Certificate Principal Balance...............................10
Certificate Register........................................10
Certificate Registrar.......................................10
Certificateholder...........................................67
Certificates.................................................1
Clearing Agency..............................................4
Clearing Agency Participants.................................4
Code.........................................................4
Companion Certificates......................................11
Compound Interest Certificates..............................11
Contract Loan Schedule......................................31
Contract Pool...............................................17
Contracts...................................................17
Conventional Multifamily Loans...............................1
Cooperative Loans...........................................14
Cooperatives.................................................1
Credit Enhancement....................................4, 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...................................62
Distribution Date...........................................11
DOL.........................................................51
Due Dates...................................................16
Eligible Investments........................................33
Equity Participation........................................16
ERISA........................................................5
Events of Default...........................................35
FDIC........................................................24
FHA..........................................................1
FHA-Insured Multifamily Loans................................1
FHLMC........................................................2
Financial Guaranty Insurance Policy.........................19
Financial Guaranty Insurer..................................19
FNMA.........................................................2
Garn-St. Germain Act........................................41
GNMA.........................................................2
HUD.........................................................46
Insurance Paying Agent......................................19
Insurance Proceeds..........................................24
Insured Payment.............................................19
Interest Accrual Period.....................................12
Liquidation Proceeds........................................24
Loan-to-Value Ratio.........................................15
Lock-out Expiration Date....................................16
Lock-out Period.............................................16
Manufactured Home...........................................17
Manufactured Home Loans.....................................46
Mark to Market Regulations..................................60
Master Servicer..............................................1
MBS......................................................2, 18
MBS Agreement...............................................18
MBS Issuer..................................................18
MBS Servicer................................................18
MBS Trustee.................................................18
Monthly Advance.............................................24
Mortgage Assets..............................................1
Mortgage Loan Rate..........................................16
Mortgage Loans...............................................1
Mortgage Notes..............................................14
Mortgage Pool Insurance Policy..............................20
Mortgage Rates..............................................15
Mortgage-Backed Securities...............................2, 18
Mortgaged Properties........................................14
Mortgages...................................................14
Mortgagors..................................................23
Multifamily Loans............................................1
Multifamily Properties......................................14
NCUA........................................................24
Net Leases..................................................17
Net Operating Income........................................16
Noneconomic Residual Interest...............................62
Non-Priority Certificates...................................11
Nonrecoverable Advance......................................24
Non-U.S. Person.............................................65
Notional Principal Balance..............................10, 12
OID Regulations.............................................52
Original Value..............................................15
OTS.........................................................42
Owners...................................................4, 11
Partnership Interests.......................................72
Pass-Through Entity.....................................61, 62
Pass-Through Rate............................................3
Plans.......................................................50
Policy Statement............................................50
Pool Insurer................................................21
Pre-Funding Account..........................................3
Pre-Funding Agreement........................................3
Prepayment Assumption.......................................55
Prepayment Premium..........................................16
Principal Balance...........................................15
Principal Prepayments.......................................12
Priority Certificates.......................................11
Property Improvement Loans..................................45
PTE 83-1....................................................51
Record Date.................................................11
Regular Certificateholder...................................53
Regular Certificates....................................52, 66
REIT........................................................53
Relief Act...................................................9
REMIC.................................................1, 4, 52
REMIC Certificates..........................................52
REMIC Pool..................................................52
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REMIC Regulations...........................................52
Remittance Date.............................................24
Remittance Rate.............................................24
Reserve Fund................................................23
Residual Certificateholders.................................58
Residual Certificates.......................................52
Retail Class Certificate....................................54
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......................................22
Standard Certificate........................................67
Stripped Certificateholder..................................70
Stripped Certificates...................................67, 69
Subordinated Certificates...................................19
Title I Contracts...........................................46
Title I Loans...............................................45
Title I Program.............................................45
TMP.........................................................53
Trust........................................................1
Trustee......................................................1
U.S. Person.................................................63
UCC.........................................................39
Underwriters................................................72
VA...........................................................2
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