<PAGE>
Filed Pursuant to Rule 424(b)(5)
Registration File No.: 333-61863
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED SEPTEMBER 17, 1998
$800,000,000
(APPROXIMATE)
CONTIMORTGAGE HOME EQUITY LOAN TRUST 1999-3
[CONTIMORTGAGE LOGO OMITTED]
SELLER AND SERVICER
CONTIWEST CORPORATION
SELLER
CONTISECURITIES ASSET FUNDING CORP.
DEPOSITOR
-----------
The trust is offering its Class A and Class B Certificates for sale pursuant
to this prospectus supplement. The property of the trust consists of a pool of
fixed and adjustable rate, first or second lien residential mortgage loans.
Interest and principal on the certificates is scheduled to be paid monthly on
the 25th day of the month, or the next business day. The first scheduled
payment date is July 26, 1999.
<TABLE>
<CAPTION>
UNDERWRITING
DISCOUNTS PROCEEDS TO
PRINCIPAL PASS-THROUGH PRICE TO AND DEPOSITOR
CLASS BALANCE RATE PUBLIC COMMISSIONS (1)(2)
- ----------------- ------------------ ---------------------------- ---------------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
Class A-1 ....... $209,100,000 6.42% 99.99768% 0.1250% 99.87268%
Class A-2 ....... $126,300,000 6.77% 99.98545% 0.1650% 99.82045%
Class A-3 ....... $72,700,000 6.93% 99.97451% 0.1875% 99.78701%
Class A-4 ....... $41,500,000 7.12% 99.98696% 0.2110% 99.77596%
Class A-5 ....... $40,900,000 7.36%(3) 99.96325% 0.2610% 99.70225%
Class A-6 ....... $72,700,000 7.68%(3)(4) 99.88302% 0.3600% 99.52302%
Class A-7 ....... $44,800,000 7.28%(3)(4) 99.98660% 0.3350% 99.65160%
Class A-8 ....... $152,000,000 LIBOR + 0.28%(3)(4) 100.00000% 0.2300% 99.77000%
Class A-9IO ..... (5) 6.00% 3.76089% 0.0700% 3.69089%
Class B ......... $40,000,000 7.00%(3)(4) 84.12721% 0.7725% 83.35471%
Total ........... $800,000,000 $800,455,281 $2,000,297 $798,454,985
</TABLE>
- ---------
(1) Plus accrued interest from June 1, 1999 with respect to the Fixed-Rate
Certificates.
(2) Before deducting expenses estimated to be $750,000.
(3) Subject to a cap on the interest rate.
(4) Subject to a step-up if the clean-up call is not exercised.
(5) The Class A-9IO Certificates are "interest-only" certificates with a
notional principal balance. The notional balance will be a fixed schedule
for the first 30 payment dates, and zero thereafter.
-----------
These securities represent non-recourse asset-backed obligations of the trust
only and are not interests in or obligations of any other person or entity.
Neither these securities 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 these securities only if accompanied by the
prospectus. The Class A Certificates will have the benefit of an insurance
policy from Ambac Assurance Corporation which will guarantee certain payments
with respect to the Class A Certificates.
[AMBAC LOGO OMITTED]
Delivery of these securities in book-entry form through The Depository Trust
Company, Cedelbank and the Euroclear system will be made on or about June 17,
1999.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus supplement or the prospectus to which it relates is truthful or
complete. Any representation to the contrary is a criminal offense.
CREDIT SUISSE FIRST BOSTON
BEAR, STEARNS & CO. INC.
GREENWICH CAPITAL MARKETS, INC.
MERRILL LYNCH & CO.
MORGAN STANLEY DEAN WITTER
-------------------
UNDERWRITER OF THE CLASS A-9IO CERTIFICATES
CREDIT SUISSE FIRST BOSTON
-------------------
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS JUNE 9, 1999
<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.
Dealers will be required to deliver a prospectus supplement and
prospectus when acting as underwriters of the securities offered hereby and with
respect to their unsold allotments or subscriptions. In addition, all dealers
selling the securities, whether or not participating in this offering, may be
required to deliver a prospectus supplement and prospectus until September 17,
1999.
S-ii
<PAGE>
TABLE OF CONTENTS
SUMMARY OF TERMS......................................................S-1
RISK FACTORS..........................................................S-6
THE SELLERS AND THE SERVICER..........................................S-9
General...............................................................S-9
Recent Developments..................................................S-10
Credit and Underwriting Guidelines...................................S-11
Master Servicing.....................................................S-12
Indemnification by the Depositor.....................................S-13
Delinquency, Loan Loss and Foreclosure Information...................S-13
USE OF PROCEEDS......................................................S-14
THE DEPOSITOR........................................................S-15
THE MASTER SERVICER..................................................S-15
THE HOME EQUITY LOANS................................................S-15
PREPAYMENT AND YIELD CONSIDERATIONS..................................S-16
General..............................................................S-16
Class A-7 "NAS" Certificates.........................................S-18
Class A-9IO "Interest-Only" Certificates.............................S-18
Payment Lag Feature of the Fixed Rate Certificates...................S-18
Decrement Tables.....................................................S-19
FORMATION OF THE TRUST AND TRUST PROPERTY............................S-19
ADDITIONAL INFORMATION...............................................S-19
DESCRIPTION OF THE CERTIFICATES......................................S-20
General..............................................................S-20
Payment Dates........................................................S-20
Distributions........................................................S-20
Cashflow Priority, Flow of Funds.....................................S-21
Interest Calculations................................................S-22
Available Funds Caps.................................................S-23
Class A-9IO Notional Principal Amount Schedule.......................S-24
Principal Calculations...............................................S-25
Calculation of LIBOR.................................................S-30
Book-Entry Registration of the Certificates..........................S-31
Assignment of Rights.................................................S-34
CREDIT ENHANCEMENT...................................................S-34
THE CERTIFICATE INSURER..............................................S-37
THE CERTIFICATE INSURANCE POLICY.....................................S-39
THE POOLING AND SERVICING AGREEMENT..................................S-41
Covenant of the Sellers to Take Certain Actions with Respect
to the home equity loans..........................................S-41
Assignment of home equity loans......................................S-42
Servicing and Sub-Servicing..........................................S-44
Removal and Resignation of Servicer..................................S-47
The Trustee..........................................................S-48
Reporting Requirements...............................................S-48
Removal of Trustee for Cause.........................................S-50
Governing Law........................................................S-50
Amendments...........................................................S-50
Termination of the Trust.............................................S-51
Optional Termination.................................................S-51
CERTAIN FEDERAL INCOME TAX CONSEQUENCES..............................S-52
REMIC Elections......................................................S-52
ERISA CONSIDERATIONS.................................................S-52
The Class A Certificates.............................................S-53
The Class B Certificates.............................................S-55
Insurance Company Purchases..........................................S-55
RATINGS..............................................................S-56
LEGAL INVESTMENT CONSIDERATIONS......................................S-57
UNDERWRITING.........................................................S-57
EXPERTS..............................................................S-58
CERTAIN LEGAL MATTERS................................................S-59
INDEX OF PRINCIPAL DEFINED TERMS.....................................S-60
Annex I...............................................................I-1
Annex II.............................................................II-1
Annex III...........................................................III-1
S-iii
<PAGE>
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 1999-3.
THE TRUST: The Trust will be created pursuant to a Pooling and Servicing
Agreement to be dated as of June 1, 1999, among ContiSecurities
Asset Funding Corp., ContiMortgage Corporation, ContiWest
Corporation, Norwest Bank Minnesota, National Association, 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.
Norwest will act as master servicer for at least the first year of
the transaction.
Manufacturers and Traders Trust Company will act as trustee for the
benefit of the Certificateholders.
THE GROUPS: The home equity loans held by the Trust will be assigned to one of
two groups, either the Fixed Rate Group (which contains loans having
fixed rates of interest) or the ARM Group (which contains loans
having adjustable rates of interest).
The Class A-1, A-2, A-3, A-4, A-5, A-6, A-7 and A-9IO Certificates
will relate to the Fixed Rate Group, and the Class A-8 Certificates
will relate to the ARM Group. The Class B Certificates will relate
to both Groups.
CERTIFICATES
ISSUED: $800,000,000 ContiMortgage Home Equity Loan Pass-Through
Certificates, Series 1999-3, to be issued in the following classes
and original principal balances set forth below:
INITIAL
CERTIFICATE
TRANCHE PRINCIPAL PASS-THROUGH
CLASS TYPE(1) BALANCE RATE
- --------------------------------------------------
A-1 Senior Seq $209,100,000 6.42%
A-2 Senior Seq $126,300,000 6.77%
A-3 Senior Seq $ 72,700,000 6.93%
A-4 Senior Seq $ 41,500,000 7.12%
A-5 Senior Seq $ 40,900,000 7.36%(2)
A-6 Senior Seq $ 72,700,000 7.68%(2)(3)
A-7 Senior NAS $ 44,800,000 7.28%(2)(3)
A-8 Senior
Floater $152,000,000 LIBOR
0.28%(2)(3)
A-9IO Senior IO N/A(4) 6.00%
B Subordinate $ 40,000,000 7.00%(2)(3)
(1) Tranche types are as follows: "Senior" means a class which is not
subordinate to any other class; "Seq" means a class in a series of
sequential-pay classes; "NAS" means a non-accelerated senior class, also
known as a "lockout" class; "Floater"
S-1
<PAGE>
means a class having a variable interest rate; "IO" means an interest-only
class; "Subordinate" means a class which is subordinate to other classes.
(2) Subject to a cap on the interest rate.
(3) Subject to a step-up if the clean-up call is not exercised.
(4) The Class A-9IO Certificates will not pay principal, but will pay interest
based on a notional balance described under "Description of the
Certificates - Class A-9IO Notional Principal Amount Schedule".
The Trust will also issue one or more subordinate and/or "residual"
certificates (collectively, 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 Certificates will initially be issued in book-entry form through
DTC, Cedelbank or Euroclear. We refer you to "Description of the
Certificates--Book-Entry Registration of the Certificates" herein,
and Annex I herein, and "Description of the Certificates-Book-Entry
Registration" in the Prospectus for more detail.
CLASS B
CERTIFICATES:
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 5.00% 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.
MASTER
SERVICER: Norwest Bank Minnesota, National Association (the "Master
Servicer"), a national banking association.
SELLERS: ContiMortgage Corporation, a Delaware corporation and ContiWest
Corporation, a Nevada corporation (each a "Seller" and collectively,
the "Sellers").
ORIGINATOR: ContiMortgage Corporation (the "Originator"), a Delaware
corporation.
TRUSTEE: Manufacturers and Traders Trust Company (the "Trustee"), a New York
banking corporation.
CUT-OFF
DATE: As of the close of business on May 31, 1999. The Trust will be
entitled to all moneys due and received on the home equity loans
after such date.
CLOSING
DATE: On or about June 17, 1999.
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
- ----- ----------------------------
A-1 April 25, 2014
A-2 January 25, 2018
A-3 November 25, 2022
A-4 January 25, 2025
A-5 October 25, 2026
S-2
<PAGE>
A-6 December 25, 2029
A-7 April 25, 2014
A-8 May 25, 2029
A-9IO December 25, 2001
B December 25, 2029
THE HOME
EQUITY
LOANS: The home equity loans are fixed and adjustable 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.
We refer you to "Additional Information" in this Prospectus
Supplement and "ANNEX II--THE HOME EQUITY LOAN POOLS" 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.
Distributions will be made on each payment date to the
certificateholders as of the related record date. The record date
for a payment date is the last day of the prior calendar month in
the case of all classes except the Class A-8 Certificates; for the
Class A-8 Certificates, the record date is the day preceding the
payment date.
A "payment date" is the 25th 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 July, 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, certain accrued and unpaid interest on the Class B
Certificates;
o seventh, principal on the Class B Certificates to the extent
necessary to reduce the principal amount of the Class B
Certificates to a specified level;
o eighth the remaining amount will be applied:
(a) to pay losses which resulted in prior "write-
S-3
<PAGE>
downs" of the Class B Certificates;
(b) to reimburse the servicer and/or the master servicer for
prior unreimbursed advances and/or other expenses; and
(c) to make a distribution to the residual holder.
The cashflows from the two loan groups are fully
cross-collateralized, although the Certificates related to a loan
group will generally amortize only as the related loan group
amortizes.
CERTIFICATE
INSURER: Ambac Assurance Corporation.
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 current losses and to create
overcollateralization which will be available to cover future
losses;
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 issued by the Certificate
Insurer.
The Class B Certificates are not covered by the financial guaranty
insurance policy, and are supported only by excess interest and
overcollateralization.
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 exercise a
clean-up call, which will 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.
The clean-up call termination applies to the entire trust, and not
to either loan group individually.
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-1, Aaa AAA
A-2, A-3,
A-4, A-5,
A-6, A-7
and A-8
Certificates
Class A-9I0 Aaa AAAr
Certificates
Class B Baa3 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
S-4
<PAGE>
"Prepayment and Yield Considerations" and "Ratings" herein for more
detail.
RISK For a discussion of other risk factors that should be considered
FACTORS: 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.
The Class B Certificates are not eligible for purchase by ERISA
plans.
We refer you to "ERISA Considerations" herein and in the Prospectus
for more detail.
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-5
<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 the Certificate Insurer 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 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 in the Fixed Rate Group are all fixed rate
loans. 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.
The home equity loans in the ARM Group are all adjustable rate
loans, including hybrid ARMs ("hybrid ARMs" being loans which have a fixed rate
of interest for the first two years ("2/28 Loans") or three years ("3/27
Loans")), which fixed rate then converts to an adjustable rate. The prepayment
experience on the adjustable rate loans, including the 2/28 Loans and the 3/27
Loans, may differ from the prepayment experience on fixed rate loans due to the
provisions providing for adjustment to the coupon rate and related monthly
payment and the applicable periodic reset caps and maximum rates. In particular,
the 2/28 Loans and the 3/27 Loans may be subject to higher prepayment rates as
they approach their initial coupon change dates.
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 the Certificate Insurer fails to perform its obligations
under the certificate insurance policy, then:
o There will be a delay in distributions to you if a deficiency
judgment against the borrower is sought.
S-6
<PAGE>
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 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
S-7
<PAGE>
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 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.
CONTIFINANCIAL'S FINANCIAL CONDITION AND DEPENDENCE ON EXTERNAL
FINANCING FACILITIES. ContiFinancial Corporation, the corporate parent of the
servicer and sellers, announced on June 4, 1999 that it anticipated a pre-tax
loss for the fourth quarter ended March 31, 1999 of approximately $247 million.
ContiFinancial also announced that the anticipated fourth quarter loss arises
mainly from the write-down of excess spread receivables held by ContiFinancial
because of an increase in the amount of credit losses estimated to occur in
future periods and an increase in the rate used to discount anticipated future
cash flows from the excess spread receivables, as well as from additional
write-downs of ContiFinancial's commercial real estate loan portfolio, and
increased reserves relating to ContiFinancial's relinquishment of a minority
interest in another mortgage company.
ContiFinancial is dependent on continued access to short- and
long-term sources of funding for its continued operations. ContiFinancial's
revolving credit and letter of credit facilities expire on August 20, 1999.
ContiFinancial's warehouse facilities expire at various times from June 1999
through December 1999. ContiFinancial's continued operations are dependent on
the extension, renegotiation or refinancing of these facilities.
ContiFinancial's ability to extend, renegotiate or refinance its facilities may
depend on the successful completion of a transaction with Residential Funding
Corporation, or with another buyer or equity investor. Failure of ContiFinancial
to extend, renegotiate or refinance its financing facilities is likely to impair
the ability of the servicer and/or the sellers to perform their obligations
under the Pooling and Servicing Agreement, and may cause the certificate insurer
to fail to renew ContiMortgage's contract as servicer. Any such removal or
impairment could result in losses on the home equity loan pool and/or delays in
distributions. Any losses or delays would disproportionately affect the Class B
Certificates, which are not covered by the certificate insurance policy. See
"The Sellers and the Servicer - Recent Developments".
A SERVICING TRANSFER, IF ONE OCCURS, COULD BE DISRUPTIVE TO
SERVICING. The Certificate Insurer has required that ContiMortgage be retained
as Servicer on a "term to term" basis for the first year of the transaction.
This provision allows the Certificate Insurer the right not to renew
ContiMortgage as the Servicer every two months. Alternatively, the Certificate
Insurer may at any time during the first year waive this requirement, which
would leave ContiMortgage as the permanent Servicer.
In the event that the Certificate Insurer does not renew
ContiMortgage as Servicer, the direct servicing functions would be transferred
to the Master Servicer or to a successor servicer appointed by the Master
Servicer. Servicing transfers, no matter how well executed, typically result in
a short-term increase in delinquency levels. Any such increase in delinquencies
may adversely affect distributions to the Owners of the Certificates,
particularly the Owners of the subordinate Class B Certificates.
S-8
<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 of 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 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, together with the Sellers' receipt of 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; 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 Certificate Insurer has required that ContiMortgage be
retained as Servicer on a "term to term" basis for the first year of the
transaction. This provision allows the Certificate Insurer the right not to
renew ContiMortgage as the Servicer every two months. Alternatively, the
Certificate Insurer may at any time during the first year waive this
requirement, which would leave ContiMortgage as the permanent Servicer.
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 Master Servicer,
if it is then in place, will become the successor Servicer. If the Master
Servicer is not in place at the time the Servicer is removed or resigns, 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
S-9
<PAGE>
acceptable to the Certificate Insurer and which shall assume all of the
responsibilities, duties or liabilities of the Servicer.
The Certificates will not represent an interest in or obligation
of, nor are the home equity loans guaranteed by, the Sellers or any of their
affiliates or the Certificate Insurer.
RECENT DEVELOPMENTS
ContiFinancial Corporation ("ContiFinancial"), the corporate
parent of ContiMortgage Corporation and ContiWest Corporation, reported net
losses of $114.3 million for the quarter ended September 30, 1998 and $58.8
million for the quarter ended December 31, 1998 and based on preliminary
unaudited results, expects to report a pre-tax loss for the quarter ended March
31, 1999 of approximately $247 million. The anticipated fourth quarter loss
arises mainly from the write-down of excess spread receivables held by
ContiFinancial because of an increase in the amount of credit losses estimated
to occur in future periods and an increase in the rate used to discount
anticipated future cash flows from the excess spread receivables. ContFinancial
will use those higher estimated future loss rates and discount rates when
recording its gain on sale both for the fourth quarter and in the future
periods.
The anticipated loss also results from additional write-downs
with respect to ContiFinancial's remaining commercial real estate loan
portfolio, which is being held for sale, and increased reserves relating to
ContiFinancial's relinquishment of its minority interest in another mortgage
company.
In May 1999, ContiFinancial signed a written indication of
interest with Residential Funding Corporation, a subsidiary of General Motors
Acceptance Corporation, for the acquisition through merger of 100% of the issued
and outstanding shares of ContiFinancial.
In May 1999, ContiFinancial also entered into a warehouse
financing agreement with Continental Grain Company ("Continental Grain"), the
78% parent of ContiFinancial, to fund mortgage loans acquired from time-to-time
in the ordinary course of business. Continental Grain's commitment of
$60,000,000 under the warehouse facility is limited by the amount of Delinquency
Advances outstanding under the Continental Grain Subservicing Agreement, but
does not affect Continental Grain's commitment to fund advances under the
Subservicing Agreement; the combined balance under both facilities cannot exceed
$85,000,000.
ContiFinancial and its subsidiaries are dependent on continued
access to short- and long-term sources of funding for its continued operations.
ContiFinancial is required to comply with various financial
covenants in certain of its financing facilities. As of March 31, 1999,
ContiFinancial's leverage ratio exceeded the leverage ratio test under the
covenants of its outstanding senior notes. As a result, ContiFinancial is
prevented from issuing additional unsecured debt until its leverage ratio is
below such test. The banks providing ContiFinancial's revolving credit facility
and the letter of credit facility used by ContiFinancial in connection with its
commercial paper program have amended those facilities to eliminate all
financial covenants until the August 20, 1999 maturity date of these facilities.
ContiFinancial's warehouse lenders whose facilities contain certain covenants
have similarly agreed to amend their warehouse facilities to eliminate financial
covenant requirements. If such amendments had not been obtained, ContiFinancial
would not have been in compliance with the covenants in such financing
agreements. ContiFinancial was in material compliance with all of its financing
agreements as of March 31, 1999.
As discussed above, ContiFinancial's revolving credit and letter
of credit facilities expire on August 20, 1999. ContiFinancial's warehouse
facilities expire at various times from June 1999 through December 1999. The
Company's continued operations are dependent on the extension, renegotiation or
refinancing of these facilities. The Company's ability to extend, renegotiate or
refinance its facilities may depend on the successful completion of a
transaction with Residential Funding Corporation, or with another buyer or
equity investor.
S-10
<PAGE>
If ContiFinancial's liquidity, financial condition and operations
are materially and adversely affected by market conditions or otherwise, or if
ContiFinancial is unable to continue operations due to failure to extend,
renegotiate or refinance its financing facilities, it is likely to 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
cause the Certificate Insurer to fail to renew ContiMortgage Corporation's
contract 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.
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
S-11
<PAGE>
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.
MASTER SERVICING
Norwest Bank Minnesota, National Association, will be the Master
Servicer. The Master Servicer is in place for a minimum of one year from the
Closing Date subject to certain servicing arrangements being in place. The
Master Servicer will monitor the servicing activities of the Servicer, be
responsible for funding Delinquency Advances and, to a limited extent,
Compensating Interest in the event that those amounts are not funded in full by
the Servicer, and, upon any termination of the Servicer, will accept appointment
as, or cause another entity to be appointed as, the successor servicer. The
Master Servicer's role may be terminated at any time after the first year,
subject to the consent of the Certificate Insurer, and upon obtaining written
confirmation from Standard & Poor's and Fitch that such termination will not
cause a downgrade, withdrawal or qualification of the then current ratings on
any class of Certificates. See "The Master Servicer" in this prospectus
supplement.
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.
It is expected that the rate of growth of the portfolio for the
first quarter of 1999 will not be as great as in the past. The expected decrease
in the rate of growth of the portfolio combined with the increased seasoning of
the portfolio is expected to result in greater delinquencies and losses as a
percentage of the aggregate or average principal balance outstanding.
<TABLE>
<CAPTION>
DELINQUENCY AND FORECLOSURE INFORMATION (DOLLARS IN THOUSANDS)(1)
Year Ending December 31,
-------------------------------------------------------------------------
1998 1997 1996 1995
--------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C>
Portfolio At $12,676,546 $9,122,792 $5,699,145 $3,427,190
Delinquency Percentage(2)
30-59 days 2.06% 2.37% 3.09% 2.02%
60-89 days 0.74% 0.74% 0.72% 0.70%
90 days and over 0.63% 0.31% 0.36% 1.01%
---------------- ----- ----- ----- -----
Total Delinquency 3.43% 3.42% 4.17% 3.73%
===== ===== ===== =====
Total Delinquency Amount $434,841 $311,821 $237,642 $128,063
======== ======== ======== ========
Default Percentage(3)
Foreclosure 2.14% 2.78% 2.62% 1.15%
Bankruptcy 1.59% 1.53% 1.12% 0.69%
Real Estate Owned 1.05% 0.65% 0.49% 0.08%
Loss Mitigation(4) 1.04% 0.59% 0.15% 0.12%
--------------- ----- ----- ----- -----
Total Default 5.82% 5.55% 4.38% 2.04%
===== ===== ===== =====
Total Default Amount $737,189 $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.
S-13
<PAGE>
(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.
LOAN LOSS EXPERIENCE ON THE
SERVICER'S SERVICING PORTFOLIO
OF HOME EQUITY LOANS(1)
<TABLE>
<CAPTION>
Year Ending December 31,
-------------------------------------------------------------------------
1998 1997 1996 1995
--------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C>
Average Amount $11,270,111 $7,248,686 $4,261,983 $2,641,686
Outstanding(2)
Net REMIC Losses(3) 88,398 30,030 9,410 2,689
Net Losses on Loans and
Properties Purchased
Out of REMIC 9,668 20,671 -------- --------
--------------- -------------- -------------- ----------------
Total Net Losses $98,066 $50,701 $9,410 $2,689
=============== ============== ============== ================
Net Losses as a
Percentage of Average
Amount Outstanding:
REMIC Losses 0.78% 0.41% 0.22% 0.10%
Loans and properties
purchased out of
REMIC 0.09% 0.29% 0.00% 0.00%
--------------- -------------- -------------- ----------------
Total Net Losses 0.87% 0.70% 0.22% 0.10%
=============== ============== ============== ================
</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) "Net REMIC Losses" are actual losses (including all principal, foreclosure
costs and all accrued interest) incurred on liquidated properties in the
existing REMIC trusts for each respective period, less recoveries from
liquidation proceeds and deficiency judgments.
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-14
<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.
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 MASTER SERVICER
Norwest Bank Minnesota, National Association ("Norwest"), as the
master servicer (the "Master Servicer"), will oversee and monitor the
performance of the Servicer's loan servicing functions under the Pooling and
Servicing Agreement.
Norwest is a national banking association with executive offices
located at Sixth Street and Marquette Avenue, Minneapolis, Minnesota 55479 and
its loan master servicing offices located at 11000 Broken Land Parkway,
Columbia, Maryland 21044. Norwest is engaged in the business of master servicing
single family residential mortgage loans secured by properties in all 50 states
and the District of Columbia. As of December 31, 1998, Norwest was master
servicing more than 570,000 mortgage loans representing an aggregate outstanding
principal balance of approximately $67 billion.
Norwest provided the foregoing information regarding Norwest, and
none of the Depositor, the Sellers, the Servicer or the Underwriters makes any
representation or warranty as to the accuracy and completeness of such
information.
The Master Servicer will be responsible for performing its master
servicing functions for the home equity loans pursuant to the Pooling and
Servicing Agreement. As compensation for performing its duties as the Master
Servicer, including its oversight functions, the Master Servicer will be
entitled to a monthly fee (the "Master Servicing Fee") as to each Home Equity
Loan.
The Master Servicer may not resign under the Pooling and
Servicing Agreement unless either the Master Servicer obtains the consent of the
Certificate Insurer or it is determined that the performance of its duties under
the Pooling and Servicing Agreement are no longer permissible under applicable
law. The Master Servicer's role may be terminated at any time after the first
year, subject to the consent of the Certificate Insurer, and upon obtaining
written confirmation from Standard & Poor's and Fitch that such termination will
not cause a downgrade, withdrawal or qualification of the then current ratings
on any class of Certificates. If the Master Servicer is dismissed, or resigns,
the Certificate Insurer may determine not to replace the Master Servicer; if the
Master Servicer is dismissed or resigns, and is not replaced, the Trustee will
become the backup servicer in the event of the Servicer's removal or
resignation, but will not be required generally to assume the Master Servicer's
duties. Any decision not to replace the Master Servicer will require
confirmation from Standard & Poor's and Fitch that such decision will not cause
a downgrade, withdrawal or qualification of the then current ratings on any
class of Certificates.
THE HOME EQUITY LOANS
The home equity loans will consist of fixed and adjustable 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 Cut-Off Date. The home
equity loans are not insured by either
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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 information presented in this Prospectus Supplement
concerning the pool of home equity loans is based on the pool of home equity
loans as of the Cut-Off Date. The pools aggregated $640,001,379.88 with respect
to the Fixed Rate Group, $160,000,278.20 with respect to the ARM Group and
$800,001,658.08 in total as of the Cut-Off Date. Some amortization of the home
equity loans will occur after the Cut-Off Date and prior to the Closing Date.
Moreover, certain loans included in the pools as of the Cut-Off Date may prepay
in full. As a result of the foregoing, the distribution of characteristics as of
the Closing Date for the final home equity loan pools will vary from the
distribution of such characteristics as of the Cut-Off Date as presented in this
Prospectus Supplement. Unless otherwise noted, all percentages in this
Prospectus Supplement are measured by the aggregate principal balance of the
home equity loans in the related pool, as of the Cut-Off Date.
The home equity loan pool consists of fixed-rate and
adjustable-rate home equity loans with remaining terms to maturity of not more
than 360 months (including both fully amortizing Home equity loans and Balloon
Loans). The home equity loans have the characteristics set forth below as of the
Cut-Off Date. Percentages expressed herein based on Loan Balances and number of
Home equity loans have been rounded, and in the tables set forth herein the sum
of the percentages may not equal the respective totals due to such rounding.
The Loan-to-Value Ratios and Combined Loan-to-Value Ratios 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 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 information regarding the home equity loans as of the
Cut-Off Date 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 Fixed Rate Certificates"), the
yield to maturity on the Certificates will relate to the rate of payment of
principal of the home equity loans in the related loan group, including for this
purpose, prepayments, liquidations due to defaults, casualties and
condemnations, repurchases by the Sellers of home equity loans and any
accelerated payment of principal due to the effect of a Cumulative Realized Loss
Trigger Event or the home equity loan pool reaching certain delinquency levels.
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
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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 in
the Fixed Rate Pool is affected by prevailing market rates for home equity loans
of a comparable term and risk level. When the market interest rate is below the
mortgage coupon, mortgagors may have an increased incentive to refinance their
home equity loans. Depending on prevailing market rates, the future outlook for
market rates and economic conditions generally, some mortgagors may sell or
refinance mortgaged properties in order to realize their equity in the mortgaged
properties, to meet cash flow needs or to make other investments.
All of the home equity loans in the ARM Group are adjustable-rate
home equity loans. As is the case with conventional fixed-rate home equity
loans, adjustable-rate home equity loans may be subject to a greater rate of
principal prepayments in a declining interest rate environment. For example, if
prevailing interest rates fall significantly, adjustable-rate home equity loans
could be subject to higher prepayment rates than if prevailing interest rates
remain constant because the availability of fixed-rate home equity loans at
competitive interest rates may encourage mortgagors to refinance their
adjustable-rate home equity loans to "lock in" a lower fixed interest rate.
However, no assurance can be given as to the level of prepayments that the home
equity loans will experience.
The prepayment behavior of the 2/28 Loans and 3/27 Loans may
differ from that of the other adjustable rate home equity loans. As a 2/28 Loan
or 3/27 Loan approaches its initial adjustment date, the borrower may become
more likely to refinance such home equity loan to avoid an increase in the
coupon rate, even if fixed rate home equity loans are only available at rates
that are slightly lower or higher than the coupon rate before adjustment. The
existence of the applicable periodic rate cap, maximum rate and minimum rate
also may affect the likelihood of prepayments resulting from refinancings. In
addition, the delinquency and loss experience on the adjustable rate home equity
loans may differ from that on the fixed rate home equity loans because the
amount of the monthly payments on the adjustable rate home equity loans are
subject to adjustment on each adjustment date.
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
Certificateholders, if the weighted average margins are reduced.
In addition to the foregoing factors affecting the weighted
average life of each Class of the Certificates, the overcollateralization
provisions of the Trust may result in an additional reduction of the Class A
Certificates relative to the amortization of the home equity loans in the
related Pool in early months of the transaction. 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
related classes of Certificates then entitled to distributions of principal.
This creates overcollateralization which results from the excess of the combined
Pool Balance 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
Overcollateralization Amount at the Targeted Overcollateralization Amount.
The Class A-1, Class A-2, Class A-3, Class A-4, Class A-5 and
Class A-6 Certificates will pay in "sequential-pay" fashion, meaning that Class
A-2 will receive no distribution of principal until the Certificate Principal
Balance of the Class A-1 Certificates has been paid to zero; Class A-3 will
receive no distribution of principal until the Certificate Principal Balance of
the Class A-2 Certificates has
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been paid to zero, and so on. The Class A-8 Certificates are "pass-through"
Certificates, which generally will receive a principal distribution on each
Payment Date for so long as the class is outstanding.
CLASS A-7 "NAS" CERTIFICATES
Investors in the Class A-7 Certificates (the "NAS" or "Lockout"
Class) should be aware that because the Class A-7 Certificates are not scheduled
to receive any portion of principal payments prior to the Payment Date occurring
in July 2002 and thereafter, they will receive a disproportionately small or
large portion of principal payments (unless the Certificate Principal Balance of
the Class A-1, Class A-2, Class A-3, Class A-4, Class A-5 and Class A-6
Certificates have been reduced to zero). The weighted average life of the Class
A-7 Certificates will be longer or shorter than would otherwise be the case, and
the effect on the market value of the Class A-7 Certificates of changes in
market interest rates or market yields of similar securities will be greater or
lesser than for other classes of Class A Fixed Rate Group Certificates entitled
to such distributions.
CLASS A-9IO "INTEREST-ONLY" CERTIFICATES
Because amounts distributable to the Owners of the Class A-9IO
"Interest-Only" Certificates consist entirely of interest, the yield to maturity
of the Class A-9IO "Interest Only" Certificates will be somewhat sensitive to
the repurchase, prepayment and default experience of the home equity loans in
the Fixed Rate Group and prospective investors should fully consider the
associated risks, including the risk that such investors may not fully recover
their initial investment.
The Class A-9IO Notional Principal Amount applicable to interest
calculations on the Class A-9IO Certificates is the lesser of (i) the dollar
amount for such date, as set forth in the Class A-9IO Notional Balance schedule
(as described under "Description of the Certificates - Class A-9IO Notional
Balance Schedule") and (ii) the Fixed Rate Pool Balance as of the end of the
related Remittance Period. The Class A-9IO Notional Principal Amount will be
zero for all Payment Dates beginning with the 31st Payment Date. Since the
scheduled amounts set forth in the Class A-9IO Notional Principal Amount are
fixed, and will control for purposes of calculating Class A-9IO distributions
(unless prepayments in the Fixed Rate Group are extremely rapid), the
performance of the Class A-9IO Certificates will be more stable than if the
Class A-9IO Notional Principal Amount were calculated using the underlying home
equity loans in the Fixed Rate Group directly. Consequently, the yield
sensitivity of the Class A-9IO Certificate will only be impacted at extremely
high rates of prepayments.
"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 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
"prepayments" includes prepayments and liquidations due to default).
It is very unlikely that the home equity loans will prepay at
rates consistent with the Prepayment Assumption until maturity or that all of
the home equity loans 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 FIXED RATE CERTIFICATES
Pursuant to the Pooling and Servicing Agreement, interest on the
Fixed Rate Certificates generally accrues during the calendar month immediately
preceding the month in which the related Payment Date occurs. Payment Dates
occur on the 25th 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 Fixed
Rate Certificates will be below that otherwise produced by the related
Pass-Through Rate because distributions
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to Owners of the Fixed Rate Certificates in respect of any given month will not
be made until on or after the 25th 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 1999-3 (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.
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the home equity
loans and the Properties is based upon the pool as constituted at the close of
business on the Cut-Off Date. Prior to the issuance of the 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 Certificates and will be filed and incorporated by reference to the
Registration Statement together with the Pooling and
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Servicing Agreement with the Securities and Exchange Commission within fifteen
days after the initial issuance of the 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 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 Certificates-Book Entry
Registration of the 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 Certificates will be entitled to
receive such Owner's Percentage Interest in the amounts due on the related Class
on such Payment Date. The "Percentage Interest" of 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 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.
On the 25th day of each month, or, if such day is not a Business
Day, then the next succeeding Business Day, commencing July 26, 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 related 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).
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The "Record Date" for a Payment Date is, in the case of the Fixed
Rate Certificates, the last day of the calendar month immediately preceding the
calendar month in which such Payment Date occurs and, in the case of the Class
A-8 Certificates, the day prior to such Payment Date.
For each Payment Date, interest due with respect to the Fixed
Rate 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, and the interest due with respect to the Class
A-8 Certificates will be interest which has accrued on the related Certificate
Principal Balance during the period commencing on the immediately preceding
Payment Date (or on the Closing Date, in the case of the first Payment Date) and
ending on the day immediately preceding such 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 Fixed Rate
Certificates will be made on the basis of a 360-day year assumed to consist of
twelve 30-day months; all calculations of interest on the Class A-8 Certificates
will be made on the basis of a 360-day year and the actual number of days
elapsed in the Accrual Period.
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.
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") be applied in the following order of priority:
First, for the payment of certain fees, concurrently, to the
Trustee, the Trustee Fee, to the Master Servicer, the Master Servicing 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, (such amount, the
"Interest Amount Available"), to the Owners of the Class A Certificates, the
related Current Interest plus the Interest Carry Forward Amount with respect to
each such Class of related Class A Certificates without any priority among such
Class A Certificates; provided, that if the Interest Amount Available is not
sufficient to make a full distribution of interest with respect to all Classes
of the Class A Certificates, then such amount will be distributed among the
outstanding Classes of Class A Certificates pro rata based on the aggregate
amount of interest due on each such Class, and any shortfall will be carried
forward with accrued interest;
Third, for the payment of 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 the Current Interest for the Class B
Certificates;
Fourth, for the payment of the Reimbursement Amount, if any, then
due to the Certificate Insurer, the lesser of (x) the Reimbursement Amount then
owed to the Certificate Insurer and (y) the Maximum Insurer Current
Reimbursement Amount (as defined below) for such Payment Date;
Fifth, for the payment of Class A Certificate principal, to the
extent of the Available Funds then remaining in the Certificate Account, plus
the principal component of any Insured Payment, to the Owners of the Class A
Certificates, an amount necessary to reduce the Aggregate Class A Principal
Balance to the Class A Optimal Balance for such Payment Date; such amount to be
distributed with respect to specific classes of the Class A Certificates in the
further priorities described below under "Principal Allocations with Respect to
Class A Certificates";
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Sixth, 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;
Seventh, for the payment of Class B Certificate principal, to the
extent of the amount then remaining in the Certificate Account, an amount
necessary to reduce the Class B Principal Balance to the Class B Optimal Balance
for such Payment Date;
Eighth, the remaining amount, if any, on deposit in the
Certificate Account with respect to both Loan Groups is the "Monthly Excess
Cashflow Amount", which shall be applied in the following order of priority:
(a) to fund the Class B Realized Loss Amortization Amount for
such Payment Date;
(b) to the Servicer or to the Master Servicer, as applicable,
to the extent of any unreimbursed Delinquency Advances or
Servicing Advances and any other costs and expenses
(including, the case of the Master Servicer, any servicing
transition costs) incurred by either of them; and
(c) to fund a distribution to Owners of the Residual Interest.
"Current Interest" with respect to each Class of Certificates
means, with respect to any Payment Date, the interest accrued during the related
Accrual Period on the Certificate Principal Balance (or, in the case of the
Class A-9IO Certificates, the Class A-9IO Notional Balance) of such Class.
"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. An Interest Carry
Forward Amount would only arise with respect to the Class A Certificates only in
the event that the Certificate Insurer were then in default (assuming that the
Certificate Insurance Policy was timely and properly drawn upon in the event of
an anticipated shortfall) or in the event that such shortfall arose as a result
of a Compensating Interest Shortfall or a Relief Act Shortfall (neither of which
is covered by the Certificate Insurance Policy).
"Maximum 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 Certificate Principal on such Payment Date, without causing the
Aggregate Class A Certificate Balance to exceed the Combined Pool Balance (i.e.,
without causing there to be a Class A Overcollateralization Deficit).
Specifically, the "Maximum Insurer Current Reimbursement Amount" for any Payment
Date equals the lesser of (x) the Available Funds remaining in the Certificate
Account with respect to both Loan Groups after taking into account all
distributions described in clauses "First" through "Third" above and (y) the
excess of (1) the sum of (a) the Combined Pool Balance as of the end of the
related Remittance Period plus (b) the amount described in the immediately
preceding clause (x) over (2) the aggregate Class A Certificate Principal
Balance prior to taking into account any payment of principal on such Payment
Date.
INTEREST CALCULATIONS
PASS-THROUGH RATES
The Pass-Through Rates applicable to the Certificates are as
follows:
Class A-1 Pass-Through Rate: 6.42% per annum.
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Class A-2 Pass-Through Rate: 6.77% per annum.
Class A-3 Pass-Through Rate: 6.93% per annum.
Class A-4 Pass-Through Rate: 7.12% per annum.
Class A-5 Pass-Through Rate: For any Payment Date, the lesser of
(x) 7.36% per annum or (y) the Fixed Rate Group Available Funds Cap Rate for
such Payment Date.
Class A-6 Pass-Through Rate: For any Payment Date, the lesser of
(i)(a) with respect to any Payment Date which occurs on or prior to the Step-Up
Payment Date, 7.68% per annum, or (b) with respect to any Payment Date
thereafter, 8.18% per annum or (ii) the Fixed Rate Group Available Funds Cap
Rate for such Payment Date.
Class A-7 Pass-Through Rate: For any Payment Date, the lesser of
(i)(a) with respect to any Payment Date which occurs on or prior to the Step-Up
Payment Date, 7.28% per annum, or (b) with respect to any Payment Date
thereafter, 7.78% per annum or (ii) the Fixed Rate Group Available Funds Cap
Rate for such Payment Date.
Class A-8 Pass-Through Rate: For any Payment Date, the lesser of
(i)(a) with respect to any Payment Date which occurs on or prior to the Step-Up
Payment Date, the London interbank offering rate for one-month United States
dollar deposits ("LIBOR") (calculated as described below under "Calculation of
LIBOR") plus 0.28% per annum or (b) with respect to any Payment Date thereafter,
LIBOR plus 0.56% per annum (the rate described in this clause (i) being the
"Class A-8 Formula Pass-Through Rate") and (ii) the ARM Group Available Funds
Cap Rate for such Payment Date.
Class A-9IO Pass-Through Rate: 6.00% per annum.
Class B Pass-Through Rate: For any Payment Date, the lesser of
(i)(a) with respect to any Payment Date which occurs on or prior to the Step-Up
Payment Date, 7.00% per annum, or (b) with respect to any Payment Date
thereafter, 7.50% per annum or (ii) the lesser of (x) the Fixed Rate Group
Available Funds Cap Rate for such Payment Date or (y) the Arm Group Available
Funds Pass-Through Rate for such Payment Date.
The "Step-Up Payment Date" is the first Payment Date which occurs
after the Clean-Up Call Date.
The Certificate Insurance Policy does not cover shortfalls in
Current Interest on the Class A Certificates which result from Compensating
Interest Shortfalls or Relief Act Shortfalls. "Compensating Interest Shortfalls"
may result when the aggregate Compensating Interest for a Remittance Period
exceeds the aggregate Servicing Fee for that Remittance Period. "Relief Act
Shortfalls" may result when a Mortgagor's payment is reduced by application of
the Relief Act.
AVAILABLE FUNDS CAPS
Fixed Rate Group Available Funds Cap: The Pass-Through Rate with
respect to the Class A-5, Class A-6 and Class A-7 Certificates on any Payment
Date will equal the lesser of (x) the related fixed percentage for such Class
set forth above and (y) the weighted average Coupon Rate of the home equity
loans in the Fixed Rate Group as of the opening of business on the first day of
the related Remittance Period, less the sum of (i) (a) the sum of the related
Premium Amount plus the related Trustee Fee plus the related Servicing Fee and
the related Master Servicing Fee divided by (b) the aggregate Loan Balance of
the home equity loans in the Fixed Rate Group as of the opening of business on
the first day of the related Remittance Period, plus (ii) during the period
commencing on the first Payment Date and ending on the 30th Payment Date, the
annualized percentage equivalent of the product of (a) the Class A-9IO
Pass-Through Rate and (b) the Class A-9IO Notional Principal Amount divided by
the Fixed Rate Group Pool Balance as of the opening of business on the first day
of the related Remittance Period; such rate described in clause (y) above, for
any Payment Date, the "Fixed Rate Group Available Funds Cap" for such Payment
Date.
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ARM Group Available Funds Cap: The Pass-Through Rate with respect
to the Class A-8 Certificates will on any Payment Date equal the lesser of (x)
the floating rate for such Class set forth above and (y) the weighted average
Coupon Rate of the home equity loans in the ARM Group as of the opening of
business on the first day of the related Remittance Period, less the sum of (i)
(a) the sum of the related Premium Amount plus the related Trustee Fee plus the
related Servicing Fee and the related Master Servicing Fee divided by (b) the
aggregate Loan Balance of the home equity loans in the ARM Group as of the
opening of business on the first day of the related Remittance Period and (ii)
0.50% per annum; such rate described in clause (y) above, for any Payment Date,
the "ARM Group Available Funds Cap" for such Payment Date.
CLASS A-9IO NOTIONAL PRINCIPAL AMOUNT SCHEDULE
Distributions to the Owners of the Class A-9IO Certificates will be
based on the Class A-9IO Notional Principal Amount Schedule, which is as
follows:
-----------------------------------------------------------------------
Payment Dates Scheduled Notional Principal
Amount
-----------------------------------------------------------------------
1-3 $185,000,000
-----------------------------------------------------------------------
4-6 $120,000,000
-----------------------------------------------------------------------
7-9 $60,000,000
-----------------------------------------------------------------------
10-12 $54,000,000
-----------------------------------------------------------------------
13-15 $22,500,000
-----------------------------------------------------------------------
16-18 $20,000,000
-----------------------------------------------------------------------
19-21 $18,500,000
-----------------------------------------------------------------------
22-24 $17,500,000
-----------------------------------------------------------------------
25-27 $12,500,000
-----------------------------------------------------------------------
28-30 $10,000,000
-----------------------------------------------------------------------
Thereafter $0
-----------------------------------------------------------------------
The "Class A-9I0 Notional Principal Amount" for any Payment Date will be
the lesser of (x) the dollar amount shown in the schedule with respect to that
Payment Date, or (x) the Fixed Rate Pool Balance as of the end of the related
Remittance Period.
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PRINCIPAL CALCULATIONS
GENERAL
The principal paydown rules require that the Class A Optimal
Balance be determined for each Payment Date. The Class A Optimal Balance is
determined with respect to both Loan Groups together, and is a function of both
the amortization of the underlying mortgage loans and the overall level of
delinquencies, as well as whether a Cumulative Realized Loss Trigger Event is
then in effect.
The amount to be distributed as principal to the Class A
Certificateholders on a Payment Date is the Class A Principal Distribution
Amount which will equal the lesser of the amount necessary to pay the Class A
Certificates to the Class A Optimal Balance for such Payment Date, or the amount
of funds available for such purpose.
The Class A Principal Distribution Amount is then allocated
between the Class A Fixed Rate Group Certificates and the Class A ARM Group
Certificates based upon the relative amortization of the two Loan Groups.
Similarly, the Class B Optimal Balance will be determined for
each Payment Date. The Class B Optimal Balance is also a function of the
amortization of the underlying mortgage loans, the Class A Certificate Principal
Balance as of such Payment Date (after taking into account any reduction on such
Payment Date), as well as whether a Cumulative Realized Loss Trigger Event has
occurred.
The amount to be distributed as principal to the Class B
Certificateholders on a Payment Date as the Class B Principal Distribution
Amount, which will equal the lesser of the amount necessary to pay the Class B
Certificate to the Class B Optimal Balance for such Payment Date, or the amount
of funds available for such purpose.
The difference between the Aggregate Certificate Principal
Balance of all Class A Certificates and the Class B Certificates, on the one
hand, and the Combined Pool Balance, on the other hand, is the
Overcollateralization Amount, which is available to absorb losses.
OPTIMAL BALANCES: "Class A Optimal Balance" means, as of any Payment Date
and with respect to both Loan Groups together, as follows,
but in no event less than zero:
I. Prior to the Stepdown Date, the lesser of:
(a) (i) if a Cumulative Realized Loss Trigger Event
is not then in effect, the excess of :
(x) the Combined Pool Balance as of the
end of the related Remittance Period
over
(y) an amount equal to 7.45% of the
Original Combined Pool Balance; or
(ii) if a Cumulative Realized Loss Trigger
Event is in effect, the excess of:
(x) the Combined Pool Balance as of the
end of the related Remittance Period
over
(y) an amount equal to 8.10% of the
Original Combined Pool Balance;
or
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(b) the product of :
(x) 100% minus two times the excess of:
(a) one-half of the Six-Month Rolling
Average 90+ Day Delinquency Rate
over
(b) three times the Six-Month Rolling
Average Excess Spread and
(y) the Combined Pool Balance as of the end
of the related Remittance Period.
II. On and after the Stepdown Date, the least of:
(a) (i) if a Cumulative Realized Loss Trigger Event
is not then in effect, the greater of:
(x) the excess of (i) the Combined Pool
Balance as of the end of the related
Remittance Period over (ii) an amount
equal to 14.90% of the Combined Pool
Balance as of the end of the related
Remittance Period;
and
(y) the excess of (i) the Combined Pool
Balance as of the end of the related
Remittance Period over (ii) an amount
equal to 7.45% of the Original Combined
Pool Balance;
(ii) if a Cumulative Realized Loss Trigger
Event is then in effect, the excess of:
(x) the product of (i) 90% and (ii) the
Combined Pool Balance as of the end of the
related Remittance Period
over
(y) an amount equal to 3.10% of the Original
Combined Pool Balance;
or
(b) the product of:
(x) 100% minus two times the excess of
(a) one-half of the Six-Month Rolling
Average 90+ Day Delinquency Rate
over
(b) three times the Six-Month Rolling
Average Excess Spread and
(y) the Combined Pool Balance as of the
end of the related Remittance Period;
or
(c) the excess of (x) the Combined Pool Balance as
of the end of the related Remittance Period
over (y) an amount equal to 0.50% of the
Original Combined Pool Balance;
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<PAGE>
or
(d) the excess of (x) the Combined Pool Balance as
of the end of the related Remittance Period
over (y) the sum of the Loan Balances as of the
end of the related Remittance Period of the
three home equity loans having the largest Loan
Balances.
"Class B Optimal Balance", means, as of any Payment Date:
I. Prior to the Stepdown Date and if the Aggregate 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 Aggregate
Class A Certificate Principal Balance then equals
zero, the excess of (a) the Combined Pool Balance as
of the end of the related Remittance Period over (b)
the Aggregate Class A Certificate Principal Balance
plus the Targeted Overcollateralization Amount (after
taking into account any reduction thereof on such
Payment Date and any effects described in "Credit
Enhancement--Interplay of Principal Paydown Rules and
Targeted Overcollateralization Amount Definition"
below).
"Aggregate Class A Certificate Principal Balance" means, for any
Payment Date, the aggregate Class A Certificate Principal Balance for both Loan
Groups after taking into account the payment of the Class A Principal
Distribution Amount for both Loan Groups on such Payment Date.
"ARM Pool Balance" means, for any Payment, the aggregate
outstanding Loan Balance of the home equity loans in the ARM Group as of the
last day of the related Remittance Period.
"Fixed Rate Pool Balance" means, for any Payment Date, the
aggregate outstanding Loan Balance of the home equity loans in the Fixed Rate
Group as of the last day of the related Remittance Period.
"Combined Pool Balance" means, for any Payment Date, the sum of
the ARM Pool Balance and the Fixed Rate Pool Balance as of the end of the
related Remittance Period.
"Original ARM Pool Balance" means the aggregate Loan Balance of
the home equity loans in the ARM Group as of the Cut-Off Date.
"Original Fixed Rate Pool Balance" means the aggregate Loan
Balance of the home equity loans in the Fixed Rate Group as of the Cut-Off
Date.
"Original Combined Pool Balance" means the sum of the Original
Fixed Rate Pool Balance and the Original ARM Pool Balance.
"Pool Balance" means for any Payment Date, the applicable Fixed
Rate Pool Balance or ARM Pool Balance for such Payment Date.
"Six-Month Rolling Average 90+ Day Delinquency Rate" means, with
respect to any Payment Date, the fraction, expressed as a percentage (A) the
numerator of which is the sum of the following six (or lesser number of
Remittance Periods which have elapsed since the Closing Date) percentages for
each of the past six (or such lesser number) Remittance Periods (x) of the
aggregate outstanding Loan Balance of all home equity loans which are 90 or more
days delinquent (including real
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<PAGE>
estate owned properties, foreclosures and bankruptcies) as of the last day of
the related Remittance Period divided by (y) the Combined Pool Balance as of the
end of the related Remittance Period and (B) the denominator of which is six (or
such lesser number).
"Six-Month Rolling Average Excess Spread" means with respect to
any Payment Date, the fraction, expressed as a percentage (A) the numerator of
which is the sum of the following six (or lesser number of Remittance Periods
which have elapsed since the Closing Date) percentages for each of the past six
(or such lesser number) Remittance Periods (x) one-twelfth of 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 (a) the sum of (i) the
aggregate Premium Amount, the aggregate Servicing Fee, the aggregate Master
Servicing Fee and the aggregate Trustee Fee for such Remittance Period, (ii) the
aggregate Current Interest for the Class A and Class B Certificates with respect
to such Payment Date and (iii) Realized Losses which occurred during such
Remittance Period divided by (b) the Combined Pool Balance as of the end of the
related Remittance Period and (B) the denominator of which is six (or such
lesser number).
PRINCIPAL ALLOCATIONS WITH RESPECT TO THE CLASS A CERTIFICATES
"Class A Principal Distribution Amount" means, with respect to
both Loan Groups and any Payment Date, the actual amount distributed as
principal to the Owners of the related Class A Certificates in accordance with
priority "Fifth" under "Cashflow Priority, Flow of Funds" above on such Payment
Date (i.e., the lesser of the remaining Available Funds at priority "Fifth", or
the amount needed to reduce the Aggregate Class A Certificate Principal Balance
to the Class A Optimal Balance for 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 "Seventh" above on such
Payment Date (i.e., the lesser of the remaining Available Funds at priority
"Seventh", or the amount needed to reduce the Class B Certificate Principal
Balance to the Class B Optimal Balance for such Payment Date). Since, prior to
the Stepdown Date, the "Class B Optimal Balance" 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 Stepdown
Date (unless the Certificate Principal Balances of all Class A Certificates are
earlier reduced to zero).
The Class A Principal Distribution Amount is required to be
distributed on each Payment Date, pari passu, to (i) the Class A Fixed Rate
Group Certificates, in an amount equal to the Fixed Rate Group Class A Principal
Distribution Amount and (ii) the Class A ARM Group Certificates, in an amount
equal to the ARM Group Class A Principal Distribution Amount.
The "Fixed Rate Group Class A Principal Distribution Amount" for
any Payment Date is an amount equal to the lesser of:
(I) the excess of (x) the aggregate Certificate Principal Balance
of the Class A Fixed Rate Group Certificates immediately prior to such Payment
Date over (y) the Fixed Rate Group Class A Optimal Balance with respect to such
Payment Date; and
(II) the Class A Principal Distribution Amount with respect to
such Payment Date;
provided, however, that in no event will the aggregate Fixed Rate
Group Class A Certificate Principal Balance exceed the Fixed Rate Pool Balance
as of the last day of the related Remittance Period.
"The Fixed Rate Group Class A Optimal Balance" with respect to
any Payment Date is an amount equal to the product of:
(x) the Fixed Rate Pool Balance as of the end of the related
Remittance Period; and
(y) a fraction, the numerator of which is equal to (i) the
Aggregate Class A Certificate Principal Balance immediately prior to such
Payment Date minus (ii) the Class A Principal Distribution
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<PAGE>
Amount for such Payment Date and the denominator of which is (y) the Combined
Pool Balance as of the end of the related Remittance Period.
The "ARM Group Class A Principal Distribution Amount" for any
Payment Date is an amount equal to the lesser of:
(I) the excess of (x) the aggregate Certificate Principal Balance
of the Class A ARM Group Certificates immediately prior to such Payment Date
over (y) the ARM Group Class A Optimal Balance with respect to such Payment
Date; and
(II) the Class A Principal Distribution Amount with respect to
such Payment Date;
provided, however, that in no event will the Certificate
Principal Balance of the Class A ARM Group Certificates exceed the ARM Pool
Balance as of the last day of the related Remittance Period.
The "ARM Group Class A Optimal Balance" with respect to any
Payment Date is an amount equal to the product of:
(x) the aggregate ARM Pool Balance as of the end of the related
Remittance Period; and
(y) a fraction, the numerator of which is equal to (i) the
Aggregate Class A Certificate Principal Balance immediately prior to such
Payment Date minus (ii) the Class A Principal Distribution Amount for such
Payment Date and the denominator of which is (y) the Combined Pool Balance as of
the end of the related Remittance Period.
The Fixed Rate Pool Class A Principal Distribution Amount is
required to be distributed on each Payment Date in the following order of
priority:
(i) first, to the Class A-7 Certificates, in an amount equal to
the lesser of (a) the Class A-7 Principal Distribution Amount for such Payment
Date and (b) the Fixed Rate Pool Class A Principal Distribution Amount on such
Payment Date;
(ii) second, to the Class A-1 through the Class A-6 Certificates,
sequentially, in the amounts necessary to reduce their respective Certificate
Principal Balances to zero;
(iii) third, to the Class A-7 Certificates, without regard to the
Class A-7 Principal Distribution Amount, any remaining amount of the Fixed Rate
Pool Class A Principal Distribution Amount for such Payment Date, until the
Class A-7 Certificate Principal Balance has been reduced to zero.
The "Class A-7 Principal Distribution Amount" for any Payment
Date will be the "applicable percentage" set forth below of the Class A-7 Pro
Rata Principal Distribution Amount with respect to such Payment Date:
Payment Dates Applicable Percentage
1-36 0%
37-60 45%
61-72 80%
73-84 100%
85-end 300%
The "Class A-7 Pro Rata Principal Distribution Amount" for a
Payment Date is the product of (x) the Fixed Rate Pool Class A Principal
Distribution Amount for such Payment Date and (y) a fraction, the numerator of
which is the Class A-7 Certificate Principal Balance immediately prior to such
Payment Date and the denominator of which is the Class A Fixed Rate Pool
Certificate Principal Balances immediately prior to such Payment Date.
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<PAGE>
The ARM Pool Class A Principal Distribution Amount is required to
be distributed on each Payment Date to the Owners of the Class A-8 Certificates,
until the Class A-8 Certificate Principal Balance has been reduced to zero.
Notwithstanding the foregoing, if on any Payment Date the
Certificate Principal Balance of the Class B Certificates has been reduced to
zero and the Certificate Insurer is then in default, distributions of principal
of the Class A Certificates will be made on a pro rata basis without regard to
the order of priority described above.
The Trustee or Paying Agent, as the case may be, shall (i)
receive as attorney-in-fact of each Owner of Class A Certificates any Insured
Payment from the Certificate Insurer and (ii) disburse the same to each Owner of
Class A Certificates. The Pooling and Servicing Agreement will provide that to
the extent the Certificate Insurer makes Insured Payments, either directly or
indirectly (as by paying through the Trustee or Paying Agent, as the case may
be), to the Owners of such Class A Certificates, if any, the Certificate Insurer
will be subrogated to the rights of such Owners of Class A Certificates with
respect to such Insured Payments, and shall receive reimbursement for such
Insured Payments as provided in the Pooling and Servicing Agreement, but only
from the sources and in the manner provided in the Pooling and Servicing
Agreement for the payment of amounts distributable to Owners of Class A
Certificates, if any; such subrogation and reimbursement will have no effect on
the Certificate Insurer's obligations under the Certificate Insurance Policy.
Each Owner of a Class A Certificate will be required promptly to
notify the Trustee in writing upon the receipt of a court order relating to a
Preference Amount and will be required to enclose a copy of such order with such
notice to the Trustee.
CALCULATION OF LIBOR
On each LIBOR Determination Date (as defined below), the Trustee
will determine LIBOR for the next Accrual Period for the Class A-8 Certificates.
"LIBOR" means, as of any LIBOR Determination Date, the rate for
deposits in United States dollars for a period equal to the relevant Accrual
Period (commencing on the first day of such Accrual Period) which appears in the
Telerate Page 3750 as of 11:00 a.m., London time, on such date. If such rate
does not appear on Telerate Page 3750, the rate for that day will be determined
on the basis of the rates at which deposits in United States dollars are offered
by the Reference Banks at approximately 11:00 a.m., London time, on that day to
prime banks in the London interbank market for a period equal to the relevant
Accrual Period (commencing on the first day of such Accrual Period). The Trustee
will request the principal London office of each of the Reference Banks to
provide a quotation of its rate. If at least two such quotations are provided,
the rate for that day will be the arithmetic mean of the quotations. If fewer
than two quotations are provided as requested, the rate for that day will be the
arithmetic mean of the rates quoted by major banks in New York City, selected by
the Servicer, at approximately 11:00 a.m., New York City time, on that day for
loans in United States dollars to leading European banks for a period equal to
the relevant Accrual Period (commencing on the first day of such Accrual
Period).
"LIBOR Determination Dates" are:
o June 15, 1999 for the period beginning on and including the
Closing Date, and ending on and excluding July 26, 1999; and
o the second London business day prior to the first day of each
Accrual Period, for each Accrual Period following the first
Accrual Period.
For purposes of determining LIBOR, a "London business day" is any
day on which dealings in deposits of United States dollars are transacted in the
London interbank market.
"Telerate Page 3750" means the display page currently so
designated on the Dow Jones Telerate Service (or such other page as may replace
that page on that service for the purpose of displaying
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comparable rates or prices) and "Reference Banks" means leading banks selected
by the Trustee and engaged in transactions in Eurodollar deposits in the
international Eurocurrency market.
BOOK-ENTRY REGISTRATION OF THE CERTIFICATES
The 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 Cedelbank 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
Certificates which in the aggregate equal the principal balance of such
Certificates and will initially be registered in the name of Cede, the nominee
of DTC. Cedelbank and Euroclear will hold omnibus positions on behalf of their
Participants through customers' securities accounts in Cedelbank'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 Cedelbank 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 (or, in the case of interest-only
securities, notional principal amounts) of $1,000 and in integral multiples in
excess thereof in the case of the 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 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 Cedelbank 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 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 Certificates only through Participants and indirect participants by
instructing such Participants and indirect participants to transfer such
Certificates, by book-entry transfer, through DTC for the account of the
purchasers of such 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 Certificates will be executed through
DTC and the accounts of the respective Participants at DTC
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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 Cedelbank 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 Cedelbank Participants on such business day. Cash received
in Cedelbank or Euroclear as a result of sales of securities by or through a
Cedelbank 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 Cedelbank 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 Cedelbank 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
Cedelbank 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. Cedelbank Participants and Euroclear Participants may not deliver
instructions directly to the European Depositaries.
DTC, which is a New York-chartered limited purpose trust company,
performs services for its Participants ("DTC Participants"), some of which
(and/or their representatives) own DTC. In accordance with its normal
procedures, DTC is expected to record the positions held by each DTC Participant
in the Book-Entry Certificates, whether held for its own account or as a nominee
for another person. In general, beneficial ownership of Book-Entry Certificates
will be subject to the rules, regulations and procedures governing DTC and DTC
Participants as in effect from time to time.
Cedelbank ("Cedelbank") was incorporated in 1970 as a limited
company under Luxembourg law. Cedelbank 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 Cedelbank's stock.
Cedelbank 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.
Cedelbank holds securities for its participant organizations
("Cedelbank Participants") and facilitates the clearance and settlement of
securities transactions between Cedelbank Participants through electronic
book-entry changes in accounts of Cedelbank Participants, thereby eliminating
the need for physical movement of certificates. Transactions may be settled in
Cedelbank in any of 28 currencies, including United States dollars. Cedelbank
provides to its Cedelbank Participants, among other things, services for
safekeeping, administration, clearance and settlement of internationally traded
securities and securities lending and borrowing. Cedelbank interfaces with
domestic markets in several
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countries. As a professional depository, Cedelbank is subject to regulation by
the Luxembourg Monetary Institute. Cedelbank 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 Cedelbank is also available to others,
such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a Cedelbank Participant, either directly
or indirectly.
Euroclear was created in 1968 to hold securities for participants
of Euroclear ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 32 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York (the "Euroclear Operator"), under contract
with Euroclear Clearance Systems S.C., a Belgian cooperative corporation (the
"Cooperative"). All operations are conducted by the Euroclear Operator, and all
Euroclear Securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear Operator, not the Cooperative. The Cooperative establishes
policy for Euroclear on behalf of Euroclear Participants. Euroclear Participants
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries. Indirect access to Euroclear is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York
banking corporation which is a member bank of the Federal Reserve System. As
such, it is regulated and examined by the Board of Governors of the Federal
Reserve System and the New York State Banking Department, as well as the Belgian
Banking Commission.
Securities clearance accounts and cash accounts with the
Euroclear Operator are governed by the Terms and Conditions Governing Use of
Euroclear and the related Operating Procedures of the Euroclear System and
applicable Belgian law (collectively, the "Terms and Conditions"). The Terms and
Conditions govern transfers of securities and cash within Euroclear, withdrawals
of securities and cash from Euroclear, and receipts of payments with respect to
securities in Euroclear. All securities in Euroclear are held on a fungible
basis without attribution of specific certificates to specific securities
clearance accounts. The Euroclear Operator acts under the Terms and Conditions
only on behalf of Euroclear Participants, and has no record of or relationship
with persons holding through Euroclear Participants.
Distributions on the Book-Entry Certificates will be made on each
Payment Date by the Trustee to DTC. DTC will be responsible for crediting the
amount of such payments to the accounts of the applicable DTC Participants in
accordance with DTC's normal procedures. Each DTC Participant will be
responsible for disbursing such payment to the Beneficial Owners of the
Book-Entry Certificates that it represents and to each Financial Intermediary
for which it acts as agent. Each such Financial Intermediary will be responsible
for disbursing funds to the Beneficial Owners of the Book-Entry Certificates
that it represents.
Under a book-entry format, Beneficial Owners of the Book-Entry
Certificates may experience some delay in their receipt of payments, since such
payments will be forwarded by the Trustee to Cede. Distributions with respect to
Certificates held through Cedelbank or Euroclear will be credited to the cash
accounts of Cedelbank 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
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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. Cedelbank 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 Cedelbank 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 Certificates which conflict with actions
taken with respect to other 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, Cedelbank and Euroclear have agreed to the
foregoing procedures in order to facilitate transfers of Certificates among
Participants of DTC, Cedelbank and Euroclear, they are under no obligation to
perform or continue to perform such procedures and such procedures may be
discontinued at any time.
ASSIGNMENT OF RIGHTS
An Owner may pledge, encumber, hypothecate or assign all or any
part of its right to receive distributions under any Certificate, but such
pledge, encumbrance, hypothecation or assignment shall not constitute a transfer
of an ownership interest sufficient to render the transferee an Owner of the
Trust without compliance with the provisions of the Pooling and Servicing
Agreement described above.
CREDIT ENHANCEMENT
"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 which is available
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for distribution to the Owners of the Residual Interest. Such distributions are,
however, the most subordinate distributions which may be made by the Trust, and
thus are 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
Combined Pool Balance of the home equity loans, resulting in
overcollateralization (i.e., the maintenance of the Overcollateralization Amount
at least at the level of the Targeted Overcollateralization Amount).
The Pooling and Servicing Agreement requires that, the
Overcollateralization Amount shall be initially increased to, and thereafter
maintained at, a level at least equal to the Targeted Overcollateralization
Amount.
SUBORDINATION. With respect to the Class A Certificates, the
paydown rules require that prior to the occurrence of the Stepdown Date, the
Combined Pool Balance exceed the Class A Certificate Principal Balance by an
amount equal to 7.45% of the Original Combined Pool Balance (i.e., $59,600,000)
subject to the occurrence of a Cumulative Realized Loss Trigger Event. The 7.45%
(based on the Original Combined Pool Balance) subordination level for the Class
A Certificates is allowed to reduce or "step down" on and after the Stepdown
Date to 14.90% of the amortizing Combined Pool Balance. The 7.45% subordinate
amount is represented by the Class B Certificate Principal Balance (originally
equal to approximately 5.00% of the Original Combined 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 Combined 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 July 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:
(A) if no Cumulative Realized Loss Trigger Event is in
effect, 2.45% of the Original Combined Pool Balance (i.e.,
$19,600,000); or
(B) if a Cumulative Realized Loss Trigger Event is in
effect, an amount equal to 3.10% of the Original Combined
Pool Balance (i.e., $24,800,000);
(iii) on and after the Stepdown Date:
(A) if a Cumulative Realized Loss Trigger Event is not
in effect, the greater of (I) the lesser of (x)
2.45% of the Original Combined Pool Balance (i.e.,
$19,600,000) and (y) 4.90% of the Combined Pool
Balance and (II) 0.50% of the Original Combined
Pool Balance (i.e., $4,000,000); or
(B) if a Cumulative Realized Loss Trigger Event is in
effect, an amount equal to 3.10% of the Original
Combined Pool Balance (i.e., $24,800,000).
INTERPLAY OF PRINCIPAL PAYDOWN RULES AND TARGETED
OVERCOLLATERALIZATION AMOUNT DEFINITION. The cashflow priorities of the Trust
provide that all Available Funds remaining on a Payment Date after the payment
of fees, Certificate interest and Certificate Insurer reimbursement will be
applied to pay down the Class A Certificates to their Class A Optimal Balance.
The Class A Optimal Balance definition takes into account the
level of delinquencies on the mortgage pool. If the delinquencies exceed a
certain level, the Class A Optimal Balance will be reduced, requiring the Trust
to accelerate the paydown of the Class A Certificates to their lower Class A
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Optimal Balance. In some cases, this will result in the paydown rules requiring
a higher level of overcollateralization than does the Targeted
Overcollateralization Amount definition. In that event, the paydown rules will
control, and the actual Overcollateralization Amount will exceed the Targeted
Overcollateralization Amount.
CUMULATIVE REALIZED LOSS TRIGGER. 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
July 1999 - June 2001 1.225%
July 2001 - June 2002 2.100%
July 2002 - June 2003 2.800%
July 2003 - June 2004 3.325%
July 2004 and thereafter 3.500%
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 Combined 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.
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
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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 Combined 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.
"Class A Overcollateralization Deficit" for any Payment Date
means the excess of the Class A Certificate Principal Balance over the
outstanding Combined Pool Balance, calculated after taking into account the
reduction on such Payment Date of the Aggregate Class A Certificate Principal
Balance resulting from all sources other than the proceeds of any Insured
Payment.
The "Certificate Principal Balance" of any class of Class A
Certificates is the Original Class A Certificate Principal Balance of such
Class, as reduced by all amounts actually distributed to the Owners of such
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 excess of (i) the Monthly Excess Cashflow Amount over
(ii) the Interest Carry Forward Amount for the Class B Certificates, in each
case for such Payment Date.
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 INSURER
The following information has been supplied by Ambac Assurance
Corporation (the "Certificate Insurer") for inclusion in this Prospectus
Supplement. No representation is made by the Underwriters, the Sellers, the
Master Servicer, the Servicer, the Depositor or any of their affiliates as to
the accuracy or completeness of such information.
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The Certificate Insurer is a Wisconsin-domiciled stock insurance
corporation regulated by the Office of the Commissioner of Insurance of the
State of Wisconsin and licensed to do business in 50 states, the District of
Columbia, the Commonwealth of Puerto Rico and the Territory of Guam. The
Certificate Insurer primarily insures newly issued municipal and structured
finance obligations. The Certificate Insurer is a wholly-owned subsidiary of
Ambac Financial Group, Inc. (formerly, AMBAC, Inc.), a 100% publicly-held
company. Moody's Investors Service, Standard & Poor's Ratings Services, a
division of The McGraw Hill Companies, Inc., and Fitch IBCA, Inc. have each
assigned a triple-A financial strength rating to the Certificate Insurer.
The consolidated financial statements of the Certificate Insurer
and subsidiaries as of December 31, 1998 and December 31, 1997, and for each of
the years in the three-year period ended December 31, 1998, prepared in
accordance with generally accepted accounting principles, included in the Annual
Report on Form 10-K of Ambac Financial Group, Inc. (which was filed with the
Commission on March 30, 1999; Commission File No. 1-10777) and the unaudited
consolidated financial statements of the Certificate Insurer and subsidiaries as
of March 31, 1999, and for the periods ending March 31, 1999 and March 31, 1998
included in the Quarterly Report on Form 10-Q of Ambac Financial Group, Inc. for
the period ended March 31, 1999, (which was filed with the Commission on May 12,
1999), 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 herein by reference shall be modified or superseded for the
purposes of this Prospectus Supplement to the extent that a statement contained
herein by reference herein also 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
subsidiaries included in documents filed by Ambac Financial Group, Inc. with the
Commission 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.
The following table sets forth the Certificate Insurer's
capitalization as of December 31, 1996, December 31, 1997, December 31, 1998 and
March 31, 1999, respectively, in conformity with generally accepted accounting
principles.
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AMBAC ASSURANCE CORPORATION
CONSOLIDATED CAPITALIZATION TABLE
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
March 31, 1999
December 31, 1996 December 31, 1997 December 31, 1998 (unaudited)
----------------- ----------------- ----------------- --------------
<S> <C> <C> <C> <C>
Unearned premiums......... $ 995 $1,184 $1,303 $ 1,324
Other liabilities......... 259 562 548 544
----- ----- ----- -----
Total liabilities......... $1,254 $1,746 $1,851 $ 1,868
----- ----- ----- -----
Stockholder's equity: (1)
Common stock............ $ 82 $82 $82 $82
Additional paid-in
capital................... 515 521 541 541
Accumulated other
comprehensive income... 66 118 138 112
Retained earnings....... 992 1,180 1,405 1,467
----- ----- ----- -----
Total stockholder's equity $1,655 $1,901 $2,166 $2,202
----- ----- ----- -----
Total liabilities and
stockholder's
equity.................. $2,909 $3,647 $4,017 $4,070
===== ===== ===== =====
</TABLE>
(1) Components of stockholder's equity have been restated for all periods
presented to reflect "Accumulated other comprehensive income" in accordance with
the Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive
Income" adopted by the Certificate Insurer effective January 1, 1998. As this
new standard only requires additional information on the financial statements,
it does not affect the Certificate Insurer's financial position or results of
operations.
For additional financial information concerning the Certificate
Insurer, see the audited and unaudited financial statements of the Certificate
Insurer incorporated by reference herein. Copies of the financial statements of
the Certificate Insurer incorporated herein by reference and copies of the
Certificate Insurer's annual statement for the year ended December 31, 1998
prepared in accordance with statutory accounting standards are available,
without charge from the Certificate Insurer. The address of the Certificate
Insurer's administrative offices and its telephone number are One State Street
Plaza, 17th Floor, New York, New York, 10004, (212) 668-0340.
The Certificate Insurer makes no representation regarding the
Class A Certificates or the advisability of investing in the Class A
Certificates and makes no representation regarding, nor has it participated in
the preparation of, this Prospectus Supplement other than the information
supplied by the Certificate Insurer and presented under the headings "The
Certificate Insurance Policy" and "The Certificate Insurer" and in the financial
statements incorporated herein by reference.
THE CERTIFICATE INSURANCE POLICY
The following summary of the terms of the Certificate Insurance
Policy does not purport to be complete and is qualified in its entirety by
reference to the Certificate Insurance Policy. The information in this section
regarding the Certificate Insurance Policy has been supplied by the Certificate
Insurer for inclusion herein. Only the Class A Certificates will be entitled to
the benefit of the Certificate Insurance Policy to be issued by the Certificate
Insurer.
The Certificate Insurer, in consideration of the payment of the
premium and subject to the terms of the Certificate Insurance Policy, agrees
unconditionally and irrevocably to pay to the Trustee for
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the benefit of the related Holders of the Insured Obligations, that portion of
the Insured Amounts which shall become Due for Payment but shall be unpaid by
reason of Nonpayment.
The Certificate Insurer will make such payments to the Trustee
from its own funds on the later of (a) three Business Days following delivery of
the Notice to the Certificate Insurer of Nonpayment or (b) the Business Day on
which the Insured Amounts are Due for Payment. The Certificate Insurer shall be
subrogated to all the Holders' rights to payment on the Insured Obligations to
the extent of the insurance disbursements so made. Once payments of the Insured
Amounts have been made to the Trustee, the Certificate Insurer shall have no
further obligation in respect of such Insured Amounts. Payment of Insured
Amounts shall be made only at the time set forth in the Certificate Insurance
Policy and no accelerated payment of Insured Amounts shall be made regardless of
any acceleration of any of the Class A Certificates, unless such acceleration is
at the sole option of the Certificate Insurer.
Notwithstanding the foregoing paragraph, the Certificate
Insurance Policy does not cover shortfalls, if any, attributable to the
liability of the Trust or the Trustee for withholding taxes, if any (including
interest and penalties in respect of any such liability), any prepayment penalty
or other accelerated payment which at any time may become due on or with respect
to any Insured Obligation, other than at the sole option of the Insurer, nor
against any risk other than Nonpayment, including failure of the Trustee to make
any payment due to the Holders of the Insured Obligations. The Certificate
Insurance Policy does not cover, and Insured Amounts do not include, any
shortfalls due to the application of the Relief Act or Compensating Interest.
The Certificate Insurer will pay any Insured Payment that is a
Preference Amount on the third Business Day following receipt on a Business Day
of a certified copy of the order requiring the return of a preference payment,
and such other documentation as is reasonably required by the Certificate
Insurer, such documentation 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.
Insured Payments due under the Certificate Insurance Policy
unless otherwise stated therein will be disbursed by the Certificate Insurer to
the Trustee on behalf of the Holders by wire transfer of immediately available
funds in the amount of the Insured Payment.
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 Holders, whether or not such funds are properly
distributed by the Trustee.
As used in the Certificate Insurance Policy, the following terms
shall have the following meanings:
"Deficiency Amount" means the excess, if any, of Required
Payments over the Net Available Distribution Amount for such Payment Date.
"Due for Payment" shall mean with respect to an Insured Amount or
Preference Amount, such amount is due and payable pursuant to the terms of the
Pooling and Servicing Agreement.
"Holder" shall mean any person who is the registered owner or
beneficial owner of any Insured Obligation.
"Insured Amounts" shall mean, with respect to any Payment Date,
the Deficiency Amount for such Payment Date.
"Insured Obligations" shall mean the Class A Certificates.
"Insured Payments" shall mean, the aggregate amount paid by the
Insurer to the Trustee in respect of (i) Insured Amounts for a Payment Date and
(ii) Preference Amounts for any given Business Day.
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"Net Available Distribution Amount" means, with respect to any
Payment Date, the Monthly Remittance Amount, less the aggregate amount applied
to the payment of the Master Servicer Fee, Trustee Fee and the Premium Amount.
"Nonpayment" shall mean, with respect to any Payment Date, an
Insured Amount is Due for Payment but has not been paid pursuant to the Pooling
and Servicing Agreement.
"Notice" means the telephonic or telegraphic notice promptly
confirmed in writing by telecopy, substantially in the form of Exhibit A
attached to the Certificate Insurance Policy, from the Trustee specifying the
Insured Amount which shall be due and owing on the applicable Payment Date.
"Preference Amount" means any payment of principal or interest on
a Class A Certificate which has become Due for Payment and which is made to a
Holder by or on behalf of the Trustee, which has been deemed a preferential
transfer and therefore recovered from its Holder pursuant to the United States
Bankruptcy Code (11 U.S.C.) as amended from time to time, in accordance with a
final non-appealable order of a court having competent jurisdiction.
"Required Payments" shall mean, with respect to the Class A
Certificates, as of any Payment Date, the sum of (i) the aggregate Current
Interest (less any Relief Act Shortfalls and any Compensating Interest
Shortfalls), (ii) any Class A Overcollateralization Deficit, (iii) on the
December 2029 Payment Date only, the excess, if any, of (a) the Certificate
Principal Balance of the Class A Fixed Rate Group Certificates over (b) the
Fixed Rate Group Class A Principal Distribution Amount for such Payment Date and
(iv) on the May 2029 Payment Date only, the excess, if any of (a) the
Certificate Principal Balance of the Class A-8 Certificates over (b) the ARM
Group Class A Principal Distribution Amount for such Payment Date.
Any notice under the Certificate Insurance Policy may be made at
the address listed below for the Certificate Insurer.
The notice address of the Certificate Insurer is One State Street
Plaza, New York, New York 10004 Attention: General Counsel, or such other
address as the Certificate Insurer shall specify to the Trustee in writing. The
Certificate Insurance 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 CERTIFICATE INSURANCE POLICY IS NOT COVERED BY
THE PROPERTY/CASUALTY INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF
THE NEW YORK INSURANCE LAW.
The Certificate Insurance Policy is not cancelable for any
reason. The premium on the Certificate Insurance Policy is not refundable for
any reason.
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.
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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 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 or the Master 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:
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(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 1999-3 under
the Pooling and Servicing Agreement dated as of June 1, 1999" 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).
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.
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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 release fees, bad check charges,
assumption fees, late payment charges, or any other servicing-related fees, Net
Liquidation Proceeds not required to be deposited in the Principal and Interest
Account pursuant to the Pooling and Servicing Agreement, and similar items.
The Servicer is required to create, or cause to be created, in
the name of the Trustee at one or more depository institutions a principal and
interest account maintained as a trust account in the trust department of such
institution (the "Principal and Interest Account"). All funds in the Principal
and Interest Account are required to be held (i) uninvested or (ii) invested in
Eligible Investments (as defined in the Pooling and Servicing Agreement). Any
investment of funds in the Principal and Interest Account must mature or be
withdrawable at par on or prior to the immediately succeeding Monthly Remittance
Date. Any investment earnings on funds held in the Principal and Interest
Account are for the account of, and any losses therein are also for the account
of and must be promptly replenished by, the Servicer.
The Servicer is required to deposit to the Principal and Interest
Account, within one business day following receipt, all principal collections on
the home equity loans received, and interest collections on the home equity
loans accrued after the Cut-Off Date, including any Prepayments, the proceeds of
any liquidation of a home equity loan net of expenses and unreimbursed
Delinquency Advances ("Net Liquidation Proceeds"), any income from REO
Properties and Delinquency Advances, but net of (i) the Servicing Fee with
respect to each home equity loan and other servicing compensation, (ii)
principal collected and interest accrued on any home equity loan prior to the
Cut-Off Date, (iii) Net Liquidation Proceeds to the extent that such Net
Liquidation Proceeds exceed the sum of (I) the Loan Balance of the related home
equity loan, plus (II) accrued and unpaid interest on such home equity loan (net
of the Servicing Fee) to the date of such liquidation, (iv) reimbursements for
Delinquency Advances, and (v) reimbursement for amounts deposited in the
Principal and Interest Account representing payments of principal and/or
interest on a Note by a Mortgagor which are subsequently returned by a
depository institution as unpaid (all such net amounts being referred to herein
as the "Daily Collections").
The Servicer may make withdrawals for its own account from the
amounts on deposit in the Principal and Interest Account, in the following order
and only for the following purposes:
(i) to withdraw interest paid with respect to any home
equity loans that had accrued for periods on or prior to the Cut-Off
Date;
(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;
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(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.
The Pooling and Servicing Agreement requires the Servicer to
advance from the Servicer's own funds (or from the Master Servicer's own funds,
if the Master Servicer is then acting and if the Servicer has failed to do so),
on each Remittance Date the interest component (net of the Servicing Fee) of any
Mortgagor payment due during the preceding Remittance Period, but not yet
received, but only to the extent that the Servicer reasonably believes that the
amount of such advance will be recoverable from subsequent collections on the
related Home Equity Loan, and would increase Net Liquidation Proceeds on such
Home Equity Loan, were such Home Equity Loan to continue to be delinquent and
ultimately liquidated. 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.
As used in the Pooling and Servicing Agreement the following
terms have the following meanings:
"Interest Remittance Amount" means, as of any Monthly Remittance
Date, the sum, without duplication, of (i) all interest due and collected or
advanced with respect to the related Remittance Period on the home equity loans
(less the related Servicing Fee with respect to the home equity loans), (ii) all
Compensating Interest paid by the Servicer or the Master 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 20th 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
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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 Remittance 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. If the Servicer fails to remit the full required amount
of Compensating Interest the Master Servicer is required to fund the shortfall
(but not in excess of the aggregate Master Servicing Fee for the related
Remittance Period).
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.
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.
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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.
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:
o certain acts of bankruptcy or insolvency on the part of the
Servicer;
o certain failures on the part of the Servicer to perform its
obligations under the Pooling and Servicing Agreement;
o the failure to cure material breaches of the Servicer's
representations in the Pooling and Servicing Agreement; and
o the loss or delinquency levels of the mortgage pool exceeding
the trigger levels established by the Certificate Insurer.
The Master Servicer will also have the right to remove the
Servicer if the Servicer, after its receipt of notice and the
expiration of any grace period, has failed to remit
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the full amount of any required Delinquency Advance or the
full amount of any Compensating Interest.
The Certificate Insurer has required that ContiMortgage be
retained as Servicer on a "term to term" basis for the first year of the
transaction. This provision allows the Certificate Insurer the right not to
renew ContiMortgage as the Servicer every two months. Alternatively, the
Certificate Insurer may at any time during the first year waive this
requirement, which would leave ContiMortgage as the permanent Servicer.
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.
Upon removal or resignation of the Servicer, the Master Servicer
or an entity designated by it, with the approval of the Owners of the Residual
Interest and of the Certificate Insurer, will become the successor Servicer
(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). If the Master Servicer has previously resigned or been
dismissed and was not replaced, and the Servicer thereafter is removed or
resigns, then 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
(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).
No removal or resignation of the Servicer will become effective
until the Master Servicer, 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
(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 in each Loan Group, 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 in each Loan Group (based on a Certificate in the original principal
amount of $1,000);
(iv) the Interest Carry Forward Amount for each Class;
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(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 of each Loan Group as of the last day of
the related Remittance Period;
(vii) the Combined Pool Balance as of the last day of the
related Remittance Period;
(viii) 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;
(ix) the total of any Substitution Amounts or Loan Purchase
Price amounts included in such distribution with respect to each Loan Group;
(x) the weighted average Coupon Rate of the home equity loans;
(xi) the weighted average Coupon Rate of the Fixed Rate Group;
(xii) the weighted average Coupon Rate of the ARM Group;
(xiii) whether a Cumulative Realized Loss Trigger Event and/or
the Servicer Termination Event has occurred;
(xiv) the Overcollateralization Amount;
(xv) the amount of any Applied Realized Loss Amount, Realized
Loss Amortization Amount and Unpaid Realized Loss Amount for the Class B
Certificates as of the close of such Payment Date;
(xvi) the Pass-Through Rate for the Class A-7 Certificates
applicable to the related Accrual Period and if the Class A-7 Pass-Through Rate
was limited by the ARM Group Available Funds Cap, what such Pass-Through Rate
would have been in the absence thereof;
(xvii) the Available Funds Cap for each Loan Group for such
Payment Date;
(xviii) the amount of any Insured Payment included in the
distribution to Owners of Class A Certificates for each Loan Group;
(xix) any Reimbursement Amount paid on such Payment Date and
any Reimbursement Amount remaining unpaid; and
(xx) the Six-Month Rolling Average 90+ Day Delinquency Rate
and the Six-Month Rolling Average Excess Spread.
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;
o the number and aggregate principal balances of all home
equity loans in each Loan Group, and in both Loan Groups together, 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 on the last
business day of the calendar month next preceding the Payment Date and
the aggregate number and aggregate Loan Balance of such Loans;
o the status and the number and dollar amounts of all home
equity loans in each Loan Group, and in both Loan Groups together, 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;
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o the number of Mortgagors and the Loan Balances of the
related Mortgages for all home equity loans, each Loan Group, and in
both Loan Groups together, involved in bankruptcy proceedings as of the
close of business on the last business day of the calendar month next
preceding such Payment Date;
o the existence and status of any Properties for all home
equity loans, each Loan Group, and in both Loan Groups together, 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;
o the book value of any real estate acquired through
foreclosure or grant of a deed in lieu of foreclosure for all home
equity loans, each Loan Group, and in both Loan Groups together, as of
the close of business on the last business day of the calendar month
next preceding the Payment Date;
o the amount of cumulative Realized Losses for all home equity
loans, each Loan Group, and in both Loan Groups together;
o the Six-Month Rolling Average 90+ Delinquency Rate for all
home equity loans, each Loan Group, and in both Loan Groups together;
and
o the Six-Month Rolling Average Excess Spread.
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 Class A Certificates or, if there are no Class A Certificates then
Outstanding, by a majority of the Percentage Interests represented by the Class
B Certificates, may appoint a successor trustee.
GOVERNING LAW
The Pooling and Servicing Agreement and each Certificate will be
construed in accordance with and governed by the laws of the State of New York
applicable to agreements made and to be performed therein.
AMENDMENTS
The Trustee, the Depositor, the Sellers and the Servicer 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 of any portion of the Residual Interest
which is a "residual interest" in a REMIC 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
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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 Policy. 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 for any 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 and Master Servicing Fees plus the aggregate amount of any
unreimbursed Delinquency Advances and Servicing Advances and Delinquency
Advances which the Servicer or the Master 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 the Certificate
Insurer under the Insurance Agreement. The consent of the Certificate Insurer is
required for such optional termination if the exercise thereof would result in a
drawing under the Certificate Insurance Policy. The Class B Certificateholders
would not recover Class B Unpaid Applied Realized Losses, if any, in connection
with an optional termination.
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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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 ELECTIONS
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 is 130% of the
Fixed Prepayment Assumption for the Fixed Rate Loans and 100% of the Adjustable
Prepayment Assumption for the Adjustable Rate Loans. 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
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federal and state law. However, any such governmental or church plan which is
qualified under section 401(a) of the Code and exempt from taxation under
section 501(a) of the Code is subject to the prohibited transaction rules set
forth in section 503 of the Code.
Investments by Plans are subject to ERISA's general fiduciary
requirements, including the requirement of investment prudence and
diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan.
Section 406 of ERISA prohibits parties in interest with respect
to a Plan from engaging in certain transactions ("prohibited transactions")
involving a Plan and its assets unless a statutory or administrative exemption
applies to the transaction. Section 4975 of the Code imposes certain excise
taxes (or, in some cases, a civil penalty may be assessed pursuant to section
502(i) of ERISA) on parties in interest which engage in non-exempt prohibited
transactions.
The United States Department of Labor ("DOL") has issued a final
regulation (29 C.F.R. Section 2510.3-101) containing rules for determining what
constitutes the assets of a Plan. This regulation provides that, as a general
rule, the underlying assets and properties of corporations, partnerships, trusts
and certain other entities in which a Plan makes an "equity investment" will be
deemed for purposes of ERISA to be assets of the Plan unless certain exceptions
apply.
Under the terms of the regulation, the Trust may be deemed to
hold plan assets by reason of a Plan's investment in a Certificate; such plan
assets would include an undivided interest in the home equity loans and any
other assets held by the Trust. In such an event, persons providing services
with respect to the assets of the Trust, may be parties in interest, subject to
the fiduciary responsibility provisions of Title I of ERISA, including the
prohibited transaction provisions of Section 406 of ERISA (and of Section 4975
of the Code), with respect to transactions involving such assets unless such
transactions are subject to a statutory or administrative exemption.
Any fiduciary of a Plan considering whether to purchase a Class A
Certificate or a Class B Certificate should consult with its own legal advisors
concerning the impact of ERISA and the Code and the potential consequences to
its specific circumstances, prior to making an investment in the such
Certificates. Moreover, each Plan fiduciary should determine whether under the
general fiduciary standards of investment procedure and diversification an
investment in the Class A or Class B Certificate is appropriate for the Plan,
taking into account the overall investment of the Plan and the composition of
the Plan's investment portfolio.
THE CLASS A CERTIFICATES
The DOL has granted 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;
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(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 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
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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.
THE CLASS B CERTIFICATES
The Exemptions do not apply to the initial purchase, the holding or the
subsequent resale of the Class B Certificates because such Certificates are
subordinate to certain other Classes of Certificates. Accordingly, Plans may not
purchase the Class B Certificates, except that any insurance company may
purchase such Certificates with assets of its general account if the exemptive
relief granted by the DOL for transactions involving insurance company general
accounts in Prohibited Transaction Exemption 95 60, 60 Fed. Reg. 35925 (October
12, 1995) is available with respect to such investment. Any insurance company
proposing to purchase such Certificates for its general account should consider
whether such relief would be available. By its acquisition of an interest in a
Subordinate Certificate, the Beneficial Owner thereof will be deemed to have
represented that such Beneficial Owner either (i) is not a Plan and is not
acquiring its interest in such Certificate with the assets of a Plan or (ii) is
an insurance company acquiring its interest as permitted by and in accordance
with the provisions of Prohibited Transaction Exemption 95 60.
INSURANCE COMPANY PURCHASES
In addition to the matters described above, purchasers of Class A
Certificates or Class B Certificates that are insurance companies should consult
with their counsel with respect to the United States Supreme Court case
interpreting the fiduciary responsibility rules of ERISA, John Hancock Mutual
Life Insurance Co. v. Harris Trust and Savings Bank 114 S.Ct. 517 (1993). In
John Hancock, the Supreme Court ruled that assets held in an insurance company's
general account may be deemed to be "plan assets" for ERISA purposes under
certain circumstances. Prospective purchasers using insurance company general
account assets should determine whether the decision or federal legislation
enacted affecting insurance company general accounts (see Section 1460 of the
Small Business Job Protection Act of 1996) affects their ability to make
purchases of the Class A Certificates.
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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-1, A-2, A-3, Aaa AAA
A-4, A-5, A-6, A-7
and A-8 Certificates
Class A-9IO Aaa AAAr
Certificates
Class B Certificates Baa3 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.
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LEGAL INVESTMENT CONSIDERATIONS
The Certificates will NOT constitute "mortgage related
securities" for purpose of SMMEA. The appropriate characterization of the
Certificates under various legal investment restrictions, and thus the ability
of investors subject to these restrictions to purchase the Certificates, may be
subject to significant interpretive uncertainties. All investors whose
investment authority is subject to legal restrictions should consult their own
legal advisors to determine whether and to what extent the Certificates offered
hereby will constitute legal investments for them.
The Depositor makes no representation as to the proper
characterization of the Certificates offered hereby for legal investment of
financial institution regulatory purposes, or as to the ability of particular
investors to purchase the Certificates under applicable legal investment
restrictions. The uncertainties described above (and any unfavorable future
determinations concerning legal investment or financial institution regulatory
characteristics of the Certificates offered hereby) may adversely affect the
liquidity of the Certificates.
UNDERWRITING
Under the terms and subject to the conditions contained in an
underwriting agreement dated June 9, 1999, the Depositor has agreed to sell to
the Underwriters named below, for whom Credit Suisse First Boston Corporation is
acting as representative, the following respective principal amounts of the
Certificates:
<TABLE>
<CAPTION>
Underwriters Class A-1 Class A-2 Class A-3
- ------------ --------- --------- ---------
<S> <C> <C> <C>
Credit Suisse First Boston Corporation.......... $41,820,000 $25,260,000 $14,540,000
Bear, Stearns & Co. Inc......................... $41,820,000 $25,260,000 $14,540,000
Greenwich Capital Markets, Inc.................. $41,820,000 $25,260,000 $14,540,000
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.................................... $41,820,000 $25,260,000 $14,540,000
Morgan Stanley & Co. Incorporated............... $41,820,000 $25,260,000 $14,540,000
Underwriters Class A-4 Class A-5 Class A-6
- ------------ --------- --------- ---------
Credit Suisse First Boston Corporation.......... $8,300000 $8,180,000 $14,540,000
Bear, Stearns & Co. Inc......................... $8,300000 $8,180,000 $14,540,000
Greenwich Capital Markets, Inc.................. $8,300000 $8,180,000 $14,540,000
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.................................... $8,300000 $8,180,000 $14,540,000
Morgan Stanley & Co. Incorporated............... $8,300000 $8,180,000 $14,540,000
Underwriters Class A-7 Class A-8 Class B
- ------------ --------- --------- -------
Credit Suisse First Boston Corporation.......... $8,960,000 $30,400,000 $8,000,000
Bear, Stearns & Co. Inc......................... $8,960,000 $30,400,000 $8,000,000
Greenwich Capital Markets, Inc.................. $8,960,000 $30,400,000 $8,000,000
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.................................... $8,960,000 $30,400,000 $8,000,000
Morgan Stanley & Co. Incorporated............... $8,960,000 $30,400,000 $8,000,000
Underwriters Class A-9IO
-----------
Credit Suisse First Boston Corporation........ 100%
</TABLE>
The underwriting agreement provides that the underwriters are
obligated to purchase all of the Certificates if any are purchased.
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The Underwriters propose to offer the Certificates initially at
the public offering prices on the cover page of this prospectus supplement and
to selling group members at that price less a concession not in excess of the
respective amounts set forth in the table below (expressed as a percentage of
the related Certificate Principal Balance). The Underwriters and selling group
members may reallow a discount not in excess of the respective amounts set forth
in the table below to other broker dealers.
Class Selling Concession Reallowance Discount
A-1 0.0750% 0.0500%
A-2 0.0990% 0.0750%
A-3 0.1125% 0.0750%
A-4 0.1266% 0.0750%
A-5 0.1566% 0.1000%
A-6 0.2160% 0.1250%
A-7 0.2010% 0.1250%
A-8 0.1380% 0.1250%
A-9IO 0.0420% 0.0050%
B 0.4635% 0.1250%
Credit Suisse First Boston Corporation has informed the Depositor
that the Underwriters do not expect discretionary sales by them to exceed 5% of
the principal balance of the Certificates.
The Underwriters may engage in over-allotment, stabilizing
transactions, syndicate covering transactions and penalty bids in accordance
with Regulation M under the Securities Act of 1934 (the "Exchange Act").
Over-allotment involves syndicate sales in excess of the offering size, which
creates a syndicate short position. Stablilizing transactions permit bids to
purchase the underlying security so long as the stabilizing bids do not exceed a
specified maximum. Syndicate covering transactions involve purchases of the
offered Certificates in the open market after the distribution has been
completed in order to cover syndicate short positions. Penalty bids permit the
Underwriters to reclaim a selling concession from a syndicate member when the
offered certificates originally sold by syndicate member are purchased in a
syndicate covering transaction to cover syndicate short positions. Stabilizing
transactions, syndicate covering transactions and penalty bids may cause the
price of the offered Certificates to be higher than it would otherwise be in the
absence of these transactions. These transactions, if commenced, may be
discontinued at any time.
The Depositor estimates that the out of pocket expenses for this
offering will be approximately $750,000.
The Depositor has agreed to indemnify the Underwriters against
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.
The Depositor or its affiliates may apply all or any portion of
the net proceeds of 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.
EXPERTS
The consolidated financial statements of the Certificate Insurer,
Ambac Assurance Corporation and subsidiaries, as of December 31, 1998 and 1997
and for each of the years in the three
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year period ended December 31, 1998, are incorporated by reference herein and in
the registration statement in reliance upon the report of KPMG LLP, independent
certified public accountants, incorporated by reference herein and upon the
authority of said 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.
S-59
<PAGE>
INDEX OF PRINCIPAL DEFINED TERMS
Page
Accrual Period................................................S-21
Aggregate Class A Certificate Principal Balance...............S-27
Appraised Values..............................................S-16
ARM Group Available Funds Cap.................................S-24
ARM Pool Balance..............................................S-27
Average Amount Outstanding....................................S-14
Beneficial Owners.............................................S-31
Book-Entry Certificates.......................................S-31
Business Day..................................................S-21
Cedelbank Participants........................................S-32
Certificate Account...........................................S-20
Certificate Insurer...........................................S-37
Class A Optimal Balance.......................................S-25
Class A Overcollateralization Deficit.........................S-37
Class A Principal Distribution Amount.........................S-28
Class A-8 Formula Pass-Through Rate...........................S-23
Class B Applied Realized Loss Amount..........................S-37
Class B Certificate Principal Balance.........................S-37
Class B Optimal Balance.......................................S-27
Class B Principal Distribution Amount.........................S-28
Class B Realized Loss Amortization Amount.....................S-37
Class B Unpaid Realized Loss Amount...........................S-37
Class Distribution Amount.....................................S-20
Clean-Up Call Date............................................S-51
Code..........................................................S-52
Combined Loan-to-Value Ratios.................................II-4
Combined Pool Balance.........................................S-27
Compensating Interest.........................................S-46
Cooperative...................................................S-33
Cumulative Realized Loss Trigger Event........................S-36
Current Interest..............................................S-22
Daily Collections.............................................S-44
Deficiency Amount.............................................S-40
Definitive Certificate........................................S-31
Delinquency Advances..........................................S-45
Depositor......................................................S-2
DOL S-53
DTC Participants..............................................S-32
Due for Payment...............................................S-40
ERISA.........................................................S-52
Euroclear Operator............................................S-33
Euroclear Participants........................................S-33
European Depositaries.........................................S-31
Exemptions....................................................S-53
FannieMae.....................................................S-48
FannieMae Guide...............................................S-44
FHLMC.........................................................S-48
Final Certification...........................................S-44
Final Determination...........................................S-51
Financial Intermediary........................................S-31
S-60
<PAGE>
Fixed Rate Group Available Funds Cap..........................S-23
Fixed Rate Pool Balance.......................................S-27
Global Securities..............................................I-1
Holder........................................................S-40
IML S-32
Insured Amounts...............................................S-40
Insured Obligations...........................................S-40
Insured Payments..............................................S-40
Interest Carry Forward Amount.................................S-22
Interest Remittance Amount....................................S-45
LIBOR.........................................................S-30
LIBOR Determination Dates.....................................S-30
Loan Purchase Price...........................................S-42
Loan-to-Value Ratios...................................II-3, II-10
Maximum Insurer Current Reimbursement Amount..................S-22
Monthly Remittance Amount.....................................S-45
Monthly Remittance Date.......................................S-45
Mortgages.....................................................S-15
Net Available Distribution Amount.............................S-41
Net Liquidation Proceeds......................................S-44
Net Losses....................................................S-14
Nonpayment....................................................S-41
Non-U.S. Person................................................I-4
Notes.........................................................S-15
Notice........................................................S-41
Original ARM Pool Balance.....................................S-27
Original Fixed Rate Pool Balance..............................S-27
Original Pool Balance.........................................S-27
Originator.....................................................S-2
Overcollateralization Amount..................................S-35
Participants..................................................S-31
Payment Date..................................................S-20
Percentage Interest...........................................S-20
Plans.........................................................S-52
Pool Balance..................................................S-27
Preference Amount.............................................S-41
Prepayment Assumption........................................III-1
Preservation Expenses.........................................S-46
Principal and Interest Account................................S-44
Principal Remittance Amount...................................S-45
Qualified Replacement Mortgage................................S-43
Rating Agencies...............................................S-54
Realized Loss.................................................S-36
Record Date...................................................S-20
Register......................................................S-20
Registrar.....................................................S-20
Relevant Depositary...........................................S-31
REMIC Opinion.................................................S-42
Remittance Period.............................................S-45
Required Payments.............................................S-41
Residual Interest..............................................S-2
Restricted Group..............................................S-54
Rules.........................................................S-31
Six-Month Rolling Average 90+ Day Delinquency Rate............S-27
Six-Month Rolling Average Excess Spread.......................S-28
Stepdown Date.................................................S-35
S-61
<PAGE>
Step-Up Payment Date..........................................S-23
Sub-Servicers..................................................S-9
Sub-Servicing Agreements.......................................S-9
Substitution Amount...........................................S-43
Targeted Overcollateralization Amount.........................S-35
Telerate Page 3750............................................S-30
Terms and Conditions..........................................S-33
Trust Estate..................................................S-19
U.S. Person....................................................I-4
Weighted average life.........................................S-18
S-62
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX
DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered
ContiMortgage Home Equity Loan Trust 1999-3 Home Equity Loan Pass-Through
Certificates (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, Cedelbank or Euroclear. The Global Securities will be tradable 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 Cedelbank and
Euroclear will be conducted in the ordinary way in accordance with the normal
rules and operating procedures of Cedelbank 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 Cedelbank or Euroclear and
DTC Participants holding Certificates will be effected on a
delivery-against-payment basis through the respective Depositaries of Cedelbank
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, Cedelbank 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
Cedelbank 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.
I-1
<PAGE>
Trading between Cedelbank and/or Euroclear Participants.
Secondary market trading between Cedelbank Participants or Euroclear
Participants will be settled using the procedures applicable to conventional
eurobonds in same-day funds.
Trading between DTC, Seller and Cedelbank or Euroclear
Participants. When Global Securities are to be transferred from the account of a
DTC Participant to the account of a Cedelbank Participant or a Euroclear
Participant, the purchaser will send instructions to Cedelbank or Euroclear
through a Cedelbank Participant or Euroclear Participant at least one business
day prior to settlement. Cedelbank or Euroclear will instruct the Relevant
Depositary, as the case may be, to receive the Global Securities against
payment. Payment will include interest accrued on the Global Securities from and
including the last coupon payment date to and excluding the settlement date, on
the basis of the actual number of days in such accrual period and a year assumed
to consist of 360 days. For transactions settling on the 31st of the month,
payment will include interest accrued to and excluding the first day of the
following month. Payment will then be made by the Relevant Depositary to the DTC
Participant's account against delivery of the Global Securities. After
settlement has been completed, the Global Securities will be credited to the
respective clearing system and by the clearing system, in accordance with its
usual procedures, to the Cedelbank 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 Cedelbank or Euroclear cash debt will be valued
instead as of the actual settlement date.
Cedelbank 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 Cedelbank or Euroclear. Under
this approach, they may take on credit exposure to Cedelbank or Euroclear until
the Global Securities are credited to their account one day later.
As an alternative, if Cedelbank or Euroclear has extended a line
of credit to them, Cedelbank 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, Cedelbank 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 Cedelbank 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 Cedelbank
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 Cedelbank or Euroclear Seller and DTC Purchaser.
Due to time zone differences in their favor, Cedelbank 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 Cedelbank or Euroclear through a Cedelbank Participant or
Euroclear Participant at least one business day prior to settlement. In these
cases Cedelbank 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
I-2
<PAGE>
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 Cedelbank Participant or Euroclear Participant the
following day, and receipt of the cash proceeds in the Cedelbank 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
Cedelbank 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 Cedelbank Participant's or Euroclear Participant's account would instead be
valued as of the actual settlement date.
Finally, day traders that use Cedelbank or Euroclear and that
purchase Global Securities from DTC Participants for delivery to Cedelbank
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 Cedelbank or Euroclear for one day
(until the purchase side of the trade is reflected in their Cedelbank
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
Cedelbank or Euroclear account in order to settle the sale side of the
trade; or
(c) staggering the value dates for the buy and sell sides of
the trade so that the value date for the purchase from the DTC
Participant is at least one day prior to the value date for the sale to
the Cedelbank Participant or Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities
through Cedelbank 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).
I-3
<PAGE>
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, 2000.
Investors are advised to consult their own tax advisors for specific tax advice
concerning their holding and disposing of the Global Securities.
I-4
<PAGE>
ANNEX II
THE HOME EQUITY LOAN POOL-STATISTICAL INFORMATION
HOME EQUITY LOANS - LOAN GROUP I - FIXED RATE
As of the Cut-Off Date, the average Loan Balance was $71,894.11;
the Coupon Rates of such home equity loans ranged from 6.25% to 17.99%; the
weighted average Loan-to-Value Ratio was 75.48%; the weighted average Combined
Loan-to-Value Ratio was 79.42%; the weighted average Coupon Rate was 10.20%; the
weighted average remaining term to maturity was 278.98 months; and the weighted
average original term to maturity was 280.79 months. The remaining terms to
maturity ranged from 57 months to 360 months. The minimum and maximum Loan
Balances as of the Cut-Off Date were $9,500.00 and $498,513.06, respectively. No
home equity loans will mature later than June 19, 2029. 7,632 of the home equity
loans are secured by first mortgages representing 93.08% of the Loan Balance of
the home equity loans and 1,270 of the home equity loans are secured by second
lien mortgages representing in the 6.92% of the Loan Balance Loans.
$469,174,932.85 or 73.31% of the home equity loans by aggregate
Loan Balance are fully-amortizing loans. $170,826,447.03 or 26.69% of the Home
equity loans by aggregate Loan Balance are balloon loans. Substantially all of
the balloon loans amortize over 30 years but mature in 15 years.
HOME EQUITY LOANS - LOAN GROUP II - ADJUSTABLE RATE
As of the Cut-Off Date, the average Loan Balance of the home
equity loans was $106,738.01; the Coupon Rates of such loans ranged from 6.75%
to 16.20%; the weighted average Loan-to-Value Ratio was 79.25%; the weighted
average Coupon Rate of the home equity loans was 10.04%; the weighted average
remaining term to maturity of the home equity loans was 357.1 months; and the
weighted average original term to maturity of the home equity loans was 360.00
months. The remaining terms to maturity of the home equity loans as of the
Cut-Off Date ranged from 344 months to 360 months. The minimum and maximum Loan
Balances of the home equity loans as of the Cut-Off Date were $18,750.00 and
$433,678.21, respectively. No home equity loan will mature later than June 1,
2029. All of the home equity loans are secured by first mortgages.
All of the home equity loans have maximum Coupon Rates. The
weighted average maximum Coupon Rate of the home equity loans was 16.51% with
maximum Coupon Rates that range from 12.75% to 23.20%. The home equity loan have
a weighted average gross margin as of the Cut-Off Date of 6.51%. The gross
margin for the home equity loans range from 1.25% to 12.51%.
Approximately $123,865,253.90 or 77.42% of the home equity loans
by aggregate Loan Balance as of the Cut-Off Date are 2/28 Loans which index is
Six-Month LIBOR. Approximately $112,414.90 or 0.07% of the home equity loans by
aggregate Loan Balance as of the Cut-Off Date are 2/28 Loans which index is 1
year Treasury Bill rate. After the first adjustment, the 2/28 Loans have
periodic reset caps ranging from 1.00% to 3.00%.
Approximately $34,083,296.43 or 21.30% of the home equity loans
by aggregate Loan Balance as of the Cut-Off Date are 3/27 Loans. After the first
adjustment, the 3/27 Loans have periodic reset caps ranging from 1.00% to 3.00%.
Approximately $1,251,226.60 or 0.78% of the home equity loans by
aggregate Loan Balance as of the Cut-Off Date are Six-Month LIBOR Loans. The
Six-Month LIBOR Loans have periodic reset caps ranging from 1.00% to 1.50%.
Approximately $688,086.37 or 0.43% of the home equity loans by
aggregate Loan Balance as of the Cut-Off Date are 1 year Treasury Bill Loans.
The One Year Treasury Bill Loans have periodic reset caps ranging from 1.00% to
2.00%.
II-1
<PAGE>
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES - LOAN GROUP I - FIXED RATE
The geographic distribution of the home equity loans by state, as
of the Cut-Off Date, was as follows:
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
STATE HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
---------------------------------- -------------------- ---------------------- ---------------------
<S> <C> <C> <C>
Arizona 203 $ 15,343,152.13 2.40 %
Arkansas 59 3,046,924.65 0.48
California 535 61,344,582.85 9.59
Colorado 154 14,298,201.33 2.23
Connecticut 72 6,100,019.00 0.95
Delaware 13 884,503.76 0.14
District of Columbia 26 2,110,291.25 0.33
Florida 581 35,711,369.79 5.58
Georgia 437 29,787,667.10 4.65
Hawaii 1 74,816.30 0.01
Idaho 22 1,407,377.87 0.22
Illinois 695 51,003,493.33 7.97
Indiana 381 21,634,952.72 3.38
Iowa 56 3,102,534.27 0.48
Kansas 47 2,915,826.80 0.46
Kentucky 184 11,112,678.39 1.74
Louisiana 144 8,078,801.31 1.26
Maine 21 1,281,910.91 0.20
Maryland 224 19,261,771.55 3.01
Massachusetts 154 12,475,680.68 1.95
Michigan 856 51,071,440.47 7.98
Minnesota 70 6,007,956.90 0.94
Mississippi 93 5,062,485.59 0.79
Missouri 159 8,579,438.73 1.34
Montana 18 1,004,796.69 0.16
Nebraska 48 3,497,501.07 0.55
Nevada 54 6,094,259.00 0.95
New Hampshire 29 1,914,485.88 0.30
New Jersey 201 18,987,659.38 2.97
New Mexico 107 7,656,738.08 1.20
New York 371 32,149,814.35 5.02
North Carolina 474 30,650,834.02 4.79
North Dakota 6 225,758.44 0.04
Ohio 709 50,278,848.29 7.86
Oklahoma 24 1,567,412.10 0.24
Oregon 46 3,366,609.65 0.53
Pennsylvania 575 35,510,066.53 5.55
Rhode Island 28 2,139,184.61 0.33
South Carolina 137 7,670,405.49 1.20
South Dakota 4 218,371.91 0.03
Tennessee 191 12,322,447.44 1.93
Texas 286 20,921,658.38 3.27
Utah 84 7,319,821.97 1.14
Vermont 6 431,926.46 0.07
Virginia 113 8,210,894.86 1.28
Washington 98 10,166,227.95 1.59
West Virginia 41 2,247,826.66 0.35
Wisconsin 62 3,557,992.50 0.56
Wyoming 3 191,960.49 0.03
---------------------------------------------------------------------------------------------------
TOTAL: 8,902 $640,001,379.88 100.00 %
===================================================================================================
</TABLE>
II-2
<PAGE>
ORIGINAL LOAN-TO-VALUE RATIOS - LOAN GROUP I - FIXED RATE
The original loan-to-value ratios as of the date of origination
of the home equity loans (based upon appraisals made at the time of origination
thereof) (the "Loan-to-Value Ratios") as of the Cut-Off Date were distributed as
follows:
<TABLE>
<CAPTION>
RANGE OF NUMBER OF AGGREGATE % OF AGGREGATE
ORIGINAL LTVS HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
0.01% - 5.00% 1 $ 22,299.31 0.00 %
5.01 - 10.00 55 1,067,894.86 0.17
10.01 - 15.00 302 7,337,406.54 1.15
15.01 - 20.00 296 8,466,502.16 1.32
20.01 - 25.00 251 9,152,764.86 1.43
25.01 - 30.00 189 7,090,445.78 1.11
30.01 - 35.00 155 6,791,550.06 1.06
35.01 - 40.00 144 6,486,409.56 1.01
40.01 - 45.00 135 6,716,349.58 1.05
45.01 - 50.00 192 9,262,528.25 1.45
50.01 - 55.00 172 9,155,813.55 1.43
55.01 - 60.00 224 12,321,832.44 1.93
60.01 - 65.00 360 21,449,975.09 3.35
65.01 - 70.00 589 38,886,620.00 6.08
70.01 - 75.00 944 64,942,297.93 10.15
75.01 - 80.00 1,995 161,934,832.48 25.30
80.01 - 85.00 1,264 111,468,772.75 17.42
85.01 - 90.00 1,565 151,684,722.77 23.70
90.01 - 95.00 68 5,564,455.28 0.87
95.01 - 100.00 1 197,906.63 0.03
- ---------------------------------------------------------------------------------------------------
TOTAL: 8,902 $640,001,379.88 100.00 %
===================================================================================================
</TABLE>
II-3
<PAGE>
COMBINED LOAN-TO-VALUE RATIOS - LOAN GROUP I - FIXED RATE
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 Cut-Off
Date were distributed as follows:
<TABLE>
<CAPTION>
RANGE OF NUMBER OF AGGREGATE % OF AGGREGATE
ORIGINAL CLTVS HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- --------------------------- ---------------------- ------------------------ --------------------------
<S> <C> <C> <C> <C>
5.01% - 10.00% 2 $ 36,343.67 0.01 %
10.01 - 15.00 7 106,235.68 0.02
15.01 - 20.00 13 338,839.73 0.05
20.01 - 25.00 21 781,523.48 0.12
25.01 - 30.00 33 1,032,443.31 0.16
30.01 - 35.00 67 2,685,739.08 0.42
35.01 - 40.00 85 3,407,346.39 0.53
40.01 - 45.00 105 4,821,402.85 0.75
45.01 - 50.00 175 7,963,580.44 1.24
50.01 - 55.00 167 8,589,350.36 1.34
55.01 - 60.00 225 12,107,122.04 1.89
60.01 - 65.00 387 22,561,772.27 3.53
65.01 - 70.00 652 40,874,782.87 6.39
70.01 - 75.00 1,031 67,730,229.82 10.58
75.01 - 80.00 2,114 166,241,952.40 25.98
80.01 - 85.00 1,484 119,030,407.74 18.60
85.01 - 90.00 2,168 172,419,314.54 26.94
90.01 - 95.00 159 8,898,970.59 1.39
95.01 - 100.00 7 374,022.62 0.06
- ------------------------------------------------------------------------------------------------------
TOTAL: 8,902 $640,001,379.88 100.00 %
======================================================================================================
</TABLE>
II-4
<PAGE>
DISTRIBUTION OF COUPON RATES -LOAN GROUP I - FIXED RATE
The Coupon Rates borne by the Notes were distributed as follows
as of the Cut-Off Date:
<TABLE>
<CAPTION>
RANGE OF NUMBER OF AGGREGATE % OF AGGREGATE
COUPON RATES HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
-------------------------- ---------------------- ------------------- ---------------------------
<S> <C> <C> <C> <C>
0.01% - 7.00% 12 $ 1,584,266.65 0.25 %
7.01 - 7.50 43 4,810,038.49 0.75
7.51 - 8.00 216 20,536,520.83 3.21
8.01 - 8.50 402 37,910,361.95 5.92
8.51 - 9.00 820 77,048,020.61 12.04
9.01 - 9.50 772 68,549,990.15 10.71
9.51 - 10.00 1,292 104,507,665.38 16.33
10.01 - 10.50 1,086 80,112,879.70 12.52
10.51 - 11.00 1,437 95,881,236.37 14.98
11.01 - 11.50 947 53,501,475.62 8.36
11.51 - 12.00 792 43,212,517.33 6.75
12.01 - 12.50 424 21,328,715.45 3.33
12.51 - 13.00 290 13,257,360.13 2.07
13.01 - 13.50 101 4,784,805.63 0.75
13.51 - 14.00 111 5,287,222.10 0.83
14.01 - 14.50 51 2,417,236.33 0.38
14.51 - 15.00 74 3,694,186.03 0.58
15.01 - 15.50 11 494,610.61 0.08
15.51 - 16.00 16 769,609.74 0.12
16.01 - 16.50 3 169,182.41 0.03
16.51 - 17.00 1 111,978.37 0.02
17.01 and over 1 31,500.00 0.00
-------------------------------------------------------------------------------------------------
TOTAL: 8,902 $640,001,379.88 100.00 %
=================================================================================================
</TABLE>
II-5
<PAGE>
DISTRIBUTION OF LOAN BALANCES - LOAN GROUP I - FIXED RATE
The distribution of the outstanding principal amounts of the home
equity loans as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
RANGE OF NUMBER OF AGGREGATE % OF AGGREGATE
CURRENT BALANCES HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$0.01 - $25,000.00 880 $ 16,676,017.32 2.61 %
25,000.01 - 50,000.00 2,660 101,827,118.16 15.91
50,000.01 - 75,000.00 2,330 143,789,900.90 22.47
75,000.01 - 100,000.00 1,324 114,210,288.04 17.85
100,000.01 - 125,000.00 712 79,102,051.87 12.36
125,000.01 - 150,000.00 383 52,116,295.05 8.14
150,000.01 - 175,000.00 184 29,643,116.53 4.63
175,000.01 - 200,000.00 129 24,139,475.98 3.77
200,000.01 - 225,000.00 69 14,582,906.48 2.28
225,000.01 - 250,000.00 85 20,145,504.25 3.15
250,000.01 - 275,000.00 56 14,609,510.24 2.28
275,000.01 - 300,000.00 32 9,121,109.36 1.43
300,000.01 - 325,000.00 25 7,808,452.18 1.22
325,000.01 - 350,000.00 9 3,045,441.42 0.48
350,000.01 - 400,000.00 21 7,845,179.04 1.23
400,000.01 - 450,000.00 2 840,500.00 0.13
450,000.01 and over 1 498,513.06 0.08
================================================================================================
TOTAL: 8,902 $640,001,379.88 100.00%
================================================================================================
</TABLE>
TYPES OF MORTGAGED PROPERTIES - LOAN GROUP I - FIXED RATE
The Properties securing the home equity loans as of the Cut-Off
Date were of the property types as follows:
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
PROPERTY TYPES HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- ------------------------------- ----------------------- ------------------ ---------------------------
<S> <C> <C> <C>
Condominium 59 $ 5,020,353.85 0.78 %
Manufactured Housing 385 22,846,613.76 3.57
Mixed Use 11 1,394,431.83 0.22
Planned Unit Development 109 10,656,430.53 1.67
Single Family Attached 186 9,832,600.47 1.54
Single Family Detached 7,705 553,146,377.94 86.43
2-4 Family 447 37,104,571.50 5.80
- ------------------------------------------------------------------------------------------------------
TOTAL: 8,902 $640,001,379.88 100.00 %
======================================================================================================
</TABLE>
II-6
<PAGE>
DISTRIBUTION OF MONTHS OF SEASONING - LOAN GROUP I - FIXED RATE
The distribution of the number of months of seasoning of the home
equity loans as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
RANGE OF NUMBER OF AGGREGATE % OF AGGREGATE
MONTHS OF SEASONING HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- ------------------------------- ----------------------- ------------------ ---------------------------
<S> <C> <C> <C> <C>
0 - 1 4,413 $312,753,832.55 48.87%
2 - 12 4,463 325,395,271.83 50.84
13 - 24 23 1,770,120.19 0.28
25 - 36 3 82,155.31 0.01
- ------------------------------------------------------------------------------------------------------
TOTAL: 8,902 $640,001,379.88 100.00%
======================================================================================================
</TABLE>
DISTRIBUTION OF REMAINING MONTHS TO MATURITY - LOAN GROUP I - FIXED RATE
The distribution of the number of remaining months to maturity of
the home equity loans as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
RANGE OF
REMAINING MONTHS TO NUMBER OF AGGREGATE % OF AGGREGATE
MATURITY HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- ------------------------ ---------------------- --------------------- ---------------------------
<S> <C> <C> <C> <C>
1 - 120 346 $ 11,779,670.46 1.84%
121 - 180 3,742 231,244,891.67 36.13
181 - 240 913 48,394,938.61 7.56
241 - 300 80 5,288,686.36 0.83
301 - 360 3,821 343,293,192.78 53.64
=================================================================================================
TOTAL: 8,902 $640,001,379.88 100.00%
=================================================================================================
</TABLE>
II-7
<PAGE>
OCCUPANCY STATUS - LOAN GROUP I - FIXED RATE
The occupancy status of the Properties securing the home equity
loans as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
OCCUPANCY STATUS HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- ---------------------------- ------------------------ -------------------- ---------------------------
<S> <C> <C> <C>
Investor Owned 600 $ 34,775,756.78 5.43 %
Owner Occupied 8,302 605,225,623.10 94.57
======================================================================================================
TOTAL: 8,902 $ 640,001,379.88 100.00 %
======================================================================================================
</TABLE>
LIEN POSITION - LOAN GROUP I - FIXED RATE
The lien positions of the Mortgages of the home equity loans as
of the Cut-Off Date were as follows:
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
LIEN POSITION HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- -------------------------------- ---------------------- ---------------------- ------------------------
<S> <C> <C> <C>
First Lien 7,632 $595,710,611.68 93.08 %
Second Lien 1,270 44,290,768.20 6.92
=======================================================================================================
TOTAL: 8,902 $640,001,379.88 100.00 %
=======================================================================================================
</TABLE>
DOCUMENTATION LEVEL - LOAN GROUP I - FIXED RATE
The documentation levels of the home equity loans as of the
Cut-Off Date were as follows:
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
DOCUMENTATION LEVEL HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- --------------------------- --------------------------- ---------------------- ------------------------
<S> <C> <C> <C>
Limited Documentation 534 $ 48,055,199.56 7.51 %
No Documentation 261 21,607,519.63 3.38
Full Documentation 8,107 570,338,660.69 89.12
=======================================================================================================
TOTAL: 8,902 $ 640,001,379.88 100.00 %
=======================================================================================================
</TABLE>
PREPAYMENT PENALTY - LOAN GROUP I - FIXED RATE
The home equity loans with prepayment penalties as of the Cut-Off
Date were as follows:
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
PREPAYMENT PENALTY HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- --------------------------------- ----------------------- ---------------------- ------------------------
<S> <C> <C> <C>
Yes 6,226 $467,404,945.65 73.03 %
No 2,676 172,596,434.23 26.97
=========================================================================================================
TOTAL: 8,902 $640,001,379.88 100.00 %
=========================================================================================================
</TABLE>
II-8
<PAGE>
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES
- LOAN GROUP II - ADJUSTABLE RATE
The geographic distribution of the home equity loans by state, as
of the Cut-Off Date, was as follows:
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
STATE HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Arizona 57 $ 5,480,541.39 3.43 %
Arkansas 3 189,728.61 0.12
California 275 45,943,405.80 28.71
Colorado 41 4,850,795.62 3.03
Connecticut 13 1,605,502.73 1.00
District of Columbia 3 642,754.18 0.40
Florida 60 4,912,413.55 3.07
Georgia 25 2,600,815.77 1.63
Idaho 20 1,485,775.15 0.93
Illinois 83 8,584,232.97 5.37
Indiana 30 1,893,242.26 1.18
Iowa 4 306,595.37 0.19
Kansas 12 908,023.94 0.57
Kentucky 15 1,474,315.96 0.92
Louisiana 10 779,701.88 0.49
Maine 1 95,423.97 0.06
Maryland 10 1,426,746.20 0.89
Massachusetts 18 1,745,656.64 1.09
Michigan 166 12,143,620.13 7.59
Minnesota 33 2,991,591.14 1.87
Mississippi 14 1,005,997.54 0.63
Missouri 39 2,366,922.81 1.48
Montana 6 414,063.81 0.26
Nebraska 1 83,630.25 0.05
Nevada 12 1,543,413.10 0.96
New Hampshire 2 186,325.21 0.12
New Jersey 14 1,840,136.39 1.15
New Mexico 24 2,070,464.43 1.29
New York 24 3,378,168.03 2.11
North Carolina 14 1,133,400.35 0.71
North Dakota 1 51,962.75 0.03
Ohio 79 6,202,448.53 3.88
Oklahoma 14 1,120,172.52 0.70
Oregon 31 3,037,162.32 1.90
Pennsylvania 38 2,579,079.79 1.61
Rhode Island 6 578,067.03 0.36
South Carolina 9 493,291.64 0.31
South Dakota 2 118,887.69 0.07
Tennessee 9 825,222.92 0.52
Texas 60 5,365,302.69 3.35
Utah 97 12,529,016.79 7.83
Virginia 15 1,606,446.06 1.00
Washington 65 8,161,250.50 5.10
West Virginia 5 362,443.82 0.23
Wisconsin 36 2,670,817.97 1.67
Wyoming 3 215,300.00 0.13
--------------------------------------------------------------------------------------------------
TOTAL: 1,499 $ 160,000,278.20 100.00 %
==================================================================================================
</TABLE>
II-9
<PAGE>
ORIGINAL LOAN-TO-VALUE RATIOS - LOAN GROUP II - ADJUSTABLE RATE
The original loan-to-value ratios as of the date of origination
of the home equity loans (based upon appraisals made at the time of origination
thereof) (the "Loan-to-Value Ratios") as of the Cut-Off Date were distributed as
follows:
<TABLE>
<CAPTION>
RANGE OF NUMBER OF AGGREGATE % OF AGGREGATE
ORIGINAL LTV'S HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
15.01% - 20.00% 1 $ 36,000.00 0.02 %
20.01 - 25.00 1 52,473.85 0.03
25.01 - 30.00 1 30,402.24 0.02
30.01 - 35.00 3 195,398.97 0.12
35.01 - 40.00 10 596,790.35 0.37
40.01 - 45.00 9 452,359.58 0.28
45.01 - 50.00 19 1,137,420.39 0.71
50.01 - 55.00 17 1,292,828.53 0.81
55.01 - 60.00 36 3,222,049.18 2.01
60.01 - 65.00 68 5,461,645.35 3.41
65.01 - 70.00 122 11,314,624.82 7.07
70.01 - 75.00 228 21,623,873.55 13.51
75.01 - 80.00 466 52,366,850.14 32.73
80.01 - 85.00 265 31,243,845.39 19.53
85.01 - 90.00 247 30,178,258.90 18.86
90.01 - 95.00 6 795,456.96 0.50
--------------------------------------------------------------------------------------------------
TOTAL: 1,499 $ 160,000,278.20 100.00 %
==================================================================================================
</TABLE>
II-10
<PAGE>
DISTRIBUTION OF COUPON RATES - LOAN GROUP II - ADJUSTABLE RATE
The Coupon Rates borne by the Notes were distributed as follows
as of the Cut-Off Date:
<TABLE>
<CAPTION>
RANGE OF CURRENT NUMBER OF AGGREGATE % OF AGGREGATE
COUPON RATES HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
0.01% - 7.00% 1 $ 288,737.43 0.18 %
7.51 - 8.00 13 1,533,535.28 0.96
8.01 - 8.50 39 5,075,819.86 3.17
8.51 - 9.00 137 19,958,610.49 12.47
9.01 - 9.50 200 24,364,971.12 15.23
9.51 - 10.00 356 40,293,878.96 25.18
10.01 - 10.50 229 24,967,122.54 15.60
10.51 - 11.00 231 22,060,686.16 13.79
11.01 - 11.50 110 9,076,426.15 5.67
11.51 - 12.00 95 6,754,486.29 4.22
12.01 - 12.50 36 2,605,952.87 1.63
12.51 - 13.00 25 1,495,133.65 0.93
13.01 - 13.50 10 575,978.96 0.36
13.51 - 14.00 7 419,548.48 0.26
14.01 - 14.50 2 50,389.56 0.03
14.51 - 15.00 6 355,237.10 0.22
15.01 - 15.50 1 22,393.52 0.01
16.01 - 16.50 1 101,369.78 0.06
- ------------------------------------------------------------------------------------------------------
TOTAL: 1,499 $ 160,000,278.20 100.00 %
======================================================================================================
</TABLE>
II-11
<PAGE>
DISTRIBUTION OF MAXIMUM COUPON RATES - LOAN GROUP II - ADJUSTABLE RATE
The maximum rates borne by the Notes were distributed as follows
as of the Cut-Off Date:
<TABLE>
<CAPTION>
RANGE OF MAXIMUM COUPON NUMBER OF AGGREGATE % OF AGGREGATE
RATES HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
12.01% - 13.00% 1 $ 288,737.43 0.18 %
13.01 - 14.00 5 439,131.18 0.27
14.01 - 15.00 99 13,427,232.19 8.39
15.01 - 16.00 397 46,314,554.50 28.95
16.01 - 17.00 503 56,777,431.42 35.49
17.01 - 18.00 316 29,782,070.70 18.61
18.01 - 19.00 125 9,760,159.89 6.10
19.01 - 20.00 31 2,028,630.80 1.27
20.01 - 21.00 14 807,967.95 0.50
21.01 - 22.00 6 225,586.90 0.14
22.01 - 23.00 1 47,405.46 0.03
23.01 - 24.00 1 101,369.78 0.06
=========================================================================================================
TOTAL: 1,499 $ 160,000,278.20 100.00 %
=========================================================================================================
</TABLE>
II-12
<PAGE>
MONTH OF NEXT COUPON RATE CHANGE - LOAN GROUP II - ADJUSTABLE RATE
The next coupon adjustment dates of the home equity loans were as
follows:
<TABLE>
<CAPTION>
RANGE OF NEXT NUMBER OF AGGREGATE % OF AGGREGATE
COUPON ADJUSTMENT HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
July, 1999 2 $ 251,216.42 0.16 %
August, 1999 3 214,640.36 0.13
September, 1999 2 192,837.13 0.12
October, 1999 4 569,653.22 0.36
November, 1999 2 143,025.00 0.09
December, 1999 2 567,940.84 0.35
January, 2000 1 68,061.27 0.04
March, 2000 3 606,565.69 0.38
April, 2000 7 1,142,887.30 0.71
May, 2000 1 134,245.58 0.08
June, 2000 7 829,347.64 0.52
July, 2000 8 638,652.14 0.40
August, 2000 19 2,194,743.59 1.37
September, 2000 32 3,998,177.75 2.50
October, 2000 50 6,749,127.50 4.22
November, 2000 54 5,701,050.29 3.56
December, 2000 63 7,703,517.34 4.81
January, 2001 112 13,742,655.73 8.59
February, 2001 103 10,598,511.64 6.62
March, 2001 242 24,948,039.31 15.59
April, 2001 205 20,610,377.60 12.88
May, 2001 192 20,099,123.07 12.56
June, 2001 41 4,615,194.61 2.88
July, 2001 4 360,744.62 0.23
August, 2001 2 302,785.03 0.19
September, 2001 10 811,014.43 0.51
October, 2001 17 2,055,144.53 1.28
November, 2001 11 1,430,701.25 0.89
December, 2001 25 2,689,953.82 1.68
January, 2002 30 2,504,977.05 1.57
February, 2002 31 2,920,894.05 1.83
March, 2002 60 5,629,828.38 3.52
April, 2002 74 7,237,261.52 4.52
May, 2002 66 6,124,577.50 3.83
June, 2002 14 1,612,805.00 1.01
- -------------------------------------------------------------------------------------------------------
TOTAL: 1,499 $ 160,000,278.20 100.00 %
=======================================================================================================
</TABLE>
II-13
<PAGE>
DISTRIBUTION OF LOAN BALANCES - LOAN GROUP II - ADJUSTABLE RATE
The distribution of the outstanding principal amounts of the home
equity loans as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
RANGE OF NUMBER OF AGGREGATE % OF AGGREGATE
CURRENT BALANCES HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$0.01 - $25,000.00 24 $ 543,361.15 0.34 %
25,000.01 - 50,000.00 217 8,742,481.48 5.46
50,000.01 - 75,000.00 335 20,842,036.14 13.03
75,000.01 - 100,000.00 305 26,790,584.41 16.74
100,000.01 - 125,000.00 200 22,442,776.40 14.03
125,000.01 - 150,000.00 136 18,569,891.16 11.61
150,000.01 - 175,000.00 75 12,117,367.12 7.57
175,000.01 - 200,000.00 54 10,099,970.77 6.31
200,000.01 - 225,000.00 40 8,456,939.40 5.29
225,000.01 - 250,000.00 44 10,482,423.33 6.55
250,000.01 - 275,000.00 19 4,963,735.37 3.10
275,000.01 - 300,000.00 20 5,749,598.99 3.59
300,000.01 - 325,000.00 12 3,754,372.85 2.35
325,000.01 - 350,000.00 9 3,029,332.00 1.89
350,000.01 - 400,000.00 7 2,565,563.38 1.60
400,000.01 - 450,000.00 2 849,844.25 0.53
------------------------------------------------------------------------------------------------
TOTAL: 1,499 $160,000,278.20 100.00 %
================================================================================================
</TABLE>
TYPES OF MORTGAGED PROPERTIES - LOAN GROUP II - ADJUSTABLE RATE
The Properties securing the home equity loans as of the Cut-Off
Date were of the property types as follows:
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
PROPERTY TYPES HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Condominium 31 $ 2,923,367.06 1.83 %
Manufactured Housing 73 6,020,810.45 3.76
Planned Unit Development 49 7,800,906.93 4.88
Single Family Attached 16 1,675,597.43 1.05
Single Family Detached 1,250 132,941,343.05 83.09
Two-to-Four Family 80 8,638,253.28 5.40
-------------------------------------------------------------------------------------------------------
TOTAL: 1,499 $ 160,000,278.20 100.00 %
=======================================================================================================
</TABLE>
II-14
<PAGE>
DISTRIBUTION OF MONTHS OF SEASONING - LOAN GROUP II - ADJUSTABLE RATE
The distribution of the number of months of seasoning of the home
equity loans as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
RANGE OF MONTHS OF NUMBER OF AGGREGATE % OF AGGREGATE
SEASONING HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
0 - 1 592 $ 60,201,103.33 37.63%
2 - 12 894 97,809,280.97 61.13
13 - 24 13 1,989,893.90 1.24
- ---------------------------------------------------------------------------------------------------------
TOTAL: 1,499 $ 160,000,278.20 100.00%
=========================================================================================================
</TABLE>
DISTRIBUTION OF REMAINING MONTHS TO MATURITY - LOAN GROUP II - ADJUSTABLE RATE
The distribution of the number of remaining months to maturity of
the home equity loans as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
RANGE OF REMAINING MONTHS NUMBER OF AGGREGATE % OF AGGREGATE
TO MATURITY HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
353 and below 171 $ 20,982,192.69 13.11 %
354 65 7,131,751.54 4.46
355 90 10,961,412.00 6.85
356 144 16,498,849.20 10.31
357 134 13,527,958.55 8.45
358 303 30,697,010.89 19.19
359 279 27,836,607.76 17.40
360 313 32,364,495.57 20.23
- ------------------------------------------------------------------------------------------------------
TOTAL: 1,499 $ 160,000,278.20 100.00 %
======================================================================================================
</TABLE>
DISTRIBUTION OF ORIGINAL MONTHS TO MATURITY - LOAN GROUP II - ADJUSTABLE RATE
The distribution of the number of original months to maturity of
the home equity loans as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
ORIGINAL MONTHS TO MATURITY HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
360 1,499 $ 160,000,278.20 100.00 %
- -------------------------------------------------------------------------------------------------------------
TOTAL: 1,499 $ 160,000,278.20 100.00 %
=============================================================================================================
</TABLE>
II-15
<PAGE>
LIEN POSITION - LOAN GROUP II - ADJUSTABLE RATE
The lien positions of the mortgages of the home equity loans as
of the Cut-Off Date were as follows:
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
LIEN POSITION HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
First Lien 1,499 $ 160,000,278.20 100.00 %
- -------------------------------------------------------------------------------------------------------------
TOTAL: 1,499 $ 160,000,278.20 100.00 %
=============================================================================================================
</TABLE>
DISTRIBUTION OF MINIMUM COUPON RATES - LOAN GROUP II - ADJUSTABLE RATE
The minimum rates borne by the Notes were distributed as follows
as of the Cut-Off Date:
<TABLE>
<CAPTION>
RANGE OF NUMBER OF AGGREGATE % OF AGGREGATE
MINIMUM COUPONS HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
6.01% - 7.00% 2 $ 342,594.09 0.21 %
7.01 - 8.00 13 1,533,535.28 0.96
8.01 - 9.00 176 25,034,430.35 15.65
9.01 - 10.00 556 64,658,850.08 40.41
10.01 - 11.00 459 46,973,952.04 29.36
11.01 - 12.00 205 15,830,912.44 9.89
12.01 - 13.00 61 4,101,086.52 2.56
13.01 - 14.00 17 995,527.44 0.62
14.01 - 15.00 8 405,626.66 0.25
15.01 - 16.00 1 22,393.52 0.01
16.01 - 17.00 1 101,369.78 0.06
- -------------------------------------------------------------------------------------------------------------
TOTAL: 1,499 $ 160,000,278.20 100.00 %
=============================================================================================================
</TABLE>
II-16
<PAGE>
OCCUPANCY STATUS - LOAN GROUP II - ADJUSTABLE RATE
The occupancy status of the Properties securing the home equity
loans as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
OCCUPANCY STATUS HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investor Owned 122 $ 9,991,027.42 6.24 %
Primary Residence 1,377 150,009,250.78 93.76
- -------------------------------------------------------------------------------------------------------------
TOTAL: 1,499 $ 160,000,278.20 100.00 %
=============================================================================================================
</TABLE>
DISTRIBUTION OF MARGINS - LOAN GROUP II - ADJUSTABLE RATE
The margins borne by the Notes were distributed as follows as of the Cut-Off
Date:
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
RANGE OF MARGINS HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
0.01% - 4.00% 2 $ 254,678.32 0.16 %
4.01 - 5.00 54 7,386,667.89 4.62
5.01 - 6.00 357 44,281,131.69 27.68
6.01 - 7.00 601 65,145,707.64 40.72
7.01 - 8.00 372 33,787,993.61 21.12
8.01 - 9.00 84 6,813,863.18 4.26
9.01 - 10.00 17 1,612,440.15 1.01
10.01 - 11.00 10 617,759.91 0.39
11.01 - 12.00 1 22,393.52 0.01
12.01 - 13.00 1 77,642.29 0.05
- ---------------------------------------------------------------------------------------------------------
TOTAL: 1,499 $ 160,000,278.20 100.00 %
=========================================================================================================
</TABLE>
PRODUCT TYPE - LOAN GROUP II - ADJUSTABLE RATE
The product types of the home equity loans as of the Cut-Off Date
were as follows:
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
PRODUCT TYPE HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1 Year T-Bill 6 $ 688,086.37 0.43%
2/28 T-Bill 1 112,414.90 0.07
2/28 LIBOR 1,135 123,865,253.90 77.42
3/27 LIBOR 348 34,083,296.43 21.30
6 Month LIBOR 9 1,251,226.60 0.78
- -------------------------------------------------------------------------------------------------------------
TOTAL: 1,499 $ 160,000,278.20 100.00 %
=============================================================================================================
</TABLE>
II-17
<PAGE>
INITIAL PERIODIC CAP - LOAN GROUP II - ADJUSTABLE RATE
The initial rate caps borne by the Notes were as follows as of the Cut-Off
Date:
<TABLE>
<CAPTION>
INITIAL NUMBER OF AGGREGATE % OF AGGREGATE
RATE CAP HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1.00% 49 $ 6,092,158.26 3.81 %
1.50 106 12,399,788.01 7.75
2.00 53 4,846,474.78 3.03
3.00 1,281 135,596,811.63 84.75
5.00 1 53,856.66 0.03
6.00 9 1,011,188.86 0.63
- -------------------------------------------------------------------------------------------------------------
TOTAL: 1,499 $ 160,000,278.20 100.00 %
=============================================================================================================
</TABLE>
SUBSEQUENT PERIODIC CAP - LOAN GROUP II - ADJUSTABLE RATE
The periodic rate caps borne by the Notes were as follows as of the Cut-Off
Date:
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
PERIODIC CAP HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1.00% 1,350 $ 141,156,689.05 88.22 %
1.50 116 15,394,122.27 9.62
2.00 6 564,752.49 0.35
3.00 27 2,884,714.39 1.80
- -------------------------------------------------------------------------------------------------------------
TOTAL: 1,499 $ 160,000,278.20 100.00 %
=============================================================================================================
</TABLE>
DOCUMENTATION LEVEL - LOAN GROUP II - ADJUSTABLE RATE
The documentation levels of the home equity loans as of the
Cut-Off Date were as follows:
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
DOCUMENTATION HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Full Documentation 1,255 $ 131,372,124.90 82.11 %
Limited Documentation 123 14,922,676.20 9.33
No Documentation 121 13,705,477.10 8.57
- -------------------------------------------------------------------------------------------------------------
TOTAL: 1,499 $ 160,000,278.20 100.00 %
=============================================================================================================
</TABLE>
II-18
<PAGE>
PREPAYMENT PENALTY - LOAN GROUP II - ADJUSTABLE RATE
The home equity loans with prepayment penalties were as follows:
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
PREPAYMENT PENALTY HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Yes 1,261 $ 134,769,684.35 84.23 %
No 238 25,230,593.85 15.77
- -------------------------------------------------------------------------------------------------------------
TOTAL: 1,499 $ 160,000,278.20 100.00%
=============================================================================================================
</TABLE>
II-19
<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 "C" CREDIT GRADE "D" CREDIT GRADE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
GENERAL REPAYMENT Has a good credit Has a good credit Pays the majority Marginal credit Designed to provide
but might have some but might have some of accounts on time history which is a borrower with
minor delinquency. minor delinquency. but has some offset by other poor credit history
30-and/or 60-day positive attributes. an opportunity to
delinquency. correct past credit
problems through
lower monthly
payments.
- -----------------------------------------------------------------------------------------------------------------------------------
EXISTING MORTGAGE Current at time of Current at Current at Cannot exceed four Must be paid in
LOANS application. Cannot application time and application time 30-day full from loan
exceed 1 x 30 in a maximum of two and a maximum of delinquencies or proceeds and no
last 12 months. 30-day delinquencies three 30-day one 60-day more than 119 days
in the past 12 delinquencies in delinquency in the of delinquency.
months. the past 12 months. past 12 months.
- -----------------------------------------------------------------------------------------------------------------------------------
NON-MORTGAGE CREDIT Should be paid as Major credit and Major credit and Major credit and Major and minor
agreed. Minor installment debt installment debt installment can credit delinquency
delinquencies should be current can exhibit some exhibit some minor is acceptable, but
acceptable. but may exhibit some minor 30-and/or 30-and/or 90-day must demonstrate
minor 30-day 60-day delinquency. Minor some payment
delinquency. Minor delinquency. Minor credit may exhibit regularity.
credit may exhibit credit may exhibit more serious
some minor up to 90-day delinquency.
delinquency. delinquency.
- -----------------------------------------------------------------------------------------------------------------------------------
BANKRUPTCY FILINGS. None Charge-offs, Discharged more Discharged more Discharged prior to
judgements, liens, than two years with than two years with closing.
and former reestablished re-established
bankruptcies are credit. credit.
generally
unacceptable.
- -----------------------------------------------------------------------------------------------------------------------------------
DEBT SERVICE-TO Generally not to Generally not to Generally not to Generally not to Generally not to
INCOME RATIO exceed 45%. exceed 45%. exceed 45%. exceed 45%. exceed 50%.
- -----------------------------------------------------------------------------------------------------------------------------------
MAXIMUM
LOAN-TO-VALUE RATIO:
- -----------------------------------------------------------------------------------------------------------------------------------
OWNER-OCCUPIED Generally 80% (or Generally 80% (or Generally 80% (or Generally 75% (or Generally 65% (or
90%) for dwelling 90%) for dwelling 85%) for a 1 to 4 80%) for a 1 to 4 70%) for a 1 to 4
residence; 80% for a residence; 75% for a family dwelling family dwelling family dwelling
condominium. condominium. residence. residence. residence.
- -----------------------------------------------------------------------------------------------------------------------------------
NON-OWNER OCCUPIED N/A Generally 70% for a Generally 65% for a Generally 65% for a N/A
1 to 2 family 1 to 2 family 1 to 2 family
dwelling, 65% for a dwelling, 60% for a dwelling, 65% for a
3 to 4 family. 3 to 4 family. 3 to 4 family.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
II-20
<PAGE>
DISTRIBUTION OF CREDIT GRADES
LOAN GROUP I - FIXED RATE
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
CREDIT GRADE HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- ---------------------------------- ---------------------- -------------------- ------------------------
<S> <C> <C> <C>
A 5,693 $ 447,674,274.08 69.95 %
B 1,964 123,950,190.87 19.37
C 1,078 60,903,085.03 9.52
D 167 7,473,829.90 1.17
=======================================================================================================
TOTAL: 8,902 $ 640,001,379.88 100.00 %
=======================================================================================================
</TABLE>
LOAN GROUP II - ADJUSTABLE RATE
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
CREDIT GRADE HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
A 882 $ 102,626,837.05 64.14 %
B 368 38,005,045.83 23.75
C 222 17,666,320.85 11.04
D 27 1,702,074.47 1.06
- --------------------------------------------------------------------------------------------------------
TOTAL: 1,499 $ 160,000,278.20 100.00 %
========================================================================================================
</TABLE>
II-21
<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% Fixed
Prepayment Assumption assumes constant prepayment rates of 4% per annum of the
then outstanding principal balance of the fixed-rate home equity loans in the
first month of the life of such home equity 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 such home
equity loans, 100% Fixed Prepayment Assumption assumes a constant prepayment
rate of 20% per annum each month. A 100% Adjustable Prepayment Assumption
assumes constant prepayment rates of 4% per annum of the then outstanding
principal balance of the adjustable-rate home equity loans in the first month of
the life of such home equity loans and an additional approximate 1.824% per
annum in each month thereafter until the eighteenth month. Beginning in the
eighteenth month and in each month thereafter during the life of such home
equity loans, 100% Adjustable Prepayment Assumption assumes a constant
prepayment rate of 35% per annum each month.
As used in the table below, 0% Prepayment Assumption assumes
prepayment rates equal to 0% of the related Prepayment Assumption i.e., no
prepayments. Correspondingly, 130% Prepayment Assumption assumes prepayment
rates equal to 130% of the 100% related 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 June 17, 1999; (iii)
distributions on the Certificates are made on the 25th day of each month
regardless of the day on which the Payment Date actually occurs, commencing July
25, 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, the
Premium Amount and the Master Servicing Fee; (v) the prepayment rates with
respect to the Fixed Rate Loans are a multiple of the applicable Fixed
Prepayment Assumption and with respect to Adjustable Rate Loans are a multiple
of the applicable Adjustable Prepayment Assumption each 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; (ix) the Coupon Rate for each Adjustable Rate
Loan is adjusted on its next rate adjustments date (and on subsequent rate
adjustment dates, if necessary) to equal the sum of (a) six-month LIBOR (at an
assumed level of 5.2950%) and (b) the respective gross margin (such sum being
subject to the applicable periodic adjustments cap and maximum interest
III-1
<PAGE>
rate); (x) the Pass-Through Rate for the Class A-8 Certificates remains constant
at their initial rate (the assumed level of one-month LIBOR is 4.9550%) up to
and including the Clean-Up Call Date; and (xi) no Cumulative Realized Loss
Trigger Event occurs.
III-2
<PAGE>
PREPAYMENT SCENARIOS
<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>
Fixed Rate Loans (1) 0% 35% 65% 100% 130% 150% 175% 200%
Adjustable Rate Loans (2) 0% 25% 50% 75% 100% 125% 150% 175%
</TABLE>
(1) As a percentage of the Fixed Prepayment Assumption.
(2) As a percentage of the Adjustable Prepayment Assumption.
III-3
<PAGE>
REPRESENTATIVE LOAN POOLS
LOAN GROUP I - FIXED RATE
<TABLE>
<CAPTION>
Gross Net Original Remaining Original
Principal Coupon Coupon Term to Term to Amortization Amortization
Pool Balance Rate Rate Maturity Maturity Term Method
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1 $10,348,826.36 10.337% 9.792% 114 112 114 Fully Amortizing
2 61,909,106.35 10.278 9.733 180 178 180 Fully Amortizing
3 48,334,861.00 10.346 9.801 240 238 240 Fully Amortizing
4 5,288,674.96 9.979 9.434 299 297 299 Fully Amortizing
5 343,292,452.62 9.982 9.437 360 358 360 Fully Amortizing
6 169,277,715.35 10.574 10.029 180 178 360 Balloon
7 142,563.75 9.734 9.189 120 120 180 Balloon
8 25,130.91 8.630 8.085 60 58 120 Balloon
9 1,380,668.70 12.119 11.574 125 124 240 Balloon
------------
Total $640,000,000.00
</TABLE>
LOAN GROUP II - ADJUSTABLE RATE
<TABLE>
<CAPTION>
Current Next
Gross Net Month to Periodic Periodic Original Remaining
Principal Coupon Coupon Rate Gross Life Rate Life Rate Rate Rate Term to Term to
Pool Balance Rate Rate Change Margin Cap Floor Cap Cap Maturity Maturity
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 251,215.98 9.375% 8.830% 2 7.375% 15.875% 9.375% 1.250% 1.250% 360 356
2 214,639.99 10.243 9.698 3 7.138 17.243 10.243 1.323 1.553 360 354
3 192,836.79 9.545 9.000 4 6.654 15.927 9.545 1.382 1.382 360 356
4 569,652.23 9.929 9.384 5 6.406 16.799 9.929 1.870 1.542 360 354
5 143,024.75 10.545 10.000 6 8.660 16.924 10.545 1.000 1.000 360 360
6 124,948,001.64 10.013 9.468 21 6.552 16.454 10.013 2.808 1.076 360 357
7 $33,680,628.62 10.128 9.583 33 6.320 16.733 10.121 2.808 1.117 360 357
------------
Total $160,000,000.00
<CAPTION>
Amortization
Method
- ------------
<C>
Fully Amortizing
Fully Amortizing
Fully Amortizing
Fully Amortizing
Fully Amortizing
Fully Amortizing
Fully Amortizing
</TABLE>
III-4
<PAGE>
The following tables set forth the percentages of the initial principal
amount of the Class A Certificates and Class B 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 PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
Class A-1 Scenario Class A-2 Scenario
Scenario I II III IV V VI VII VIII Scenario I II III IV V VI VII VIII
- --------------------------------------------------------------- ----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Payment Date Payment Date
Initial Percent 100 100 100 100 100 100 100 100 Initial Percent 100 100 100 100 100 100 100 100
25-Jun-00 91 75 62 47 33 24 13 2 25-Jun-00 100 100 100 100 100 100 100 100
25-Jun-01 86 51 22 0 0 0 0 0 25-Jun-01 100 100 100 85 43 15 0 0
25-Jun-02 83 29 0 0 0 0 0 0 25-Jun-02 100 100 82 13 0 0 0 0
25-Jun-03 79 10 0 0 0 0 0 0 25-Jun-03 100 100 36 0 0 0 0 0
25-Jun-04 75 0 0 0 0 0 0 0 25-Jun-04 100 87 0 0 0 0 0 0
25-Jun-05 70 0 0 0 0 0 0 0 25-Jun-05 100 61 0 0 0 0 0 0
25-Jun-06 65 0 0 0 0 0 0 0 25-Jun-06 100 36 0 0 0 0 0 0
25-Jun-07 60 0 0 0 0 0 0 0 25-Jun-07 100 18 0 0 0 0 0 0
25-Jun-08 55 0 0 0 0 0 0 0 25-Jun-08 100 3 0 0 0 0 0 0
25-Jun-09 50 0 0 0 0 0 0 0 25-Jun-09 100 0 0 0 0 0 0 0
25-Jun-10 44 0 0 0 0 0 0 0 25-Jun-10 100 0 0 0 0 0 0 0
25-Jun-11 37 0 0 0 0 0 0 0 25-Jun-11 100 0 0 0 0 0 0 0
25-Jun-12 30 0 0 0 0 0 0 0 25-Jun-12 100 0 0 0 0 0 0 0
25-Jun-13 21 0 0 0 0 0 0 0 25-Jun-13 100 0 0 0 0 0 0 0
25-Jun-14 0 0 0 0 0 0 0 0 25-Jun-14 28 0 0 0 0 0 0 0
25-Jun-15 0 0 0 0 0 0 0 0 25-Jun-15 18 0 0 0 0 0 0 0
25-Jun-16 0 0 0 0 0 0 0 0 25-Jun-16 7 0 0 0 0 0 0 0
25-Jun-17 0 0 0 0 0 0 0 0 25-Jun-17 0 0 0 0 0 0 0 0
25-Jun-18 0 0 0 0 0 0 0 0 25-Jun-18 0 0 0 0 0 0 0 0
25-Jun-19 0 0 0 0 0 0 0 0 25-Jun-19 0 0 0 0 0 0 0 0
25-Jun-20 0 0 0 0 0 0 0 0 25-Jun-20 0 0 0 0 0 0 0 0
25-Jun-21 0 0 0 0 0 0 0 0 25-Jun-21 0 0 0 0 0 0 0 0
25-Jun-22 0 0 0 0 0 0 0 0 25-Jun-22 0 0 0 0 0 0 0 0
25-Jun-23 0 0 0 0 0 0 0 0 25-Jun-23 0 0 0 0 0 0 0 0
25-Jun-24 0 0 0 0 0 0 0 0 25-Jun-24 0 0 0 0 0 0 0 0
25-Jun-25 0 0 0 0 0 0 0 0 25-Jun-25 0 0 0 0 0 0 0 0
25-Jun-26 0 0 0 0 0 0 0 0 25-Jun-26 0 0 0 0 0 0 0 0
25-Jun-27 0 0 0 0 0 0 0 0 25-Jun-27 0 0 0 0 0 0 0 0
25-Jun-28 0 0 0 0 0 0 0 0 25-Jun-28 0 0 0 0 0 0 0 0
25-Jun-29 0 0 0 0 0 0 0 0 25-Jun-29 0 0 0 0 0 0 0 0
Weighted Weighted
Average Life Average Life
(years)(1) (years)(1)
(To Maturity): 9.05 2.21 1.39 1.02 0.85 0.77 0.70 0.64 (To Maturity): 15.30 6.64 3.78 2.54 2.00 1.75 1.53 1.36
</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-5
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
Class A-3 Scenario Class A-4 Scenario
Scenario I II III IV V VI VII VIII Scenario I II III IV V VI VII VIII
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Payment Date Payment Date
Initial Initial
Percent 100 100 100 100 100 100 100 100 Percent 100 100 100 100 100 100 100 100
25-Jun-00 100 100 100 100 100 100 100 100 25-Jun-00 100 100 100 100 100 100 100 100
25-Jun-01 100 100 100 100 100 100 71 18 25-Jun-01 100 100 100 100 100 100 100 100
25-Jun-02 100 100 100 100 34 0 0 0 25-Jun-02 100 100 100 100 100 64 0 0
25-Jun-03 100 100 100 44 0 0 0 0 25-Jun-03 100 100 100 100 41 0 0 0
25-Jun-04 100 100 99 0 0 0 0 0 25-Jun-04 100 100 100 70 0 0 0 0
25-Jun-05 100 100 52 0 0 0 0 0 25-Jun-05 100 100 100 0 0 0 0 0
25-Jun-06 100 100 13 0 0 0 0 0 25-Jun-06 100 100 100 0 0 0 0 0
25-Jun-07 100 100 0 0 0 0 0 0 25-Jun-07 100 100 81 0 0 0 0 0
25-Jun-08 100 100 0 0 0 0 0 0 25-Jun-08 100 100 37 0 0 0 0 0
25-Jun-09 100 79 0 0 0 0 0 0 25-Jun-09 100 100 0 0 0 0 0 0
25-Jun-10 100 54 0 0 0 0 0 0 25-Jun-10 100 100 0 0 0 0 0 0
25-Jun-11 100 29 0 0 0 0 0 0 25-Jun-11 100 100 0 0 0 0 0 0
25-Jun-12 100 6 0 0 0 0 0 0 25-Jun-12 100 100 0 0 0 0 0 0
25-Jun-13 100 0 0 0 0 0 0 0 25-Jun-13 100 70 0 0 0 0 0 0
25-Jun-14 100 0 0 0 0 0 0 0 25-Jun-14 100 0 0 0 0 0 0 0
25-Jun-15 100 0 0 0 0 0 0 0 25-Jun-15 100 0 0 0 0 0 0 0
25-Jun-16 100 0 0 0 0 0 0 0 25-Jun-16 100 0 0 0 0 0 0 0
25-Jun-17 94 0 0 0 0 0 0 0 25-Jun-17 100 0 0 0 0 0 0 0
25-Jun-18 74 0 0 0 0 0 0 0 25-Jun-18 100 0 0 0 0 0 0 0
25-Jun-19 53 0 0 0 0 0 0 0 25-Jun-19 100 0 0 0 0 0 0 0
25-Jun-20 36 0 0 0 0 0 0 0 25-Jun-20 100 0 0 0 0 0 0 0
25-Jun-21 17 0 0 0 0 0 0 0 25-Jun-21 100 0 0 0 0 0 0 0
25-Jun-22 0 0 0 0 0 0 0 0 25-Jun-22 94 0 0 0 0 0 0 0
25-Jun-23 0 0 0 0 0 0 0 0 25-Jun-23 54 0 0 0 0 0 0 0
25-Jun-24 0 0 0 0 0 0 0 0 25-Jun-24 9 0 0 0 0 0 0 0
25-Jun-25 0 0 0 0 0 0 0 0 25-Jun-25 0 0 0 0 0 0 0 0
25-Jun-26 0 0 0 0 0 0 0 0 25-Jun-26 0 0 0 0 0 0 0 0
25-Jun-27 0 0 0 0 0 0 0 0 25-Jun-27 0 0 0 0 0 0 0 0
25-Jun-28 0 0 0 0 0 0 0 0 25-Jun-28 0 0 0 0 0 0 0 0
25-Jun-29 0 0 0 0 0 0 0 0 25-Jun-29 0 0 0 0 0 0 0 0
Weighted Weighted
Average Average
Life Life
(years)(1) (years)(1)
(To (To
Maturity): 20.33 11.24 6.17 3.99 3.00 2.55 2.18 1.91 Maturity): 24.13 14.39 8.77 5.32 4.00 3.33 2.67 2.32
- -----------------------------
</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-6
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
Class A-5 Scenario
Scenario I II III IV V VI VII VIII
- ---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Payment Date
Initial
Percent 100 100 100 100 100 100 100 100
25-Jun-00 100 100 100 100 100 100 100 100
25-Jun-01 100 100 100 100 100 100 100 100
25-Jun-02 100 100 100 100 100 100 58 0
25-Jun-03 100 100 100 100 100 65 0 0
25-Jun-04 100 100 100 100 42 0 0 0
25-Jun-05 100 100 100 93 0 0 0 0
25-Jun-06 100 100 100 35 0 0 0 0
25-Jun-07 100 100 100 6 0 0 0 0
25-Jun-08 100 100 100 0 0 0 0 0
25-Jun-09 100 100 96 0 0 0 0 0
25-Jun-10 100 100 57 0 0 0 0 0
25-Jun-11 100 100 22 0 0 0 0 0
25-Jun-12 100 100 0 0 0 0 0 0
25-Jun-13 100 100 0 0 0 0 0 0
25-Jun-14 100 40 0 0 0 0 0 0
25-Jun-15 100 16 0 0 0 0 0 0
25-Jun-16 100 0 0 0 0 0 0 0
25-Jun-17 100 0 0 0 0 0 0 0
25-Jun-18 100 0 0 0 0 0 0 0
25-Jun-19 100 0 0 0 0 0 0 0
25-Jun-20 100 0 0 0 0 0 0 0
25-Jun-21 100 0 0 0 0 0 0 0
25-Jun-22 100 0 0 0 0 0 0 0
25-Jun-23 100 0 0 0 0 0 0 0
25-Jun-24 100 0 0 0 0 0 0 0
25-Jun-25 61 0 0 0 0 0 0 0
25-Jun-26 7 0 0 0 0 0 0 0
25-Jun-27 0 0 0 0 0 0 0 0
25-Jun-28 0 0 0 0 0 0 0 0
25-Jun-29 0 0 0 0 0 0 0 0
Weighted
Average
Life
(years)(1)
(To
Maturity): 26.26 15.28 11.29 6.91 5.00 4.22 3.36 2.69
- -----------------------------
<CAPTION>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
Class A-6 Scenario
Scenario I II III IV V VI VII VIII
- --------------- ----------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C> <C>
Payment Date
Initial
Percent 100 100 100 100 100 100 100 100
25-Jun-00 100 100 100 100 100 100 100 100
25-Jun-01 100 100 100 100 100 100 100 100
25-Jun-02 100 100 100 100 100 100 100 80
25-Jun-03 100 100 100 100 100 100 91 54
25-Jun-04 100 100 100 100 100 86 49 21
25-Jun-05 100 100 100 100 87 56 28 9
25-Jun-06 100 100 100 100 63 39 18 5
25-Jun-07 100 100 100 100 55 35 18 5
25-Jun-08 100 100 100 86 43 27 12 3
25-Jun-09 100 100 100 69 33 17 6 0
25-Jun-10 100 100 100 54 23 10 2 0
25-Jun-11 100 100 100 43 15 5 0 0
25-Jun-12 100 100 95 33 9 2 0 0
25-Jun-13 100 100 80 25 5 0 0 0
25-Jun-14 100 100 46 11 0 0 0 0
25-Jun-15 100 100 38 7 0 0 0 0
25-Jun-16 100 97 32 4 0 0 0 0
25-Jun-17 100 85 26 2 0 0 0 0
25-Jun-18 100 74 20 0 0 0 0 0
25-Jun-19 100 64 15 0 0 0 0 0
25-Jun-20 100 55 12 0 0 0 0 0
25-Jun-21 100 48 8 0 0 0 0 0
25-Jun-22 100 40 6 0 0 0 0 0
25-Jun-23 100 33 3 0 0 0 0 0
25-Jun-24 100 27 1 0 0 0 0 0
25-Jun-25 100 20 0 0 0 0 0 0
25-Jun-26 100 13 0 0 0 0 0 0
25-Jun-27 71 7 0 0 0 0 0 0
25-Jun-28 34 1 0 0 0 0 0 0
25-Jun-29 0 0 0 0 0 0 0 0
Weighted 5
Average
Life
(years)(1)
(To Call): 28.08 19.03 13.90 9.38 6.92 5.81 4.80 3.9
(To
Maturity):
28.59 22.21 16.46 11.93 8.95 7.38 5.81 4.46
</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-7
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
Class A-7 Scenario
Scenario I II III IV V VI VII VIII
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Payment Date
Initial
Percent 100 100 100 100 100 100 100 100
25-Jun-00 100 100 100 100 100 100 100 100
25-Jun-01 100 100 100 100 100 100 100 100
25-Jun-02 100 100 100 100 100 100 100 100
25-Jun-03 99 96 92 90 88 88 88 89
25-Jun-04 99 92 86 81 77 75 72 70
25-Jun-05 97 84 76 67 60 55 50 46
25-Jun-06 95 76 64 52 43 38 32 25
25-Jun-07 89 54 39 25 16 12 9 8
25-Jun-08 82 40 24 12 6 4 1 0
25-Jun-09 75 30 14 5 2 1 0 0
25-Jun-10 68 22 9 2 1 0 0 0
25-Jun-11 61 16 5 1 0 0 0 0
25-Jun-12 54 11 3 1 0 0 0 0
25-Jun-13 47 8 2 0 0 0 0 0
25-Jun-14 0 0 0 0 0 0 0 0
25-Jun-15 0 0 0 0 0 0 0 0
25-Jun-16 0 0 0 0 0 0 0 0
25-Jun-17 0 0 0 0 0 0 0 0
25-Jun-18 0 0 0 0 0 0 0 0
25-Jun-19 0 0 0 0 0 0 0 0
25-Jun-20 0 0 0 0 0 0 0 0
25-Jun-21 0 0 0 0 0 0 0 0
25-Jun-22 0 0 0 0 0 0 0 0
25-Jun-23 0 0 0 0 0 0 0 0
25-Jun-24 0 0 0 0 0 0 0 0
25-Jun-25 0 0 0 0 0 0 0 0
25-Jun-26 0 0 0 0 0 0 0 0
25-Jun-27 0 0 0 0 0 0 0 0
25-Jun-28 0 0 0 0 0 0 0 0
25-Jun-29 0 0 0 0 0 0 0 0
Weighted
Average
Life
(years)(1)
(To Call): 12.32 8.86 7.67 6.77 6.11 5.54 4.91 4.36
(To
Maturity): 12.32 8.87 7.68 6.87 6.45 6.25 6.08 5.95
- -----------------------------
<CAPTION>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
Class A-8 Scenario
Scenario I II III IV V VI VII VIII
- ----------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C> <C>
Payment Date
Initial Percent 100 100 100 100 100 100 100 100
25-Jun-00 97 92 87 82 77 72 67 61
25-Jun-01 96 83 70 58 48 38 29 21
25-Jun-02 96 74 56 41 29 19 12 7
25-Jun-03 95 67 45 30 19 12 7 3
25-Jun-04 94 60 36 22 13 7 3 1
25-Jun-05 93 54 30 16 8 4 1 0
25-Jun-06 93 48 24 12 5 2 1 0
25-Jun-07 91 43 20 9 3 1 0 0
25-Jun-08 90 38 16 6 2 1 0 0
25-Jun-09 89 35 13 5 1 0 0 0
25-Jun-10 88 31 11 3 1 0 0 0
25-Jun-11 86 28 9 2 1 0 0 0
25-Jun-12 84 25 7 2 0 0 0 0
25-Jun-13 82 22 6 1 0 0 0 0
25-Jun-14 77 20 5 1 0 0 0 0
25-Jun-15 74 18 4 0 0 0 0 0
25-Jun-16 72 16 3 0 0 0 0 0
25-Jun-17 69 14 2 0 0 0 0 0
25-Jun-18 66 12 2 0 0 0 0 0
25-Jun-19 63 10 1 0 0 0 0 0
25-Jun-20 59 9 1 0 0 0 0 0
25-Jun-21 55 8 1 0 0 0 0 0
25-Jun-22 50 6 0 0 0 0 0 0
25-Jun-23 45 5 0 0 0 0 0 0
25-Jun-24 39 4 0 0 0 0 0 0
25-Jun-25 33 3 0 0 0 0 0 0
25-Jun-26 25 2 0 0 0 0 0 0
25-Jun-27 17 1 0 0 0 0 0 0
25-Jun-28 8 0 0 0 0 0 0 0
25-Jun-29 0 0 0 0 0 0 0 0
Weighted
Average Life
(years)(1)
(To Call): 20.73 8.34 4.84 3.32 2.53 2.06 1.72 1.48
(To Maturity): 20.85 8.85 5.06 3.47 2.63 2.11 1.76 1.50
</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-8
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
Class B Scenario
Scenario I II III IV V VI VII VIII
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Payment Date
Initial Percent 100 100 100 100 100 100 100 100
25-Jun-00 100 100 100 100 100 100 100 100
25-Jun-01 100 100 100 100 100 100 100 100
25-Jun-02 100 100 100 100 100 100 100 100
25-Jun-03 100 100 100 80 59 46 34 25
25-Jun-04 100 100 94 62 42 31 21 11
25-Jun-05 100 100 80 49 30 21 10 2
25-Jun-06 100 100 68 38 22 11 3 0
25-Jun-07 100 100 57 29 13 4 0 0
25-Jun-08 100 91 48 23 6 0 0 0
25-Jun-09 100 82 41 16 2 0 0 0
25-Jun-10 100 74 34 10 0 0 0 0
25-Jun-11 100 66 29 5 0 0 0 0
25-Jun-12 100 60 24 2 0 0 0 0
25-Jun-13 100 53 20 0 0 0 0 0
25-Jun-14 100 35 8 0 0 0 0 0
25-Jun-15 100 31 5 0 0 0 0 0
25-Jun-16 100 28 2 0 0 0 0 0
25-Jun-17 96 24 0 0 0 0 0 0
25-Jun-18 91 21 0 0 0 0 0 0
25-Jun-19 85 17 0 0 0 0 0 0
25-Jun-20 80 14 0 0 0 0 0 0
25-Jun-21 74 10 0 0 0 0 0 0
25-Jun-22 67 7 0 0 0 0 0 0
25-Jun-23 60 4 0 0 0 0 0 0
25-Jun-24 52 1 0 0 0 0 0 0
25-Jun-25 43 0 0 0 0 0 0 0
25-Jun-26 34 0 0 0 0 0 0 0
25-Jun-27 23 0 0 0 0 0 0 0
25-Jun-28 6 0 0 0 0 0 0 0
25-Jun-29 0 0 0 0 0 0 0 0
Weighted Average Life
(years)(1) (To Call): 24.56 14.21 9.41 6.35 4.93 4.34 3.89 3.65
(To Maturity): 24.67 14.78 9.68 6.69 5.20 4.56 4.09 3.82
- -----------------------------
</TABLE>
(1) The weighted average life of the Class B 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 B Certificates.
III-9
<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 7 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
<TABLE>
<CAPTION>
PAGE
<S> <C>
SUMMARY OF PROSPECTUS .............................. 1
RISK FACTORS ....................................... 7
DESCRIPTION OF THE CERTIFICATES .................... 10
General ........................................... 11
Classes of Certificates ........................... 11
Distributions of Principal and Interest ........... 13
Book Entry Registration ........................... 14
List of Owners of Certificates .................... 15
THE TRUSTS ......................................... 15
Mortgage Loans .................................... 15
Contracts ......................................... 18
Mortgage-Backed Securities ........................ 19
Other Mortgage Securities ......................... 19
CREDIT ENHANCEMENT ................................. 20
SERVICING OF MORTGAGE LOANS AND
CONTRACTS ........................................ 25
Payments on Mortgage Loans ........................ 25
Advances .......................................... 26
Collection and Other Servicing Procedures ......... 26
Primary Mortgage Insurance ........................ 28
Standard Hazard Insurance ......................... 28
Title Insurance Policies .......................... 30
Claims Under Primary Mortgage Insurance
Policies and Standard Hazard Insurance
Policies; Other Realization Upon Defaulted
Loan .......................................... 30
Realization Upon or Sale of Defaulted
Multifamily Loans ................................ 30
Servicing Compensation and Payment of
Expenses ......................................... 31
Master Servicer ................................... 31
ADMINISTRATION ..................................... 32
Assignment of Mortgage Assets ..................... 32
Evidence as to Compliance ......................... 33
The Trustee ....................................... 33
Administration of the Certificate Account ......... 34
Reports ........................................... 36
Forward Commitments; Pre-Funding .................. 36
Servicer Events of Default ........................ 36
Rights Upon Servicer Event of Default ............. 37
Amendment ......................................... 37
Termination ....................................... 38
USE OF PROCEEDS .................................... 38
THE DEPOSITOR ...................................... 38
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
<S> <C>
CERTAIN LEGAL ASPECTS OF THE
MORTGAGE ASSETS .................................. 38
General ........................................... 38
Foreclosure ...................................... 39
Soldiers' and Sailors' Civil Relief Act .......... 44
The Contracts .................................... 45
The Title I Program .............................. 47
LEGAL INVESTMENT MATTERS ........................... 52
ERISA CONSIDERATIONS ............................... 53
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES ..................................... 54
Federal Income Tax Consequences For REMIC
Certificates ..................................... 54
Taxation of Regular Certificates ................. 56
Taxation of Residual Certificates ................ 61
Treatment of Certain Items of REMIC Income
and Expense ................................... 62
Tax-Related Restrictions on Transfer of
Residual Certificates ......................... 64
Sale or Exchange of a Residual Certificate ....... 66
Taxes That May Be Imposed on the REMIC
Pool .......................................... 66
Liquidation of the REMIC Pool .................... 67
Administrative Matters ........................... 67
Limitations on Deduction of Certain Expenses...... 68
Taxation of Certain Foreign Investors ............ 68
Backup Withholding ............................... 69
Reporting Requirements ........................... 69
Federal Income Tax Consequences for
Certificates as to Which No REMIC Election
Is Made ....................................... 70
Standard Certificates ............................ 70
Premium and Discount ............................. 71
Stripped Certificates ............................ 73
Reporting Requirements and Backup
Withholding ................................... 75
Taxation of Certain Foreign Investors ............ 75
Taxation of Securities Classified as Partnership
Interests ..................................... 76
PLAN OF DISTRIBUTION ............................... 76
LEGAL MATTERS ...................................... 76
FINANCIAL INFORMATION .............................. 77
INDEX TO LOCATION OF PRINCIPAL
DEFINED TERMS .................................... 78
</TABLE>
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.
<PAGE>
AVAILABLE INFORMATION
The Depositor is subject to the informational requirements of the
Securities Exchange Act of 1934 (the "Exchange Act") and in accordance
therewith files reports and other information with the Securities and Exchange
Commission (the "Commission"). Such reports and other information filed by the
Depositor can be inspected and copied at the public reference facilities
maintained by the Commission at its Public Reference Section, 450 Fifth Street,
N.W., Washington, D.C. 20549, and its Regional Offices located as follows:
Chicago Regional Office, 500 West Madison, 14th Floor, Chicago, Illinois 60661;
New York Regional Office, Seven World Trade Center, New York, New York 10048.
Copies of such material can also be obtained at prescribed rates from the
Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549, and electronically through the Commission's Electronic Data
Gathering, Analysis and Retrieval System at the Commission's web site
(http:\\www.sec.gov). The Depositor does not intend to send any financial
reports to Owners.
This Prospectus does not contain all of the information set forth in the
Registration Statement (of which this Prospectus forms a part) and exhibits
thereto which the Depositor has filed with the Commission under the Securities
act of 1933 (the "Securities Act") and to which reference is hereby made.
REPORTS TO OWNERS
The Trustee or other designated person will be required to provide
periodic unaudited reports concerning the Certificates and the Trust to all
registered holders of Certificates of the related series. See
"Administration--Reports."
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed with respect to each respective Trust pursuant to
Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act subsequent to the date
of this Prospectus and prior to the termination of the offering of the
securities of such Trust offered hereby shall be deemed to be incorporated by
reference into this Prospectus when delivered with respect to such Trust. Any
statement contained in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Prospectus.
Any person receiving a copy of this Prospectus may obtain, without charge,
upon written or oral request, a copy of any of the documents incorporated by
reference herein, except for the exhibits to such documents (other than the
documents expressly incorporated therein by reference). Requests should be
directed to ContiSecurities Asset Funding Corp., 277 Park Avenue, 38th Floor,
New York, New York 10172 (telephone number (212) 207-2840).
<PAGE>
SUMMARY OF PROSPECTUS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the Prospectus Supplement relating to a particular series of Certificates and
to the related Agreement which will be prepared in connection with each series
of Certificates. Unless otherwise specified, capitalized terms used and not
defined in this Summary of Prospectus have the meanings given to them in this
Prospectus. An index indicating where certain capitalized terms used herein are
defined appears in Appendix A hereto.
SECURITIES.................. Asset Backed Certificates, issuable from time
to time in series, in fully registered form or
book entry only form, in authorized
denominations, as described in the Prospectus
Supplement (the "Certificates"). Each Certificate
will represent a beneficial ownership interest in
a trust (a "Trust") created from time to time
pursuant to a pooling and servicing agreement or
trust agreement (each, an "Agreement").
THE DEPOSITOR............... ContiSecurities Asset Funding Corp. (the
"Depositor") is a Delaware corporation. The
Depositor's principal executive offices are
located at 277 Park Avenue, 38th Floor, New York,
New York, 10172; telephone number (212) 207-2840.
See "The Depositor" herein. The Depositor or its
affiliates may retain or hold for sale from time
to time one or more classes of a series of
Certificates.
THE SERVICER................ The entity or entities named as the Servicer in
the Prospectus Supplement (the "Servicer"), will
act as servicer, with respect to the Mortgage
Loans and Contracts included in the related
Trust. The Servicer may be an affiliate of the
Depositor and may be a seller of Mortgage Assets
to the Depositor (each, a "Seller").
THE MASTER SERVICER......... A "Master Servicer" may be specified in the
related Prospectus Supplement for the related
series of Certificates.
THE TRUSTEE................. The trustee (the "Trustee") for each series of
Certificates will be specified in the related
Prospectus Supplement.
TRUST ASSETS................ The assets of a Trust will be mortgage-related
assets (the "Mortgage Assets") consisting of one
or more of the following types of assets:
A. The Mortgage Loans....... "Mortgage Loans" may include: (i) conventional
(i.e., not insured or guaranteed by any
governmental agency) Mortgage Loans secured by
one-to-four family residential properties; (ii)
conventional multifamily mortgage loans
("Conventional Multifamily Loans") or mortgages
insured by the Federal Housing Administration
(the "FHA") ("FHA-Insured Multifamily Loans" and
together with the Conventional Multifamily Loans,
the "Multifamily Loans"); (iii) Mortgage Loans
secured by security interests in shares issued by
private, non-profit, cooperative housing
corporations ("Cooperatives") and in the related
proprietary leases or occupancy agreements
granting
1
<PAGE>
exclusive rights to occupy specific dwelling
units in such Cooperatives' buildings; and, (iv)
Mortgage Loans secured by junior liens on the
related mortgaged properties, including Title I
Loans and other types of home improvement retail
installment contracts. The Mortgage Loans may be
located in any one of the 50 states, the
District of Columbia or the Commonwealth of
Puerto Rico. See "The Trusts--Mortgage Loans"
herein.
B. Contracts................ Contracts may include conditional sales
contracts and installment sales or loan
agreements or participation interests therein
secured by new or used Manufactured Homes (as
defined herein). Contracts may be conventional
(i.e., not insured or guaranteed by any
government agency) or insured by the FHA,
including Title I Contracts, or partially
guaranteed by the Veterans Administration ("VA"),
as specified in the related Prospectus
Supplement. See "The Trusts--Contracts" herein.
C. Mortgage-Backed
Securities.................. "Mortgage-Backed Securities" (or "MBS") may
include (i) private (that is, not guaranteed or
insured by the United States or any agency or
instrumentality thereof) mortgage participations,
mortgage pass-through certificates or other
mortgage-backed securities or (ii) certificates
insured or guaranteed by Federal Home Loan
Mortgage Corporation ("FHLMC") or Federal
National Mortgage Association ("FNMA") or
Government National Mortgage Association
("GNMA"). See "The Trusts-- Mortgage-Backed
Securities" herein.
D. Other
Mortgage Securities......... Other Mortgage Securities may include other
securities that directly or indirectly represent
an ownership interest in, or are secured by and
payable from, mortgage loans on real property or
mortgage-backed securities, such as residual
interests in issuances of collateralized mortgage
obligations or mortgage pass-through
certificates. See "The Trusts--Other Mortgage
Securities" herein.
Trust assets may also include reinvestment
income, reserve funds, cash accounts, insurance
policies, guaranties, letters of credit or other
assets as described in the related Prospectus
Supplement.
The related Prospectus Supplement for a series
of Certificates will describe the Mortgage
Assets to be included in the Trust for such
series.
THE CERTIFICATES............ The Certificates of any series may be issued in
one or more classes, as specified in the
Prospectus Supplement. One or more classes of
Certificates of each series (i) may be entitled
to receive distributions allocable only to
principal, only to interest or to any combination
thereof; (ii) may be entitled to receive
distributions only of prepayments of principal
throughout the lives of the Certificates or
during specified periods; (iii) may be
subordinated in the right to receive
distributions of scheduled payments of principal,
prepayments of principal, interest or any
2
<PAGE>
combination thereof to one or more other classes
of Certificates of such series throughout the
lives of the Certificates or during specified
periods; (iv) may be entitled to receive such
distributions only after the occurrence of
events specified in the Prospectus Supplement;
(v) may be entitled to receive distributions in
accordance with a schedule or formula or on the
basis of collections from designated portions of
the assets in the related Trust; (vi) as to
Certificates entitled to distributions allocable
to interest, may be entitled to receive interest
at a fixed rate or a rate that is subject to
change from time to time; (vii) may accrue
interest, with such accrued interest added to
the principal or notional amount of the
Certificates, and no payments being made thereon
until certain other classes of the series have
been paid in full; and (viii) as to Certificates
entitled to distributions allocable to interest,
may be entitled to distributions allocable to
interest only after the occurrence of events
specified in the Prospectus Supplement and may
accrue interest until such events occur, in each
case as specified in the related Prospectus
Supplement. The timing and amounts of such
distributions may vary among classes, over time,
or otherwise as specified in the related
Prospectus Supplement.
DISTRIBUTIONS ON
THE CERTIFICATES............ The related Prospectus Supplement will specify
(i) whether distributions on the Certificates
entitled thereto will be made monthly, quarterly,
semi-annually or at other intervals and dates out
of the payments received in respect of the
Mortgage Assets included in the related Trust and
other assets, if any, pledged for the benefit of
the related Owners of Certificates; (ii) the
amount allocable to payments of principal and
interest on any Distribution Date; and (iii)
whether all distributions will be made pro rata
to Owners of Certificates of the class entitled
thereto.
The aggregate original principal balance of the
Certificates will equal the aggregate
distributions allocable to principal that such
Certificates will be entitled to receive; the
Certificates will have an aggregate original
principal balance equal to or less than the
aggregate unpaid principal balance of the
related Mortgage Assets (plus amounts held in a
Pre-Funding Account, if any) as of the first day
of the month of creation of the Trust; and the
Certificates will bear interest in the aggregate
at a rate (the "Pass-Through Rate") equal to the
interest rate borne by the related Mortgage
Assets net of servicing fees and any other
specified amounts.
PRE-FUNDING ACCOUNT......... A Trust may enter into an agreement (each, a
"Pre-Funding Agreement") with the Depositor
whereby the Depositor will agree to transfer
additional Mortgage Assets to such Trust
following the date on which such Trust is
established and the related Certificates are
issued. Any Pre-Funding Agreement will require
that any Mortgage Loans so transferred conform to
the requirements specified in such Pre-Funding
Agreement. If a Pre-Funding Agreement is to be
utilized, the related Trustee
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will be required to deposit in a segregated
account (each, a "Pre-Funding Account") all or a
portion of the proceeds received by the Trustee
in connection with the sale of one or more
classes of Certificates of the related series;
subsequently, the additional Mortgage Assets
will be transferred to the related Trust in
exchange for money released to the Depositor
from the related Pre-Funding Account. Each
Pre-Funding Agreement will set a specified
period during which any such transfers must
occur. If all moneys originally deposited to
such Pre-Funding Account are not used by the end
of such specified period, then any remaining
moneys will be applied as a mandatory prepayment
of a class or classes of Certificates as
specified in the related Prospectus Supplement.
The specified period for the acquisition by a
Trust of additional Mortgage Loans will
generally not exceed three months from the date
such Trust is established.
OPTIONAL TERMINATION........ The Servicer, the Seller, the Depositor, or, if
specified in the related Prospectus Supplement,
the Owners of a related class of Certificates or
a credit enhancer may at their respective options
effect early retirement of a series of
Certificates through the purchase of the Mortgage
Assets in the related Trust. See
"Administration--Termination" herein.
MANDATORY TERMINATION....... The Trustee, the Servicer or certain other
entities specified in the related Prospectus
Supplement may be required to effect early
retirement of a series of Certificates by
soliciting competitive bids for the purchase of
the assets of the related Trust or otherwise. See
"Administration--Termination" herein.
ADVANCES.................... The Servicer of the Mortgage Loans and
Contracts will be obligated (but only to the
extent set forth in the related Prospectus
Supplement) to advance delinquent installments of
principal and/or interest (less applicable
servicing fees) on the Mortgage Loans and
Contracts in a Trust. Any such obligation to make
advances may be limited to amounts due to the
Owners of Certificates of the related series, to
amounts deemed to be recoverable from late
payments or liquidation proceeds, to specified
periods or to any combination thereof, in each
case as specified in the related Prospectus
Supplement. Any such advance will be recoverable
as specified in the related Prospectus
Supplement. See "Servicing of Mortgage Loans and
Contracts" herein.
CREDIT ENHANCEMENT.......... If specified in the related Prospectus
Supplement, a series of Certificates, or certain
classes within such series, may have the benefit
of one or more types of credit enhancement
("Credit Enhancement"), including, but not
limited to, overcollateralization, cross support,
mortgage pool insurance, special hazard
insurance, a bankruptcy bond, reserve funds,
other insurance, guaranties and similar
instruments and arrangements. Credit Enhancement
also may be provided in the form of subordina-
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tion of one or more classes of Certificates in a
series under which losses are first allocated to
any Subordinated Certificates up to a specified
limit. The protection against losses afforded by
any such Credit Enhancement will be limited as
described in the related Prospectus Supplement.
See "Credit Enhancement" herein.
BOOK ENTRY REGISTRATION..... Certificates of one or more classes of a series
may be issued in book entry form ("Book Entry
Certificates") in the name of a clearing agency
(a "Clearing Agency") registered with the
Securities and Exchange Commission, or its
nominee. Transfers and pledges of Book Entry
Certificates may be made only through entries on
the books of the Clearing Agency in the name of
brokers, dealers, banks and other organizations
eligible to maintain accounts with the Clearing
Agency ("Clearing Agency Participants") or their
nominees. Transfers and pledges by purchasers and
other beneficial owners of Book Entry
Certificates ("Beneficial Owners") other than
Clearing Agency Participants may be effected only
through Clearing Agency Participants. All
references to the Owners of Certificates shall
mean Beneficial Owners to the extent Beneficial
Owners may exercise their rights through a
Clearing Agency. Except as otherwise specified in
this Prospectus or a related Prospectus
Supplement, the term "Owners" shall be deemed to
include Beneficial Owners. See "Risk
Factors--Book Entry Registration" and
"Description of the Certificates--Book Entry
Registration" herein.
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES.............. Federal income tax consequences will depend on,
among other factors, whether one or more
elections are made to treat a Trust or specified
portions thereof as a "real estate mortgage
investment conduit" ("REMIC") under the Internal
Revenue Code of 1986, as amended (the "Code"),
or, if no REMIC election is made, whether the
Certificates are considered to be Standard
Certificates, Stripped Certificates or
Partnership Interests. The related Prospectus
Supplement for each series of Certificates will
specify whether one or more REMIC elections will
be made. See "Certain Federal Income Tax
Consequences" herein and in the related
Prospectus Supplement.
ERISA CONSIDERATIONS........ A fiduciary of any employee benefit plan
subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), or
the Code should carefully review with its own
legal advisors whether the purchase or holding of
Certificates could give rise to a transaction
prohibited or otherwise impermissible under ERISA
or the Code. Certain classes of Certificates may
not be transferred unless the Trustee and the
Depositor are furnished with a letter of
representation or an opinion of counsel to the
effect that such transfer will not result in a
violation of the prohibited transaction
provisions of ERISA and the Code and will not
subject the Trustee, the Depositor or
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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
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priority of the security interest in each Manufactured Home securing a
Contract. A breach of any such warranty that materially adversely affects any
Contract would create an obligation of the Seller to repurchase such Contract
unless such breach is cured. If any related Credit Enhancement is exhausted and
recovery of amounts due on the Contracts is dependent on repossession and
resale of Manufactured Homes securing Contracts that are in default, certain
other factors may limit the ability of the Trust to realize upon the
Manufactured Homes or may limit the amount realized to less than the amount
due. See "Certain Legal Aspects of the Mortgage Assets--The Contracts" herein.
Limited Liquidity. There will be no market for the Certificates of any
series prior to the issuance thereof, and there can be no assurance that a
secondary market will develop or, if it does develop, that it will provide
liquidity of investment or will continue for the life of the Certificates of
such series. The market value of the Certificates will fluctuate with changes
in prevailing rates of interest. Consequently, the sale of Certificates in any
market that may develop may be at a discount from the Certificates' par value
or purchase price. Owners of Certificates generally have no right to request
redemption of Certificates, and the Certificates are subject to redemption only
under the limited circumstances described in the related Prospectus Supplement.
In addition, the Certificates will not be listed on any securities exchange.
Limited Assets. Owners of Certificates of each series must rely upon
distributions on the related Mortgage Assets, together with the other specific
assets pledged for the benefit of such series (which assets may be subject to
release from such pledge prior to payment in full of the Certificates), for the
payment of principal of, and interest on, that series of Certificates. If the
assets comprising the Trust are insufficient to make payments on such
Certificates, no other assets of the Depositor will be available for payment of
the deficiency. Because payments of principal will be applied to classes of
outstanding Certificates of a series in the priority specified in the related
Prospectus Supplement, a deficiency may have a disproportionately greater
effect on the Certificates of classes having lower priority in payment. In
addition, due to the priority of payments and the allocation of losses,
defaults experienced on the assets comprising a Trust may have a
disproportionate effect on a specified class or classes within such series.
Certain of the Mortgage Loans included in a Trust, particularly those
secured by Multifamily Properties, may not be fully amortizing (or may not
amortize at all) over their terms to maturity and, thus, will require
substantial payments of principal and interest (that is, balloon payments) at
their stated maturity. Mortgage Loans of this type involve a greater degree of
risk than self-amortizing loans because the ability of a Mortgagor to make a
balloon payment typically will depend upon its ability either to fully
refinance the loan or to sell the related Mortgaged Property at a price
sufficient to permit the Mortgagor to make the balloon payment. The ability of
a Mortgagor to accomplish either of these goals will be affected by a number of
factors, including the value of the related Mortgaged Property, the level of
available mortgage rates at the time of sale or refinancing, the Mortgagor's
equity in the related Mortgaged Property, prevailing general economic
conditions, the availability of credit for loans secured by comparable real
properties and, in the case of Multifamily Properties, the financial condition
and operating history of the Mortgagor and the related Mortgaged Property, tax
laws and rent control laws.
It is anticipated that some or all of the Mortgage Loans included in any
Trust, particularly Mortgage Loans secured by Multifamily Properties, will be
nonrecourse loans or loans for which recourse may be restricted or
unenforceable. As to those Mortgage Loans, recourse in the event of Mortgagor
default will be limited to the specific real property and other assets, if any,
that were pledged to secure the Mortgage Loan. However, even with respect to
those Mortgage Loans that provide for recourse against the Mortgagor and its
assets generally, there can be no assurance that enforcement of such recourse
provisions will be practicable, or that the other assets of the Mortgagor will
be sufficient to permit a recovery in respect of a defaulted Mortgage Loan in
excess of the liquidation value of the related Mortgaged Property.
Limitations, Reduction and Substitution of Credit Enhancement. Credit
Enhancement may be provided in one or more of the forms described in the
related Prospectus Supplement, including, but not limited to, prioritization as
to payments of one or more classes of such series, a Mortgage Pool Insurance
Policy, a Special Hazard Insurance Policy, a bankruptcy bond, one or more
Reserve Funds, other
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insurance, guaranties and similar instruments and agreements, or any
combination thereof. See "Credit Enhancement" herein. Regardless of the Credit
Enhancement provided, the amount of coverage may be limited in amount and in
most cases will be subject to periodic reduction in accordance with a schedule
or formula. Furthermore, such Credit Enhancement may provide only very limited
coverage as to certain types of losses and may provide no coverage as to
certain other types of losses. The Trustee may be permitted to reduce,
terminate or substitute all or a portion of the Credit Enhancement for any
series of Certificates, if the applicable rating agencies indicate that the
then-current rating thereof will not be adversely affected.
Original Issue Discount. All the Compound Interest Certificates and
Stripped Certificates that are entitled only to interest distributions will be,
and certain of the other Certificates may be, issued with original issue
discount for federal income tax purposes. An Owner of a Certificate issued with
original issue discount will be required to include original issue discount in
ordinary gross income for federal income tax purposes as it accrues, in advance
of receipt of the cash attributable to such income. Accrued but unpaid interest
on such Certificates generally will be treated as original issue discount for
this purpose. See "Certain Federal Income Tax Consequences--Federal Income Tax
Consequences for REMIC Certificates," "--Taxation of Regular
Certificates--Variable Rate Regular Certificates," "Certain Federal Income Tax
Consequences--Federal Income Tax Consequences for Certificates as to Which No
REMIC Election Is Made--Standard Certificates," and "Certain Federal Income Tax
Consequences--Premium and Discount" and "--Stripped Certificates" herein.
Book Entry Registration. Because transfers and pledges of Book Entry
Certificates may be effected only through book entries at a Clearing Agency
through Clearing Agency Participants, the liquidity of the secondary market for
Book Entry Certificates may be reduced to the extent that some investors are
unwilling to hold Certificates in book entry form in the name of Clearing
Agency Participants and the ability to pledge Book Entry Certificates may be
limited due to lack of a physical certificate. Beneficial Owners of Book Entry
Certificates may, in certain cases, experience delay in the receipt of payments
of principal and interest because such payments will be forwarded by the
Trustee to the Clearing Agency who will then forward payment to the Clearing
Agency Participants who will thereafter forward payment to Beneficial Owners.
In the event of the insolvency of the Clearing Agency or of a Clearing Agency
Participant in whose name Certificates are recorded, the ability of Beneficial
Owners to obtain timely payment and (if the limits of applicable insurance
coverage by the Securities Investor Protection Corporation are exceeded, or if
such coverage is otherwise unavailable) ultimate payment of principal and
interest on Book Entry Certificates may be impaired.
Certain Matters Relating to Insolvency. The Sellers of the Mortgage Assets
to the Depositor and the Depositor intend that the transfers of such Mortgage
Assets to the Depositor, and in turn to the applicable Trust, constitute sales
rather than pledges to secure indebtedness for insolvency purposes. If,
however, a seller of Mortgage Assets were to become a debtor under the federal
bankruptcy code, it is possible that a creditor, trustee-in-bankruptcy or
receiver of such seller may argue that the sale thereof by such Seller is a
pledge rather than a sale. This position, if argued or accepted by a court,
could result in a delay in or reduction of distributions on the related
Certificates.
Junior Lien Mortgage Loans. Because Mortgage Loans secured by junior
(i.e., second, third, etc.) liens are subordinate to the rights of the
beneficiaries under the related senior deeds of trust or senior mortgages, a
decline in the residential real estate market would adversely affect the
position of the related Trust as a junior beneficiary or junior mortgagee
before having such an effect on the position of the related senior
beneficiaries or senior mortgagees. A rise in interest rates over a period of
time, the general condition of a Mortgaged Property and other factors may also
have the effect of reducing the value of the Mortgaged Property from the value
at the time the junior lien Mortgage Loan was originated and, as a result, may
reduce the likelihood that, in the event of a default by the borrower,
liquidation or other proceeds will be sufficient to satisfy the junior lien
Mortgage Loan after satisfaction of any senior liens and the payment of any
liquidation expenses.
Liquidation expenses with respect to defaulted Mortgage Loans do not vary
directly with the outstanding principal balance of the Mortgage Loans at the
time of default. Therefore, assuming that a
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Servicer took the same steps in realizing upon defaulted Mortgage Loans having
small remaining principal balances as in the case of defaulted Mortgage Loans
having larger principal balances, the amount realized after expenses of
liquidation would be smaller as a percentage of the outstanding principal
balance of the smaller Mortgage Loans. To the extent the average outstanding
principal balances of the Mortgage Loans in a Trust are relatively small,
realizations net of liquidation expenses may also be relatively small as a
percentage of the principal amount of the Mortgage Loans.
Limitations on Interest Payments and Foreclosures. Generally, under the
terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as amended (the
"Relief Act"), or similar state legislation, a Mortgagor who enters military
service after the origination of the related Mortgage Loan (including a
Mortgagor who is a member of the National Guard or is in reserve status at the
time of the origination of the Mortgage Loan and is later called to active
duty) may not be charged interest (including fees and charges) above an annual
rate of 6% during the period of such Mortgagor's active duty status, unless a
court orders otherwise upon application of the lender. It is possible that such
action could have an effect, for an indeterminate period of time, on the
ability of the related Servicer to collect full amounts of interest on certain
of the Mortgage Loans. In addition, the Relief Act imposes limitations that
would impair the ability of the related Servicer to foreclose on an affected
Mortgage Loan during the Mortgagor's period of active duty status. Thus, in the
event that such a Mortgage Loan goes into default, there may be delays and
losses occasioned by the inability to realize upon the Mortgaged Property in a
timely fashion.
Security Ratings. The rating of Certificates credit enhanced through
external credit enhancement such as a letter of credit, financial guaranty
insurance policy or mortgage pool insurance will depend primarily on the
creditworthiness of the issuer of such external credit enhancement device (a
"Credit Enhancer"). Any reduction in the rating assigned to the claims-paying
ability of the related Credit Enhancer below the rating initially given to the
related Certificates would likely result in a reduction in the rating of the
Certificates. See "Ratings" in the Prospectus Supplement.
Other Legal Considerations. Applicable federal and state laws generally
regulate interest rates and other charges, require certain disclosures,
prohibit unfair and deceptive practices, regulate debt collection, and require
licensing of the originators of the mortgage loans and contracts. Depending on
the provisions of the applicable law and the specified facts and circumstances
involved, violations of those laws, policies and principles may limit the
ability to collect all or part of the principal of or interest on the Mortgage
Loans and Contracts and may entitle the borrower to a refund of amounts
previously paid. See "Certain Legal Aspects of the Mortgage Assets" herein.
DESCRIPTION OF THE CERTIFICATES
Each Trust will be created pursuant to an Agreement entered into among the
Depositor, the Trustee, the Master Servicer, if any, and the Servicer. The
provisions of each Agreement will vary depending upon the nature of the
Certificates to be issued thereunder and the nature of the related Trust.
Certificates which represent beneficial interests in the Trust will be issued
pursuant to the Agreement similar to the form filed as an Exhibit to the
Registration Statement of which this Prospectus is a part. The following
summaries and the summaries set forth under "Administration" describe certain
provisions relating to each series of Certificates. THE PROSPECTUS SUPPLEMENT
FOR A SERIES OF CERTIFICATES WILL DESCRIBE THE SPECIFIC PROVISIONS RELATING TO
SUCH SERIES. The Depositor will provide Owners of Certificates, without charge,
on written request a copy of the Agreement for the related series. Requests
should be addressed to ContiSecurities Asset Funding Corp., 277 Park Avenue,
38th Floor, New York, New York 10172. The Agreement relating to a series of
Certificates will be filed with the Securities and Exchange Commission within
15 days after the date of issuance of such series of Certificates (the
"Delivery Date").
The Certificates of a series will be entitled to payment only from the
assets of the Trust and any other assets pledged for the benefit of the
Certificates and will not be entitled to payments in respect of the assets
included in any other trust fund established by the Depositor. The Certificates
will not represent obligations of the Depositor, the Trustee, the Master
Servicer, if any, any Servicer or any affiliate thereof and will not be
guaranteed by any governmental agency. See "The Trusts" herein.
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The Mortgage Assets relating to a series of Certificates, other than Title
I Loans and GNMA MBS, will not be insured or guaranteed by any governmental
entity and, to the extent that delinquent payments on or losses in respect of
defaulted Mortgage Assets, are not advanced or paid from any applicable Credit
Enhancement, such delinquencies may result in delays in the distribution of
payments on, or losses allocated to one or more classes of Certificates of such
series.
GENERAL
The Certificates of each series will be issued either in book entry form
or in fully registered form. The minimum original denomination of each class of
Certificates will be specified in the related Prospectus Supplement. The
original "Certificate Principal Balance" of each Certificate will equal the
aggregate distributions or payments allocable to principal to which such
Certificate is entitled and distributions allocable to interest on each
Certificate that is not entitled to distributions allocable to principal will
be calculated based on the "Notional Principal Balance" of such Certificate.
The Notional Principal Balance of a Certificate will not evidence an interest
in or entitlement to distributions allocable to principal but will be used
solely for convenience in expressing the calculation of interest and for
certain other purposes.
Except as described below under "Book Entry Registration" with respect to
Book Entry Certificates, the Certificates of each series will be transferable
and exchangeable on a "Certificate Register" to be maintained at the corporate
trust office or such other office or agency maintained for such purposes by the
Trustee. The Trustee will be appointed initially as the "Certificate Registrar"
and no service charge will be made for any registration of transfer or exchange
of Certificates, but payment of a sum sufficient to cover any tax or other
governmental charge may be required.
Under current law the purchase and holding of certain classes of
Certificates may result in "prohibited transactions" within the meaning of
ERISA and the Code. See "ERISA Considerations" herein and in the related
Prospectus Supplement. Transfer of Certificates of such a class will not be
registered unless the transferee (i) executes a representation letter stating
that it is not, and is not purchasing on behalf of, any such plan, account or
arrangement or (ii) provides an opinion of counsel satisfactory to the Trustee
and the Depositor that the purchase of Certificates of such a class by or on
behalf of such plan, account or arrangement is permissible under applicable law
and will not subject the Trustee, the Servicer or the Depositor to any
obligation or liability in addition to those undertaken in the Agreement.
As to each series, one or more elections may be made to treat the related
Trust or designated portions thereof as a REMIC for federal income tax
purposes. The related Prospectus Supplement will specify whether a REMIC
election is to be made. Alternatively, the Agreement for a series may provide
that a REMIC election may be made at the discretion of the Depositor or the
Servicer and may only be made if certain conditions are satisfied. See "Certain
Federal Income Tax Considerations" herein. As to any such series, the terms and
provisions applicable to the making of a REMIC election, as well as any
material federal income tax consequences to Owners of Certificates not
otherwise described herein, will be set forth in the related Prospectus
Supplement. If such an election is made with respect to a series, one of the
classes will be designated as evidencing the "residual interests" in the
related REMIC, as defined in the Code. All other classes of Certificates in
such a series will constitute "regular interests" in the related REMIC, as
defined in the Code. As to each series with respect to which a REMIC election
is to be made, the Servicer, the Trustee, an Owner of Residual Certificates or
another person as specified in the related Prospectus Supplement will be
obligated to take all actions required in order to comply with applicable laws
and regulations and will be obligated to pay any prohibited transaction taxes.
The person so specified will be entitled to reimbursement for any such payment.
CLASSES OF CERTIFICATES
Each series of Certificates will be issued in one or more classes which
will evidence the beneficial ownership in the assets of the Trust that are
allocable to (i) principal of such class of Certificates and (ii) interest on
such Certificates. If specified in the Prospectus Supplement, one or more
classes of a series of Certificates may evidence beneficial ownership interests
in separate groups of assets included in the related Trust.
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The Certificates will have an aggregate original Certificate Principal
Balance equal to the aggregate unpaid principal balance of the Mortgage Assets
(plus, amounts held in a Pre-Funding Account, if any) as of the time and day
prior to creation of the Trust specified in the related Prospectus Supplement
(the "Cut-Off Date") after deducting payments of principal due before the
Cut-Off Date and will bear interest at rates which, on a weighted basis, will
be equal to the Pass-Through Rate. The Pass-Through Rate will equal the
weighted average rate of interest borne by the related Mortgage Assets, net of
the aggregate servicing fees, amounts allocated to the residual interests and
any other amounts as are specified in the Prospectus Supplement. The original
Certificate Principal Balance (or Notional Principal Balance) of the
Certificates of a series and the interest rate on the classes of such
Certificates will be determined in the manner specified in the Prospectus
Supplement.
Each class of Certificates that is entitled to distributions allocable to
interest will bear interest at a fixed rate or a rate that is subject to change
from time to time (a) in accordance with a schedule, (b) by reference to an
index, or (c) otherwise (each, a "Certificate Interest Rate"). One or more
classes of Certificates may provide for interest that accrues but is not
currently payable ("Compound Interest Certificates"). With respect to any class
of Compound Interest Certificates, any interest that has accrued but is not
paid on a given Distribution Date will be added to the aggregate Certificate
Principal Balance of such class of Certificates on that Distribution Date.
A series of Certificates may include one or more classes entitled only to
distributions or payments (i) allocable to interest, (ii) allocable to
principal (and allocable as between scheduled payments of principal and
Principal Prepayments, as defined below), or (iii) allocable to both principal
(and allocable as between scheduled payments of principal and Principal
Prepayments) and interest. A series of Certificates may consist of one or more
classes as to which distributions or payments will be allocated (i) on the
basis of collections from designated portions of the assets of the Trust, (ii)
in accordance with a schedule or formula, (iii) in relation to the occurrence
of events, or (iv) otherwise. The timing and amounts of such distributions or
payments may vary among classes, over time or otherwise.
A series of Certificates may include one or more Classes of Scheduled
Amortization Certificates and Companion Certificates. "Scheduled Amortization
Certificates" are Certificates with respect to which payments of principal are
to be made in specified amounts on specified Distribution Dates, to the extent
of funds available on such Distribution Date. "Companion Certificates" are
Certificates which receive payments of all or a portion of any funds available
on a given Distribution Date which are in excess of amounts required to be
applied to payments on Scheduled Amortization Certificates on such Distribution
Date. Because of the manner of application of payments of principal to
Companion Certificates, the weighted average lives of Companion Certificates of
a series may be expected to be more sensitive to the actual rate of prepayments
on the Mortgage Assets in the related Trust than will the Scheduled
Amortization Certificates of such series.
One or more series of Certificates may constitute series of "Special
Allocation Certificates", which may include Senior Certificates, Subordinated
Certificates, Priority Certificates and Non-Priority Certificates. As specified
in the related Prospectus Supplement for a series of Special Allocation
Certificates, the timing and/or priority of payments of principal and/or
interest may favor one or more classes of Certificates over one or more other
classes of Certificates. Such timing and/or priority may be modified or
reordered upon the occurrence of one or more specified events. Losses on Trust
assets for such series may be disproportionately borne by one or more classes
of such series, and the proceeds and distributions from such assets may be
applied to the payment in full of one or more classes within such series before
the balance, if any, of such proceeds are applied to one or more other classes
within such series. For example, Special Allocation Certificates in a series
may be comprised of one or more classes of Senior Certificates having a
priority in right to distributions of principal and interest over one or more
classes of Subordinated Certificates, as a form of Credit Enhancement. See
"Credit Enhancement--Subordination" herein. Typically, the Subordinated
Certificates will carry a rating by the rating agencies lower than that of the
Senior Certificates. In addition, one or more classes of Certificates
("Priority Certificates") may be entitled to a priority of distributions of
principal or interest from assets in the Trust over another class of
Certificates ("Non-Priority Certificates"), but only after the exhaustion of
other Credit Enhancement applicable to such series. The Priority Certificates
and Non-Priority Certificates nonetheless may be within the same rating
category.
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DISTRIBUTIONS OF PRINCIPAL AND INTEREST
General. Distributions of principal and interest will be made to the
extent of funds available therefor, on the dates specified in the Prospectus
Supplement (each, a "Distribution Date") to the persons in whose names the
Certificates are registered (the "Owners") at the close of business on the
dates specified in the Prospectus Supplement (each, a "Record Date"). With
respect to Certificates other than Book Entry Certificates, distributions will
be made by check or money order mailed to the person entitled thereto at the
address appearing in the Certificate Register or, if specified in the
Prospectus Supplement, in the case of Certificates that are of a certain
minimum denomination as specified in the Prospectus Supplement, upon written
request by the Owner of a Certificate, by wire transfer or by such other means
as are agreed upon with the person entitled thereto; provided, however, that
the final distribution in retirement of the Certificates (other than Book Entry
Certificates) will be made only upon presentation and surrender of the
Certificates at the office or agency of the Trustee specified in the notice of
such final distribution. With respect to Book Entry Certificates, such payments
will be made as described below under "Book Entry Registration".
Distributions will be made out of, and only to the extent of, funds in a
separate account established and maintained for the benefit of the Certificates
of the related series (the "Certificate Account" with respect to such series),
including any funds transferred from any related Reserve Fund. Amounts may be
invested in the Eligible Investments specified herein and in the Prospectus
Supplement, and all income or other gain from such investments will be
deposited in the related Certificate Account and may be available to make
payments on the Certificates of the applicable series on the next succeeding
Distribution Date or pay after amounts owed by the Trust.
Distributions of Interest. Interest will accrue on the aggregate
Certificate Principal Balance (or, in the case of Certificates entitled only to
distributions allocable to interest, the aggregate Notional Principal Balance
(as defined below)) of each class of Certificates entitled to interest from the
date, at the applicable Certificate Interest Rate and for the periods (each, an
"Interest Accrual Period") specified in the Prospectus Supplement. The
aggregate Certificate Principal Balance of any class of Certificates entitled
to distributions of principal will be the aggregate original Certificate
Principal Balance of such class of Certificates, reduced by all distributions
allocable to principal, and, in the case of Compound Interest Certificates,
increased by all interest accrued but not then distributable on such Compound
Interest Certificates. With respect to a class of Certificates entitled only to
distributions allocable to interest, such interest will accrue on a notional
principal balance (the "Notional Principal Balance") of such class, computed
solely for purposes of determining the amount of interest accrued and payable
on such class of Certificates.
To the extent funds are available therefor, interest accrued during each
Interest Accrual Period on each class of Certificates entitled to interest
(other than a class of Compound Interest Certificates) will be distributable on
the Distribution Dates specified in the Prospectus Supplement until the
aggregate Certificate Principal Balance of the Certificates of such class has
been distributed in full or, in the case of Certificates entitled only to
distributions allocable to interest, until the aggregate Notional Principal
Balance of such Certificates is reduced to zero or for the period of time
designated in the Prospectus Supplement. Distributions of interest on each
class of Compound Interest Certificates will commence only after the occurrence
of the events specified in the Prospectus Supplement and, prior to such time,
the aggregate Certificate Principal Balance (or Notional Principal Balance) of
such class of Compound Interest Certificates, will increase on each
Distribution Date by the amount of interest that accrued on such class of
Compound Interest Certificates during the preceding Interest Accrual Period but
that was not required to be distributed to such class on such Distribution
Date. Any such class of Compound Interest Certificates will thereafter accrue
interest on its outstanding Certificate Principal Balance (or Notional
Principal Balance) as so adjusted.
Distributions of Principal. The Prospectus Supplement will specify the
method by which the amount of principal to be distributed on the Certificates
on each Distribution Date will be calculated and the manner in which such
amount will be allocated among the classes of Certificates entitled to
distributions of principal.
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One or more classes of Certificates may be entitled to receive all or a
disproportionate percentage of the payments of principal which are received on
the related Mortgage Assets in advance of their scheduled due dates and are not
accompanied by amounts representing scheduled interest due after the month of
such payments ("Principal Prepayments"). Any such allocation may have the
effect of accelerating the amortization of such Certificates relative to the
interests evidenced by the other Certificates.
Unscheduled Distributions. The Certificates of a series may be subject to
receipt of distributions before the next scheduled Distribution Date under the
circumstances and in the manner described below and in the related Prospectus
Supplement. If applicable, such unscheduled distributions will be made on the
Certificates of a series on the date and in the amount specified in the related
Prospectus Supplement if, due to substantial payments of principal (including
Principal Prepayments) on the related Mortgage Assets, low rates then available
for reinvestment of such payments or both, it is determined, based on specified
assumptions, that the amount anticipated to be on deposit in the Certificate
Account for such series on the next related Distribution Date, together with,
if applicable, any amounts available to be withdrawn from any related Reserve
Fund or from any other Credit Enhancement provided for such series, may be
insufficient to make required distributions on the Certificates on such
Distribution Date. The amount of any such unscheduled distribution that is
allocable to principal will not exceed the amount that would otherwise have
been required to be distributed as principal on the Certificates on the next
Distribution Date and will include interest at the applicable Certificate
Interest Rate (if any) on the amount of the unscheduled distribution allocable
to principal for the period and to the date specified in the Prospectus
Supplement.
All distributions allocable to principal in any unscheduled distribution
will be made in the same priority and manner as distributions of principal on
the Certificates would have been made on the next Distribution Date except as
otherwise stated in the related Prospectus Supplement, and, with respect to
Certificates of the same class, unscheduled distributions of principal will be
made on a pro rata basis. Notice of any unscheduled distribution will be given
by the Trustee prior to the date of such distribution.
BOOK ENTRY REGISTRATION
Certificates may be issued as Book Entry Certificates and held in the name
of a Clearing Agency registered with the Securities and Exchange Commission or
its nominee. Transfers and pledges of Book Entry Certificates may be made only
through entries on the books of the Clearing Agency in the name of Clearing
Agency Participants or their nominees. Clearing Agency Participants may also be
Beneficial Owners of Book Entry Certificates.
Purchasers and other Beneficial Owners may not hold Book Entry
Certificates directly but may hold, transfer or pledge their ownership interest
in the Certificates only through Clearing Agency Participants. Furthermore,
Beneficial Owners will receive all payments of principal and interest with
respect to the Certificates and, if applicable, may request redemption of
Certificates, only through the Clearing Agency and the Clearing Agency
Participants. Beneficial Owners will not be registered Owners of Certificates
or be entitled to receive definitive certificates representing their ownership
interest in the Certificates except under the limited circumstances, if any,
described in the related Prospectus Supplement. See "Risk Factors--Book Entry
Registration" herein.
If Certificates of a series are issued as Book Entry Certificates, the
Clearing Agency will be required to make book entry transfers among Clearing
Agency Participants, to receive and transmit payments of principal and interest
with respect to the Certificates of such series, and to receive and transmit
requests for redemption with respect to such Certificates. Clearing Agency
Participants with whom Beneficial Owners have accounts with respect to such
Book Entry Certificates will be similarly required to make book entry transfers
and receive and transmit payments and redemption requests on behalf of their
respective Beneficial Owners. Accordingly, although Beneficial Owners will not
be registered Owners of Certificates and will not possess physical
certificates, a method will be provided whereby Beneficial Owners may receive
payments, transfer their interests, and submit redemption requests.
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LIST OF OWNERS OF CERTIFICATES
Upon written request of a specified number or percentage interests of
Owners of Certificates of record of a series of Certificates for purposes of
communicating with other Owners of Certificates with respect to their rights as
Owners of Certificates, the Trustee will afford such Owners access during
business hours to the most recent list of Owners of Certificates of that series
held by the Trustee. With respect to Book Entry Certificates, the only named
Owner on the Certificate Register will be the Clearing Agency.
The Agreement will not provide for the holding of any annual or other
meetings of Owners of Certificates.
THE TRUSTS
The Trust for a series of Certificates will consist of: (i) the Mortgage
Assets (subject, if specified in the Prospectus Supplement, to certain
exclusions) received on and after the related Cut-Off Date; (ii) all payments
(subject, if specified in the Prospectus Supplement, to certain exclusions) in
respect of such Mortgage Assets, which may be adjusted, to the extent specified
in the related Prospectus Supplement, in the case of interest payments on
Mortgage Assets, to the Pass-Through Rate; (iii) if specified in the Prospectus
Supplement, reinvestment income on such payments; (iv) with respect to a Trust
that includes Mortgage Loans, or Contracts, all property acquired by
foreclosure or deed in lieu of foreclosure with respect to any such Mortgage
Loan or Contract; (v) certain rights of the Trustee, the Depositor and the
Servicer under any policies required to be maintained in respect of the related
Mortgage Assets; (vi) certain rights of the Depositor or one of its affiliates
under any Mortgage Loan purchase agreement, including in respect of any
representations and warranties therein; and (vii) if so specified in the
Prospectus Supplement, one or more forms of Credit Enhancement.
The Certificates of each series will be entitled to payment only from the
assets of the related Trust and any other assets pledged therefor and will not
be entitled to payments in respect of the assets of any other trust established
by the Depositor.
Mortgage Assets may be acquired by the Depositor from affiliated or
unaffiliated originators. The following is a brief description of the Mortgage
Assets expected to be included in the Trusts. If specific information
respecting the Mortgage Assets is not known at the time the related series of
Certificates initially are offered, more general information of the nature
described below will be provided in the related Prospectus Supplement, and
specific information will be set forth in a report on Form 8-K to be filed with
the Securities and Exchange Commission within fifteen days after the initial
issuance of such Certificates. A copy of the Agreement with respect to each
series of Certificates will be attached to the Form 8-K and will be available
for inspection at the corporate trust office of the Trustee specified in the
related Prospectus Supplement. A schedule of the Mortgage Assets relating to
each series of Certificates, will be attached to the related Agreement
delivered to the Trustee upon delivery of such Certificates.
MORTGAGE LOANS
The Mortgage Loans will be evidenced by promissory notes (the "Mortgage
Notes") secured by mortgages or deeds of trust (the "Mortgages") creating liens
on residential properties (the "Mortgaged Properties"). Such Mortgage Loans
will be within the broad classifications of single family mortgage loans,
defined generally as loans on residences containing one-to-four dwelling units
or multifamily loans. If specified in the Prospectus Supplement, the Mortgage
Loans may include cooperative apartment loans ("Cooperative Loans") secured by
security interests in shares issued by Cooperatives and in the related
proprietary leases or occupancy agreements granting exclusive rights to occupy
specific dwelling units in such Cooperatives' buildings, or the Mortgage Loans
may be secured by junior liens on the related mortgaged properties, including
Title I Loans and other types of home improvement retail installment contracts.
The Mortgaged Properties securing the Mortgage Loans may include investment
properties and vacation and second homes. The Mortgaged Property for such loans
may also consist of residential properties consisting of five or more rental or
cooperatively-owned dwelling units in high-rise, mid-rise or garden apartment
buildings or projects ("Multifamily Properties"). Each Mortgage Loan will be
selected
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by the Depositor for inclusion in the Trust from among those acquired by the
Depositor or originated or acquired by one or more affiliated or unaffiliated
originators, including newly originated loans. Mortgaged Properties may be
located in any one of the 50 states, the District of Columbia or the
Commonwealth of Puerto Rico.
The Mortgage Loans will be "conventional" mortgage loans, that is they
will not be insured or guaranteed by any governmental agency, the principal and
interest on the Mortgage Loans included in the Trust for a series of
Certificates will be payable either on the first day of each month or on
different scheduled days throughout each month, and the interest will be
calculated either on a simple-interest or accrual method as described in the
related Prospectus Supplement. When a full principal amount is paid on a
Mortgage Loan during a month, the mortgagor is generally charged interest only
on the days of the month actually elapsed up to the date of such prepayment, at
a daily interest rate that is applied to the principal amount of the Mortgage
Loan so prepaid.
The payment terms of the Mortgage Loans to be included in a Trust for a
series will be described in the related Prospectus Supplement and may include
any of the following features or combinations thereof or other features
described in the related Prospectus Supplement:
(a) Interest may be payable at a fixed rate, a rate adjustable from time
to time in relation to an index, a rate that is fixed for a period of time
or under certain circumstances and followed by an adjustable rate, a rate
that otherwise varies from time to time, or a rate that is convertible from
an adjustable rate to a fixed rate. Changes to an adjustable rate may be
subject to periodic limitations, maximum rates, minimum rates or a
combination of such limitations. Accrued interest may be deferred and added
to the principal of a Mortgage Loan for such periods and under such
circumstances as may be specified in the related Prospectus Supplement.
Mortgage Loans may provide for the payment of interest at a rate lower than
the specified mortgage rate for a period of time or for the life of the
Mortgage Loan with the amount of any difference contributed from funds
supplied by the seller of the Mortgaged Property or another source.
(b) Principal may be payable on a level debt service basis to fully
amortize the Mortgage Loan over its term, may be calculated on the basis of
an amortization schedule that is longer than the original term to maturity
or on an interest rate that is different from the interest rate on the
Mortgage Loan or may not be amortized during all or a portion of the
original term. Payment of all or a substantial portion of the principal may
be due on maturity. Principal may include interest that has been deferred
and added to the principal balance of the Mortgage Loan.
(c) Monthly payments of principal and interest may be fixed for the life
of the Mortgage Loan, may increase over a specified period of time or may
change from period to period. Mortgage Loans may include limits on periodic
increases or decreases in the amount of monthly payments and may include
maximum or minimum amounts of monthly payments.
(d) Prepayments of principal may be subject to a prepayment fee, which
may be fixed for the life of the Mortgage Loan or may decline over time,
and may be prohibited for the life of the Mortgage Loan or for certain
periods ("lockout periods"). Certain Mortgage Loans may permit prepayments
after expiration of the applicable lockout period and may require the
payment of a prepayment fee in connection with any such subsequent
prepayment. Other Mortgage Loans may permit prepayments without payment of
a fee unless the prepayment occurs during specified time periods. The
Mortgage Loans may include "due-on-sale" clauses which permit the mortgagee
to demand payment of the entire Mortgage Loan in connection with the sale
or certain transfers of the related mortgaged property. Other Mortgage
Loans may be assumable by persons meeting the then applicable underwriting
standards of the Servicer, or as may be required by any applicable
government program.
(e) Another type of mortgage loan described in the Prospectus
Supplement.
With respect to a series for which the related Trust includes Mortgage
Loans, the related Prospectus Supplement may specify, among other things,
information regarding the interest rates (the "Mortgage Rates"), the average
Principal Balance and the aggregate Principal Balance, the years of origination
and original principal balances and the original loan-to-value ratios. The
"Principal Balance" of any Mortgage
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Loan will be the unpaid principal balance of such Mortgage Loan as of the
Cut-Off Date, after deducting any principal payments due before the Cut-Off
Date, reduced by all principal payments, including principal payments advanced
pursuant to the related Agreement, previously distributed with respect to such
Mortgage Loan and reported as allocable to principal.
The "Loan-to-Value Ratio" of any Mortgage Loan will be determined by
dividing the amount of the Mortgage Loan by the Original Value (defined below)
of the related Mortgaged Property. The "principal amount" of the Mortgage Loan,
for purposes of computation of the Loan-to-Value Ratio of any Mortgage Loan,
will include any part of an origination fee that has been financed. In some
instances, it may also include amounts which the seller or some other party to
the transaction has paid to the mortgagee, such as minor reductions in the
purchase price made at the closing. The "Original Value" of a Mortgage Loan is
(a) in the case of any purchase money Mortgage Loan, the lesser of (i) the
value of the mortgaged property, based on an appraisal thereof and (ii) the
selling price, and (b) otherwise the value of the mortgaged property, based on
an appraisal thereof.
There can be no assurance that the Original Value will reflect actual real
estate values during the term of a Mortgage Loan. If the residential real
estate market should experience an overall decline in property values such that
the outstanding principal balances of the Mortgage Loans become equal to or
greater than the values of the Mortgaged Properties, the actual rates of
delinquencies, foreclosures and losses could be significantly higher than those
now generally experienced in the mortgage lending industry. In addition,
adverse economic conditions (which may or may not affect real estate values)
may affect the timely and ultimate payment by mortgagors of scheduled payments
of principal and interest on the Mortgage Loans and, accordingly, the actual
rates of delinquencies, foreclosures and losses with respect to the Mortgage
Loans.
Multifamily Loans will consist of Multifamily Loans consisting of either
Conventional Multifamily Loans or FHA-Insured Multifamily Loans secured by
mortgages or deeds of trust or other similar security instruments creating a
lien on rental apartment buildings or projects containing five or more units,
including, but not limited to, high-rise, mid-rise and garden apartments or
secured by apartment buildings owned by cooperative housing corporations. The
Multifamily Properties may include mixed commercial and residential structures.
Unless otherwise specified in the related Prospectus Supplement, each Mortgage
Loan will create a first priority mortgage lien on a Mortgaged Property. A
Multifamily Loan may create a lien on a borrower's leasehold estate in a
property; however, unless otherwise specified in the related Prospectus
Supplement, the term of any such leasehold will exceed the term of the Mortgage
Loan by at least two years. The Depositor expects that Mortgage Loans will have
been originated by mortgagees in the ordinary course of their real estate
lending activities. Each Multifamily Loan will bear interest at an annual fixed
rate or adjustable rate of interest specified in the Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, all of
the Multifamily Loans will have had original terms to maturity of not more than
40 years and will provide for scheduled payments of principal, interest or
both, to be made on specified dates ("Due Dates") that occur monthly, quarterly
or semi-annually. A Multifamily Loan (i) may provide for accrual of interest
thereon at an interest rate (a "Mortgage Loan Rate") that is fixed over its
term of that adjusts from time to time, or that may be converted at the
borrower's election from an adjustable to a fixed Mortgage Loan Rate, or from a
fixed to an adjustable Mortgage Loan Rate, (ii) may provide for level payments
to maturity or for payments that adjust from time to time to accommodate
changes in the Mortgage Loan Rate or to reflect the occurrence of certain
events, and may permit negative amortization, (iii) may be fully amortizing
over its term to maturity, or may provide for little or no amortization over
its term and thus require a balloon payment on its stated maturity date, and
(iv) may contain a prohibition on prepayment (the period of such prohibition, a
"Lock-out Period" and its date of expiration, a "Lock-out Expiration Date") or
require payment of a premium or a yield maintenance penalty (a "Prepayment
Premium") in connection with a prepayment, in each case as described in the
related Prospectus Supplement. A Multifamily Loan may also contain a provision
that entitles the lender to a share of profits realized from the operation or
disposition of the Mortgaged Property (an "Equity Participation"), as described
in the related Prospectus Supplement. If holders of any class or classes of
Certificates of a series will be entitled to all or a portion of an Equity
Participation, the related Prospectus Supplement will describe the Equity
Participation and the method or methods by which distributions in respect
thereof will be made to such holders.
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Lenders typically look to the Debt Service Coverage Ratio of a loan
secured by income-producing property as an important measure of the risk of
default on such loan. Unless otherwise defined in the related Prospectus
Supplement, the "Debt Service Coverage Ratio" of a Multifamily Loan at any
given time is the ratio of (i) the Net Operating Income of the related
Mortgaged Property for a twelve-month period to (ii) the annualized scheduled
payments on the Multifamily Loan and on any other loan that is secured by a
lien on the Mortgaged Property prior to the lien of the related Mortgage.
Unless otherwise defined in the related Prospectus Supplement, "Net Operating
Income" means, for any given period, the total operating revenues derived from
a Mortgaged Property during such period, minus the total operating expenses
incurred in respect of such Mortgaged Property during such period other than
(i) non-cash items such as depreciation and amortization, (ii) capital
expenditures and (iii) debt service on loans (including the related Multifamily
Loan) secured by liens on the Mortgaged Property. The Net Operating Income of a
Mortgage Property will fluctuate over time and may or may not be sufficient to
cover debt service on the related Multifamily Loan at any given time. As the
primary source of the operating revenues of a non-owner occupied
income-producing property, rental income (and maintenance payments from
tenant-stockholders of a Cooperative) may be affected by the condition of the
applicable real estate market and/or area economy.
Increases in operating expenses due to the general economic climate or
economic conditions in a locality or industry segment, such as increases in
interest rates, real estate tax rates, energy costs, labor costs and other
operating expenses and/or to changes in governmental rules, regulations and
fiscal policies, may also affect the risk of default on a Multifamily Loan. As
may be further described in the related Prospectus Supplement, in some cases
leases of Mortgaged Properties may provide that the lessee, rather than the
borrower/landlord, is responsible for payment of operating expenses ("Net
Leases"). However, the existence of such "net of expense" provisions will
result in stable Net Operating Income to the borrower/landlord only to the
extent that the lessee is able to absorb operating expense increases while
continuing to make rent payments.
CONTRACTS
Each pool of Contracts included in the Trust with respect to a series of
Certificates (the "Contract Pool") will consist of manufactured housing
conditional sales contracts and installment loan agreements or participation
interests therein (collectively, "Contracts"). The Contracts may be
conventional manufactured housing contracts or contracts insured by the FHA,
including Title I Contracts, or partially guaranteed by the VA. Each Contract
is secured by a Manufactured Home. The Prospectus Supplement will specify
whether the Contracts will be fully amortizing or have a balloon payment and
whether they will bear interest at a fixed or variable rate.
The Manufactured Homes securing the Contracts consist of manufactured
homes within the meaning of 42 United States Code, Section 5402(6), which
defines a "Manufactured Home" as "a structure, transportable in one or more
sections, which in the traveling mode, is eight body feet or more in width or
forty body feet or more in length, or, when erected on site, is three hundred
twenty or more square feet, and which is built on a permanent chassis and
designed to be used as a dwelling with or without permanent foundation when
connected to the required utilities, and includes the plumbing, heating,
air-conditioning, and electrical systems contained therein; except that such
term shall include any structure which meets all the requirements of this
paragraph except the size requirements and with respect to which the
manufacturer voluntarily files a certification required by the Secretary of
Housing and Urban Development and complies with the standards established under
[this] chapter." Moreover, if an election is made to treat the Trust as a REMIC
as described in "Certain Federal Income Tax Consequences--Federal Income Tax
Consequences for REMIC Certificates" herein, Manufactured Homes will have a
minimum of 400 square feet of living space and a minimum width in excess of 102
inches.
For purposes of calculating the loan-to-value ratio of a Contract relating
to a new Manufactured Home, the "Collateral Value" is no greater than the sum
of a fixed percentage of the list price of the unit actually billed by the
manufacturer to the dealer (exclusive of freight to the dealer site) including
"accessories" identified in the invoice (the "Manufacturer's Invoice Price"),
plus the actual cost of any
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accessories purchased from the dealer, a delivery and set-up allowance,
depending on the size of the unit and the cost of state and local taxes, filing
fees and up to three years prepaid hazard insurance premiums. The Collateral
Value of a used Manufactured Home is the least of the sales price, the
appraised value, and the National Automobile Dealer's Association book value
plus prepaid taxes and hazard insurance premiums. The appraised value of a
Manufactured Home is based upon the age and condition of the manufactured
housing unit and the quality and condition of the mobile home park in which it
is situated, if applicable.
The related Prospectus Supplement may specify for the Contracts contained
in the related Contract Pool, among other things, the date of origination of
the Contracts; the annual percentage rates on the Contracts; the loan-to-value
ratios; the minimum and maximum outstanding principal balance as of the Cut-Off
Date and the average outstanding principal balance; the outstanding principal
balances of the Contracts included in the Contract Pool; the original
maturities of the Contracts; and the last maturity date of any Contract.
MORTGAGE-BACKED SECURITIES
"Mortgage-Backed Securities" (or "MBS") may include (i) private (that is,
not guaranteed or insured by the United States or any agency or instrumentality
thereof) mortgage participations, mortgage pass-through certificates or other
mortgage-backed securities or (ii) certificates insured or guaranteed by FHLMC
or FNMA or GNMA.
Any MBS will have been issued pursuant to a participation and servicing
agreement, a pooling and servicing agreement, an indenture or similar agreement
(an "MBS Agreement"). A seller (the "MBS Issuer") and/or servicer (the "MBS
Servicer") of the underlying mortgage loans will have entered into the MBS
Agreement with a trustee or a custodian under the MBS Agreement (the "MBS
Trustee"), if any, or with the original purchaser or purchasers of the MBS.
The MBS may have been issued in one or more classes with characteristics
similar to the classes of Certificates described herein. Distributions in
respect of the MBS will be made by the MBS Servicer or the MBS Trustee on the
dates specified in the related Prospectus Supplement. The MBS Issuer or the MBS
Servicer or another person specified in the related Prospectus Supplement may
have the right or obligation to repurchase or substitute assets underlying the
MBS after a certain date or under other circumstances specified in the related
Prospectus Supplement.
Reserve funds, subordination, cross-support or other credit enhancement
similar to that described for the Certificates under "Credit Enhancement" may
have been provided with respect to the MBS. The type, characteristics and
amount of such credit enhancement, if any, will be a function of the
characteristics of the underlying mortgage loans and other factors and
generally will have been established on the basis of the requirements of any
rating agency that may have assigned a rating to the MBS, or by the initial
purchasers of the MBS.
The Prospectus Supplement for a series of Certificates that evidence
interests in MBS will specify, to the extent available, (i) the aggregate
approximate initial and outstanding principal amount and type of the MBS to be
included in the Trust, (ii) the original and remaining term to stated maturity
of the MBS, if applicable, (iii) the pass-through or bond rate of the MBS or
the formula for determining such rates, (iv) the payment characteristics of the
MBS, (v) the MBS Issuer, MBS Servicer and MBS Trustee, as applicable, (vi) a
description of the credit support, if any, (vii) the circumstances under which
the stated underlying mortgage loans, or the MBS themselves may be purchased
prior to their maturity, (viii) the terms on which mortgage loans may be
substituted for those originally underlying the MBS, (ix) the servicing fees
payable under the MBS Agreement, (x) to the extent available to the Depositor,
information in respect of the underlying mortgage loans, and (xi) the
characteristics of any cash flow agreements that relate to the MBS.
OTHER MORTGAGE SECURITIES
Other Mortgage Securities include other securities that directly or
indirectly represent an ownership interest in, or are secured by and payable
from, mortgage loans on real property or mortgage-backed
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securities, including residual interests in issuances of collateralized
mortgage obligations or mortgage pass-through certificates. Any Other Mortgage
Securities that are privately placed securities will not be included in a Trust
until such time as such privately placed securities would be freely
transferable pursuant to Rule 144A of the Securities Act of 1933, as amended.
Further (i) such privately placed securities will have been acquired in the
secondary market and not pursuant to an initial offering thereof and (ii) the
underlying issuer of such securities will not be affiliated with the Depositor
and will not have an interest in the Trust. The Prospectus Supplement for a
series of Certificates will describe any Other Mortgage Securities to be
included in the Trust for such series.
CREDIT ENHANCEMENT
General. Various forms of Credit Enhancement may be provided with respect
to one or more classes of a series of Certificates or with respect to the
assets in the related Trust. Credit Enhancement may be in the form of the
subordination of one or more classes of the Certificates of such series, the
establishment of one or more Reserve Funds, the use of a cross-support feature,
use of a Mortgage Pool Insurance Policy, Special Hazard Insurance Policy,
bankruptcy bond, or another form of Credit Enhancement described in the related
Prospectus Supplement, or any combination of the foregoing. Credit Enhancement
may not provide protection against all risks of loss and may not guarantee
repayment of the entire principal balance of the Certificates and interest
thereon. If losses occur which exceed the amount covered by Credit Enhancement
or which are not covered by the Credit Enhancement, Owners of Certificates will
bear their allocable share of deficiencies.
Financial Guaranty Insurance Policies. If so specified in the related
Prospectus Supplement, a financial guaranty insurance policy or surety bond
("Financial Guaranty Insurance Policy") may be obtained and maintained for each
class or series of Certificates. The issuer of any Financial Guaranty Insurance
Policy (a "Financial Guaranty Insurer") will be described in the related
Prospectus Supplement. Such description will include financial information on
the Financial Guaranty Insurer. In addition, the audited financial statements
of a Financial Guaranty Insurer and an auditors consent to use such financial
statements will be filed with the Securities and Exchange Commission on Form
8-K or will be incorporated by reference to financial statements already on
file with the Securities and Exchange Commission.
Unless otherwise specified in the related Prospectus Supplement, a
Financial Guaranty Insurance Policy will unconditionally and irrevocably
guarantee to Certificateholders that an amount equal to each full and completed
insured payment will be received by an agent of the Trustee (an "Insurance
Paying Agent") on behalf of Certificateholders, for distribution by the Trustee
to each Certificateholder. The "insured payment" will be defined in the related
Prospectus Supplement, and will generally equal the full amount of the
distributions of principal and interest to which Certificateholders are
entitled under the related Agreement plus any other amounts specified therein
or in the related Prospectus Supplement (the "Insured Payment").
Financial Guaranty Insurance Policies may apply only to certain specified
classes, or may apply at the Mortgage Asset level and only to specified
Mortgage Assets.
The specific terms of any Financial Guaranty Insurance Policy will be as
set forth in the related Prospectus Supplement. Financial Guaranty Insurance
Policies may have limitations, including (but not limited to) limitations on
the insurer's obligation to guarantee the obligations of the Seller or
Depositor to repurchase or substitute for any Mortgage Loans, Financial
Guaranty Insurance Policies will not guarantee any specified rate of
prepayments and/or to provide funds to redeem Certificates on any specified
date.
Subject to the terms of the related Agreement, the Financial Guaranty
Insurer may be subrogated to the rights of Certificateholder to receive
payments under the Certificates to the extent of any payment by such Financial
Guaranty Insurer under the related Financial Guaranty Insurance Policy.
Subordination. Distributions in respect of scheduled principal, interest
or any combination thereof otherwise payable to one or more classes of
Certificates of a series (the "Subordinated Certificates") may be paid to one
or more other classes of such series (the "Senior Certificates") under the
circumstances and
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to the extent provided in the Prospectus Supplement. If specified in the
Prospectus Supplement, delays in receipt of scheduled payments on the Mortgage
Assets and losses on defaulted Mortgage Assets will be borne first by the
various classes of Subordinated Certificates and thereafter by the various
classes of Senior Certificates, in each case under the circumstances and
subject to the limitations specified in the Prospectus Supplement. The
aggregate distributions in respect of delinquent payments on the Mortgage
Assets over the lives of the Certificates or at any time, the aggregate losses
in respect of defaulted Mortgage Assets which must be borne by the Subordinated
Certificates by virtue of subordination and the amount of the distributions
otherwise distributable to the Subordinated Certificates that will be
distributable to Owners of Senior Certificates on any Distribution Date may be
limited as specified in the Prospectus Supplement. If aggregate distributions
in respect of delinquent payments on the Mortgage Assets or aggregate losses in
respect of such Mortgage Assets were to exceed the total amounts payable and
available for distribution to Owners of Subordinated Certificates or, if
applicable, were to exceed the specified maximum amount, Owners of Senior
Certificates could experience losses on the Certificates.
In addition to or in lieu of the foregoing, all or any portion of
distributions otherwise payable to Subordinated Certificates on any
Distribution Date may instead be deposited into one or more Reserve Funds (as
defined below) established by the Trustee. If so specified in the Prospectus
Supplement, such deposits may be made on each Distribution Date, on each
Distribution Date for specified periods, or on each Distribution Date until the
balance in the Reserve Fund has reached a specified amount and, following
payments from the Reserve Fund to Owners of Senior Certificates or otherwise,
thereafter to the extent necessary to restore the balance in the Reserve Fund
to required levels, in each case as specified in the Prospectus Supplement. If
so specified in the Prospectus Supplement, amounts on deposit in the Reserve
Fund may be released to the Depositor or the Owners of any class of
Certificates at the times and under the circumstances specified in the
Prospectus Supplement.
If specified in the Prospectus Supplement, various classes of Subordinate
Certificates and Subordinated Certificates may themselves be subordinate in
their right to receive certain distributions to other classes of Senior and
Subordinated Certificates, respectively, through a cross-support mechanism or
otherwise.
As between classes of Senior Certificates and as between classes of
Subordinated Certificates, distributions may be allocated among such classes
(i) in the order of their scheduled final distribution dates, (ii) in
accordance with a schedule or formula, (iii) in relation to the occurrence of
events, or (iv) otherwise, in each case as specified in the Prospectus
Supplement. As between classes of Subordinated Certificates, payments with
respect to Senior Certificates on account of delinquencies or losses and
payments to any Reserve Fund will be allocated as specified in the Prospectus
Supplement.
Overcollateralization. If specified in the Prospectus Supplement,
subordination provisions of a Trust may be used to accelerate to a limited
extent the amortization of one or more classes of Certificates relative to the
amortization of the related Mortgage Loans. The accelerated amortization is
achieved by the application of certain excess interest to the payment of
principal of one or more classes of Certificates. This acceleration feature
creates, with respect to the Mortgage Loans or groups thereof,
overcollateralization which results from the excess of the aggregate principal
balance of the related Mortgage Loans, or a group thereof, over the principal
balance of the related class of Certificates. Such acceleration may continue
for the life of the related Certificates, or may be limited. In the case of
limited acceleration, once the required level of overcollateralization is
reached, and subject to certain provisions specified in the related Prospectus
Supplement, such limited acceleration feature may cease, unless necessary to
maintain the required level of overcollateralization.
Cross-Support. If specified in the related Prospectus Supplement, the
beneficial ownership of separate groups of assets included in the Trust for a
series may be evidenced by separate classes of related series of Certificates.
In such case, Credit Enhancement may be provided by a cross-support feature
which may require that distributions be made with respect to Certificates
evidencing beneficial ownership of one or more asset groups prior to
distributions to Subordinated Certificates evidencing a beneficial ownership
interest in other asset groups within the same Trust. The Prospectus Supplement
for a series which includes a cross-support feature will describe the manner
and conditions for applying such cross-support feature.
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If specified in the Prospectus Supplement, the coverage provided by one or
more forms of Credit Enhancement may apply concurrently to two or more separate
Trusts for a separate series of Certificates. If applicable, the Prospectus
Supplement will identify the Trusts to which such credit support relates and
the manner of determining the amount of the coverage provided thereby and of
the application of such coverage to the identified Trusts.
Pool Insurance. If specified in the related Prospectus Supplement, one or
more mortgage pool insurance policies (each, a "Mortgage Pool Insurance
Policy") will be obtained.
Any such Mortgage Pool Insurance Policy will, subject to the limitations
described below and in the Prospectus Supplement, cover loss by reason of
default in payments on such Mortgage Loans up to the amounts specified in the
Prospectus Supplement or report on Form 8-K and for the periods specified in
the Prospectus Supplement. The Trustee under the related Agreement will agree
to use its best reasonable efforts to cause to be maintained in effect any such
Mortgage Pool Insurance Policy and to supervise the filing of claims thereunder
to the issuer of such Mortgage Pool Insurance Policy (the "Pool Insurer") for
the period of time specified in the related Prospectus Supplement. A Mortgage
Pool Insurance Policy, however, is not a blanket policy against loss, because
claims thereunder may only be made respecting particular defaulted Mortgage
Loans and only upon satisfaction of certain conditions precedent set forth in
such policy as described in the related Prospectus Supplement. The Mortgage
Pool Insurance Policies, if any, will not cover loss due to a failure to pay or
denial of a claim under a primary mortgage insurance policy, irrespective of
the reason therefor. The related Prospectus Supplement will describe the terms
of any applicable Mortgage Pool Insurance Policy and will set forth certain
information with respect to the related Pool Insurer.
In general, a Mortgage Pool Insurance Policy may not insure against loss
sustained by reason of a default arising from, among other things, (i) fraud or
negligence in the origination or servicing of a Mortgage Loan, including
misrepresentation by the Mortgagor or persons involved in the origination
thereof or (ii) failure to construct a Mortgaged Property in accordance with
plans and specifications. If so specified in the related Prospectus Supplement,
a failure of coverage attributable to one of the foregoing events might result
in a breach of a representation of the Seller and in such event might give rise
to an obligation on the part of the Seller to purchase the defaulted Mortgage
Loan if the breach materially and adversely affects the interests of the Owners
of the Certificates and cannot be cured by the Seller.
The original amount of coverage under any Mortgage Pool Insurance Policy
will be reduced over the life of such Certificates by the aggregate dollar
amount of claims paid less the aggregate of the net amounts realized by the
Pool Insurer upon disposition of all foreclosed properties. The amount of
claims paid will generally include certain expenses incurred with respect to
the applicable Mortgage Loans as well as accrued interest on delinquent
Mortgage Loans to the date of payment of the claim. See "Certain Legal Aspects
of the Mortgage Assets--Foreclosure" herein. Accordingly, if aggregate net
claims paid under any Mortgage Pool Insurance Policy reach the original policy
limit, coverage under that Mortgage Pool Insurance Policy will be exhausted and
any further losses will be borne by one or more classes of Certificates unless
otherwise covered by another form of Credit Enhancement, as specified in the
Prospectus Supplement.
Since any Mortgage Pool Insurance Policy may require that the Mortgaged
Property subject to a defaulted Mortgage Loan be restored to its original
condition prior to claiming against the Pool Insurer, such policy may not
provide coverage against hazard losses. As set forth under "Servicing of
Mortgage Loans and Contracts C Standard Hazard Insurance", the hazard policies
concerning the Mortgage Loans typically exclude from coverage physical damage
resulting from a number of causes and even when the damage is covered, may
afford recoveries which are significantly less than the full replacement cost
of such losses. Even if special hazard insurance is applicable as specified in
the Prospectus Supplement, no coverage in respect of special hazard losses will
cover all risks, and the amount of any such coverage will be limited. See
"Special Hazard Insurance" below. As a result, certain hazard risks will not be
insured against and will therefore be borne by Owners of the Certificates,
unless otherwise covered by another form of Credit Enhancement, as specified in
the Prospectus Supplement.
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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 area), chemical contamination and certain other risks. Aggregate claims
under each Special Hazard Insurance Policy will be limited as described in the
related Prospectus Supplement. Any Special Hazard Insurance Policy may also
provide that no claim may be paid unless hazard and, if applicable, flood
insurance on the Mortgaged Property has been kept in force and other protection
and preservation expenses have been paid.
Subject to the foregoing limitations, any Special Hazard Insurance Policy
generally will provide that, where there has been damage to property securing a
foreclosed Mortgage Loan (title to which has been acquired by the insured) and
to the extent such damage is not covered by the hazard insurance policy or
flood insurance policy, if any, maintained with respect to such Mortgage Loan,
the issuer of the Special Hazard Insurance Policy (the "Special Hazard
Insurer") will pay the lesser of (i) the cost of repair or replacement of such
property or (ii) upon transfer of the property to the special hazard insurer,
the unpaid principal balance of such Mortgage Loan at the time of acquisition
of such property by foreclosure or deed in lieu of foreclosure, plus accrued
interest to the date of claim settlement and certain expenses incurred with
respect to such property. If the unpaid principal balance plus accrued interest
and certain expenses is paid by the Special Hazard Insurer, the amount of
further coverage under the related Special Hazard Insurance Policy will be
reduced by such amount less any net proceeds from the sale of the property. Any
amount paid as the cost of repair or replacement of the property will also
reduce coverage by such amount. Restoration of the property with the proceeds
described under (i) above will satisfy the condition under any applicable
Mortgage Pool Insurance Policy that the property be restored before a claim
under such Mortgage Pool Insurance Policy may be validly presented with respect
to the defaulted Mortgage Loan secured by such property. The payment described
under (ii) above will render unnecessary presentation of a claim in respect of
such Mortgage Loan under any related Mortgage Pool Insurance Policy. Therefore,
so long as a Mortgage Pool Insurance Policy remains in effect, the payment by
the Special Hazard Insurer under a Special Hazard Insurance Policy of the cost
of repair or replacement or the unpaid principal balance of the Mortgage Loan
plus accrued interest and certain expenses will not affect the total insurance
proceeds but will affect the relative amounts of coverage remaining under any
related Special Hazard Insurance Policy and any related Mortgage Pool Insurance
Policy.
The terms of any Special Hazard Insurance Policy relating to a Contract
Pool will be described in the related Prospectus Supplement.
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
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Prospectus Supplement, the Depositor will obtain a bankruptcy bond or similar
insurance contract (the "bankruptcy bond") for proceedings with respect to
borrowers under the Bankruptcy Code. The bankruptcy bond will cover certain
losses resulting from a reduction by a bankruptcy court of scheduled payments
of principal of and interest on a Mortgage Loan or a reduction by such court of
the principal amount of a Mortgage Loan and will cover certain unpaid interest
on the amount of such a principal reduction from the date of the filing of a
bankruptcy petition.
The bankruptcy bond will provide coverage in the aggregate amount
specified in the related Prospectus Supplement. Such amount will be reduced by
payments made under such bankruptcy bond in respect of the related Mortgage
Loans and will not be restored.
If specified in the related Prospectus Supplement, other forms of Credit
Enhancement may be provided to cover such bankruptcy-related losses. Any
bankruptcy bond or other form of Credit Enhancement provided to cover
bankruptcy-related losses will be described in the related Prospectus
Supplement.
Reserve Funds. If specified in the Prospectus Supplement, cash, U.S.
Treasury securities, instruments evidencing ownership of principal or interest
payments thereon, letters of credit, surety bonds, demand notes, certificates
of deposit or a combination thereof in the aggregate amount specified in the
Prospectus Supplement will be deposited by the Depositor on the Delivery Date
in one or more accounts (each, a "Reserve Fund") established and maintained
with the Trustee. Such cash and the principal and interest payments on such
other investments will be used to enhance the likelihood of timely payment of
principal of, and interest on, or, if so specified in the Prospectus
Supplement, to provide additional protection against losses in respect of, the
assets in the related Trust, to pay the expenses of the Trust or for such other
purposes specified in the Prospectus Supplement. Whether or not the Depositor
has any obligation to make such a deposit, certain amounts to which the Owners
of Subordinated Certificates, if any, would otherwise be entitled may instead
be deposited into the Reserve Fund from time to time and in the amounts as
specified in the Prospectus Supplement. Any cash in any Reserve Fund and the
proceeds of any other instrument upon maturity will be invested in Eligible
Investments. If a letter of credit is deposited with the Trustee, such letter
of credit will be irrevocable. Any instrument deposited therein will name the
Trustee as a beneficiary and will be issued by an entity acceptable to each
rating agency that rates the Certificates. Additional information with respect
to such instruments deposited in the Reserve Funds may be set forth in the
Prospectus Supplement.
Any amounts so deposited and payments on instruments so deposited will be
available for withdrawal from the Reserve Fund for distribution with respect to
the Certificates for the purposes, in the manner and at the times specified in
the Prospectus Supplement.
Other Insurance, Guaranties and Similar Instruments or Agreements. If
specified in the Prospectus Supplement, the related Trust may also include
insurance, guaranties, surety bonds, letters of credit, guaranteed investment
contracts or similar arrangements for the purpose of (i) maintaining timely
payments or providing additional protection against losses on the assets
included in such Trust, (ii) paying administrative expenses, (iii) establishing
a minimum reinvestment rate on the payments made in respect of such assets or
principal payment rate on such assets, (iv) guaranteeing timely payment of
principal and interest under the Certificates, or for such other purpose as is
specified in such Prospectus Supplement. Such arrangements may include
agreements under which Owners of Certificates are entitled to receive amounts
deposited in various accounts held by the Trustee upon the terms specified in
the Prospectus Supplement. Such arrangements may be in lieu of any obligation
of the Servicers or the Seller to advance delinquent installments in respect of
the Mortgage Loans. See "Servicing of Mortgage Loans and Contracts--Advances"
herein.
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SERVICING OF MORTGAGE LOANS AND CONTRACTS
With respect to each series of Certificates, the related Mortgage Loans
and Contracts will be serviced by a sole servicer or by a master servicer with
various sub-servicers pursuant to, or as provided for in, the Agreement. The
Prospectus Supplement for each series will specify the servicer and the master
servicer, if any, for such series.
The related Prospectus Supplement will specify whether the Servicer is a
FNMA- or FHLMC-approved servicer of conventional mortgage loans. In addition,
the Depositor will require adequate servicing experience, where appropriate,
and financial stability, generally including a net worth requirement (to be
specified in the Agreement) as well as satisfaction of certain other criteria.
Each Servicer will be required to perform the customary functions of a
mortgage loan servicer, including collection of payments from borrowers (the
"Mortgagors") and remittance of such collections to the Trustee, maintenance of
applicable standard hazard insurance or primary mortgage insurance policies,
attempting to cure delinquencies, supervising foreclosures, management of
Mortgaged Properties under certain circumstances, and maintaining accounting
records relating to the Mortgage Loans and Contracts, as applicable, and, if
specified in the related Prospectus Supplement, maintenance of escrow or
impoundment accounts of Mortgagors for payment of taxes, insurance, and other
items required to be paid by the Mortgagor pursuant to the Mortgage Loan or
Contract. Each Servicer will also be obligated to make advances in respect of
delinquent installments on Mortgage Loans and Contracts, as applicable, as
described more fully under "--Payments on Mortgage Loans" and "--Advances"
below and in respect of certain taxes and insurance premiums not paid on a
timely basis by Mortgagors.
Each Servicer will be entitled to a monthly servicing fee as specified in
the related Prospectus Supplement. Each Servicer will also generally be
entitled to collect and retain, as part of its servicing compensation, late
payment charges and assumption underwriting fees. Each Servicer will be
reimbursed from proceeds of one or more of the insurance policies described
herein ("Insurance Proceeds") or from proceeds received in connection with the
liquidation of defaulted Mortgage Loans ("Liquidation Proceeds") for certain
expenditures pursuant to the Agreement. See "--Advances" and "--Servicing
Compensation and Payment of Expenses" below.
Each Servicer will be required to service each Mortgage Loan and Contract,
as applicable, pursuant to the terms of the Agreement for the entire term of
such Mortgage Loan and Contract, as applicable, unless such Agreement is
earlier terminated. Upon termination, a replacement for the Servicer will be
appointed.
PAYMENTS ON MORTGAGE LOANS
Each Servicer will establish and maintain a separate account (each, a
"Custodial Account"). Subject to the following paragraph, each Custodial
Account must be an account the deposits in which are fully insured by either
the Federal Deposit Insurance Corporation ("FDIC") or the National Credit Union
Administration ("NCUA") or are, to the extent such deposits are in excess of
the coverage provided by such insurance, continuously secured by certain
obligations issued or guaranteed by the United States of America. If at any
time the amount on deposit in such Custodial Account shall exceed the amount so
insured or secured, the applicable Servicer must remit to the Trustee the
amount on deposit in such Custodial Account which exceeds the amount so insured
or secured, less any amount such Servicer may retain for its own account
pursuant to its Servicing Agreement.
Notwithstanding the foregoing, the deposits in a Servicer's Custodial
Account will not be required to be fully insured or secured as described above,
and such Servicer will not be required to remit amounts on deposit therein in
excess of the amount so insured or secured, so long as such Servicer meets
certain requirements established by the rating agencies requested to rate the
Certificates.
Each Servicer is required to deposit into its Custodial Account on a daily
basis all amounts in respect of each Mortgage Loan received by such Servicer,
with interest adjusted to a rate (the "Remittance Rate") equal to the related
Mortgage Rate less the Servicer's servicing fee rate. On the day of each month
specified in the related Prospectus Supplement (the "Remittance Date"), each
Servicer of the Mortgage
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Loans will remit to the Trustee all funds held in its Custodial Account with
respect to each Mortgage Loan; provided, however, that Principal Prepayments
may be remitted on the Remittance Date in the month following the month of such
prepayment. Each Servicer will be required pursuant to the terms of the
Agreement and as specified in the related Prospectus Supplement, to remit with
each Principal Prepayment interest thereon at the Remittance Rate through the
last day of the month in which such Principal Prepayment is made. Each Servicer
may also be required to advance its own funds as described below.
ADVANCES
With respect to a delinquent Mortgage Loan or Contract, the related
Servicer may be obligated (but only to the extent set forth in the related
Prospectus Supplement) to advance its own funds or funds from its Custodial
Account equal to the aggregate amount of payments of principal and interest
(adjusted to the applicable Remittance Rate) which were due on a due date and
which are delinquent as of the close of business on the business day preceding
the Remittance Date ("Monthly Advance"). Generally, such advances will be
required to be made by the Servicer unless the Servicer determines that such
advances ultimately would not be recoverable under any applicable insurance
policy, from the proceeds of liquidation of the related Mortgaged Properties,
or from any other source (any amount not so reimbursable being referred to
herein as a "Nonrecoverable Advance"). Such advance obligation generally will
continue through the month following the month of final liquidation of such
Mortgage Loan or Contract. Any Servicer funds thus advanced will be
reimbursable to such Servicer out of recoveries on the Mortgage Loans or
Contracts with respect to which such amounts were advanced. Each Servicer will
also be obligated to make advances with respect to certain taxes and insurance
premiums not paid by Mortgagors on a timely basis. Funds so advanced are
reimbursable to the Servicers out of recoveries on the related Mortgage Loans
or Contracts. Each Servicer's right of reimbursement for any advance will be
prior to the rights of the Trust to receive any related Insurance Proceeds or
Liquidation Proceeds. Failure by a Servicer to make a required Monthly Advance
will be grounds for termination under the related Agreement.
COLLECTION AND OTHER SERVICING PROCEDURES
Each Servicer will service the Mortgage Loans and Contracts pursuant to
guidelines established in the related Agreement.
Mortgage Loans. The Servicer will be responsible for making reasonable
efforts to collect all payments called for under the Mortgage Loans. The
Servicer will be obligated to follow such normal practices and procedures as it
deems necessary or advisable to realize upon a defaulted Mortgage Loan. In this
regard, the Servicer may (directly or through a local assignee) sell the
property at a foreclosure or trustee's sale, negotiate with the Mortgagor for a
deed in lieu of foreclosure or, in the event a deficiency judgment is available
against the Mortgagor or other person (see "Certain Legal Aspects of the
Mortgage Assets C Foreclosure--Anti-Deficiency Legislation and Other
Limitations on Lenders" for a description of the limited availability of
deficiency judgments), foreclose against such property and proceed for the
deficiency against the appropriate person. The amount of the ultimate net
recovery (including the proceeds of any Mortgage Pool Insurance Policy or other
applicable Credit Enhancement), after reimbursement to the Servicer of its
expenses incurred in connection with the liquidation of any such defaulted
Mortgage Loan and prior unreimbursed advances of principal and interest with
respect thereto will be deposited in the Certificate Account when realized and
will be distributed to Owners of Certificates on the next Distribution Date
following the month of receipt.
With respect to Cooperative Loans, any prospective purchaser will
generally have to obtain the approval of the board of directors of the relevant
Cooperative before purchasing the shares and acquiring rights under the related
proprietary lease or occupancy agreement. See "Certain Legal Aspects of the
Mortgage Assets" herein. This approval is usually based on the purchaser's
income and net worth and numerous other factors. Although the Cooperative's
approval is unlikely to be unreasonably withheld or delayed, the necessity of
acquiring such approval could limit the number of potential purchasers for
those shares and otherwise limit the Trust's ability to sell and realize the
value of those shares.
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In general, a "tenant-stockholder" (as defined in Code Section 216(b) (2))
of a corporation that qualifies as a "cooperative housing corporation" within
the meaning of Code Section 216(b)(1) is allowed a deduction for amounts paid
or accrued within his taxable year to the corporation representing his
proportionate share of certain interest expenses and certain real estate taxes
allowable as a deduction under Code Section 216(a) to the corporation under
Code Sections 163 and 164. In order for a corporation to qualify under Code
Section 216(b)(1) for its taxable year in which such items are allowable as a
deduction to the corporation, such Section requires, among other things, that
at least 80% of the gross income of the corporation be derived from its
tenant-stockholders. By virtue of this requirement, the status of a corporation
for purposes of Code Section 216(b)(1) must be determined on a year-to-year
basis. Consequently, there can be no assurance that Cooperatives relating to
the Cooperative Loans will qualify under such Section for any particular year.
In the event that such a Cooperative fails to qualify for one or more years,
the value of the collateral securing any related Cooperative Loans could be
significantly impaired because no deduction would be allowable to its
tenant-stockholders under Code Section 216(a) with respect to those years. In
view of the significance of the tax benefits accorded tenant-stockholders of a
corporation that qualifies as a cooperative housing corporation, however, the
likelihood that such a failure would be permitted to continue over a period of
years appears remote.
The Servicer will expend its own funds to restore property securing a
Mortgage Loan which has sustained uninsured damage only if it determines that
such restoration will increase the proceeds to the Trust of liquidation of the
Mortgage Loan after the reimbursement to the Servicer of its expenses.
If a Mortgaged Property has been or is about to be conveyed by the
Mortgagor, the Servicer will be obligated (to the extent it has knowledge of
such conveyance) to accelerate the maturity of the Mortgage Loan, unless it
reasonably believes it is unable to enforce that Mortgage Loan's "due-on-sale"
clause under the applicable law. If it reasonably believes it may be restricted
by law, for any reason, from enforcing such a "due-on-sale" clause, the
Servicer may enter into an assumption and modification agreement with the
person to whom such property has been or is about to be conveyed, pursuant to
which such person becomes liable under the Mortgage Note, provided such person
satisfies the criteria required to maintain the coverage provided by applicable
insurance policies (unless otherwise restricted by applicable law). Any fee
collected by the Servicer for entering into an assumption agreement will be
retained by the Servicer as additional servicing compensation. For a
description of circumstances in which the Servicer may be unable to enforce
"due-on-sale" clauses, see "Certain Legal Aspects of the Mortgage
Assets--Foreclosure--Enforceability of Certain Provisions" herein. In
connection with any such assumption, the Mortgage Rate borne by the related
Mortgage Note may not be decreased.
If specified in the related Prospectus Supplement, the Servicer will
maintain with one or more depository institutions one or more accounts into
which it will deposit all payments of taxes, insurance premiums, assessments or
comparable items received for the account of the Mortgagors. Withdrawals from
such account or accounts may be made only to effect payment of taxes, insurance
premiums, assessments or comparable items, to reimburse the Servicer out of
related collections for any cost incurred in paying taxes, insurance premiums
and assessments or otherwise preserving or protecting the value of the
Mortgages, to refund to mortgagors any amounts determined to be overages and to
pay interest to Mortgagors on balances in such account or accounts to the
extent required by law.
So long as it acts as servicer of the Mortgage Loans, the Servicer will be
required to maintain certain insurance covering errors and omissions in the
performance of its obligations as servicer and certain fidelity bond coverage
ensuring against losses through wrongdoing of its officers, employees and
agents.
In the case of Multifamily Loans, a Mortgagor's failure to make required
Mortgage Loan payments may mean that operating income is insufficient to
service the mortgage debt, or may reflect the diversion of that income from the
servicing of the mortgage debt. In addition, a Mortgagor under a Multifamily
Loan that is unable to make Mortgage Loan payments may also be unable to make
timely payment of taxes and otherwise to maintain and insure the related
Mortgaged Property. In general, the Servicer will be required to monitor any
Multifamily Loan that is in default, evaluate whether the causes of the default
can be corrected over a reasonable period without significant impairment of the
value of the related Mortgaged Property, initiate corrective action in
cooperation with the Mortgagor if cure is likely, inspect
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the related Mortgaged Property and take such other actions as are consistent
with the Agreement. A significant period of time may elapse before the Servicer
is able to assess the success of any such corrective action or the need for
additional in initiatives. The time within which the Servicer can make the
initial determination of appropriate action, evaluate the success of corrective
action, develop additional initiatives, institute foreclosure proceedings and
actually foreclose (or accept a deed to a Mortgaged Property in lieu of
foreclosure) on behalf of the Owners of the related series may vary
considerably depending on the particular Multifamily Loan, the Mortgaged
Property, the Mortgagor, the presence of an acceptable party to assume the
Multifamily Loan and the laws of the jurisdiction in which the Mortgaged
Property is located. If a Mortgagor files a bankruptcy petition, the Servicer
may not be permitted to accelerate the maturity of the related Multifamily Loan
or to foreclose on the Mortgaged Property for a considerable period of time.
See "Certain Legal Aspects of Mortgage Loans."
Contracts. Pursuant to the Agreement, the Servicer will service and
administer the Contracts assigned to the Trustee as more fully set forth below.
The Servicer, either directly or through sub-servicers subject to general
supervision by the Servicer, will perform diligently all services and duties
required to be performed under the Agreement, in the same manner as performed
by prudent lending institutions of manufactured housing installment sales
contracts of the same type as the Contracts in those jurisdictions where the
related Manufactured Homes are located. The duties to be performed by the
Servicer will include collection and remittance of principal and interest
payments, collection of insurance claims and, if necessary, repossession.
Each Agreement will provide that when any Manufactured Home securing a
Contract is about to be conveyed by the borrower, the Servicer (to the extent
it has knowledge of such prospective conveyance and prior to the time of the
consummation of such conveyance) may exercise its rights to accelerate the
maturity of such Contract under the applicable "due-on-sale" clause, if any,
unless the Servicer reasonably believes it is unable to enforce such
"due-on-sale" clause under applicable law. In such case the Servicer is
authorized to take or enter into an assumption agreement from or with the
person to whom such Manufactured Home has been or is about to be conveyed,
pursuant to which such person becomes liable under the Contract, provided such
person satisfies the criteria required to maintain the coverage provided by
applicable insurance policies (unless otherwise restricted by applicable law).
Where authorized by the Contract, the annual percentage rate may be increased,
upon assumption, to the then-prevailing market rate but will not be decreased.
Under each Agreement the Servicer will repossess or otherwise comparably
convert the ownership of properties securing such of the related Contracts as
come into and continue in default and as to which no satisfactory arrangements
can be made for collection of delinquent payments. In connection with such
repossession or other conversion, the Servicer will follow such practices and
procedures as it deems necessary or advisable and as shall be normal and usual
in its general servicing activities. The Servicer, however, will not be
required to expend its own funds in connection with any repossession or towards
the restoration of any property unless it determines (i) that such restoration
or repossession will increase the proceeds of liquidation of the related
Contract to the Trust after reimbursement to itself for such expenses and (ii)
that such expenses will be recoverable to it either through Liquidation
Proceeds or through Insurance Proceeds.
PRIMARY MORTGAGE INSURANCE
Mortgage Loans that the Depositor acquires will generally not have primary
mortgage insurance. If obtained, the primary mortgage insurance policies will
not insure against certain losses which may be sustained in the event of a
personal bankruptcy of the mortgagor under a Mortgage Loan.
STANDARD HAZARD INSURANCE
Mortgage Loans. The Servicer will be required to cause to be maintained
for each Mortgage Loan a standard hazard insurance policy. The coverage of such
policy is required to be in an amount not less than the maximum insurable value
of the improvements securing such Mortgage Loan from time to time or the
principal balance owing on such Mortgage Loan from time to time, whichever is
less. In all events,
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such coverage shall be in an amount sufficient to ensure avoidance of the
applicability of the co-insurance provisions under the terms and conditions of
the applicable policy. The ability of each Servicer to assure that hazard
insurance proceeds are appropriately applied may be dependent on its being
named as an additional insured under any standard hazard insurance policy and
under any flood insurance policy referred to below, or upon the extent to which
information in this regard is furnished to such Servicer by Mortgagors. Each
Agreement may provide that the related Servicer may satisfy its obligation to
cause hazard insurance policies to be maintained by maintaining a blanket
policy insuring against hazard losses on the Mortgage Loans serviced by such
Servicer.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements on the property by fire,
lightning, explosion, smoke, wind-storm and hail, riot, strike and civil
commotion, subject to the conditions and exclusions particularized in each
policy. Although the policies relating to the Mortgage Loans will be
underwritten by different insurers and, therefore, will not contain identical
terms and conditions, the basic terms thereof are dictated by state law. Such
policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other
water-related causes, earth movement (including earthquakes, landslides and mud
flow), nuclear reactions, wet or dry rot, vermin, rodents, insects or domestic
animals, theft and, in certain cases, vandalism. The foregoing list is merely
indicative of certain kinds of uninsured risks and is not intended to be
all-inclusive. If the property securing a Mortgage Loan is located in a
federally designated flood area, flood insurance will be required to be
maintained in such amounts as would be required by FNMA in connection with its
mortgage loan purchase program. The Depositor may also purchase special hazard
insurance against certain of the uninsured risks described above. See "Credit
Enhancement--Special Hazard Insurance".
Since the amount of hazard insurance the Servicer is required to cause to
be maintained on the improvements securing the Mortgage Loans declines as the
principal balances owing thereon decrease, if the residential properties
securing the Mortgage Loans appreciate in value over time, the effect of
coinsurance in the event of partial loss may be that hazard insurance proceeds
will be insufficient to restore fully the damaged property.
The Depositor will not require that a standard hazard or flood insurance
policy be maintained on the cooperative dwelling relating to any Cooperative
Loan. Generally, the Cooperative itself is responsible for maintenance of
hazard insurance for the property owned by the Cooperative and the
tenant-stockholders of that Cooperative do not maintain individual hazard
insurance policies. To the extent, however, that a Cooperative and the related
borrower on a Cooperative Loan do not maintain such insurance or do not
maintain adequate coverage or any insurance proceeds are not applied to the
restoration of damaged property, any damage to such borrower's cooperative
dwelling or such Cooperative's building could significantly reduce the value of
the collateral securing such Cooperative Loan to the extent not covered by
other credit support.
Contracts. The Servicer will generally be required to cause to be
maintained with respect to each Contract one or more hazard insurance policies
which provide, at a minimum, the same coverage as a standard form fire and
extended coverage insurance policy that is customary for manufactured housing,
issued by a company authorized to issue such policies in the state in which the
Manufactured Home is located and in an amount which is not less than the
maximum insurable value of such Manufactured Home or the principal balance due
from the borrower on the related Contract, whichever is less. When a
Manufactured Home's location was, at the time of origination of the related
Contract, within a federally designated special flood hazard area, the Servicer
also shall cause such flood insurance to be maintained, which coverage shall be
at least equal to the minimum amount specified in the preceding sentence or
such lesser amount as may be available under the federal flood insurance
program.
The Servicer may maintain, in lieu of causing individual hazard insurance
policies to be maintained with respect to each Manufactured Home, and shall
maintain, to the extent that the related Contract does not require the borrower
to maintain a hazard insurance policy with respect to the related Manufactured
Home, one or more blanket insurance policies covering losses on the borrowers'
interests in the Contracts resulting from the absence or insufficiency of
individual hazard insurance policies.
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The Servicer, to the extent practicable, will cause the borrowers to pay
all taxes and similar governmental charges when and as due. To the extent that
nonpayment of any taxes or charges would result in the creation of a lien upon
any Manufactured Home having a priority equal or senior to the lien of the
related Contract, the Servicer will pay any such delinquent tax or charge.
If the Servicer repossesses a Manufactured Home on behalf of the Trustee,
the Servicer will either (i) maintain at its expense hazard insurance with
respect to such Manufactured Home or (ii) indemnify the Trustee against any
damage to such Manufactured Home prior to resale or other disposition.
TITLE INSURANCE POLICIES
The Agreements will generally require that a title insurance policy be in
effect on each of the Mortgaged Properties and that such title insurance policy
contain no coverage exceptions, except customary exceptions generally accepted
in the mortgage banking industry.
CLAIMS UNDER PRIMARY MORTGAGE INSURANCE POLICIES AND STANDARD HAZARD INSURANCE
POLICIES; OTHER REALIZATION UPON DEFAULTED LOAN
Each Servicer will present claims to any primary insurer under any related
primary mortgage insurance policy and to the hazard insurer under any related
standard hazard insurance policy. All collections under any related primary
mortgage insurance policy or any related standard hazard insurance policy (less
any proceeds to be applied to the restoration or repair of the related
Mortgaged Property or to the reimbursement of Advances by the Servicer) will be
remitted to the Trustee.
If any Mortgaged Property securing a defaulted Mortgage Loan is damaged
and proceeds, if any, from the related standard hazard insurance policy are
insufficient to restore the damaged property to a condition sufficient to
permit recovery under any applicable Mortgage Pool Insurance Policy or any
related primary mortgage insurance policy, each Servicer may be required to
expend its own finds to restore the damaged property to the extent specified in
the related Prospectus Supplement, but only to the extent it determines such
expenditures are recoverable from Insurance Proceeds or Liquidation Proceeds.
If recovery under any applicable Mortgage Pool Insurance Policy or any
related primary mortgage insurance policy is not available, the Servicer will
nevertheless be obligated to attempt to realize upon the defaulted Mortgage
Loan. Foreclosure proceedings will be conducted by the Servicer in accordance
with the Agreement. If the proceeds of any liquidation of the Mortgaged
Property securing the defaulted Mortgage Loan are less than the Principal
Balance of the defaulted Mortgage Loan plus interest accrued thereon, a loss
will be realized on such Mortgage Loan, to the extent the applicable Credit
Enhancement is not sufficient, in the amount of such difference plus the
aggregate of expenses which are incurred by the Servicer in connection with
such proceedings and are reimbursable under the Agreement. In such case there
will be a reduction in the value of the Mortgage Loans and Trust may be unable
to recover the full amount of principal and interest due thereon.
In addition, where a Mortgaged Property securing a defaulted Mortgage Loan
can be resold for an amount exceeding the principal balance of the related
Mortgage Loan together with accrued interest and expenses, it may be expected
that, where retention of any such amount is legally permissible, the Pool
Insurer will exercise its right under the related Mortgage Pool Insurance
Policy, if any, to purchase such Mortgaged Property and realize for itself any
excess proceeds. Any amounts remaining in the Certificate Account after such
foreclosure or liquidation and attributable to such Mortgage Loan will be
distributed to Owners of the Certificates.
REALIZATION UPON OR SALE OF DEFAULTED MULTIFAMILY LOANS
Unless otherwise specified in the related Prospectus Supplement, the
Servicer may not acquire title to any Multifamily Property securing a Mortgage
Loan or take any other action that would cause the related Trustee, for the
benefit of Owners of the related series, or any other specified person to be
considered to hold title to, to be a "mortgagee-in-possession" of, or to be an
"owner" or an "operator"
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of such Mortgaged Property within the meaning of certain federal environmental
laws, unless the Servicer has previously determined, based on a report prepared
by a person who regularly conducts environmental audits, that either:
(i) the Mortgaged Property is in compliance with applicable environmental
laws and regulations or, if not, that taking such actions are necessary to
bring the Mortgaged Property into compliance therewith is reasonably likely
to produce a greater recovery on a present value basis than not taking such
actions; and
(ii) there are no circumstances or conditions present at the Mortgaged
Property that have resulted in any contamination for which investigation,
testing, monitoring, containment, clean-up or remediation could be required
under any applicable environmental laws and regulations or, if such
circumstances or conditions are present for which any such action could be
required, taking such actions with respect to the Mortgaged Property is
reasonably likely to produce a greater recovery on a present value basis
than not taking such actions. See "Certain Legal Aspects of Mortgage
Loans--Foreclosure--Environmental Legislation."
In addition, unless otherwise specified in the related Prospectus
Supplement, the Servicer will not be obligated to foreclose upon or otherwise
convert the ownership of any Mortgaged Property securing a single family
Mortgage Loan if it has received notice or has actual knowledge that such
property may be contaminated with or affected by hazardous wastes or hazardous
substances; however, no environmental testing will generally be required. The
Servicer will not be liable to the Owners of the related series if, based on
its belief that no such contamination or affect exists, the Servicer forecloses
on a Mortgaged Property and takes title to such Mortgaged Property, and
thereafter such Mortgaged Property is determined to be so contaminated or
affected.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
As compensation for its servicing duties, each Servicer will be entitled
to a monthly servicing fee in the amount specified in the related Prospectus
Supplement. In addition to the primary compensation, a Servicer may be
permitted to retain all assumption underwriting fees and late payment charges,
to the extent collected from Mortgagors.
As set forth above, each Servicer will be entitled to reimbursement for
certain expenses incurred by it in connection with the liquidation of defaulted
Mortgage Loans and Contracts and in connection with advancing delinquent
payments. No loss will be suffered on the Certificates by reason of such
expenses to the extent claims for such expenses are paid directly under any
applicable Mortgage Pool Insurance Policy, a primary mortgage insurance policy,
the special hazard insurance policy or from other forms of Credit Enhancement.
In the event, however, that the defaulted Mortgage Loans are not covered by a
Mortgage Pool Insurance Policy, primary mortgage insurance policies, the
Special Hazard Insurance Policy or another form of Credit Enhancement, or
claims are either not made or paid under such policies or Credit Enhancement,
or if coverage thereunder has ceased, such a loss will occur to the extent that
the proceeds from the liquidation of a defaulted Mortgage Loan or Contract,
after reimbursement of the Servicer's expenses, are less than the Principal
Balance of such defaulted Mortgage Loan or Contract.
MASTER SERVICER
A Master Servicer may be specified in the related Prospectus Supplement
for the related series of Certificates. Customary servicing functions with
respect to Mortgage Loans constituting the Mortgage Pool will be provided by
the Servicer directly or through one or more Sub-Servicers subject to
supervision by the Master Servicer. If the Master Servicer is not directly
servicing the Mortgage Loans, then the Master Servicer will (i) administer and
supervise the performance by the Servicer of its servicing responsibilities
under the Agreement with the Master Servicer, (ii) maintain a current data base
with the payment histories of each Mortgagor, (iii) review monthly servicing
reports and data relating to the Mortgage Pool for discrepancies and errors,
and (iv) act as back-up Servicer during the term of the transaction unless the
Servicer is terminated or resigns in such case the Master Servicer shall assume
the obligations of the Servicer.
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The Master Servicer will be a party to the Agreement for any series for
which Mortgage Loans comprise the assets of a Trust. The Master Servicer will
be required to satisfy the standard established for the qualification of the
Master Servicer in the related Agreement. The Master Servicer will be
compensated for the performance of its services and duties under each Agreement
as specified in the related Prospectus Supplement.
ADMINISTRATION
The following summary describes certain provisions which will be common to
each Agreement. The summary does not purport to be complete and is subject to
the provisions of a particular Agreement.
ASSIGNMENT OF MORTGAGE ASSETS
Assignment of the Mortgage Loans. At the time of issuance of the
Certificates, the Depositor will assign the Mortgage Loans to the Trustee,
together with all principal and interest adjusted to the Remittance Rate,
subject to exclusions specified in the Prospectus Supplement, due on or with
respect to such Mortgage Loans on or after the Cut-Off Date. The Trustee will,
concurrently with such assignment, execute, countersign and deliver the
Certificates to the Depositor in exchange for the Mortgage Loans. Each Mortgage
Loan will be identified in a schedule appearing as an exhibit to the Agreement.
Such schedule may include information as to the Principal Balance of each
Mortgage Loan as of the Cut-Off Date, as well as information respecting the
Mortgage Rate, the scheduled monthly payment of principal and interest as of
the Cut-Off Date and the maturity date of each Mortgage Note.
In addition, as to each Mortgage Loan, the Depositor will deliver to the
Trustee the Mortgage Note and Mortgage, any assumption and modification
agreement, an assignment of the Mortgage in recordable form (but not
necessarily recorded), evidence of title insurance, if obtained, and, if
applicable, the certificate of private mortgage insurance. In instances where
recorded documents cannot be delivered due to delays in connection with
recording, the Depositor may deliver copies thereof and deliver the original
recorded documents promptly upon receipt.
With respect to any Mortgage Loans which are Cooperative Loans, the
Depositor will cause to be delivered to the Trustee, the related original
Cooperative note endorsed to the order of the Trustee, the original security
agreement, the proprietary lease or occupancy agreement, the recognition
agreement, an executed financing agreement and the relevant stock certificate
and related blank stock powers. The Depositor will file in the appropriate
office an assignment and a financing statement evidencing the Trustee's
security interest in each Cooperative Loan.
Each Seller generally will represent and warrant to the Depositor with
respect to the Mortgage Loans sold by it, among other things, that (i) the
information set forth in the schedule of Mortgage Loans attached thereto is
correct in all material respects: (ii) a lender's title insurance policy or
binder for each Mortgage Loan subject to the Agreement was issued on the date
of origination thereof and each such policy or binder assurance is valid and
remains in full force and effect or a legal opinion concerning title or title
search was obtained or conducted in connection with the origination of the
Mortgage Loans; (iii) at the date of initial issuance of the Certificates, the
Seller has good title to the Mortgage Loans and the Mortgage Loans are free of
offsets, defenses or counterclaims; (iv) at the date of initial issuance of the
Certificates, each Mortgage is a valid first lien on the property securing the
Mortgage Note (subject only to (a) the lien of current real property taxes and
assessments, (b) covenants, conditions, and restrictions, rights of way,
easements and other matters of public record as of the date of the recording of
such Mortgage, such exceptions appearing of record being acceptable to mortgage
lending institutions generally in the area wherein the property subject to the
Mortgage is located or specifically reflected in the appraisal obtained by the
Depositor and (c) other matters to which like properties are commonly subject
which do not materially interfere with the benefits of the security intended to
be provided by such Mortgage) and such property is free of material damage and
is in good repair or, with respect to a junior lien Mortgage Loan, that such
Mortgage is a valid junior lien Mortgage, as the case may be and specifying the
percentage of the Mortgage Loan Pool comprised of junior lien Mortgage Loans;
(v) at the date of initial issuance of the Certificates, no Mortgage Loan is 31
or more days delinquent (with such exceptions
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as may be specified in the related Prospectus Supplement) and there are no
delinquent tax or assessment liens against the property covered by the related
Mortgage; (vi) at the date of initial issuance of the Certificates, the portion
of each Mortgage Loan, if any, which in the circumstances set forth below under
"Servicing of Mortgage Loans and Contracts--Primary Mortgage Insurance" should
be insured with a private mortgage insurer is so insured; and (vii) each
Mortgage Loan at the time it was made complied in all material respects with
applicable state and federal laws, including, with out limitation, usury, equal
credit opportunity and disclosure laws. The Depositor's rights against the
Seller in the event of a breach of its representations will be assigned to the
Trustee for the benefit of the Certificates of such series.
Assignment of Contracts. The Depositor will cause the Contracts to be
assigned to the Trustee, together with principal and interest due on or with
respect to the Contracts on and after the Cut-Off Date. Each Contract will be
identified in a loan schedule ("Contract Loan Schedule") appearing as an
exhibit to the related Agreement. Such Contract Loan Schedule may specify, with
respect to each Contract, among other things: the original principal balance
and the outstanding Principal Balance as of the Cut-Off Date; the interest
rate; the current scheduled payment of principal and interest; and the maturity
date.
In addition, with respect to each Contract, the Depositor will deliver or
cause to be delivered to the Trustee, the original Contract and copies of
documents and instruments related to each Contract and the security interest in
the Manufactured Home securing each Contract. To give notice of the right,
title and interest of the Trust to the Contracts, the Depositor will cause a
UCC-1 financing statement to be filed identifying the Trustee as the secured
party and identifying all Contracts as collateral. The Contracts will not be
stamped or otherwise marked to reflect their assignment from the Depositor to
the Trustee. Therefore, if a subsequent purchaser were able to take physical
possession of the Contracts without notice of such assignment, the interest of
the Trust in the Contracts could be defeated. See "Certain Legal Aspects of the
Mortgage Assets" herein.
The Depositor or the related Seller, as the case may be, may provide
limited representations and warranties to the Trustee concerning the Contracts.
Such representations and warranties may include: (i) that the information
contained in the Contract Loan Schedule provides an accurate listing of the
Contracts and that the information respecting such Contracts set forth in such
Contract Loan Schedule is true and correct in all material respects at the date
or dates respecting which such information is furnished; (ii) that, immediately
prior to the conveyance of the Contracts, the Depositor had good title to and
was sole owner of, each such Contract; and (iii) that there has been no other
sale by it of such Contract and that the Contract is not subject to any lien,
charge, security interest or other encumbrance.
Assignment of Mortgage-Backed Securities and Other Mortgage
Securities. With respect to each series, the Depositor will cause any
Mortgage-Backed Securities and Other Mortgage Securities included in the
related Trust to be registered in the name of the Trustee (directly or through
a participant in a depository). The Trustee (or its custodian) will have
possession of any certificated Mortgage-Backed Securities and Other Mortgage
Securities. The Trustee will not be in possession of or be assignee of record
of any underlying assets for a Mortgage-Backed Security or Other Mortgage
Security. Each Mortgage-Backed Security and Other Mortgage Security will be
identified in a schedule appearing as an exhibit to the related Agreement which
may specify certain information with respect to such security, including, as
applicable, the original principal amount, outstanding principal balance as of
the Cut-Off Date, annual pass-through rate or interest rate and maturity date
and certain other pertinent information for each such security. The Depositor
will represent and warrant to the Trustee, among other things, the information
contained in such schedule is true and correct and that immediately prior to
the transfer of the related securities to the Trustee, the Depositor had good
title to, and was the sole owner of, each such security.
Repurchase or Substitution of Mortgage Loans and Contracts. The Trustee
will review the documents delivered to it with respect to the Mortgage Loans
and Contracts included in the related Trust. If any document is not delivered
or is found to be defective in any material respect and the Depositor or the
related Seller, if so required cannot deliver such document or cure such defect
within the period specified in the related Prospectus Supplement after notice
thereof (which the Trustee will undertake to give within the period specified
in the related Prospectus Supplement), and if any other party obligated to
deliver such document or cure such defect has not done so and has not
substituted or repurchased the
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affected Mortgage Loan or Contract then the Depositor will cause the Seller,
not later than the first date designated for the deposit of payments into the
Certificate Account (a "Deposit Date") which is more than a specified number of
days after such period, (a) if so provided in the Prospectus Supplement to
remove the affected Mortgage Loan or Contract from the Trust and substitute one
or more other Mortgage Loans or Contracts therefor or (b) repurchase the
Mortgage Loan or Contract from the Trustee for a price equal to 100% of its
Principal Balance plus one month's interest thereon at the applicable
Remittance Rate. This repurchase and, if applicable, substitution obligation
will generally constitute the sole remedy available to the Trustee for a
material defect in a document relating to a Mortgage Loan or Contract.
The Depositor is required to cause the Seller to do either of the
following (a) cure any breach of any representation or warranty that materially
and adversely affects the interests of the Owners of the Certificates in a
Mortgage Loan (each, a "Defective Mortgage Loan") or Contract within a
specified number of days of its discovery by the Depositor or its receipt of
notice thereof from the Trustee, (b) repurchase such Defective Mortgage Loan or
Contract not later than the first Deposit Date which is more than a specified
number of days after such period for a price equal to 100% of its Principal
Balance plus one month's interest thereon at the applicable Remittance Rate, or
(c) if so specified in the Prospectus Supplement, remove the affected Mortgage
Loan or Contract from the Trust and substitute one or more other mortgage loans
or contracts therefor. This repurchase and, if applicable, substitution
obligation will generally constitute the sole remedies available to the Trustee
for any such breach.
If the related Prospectus Supplement so provides, the Depositor or a
designated affiliate may be obligated to repurchase or substitute Mortgage
Loans or Contracts as described above, whether or not the Depositor obtains
such an agreement from the Seller which sold such Mortgage Loans or Contracts.
If a REMIC election is to be made with respect to all or a portion of a
Trust, there may be federal income tax limitations on the right to substitute
Mortgage Loans or Contracts.
EVIDENCE AS TO COMPLIANCE
The Agreement will provide that on or before a specified date in each
year, beginning the first such date that is at least a specified number of
months on and after the Cut-Off Date, a firm of independent public accountants
will furnish a statement to the Trustee to the effect that, based on an
examination of certain specified documents and records relating to the
servicing of the Depositor's mortgage loan portfolio conducted substantially in
compliance with the audit program for mortgages serviced for FNMA or FHLMC, the
United States Department of Housing and Urban Development Mortgage Audit
Standards or the Uniform Single Audit Program for Mortgage Bankers or in
accordance with other standards specified in the Agreement (the "Applicable
Accounting Standards"), such firm is of the opinion that such servicing has
been conducted in compliance with the Applicable Accounting Standards except
for (a) such exceptions as such firm shall believe to be immaterial and (b)
such other exceptions as shall be set forth in such statement.
THE TRUSTEE
Any commercial bank or trust company serving as Trustee may have normal
banking relationships with the Depositor. In addition, the Depositor and the
Trustee acting jointly will have the power and the responsibility for
appointing co-trustees or separate trustees of all or any part of the Trust
relating to a particular series of Certificates. In the event of such
appointment, all rights, powers, duties and obligations conferred or imposed
upon the Trustee by the Agreement shall be conferred or imposed upon the
Trustee and such separate trustee or co-trustee jointly, or, in any
jurisdiction in which the Trustee shall be incompetent or unqualified to
perform certain acts, singly upon such separate trustee or co-trustee who shall
exercise and perform such rights, powers, duties and obligations solely at the
direction of the Trustee.
The Trustee will make no representations as to the validity or sufficiency
of the Agreement, the Certificates or of any Mortgage Asset or related
document, and will not be accountable for the use or application by the
Depositor of any funds paid to the Depositor in respect of the Certificates or
the related assets, or amounts deposited in the Certificate Account or
deposited into the Distribution Account. If no
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Event of Default has occurred, the Trustee will be required to perform only
those duties specifically required of it under the Agreement. However, upon
receipt of the various certificates, reports or other instruments required to
be furnished to it, the Trustee will be required to examine them to determine
whether they conform to the requirements of the Agreement.
The Trustee may resign at any time, and the Depositor may remove the
Trustee if the Trustee ceases to be eligible to continue as such under the
Agreement, if the Trustee becomes insolvent or in such other instances, if any,
as are set forth in the Agreement. Following any resignation or removal of the
Trustee, the Depositor will be obligated to appoint a successor Trustee. Any
resignation or removal of the Trustee and appointment of a successor Trustee
will not become effective until acceptance of the appointment by the successor
Trustee.
ADMINISTRATION OF THE CERTIFICATE ACCOUNT
The Agreement will require that the Certificate Account be either (i)
maintained with a depository institution the debt obligations of which (or, in
the case of a depository institution which is a part of a holding company
structure, the debt obligations of the holding company of which) have a rating
acceptable to each rating agency that was requested to rate the Certificates,
or (ii) an account or accounts the deposits in which are fully insured by
either the Bank Insurance Fund (the "BIF") of the FDIC or the Savings
Association Insurance Fund (as successor to the Federal Savings and Loan
Insurance Corporation) ("SAIF") of the FDIC. The collateral eligible to secure
amounts in the Certificate Account is limited to United States government
securities and other investments acceptable to the rating agencies rating such
series of Certificates, and may include one or more Certificates of a series
("Eligible Investments"). If so specified in the related Prospectus Supplement,
a Certificate Account may be maintained as an interest bearing account, or the
funds held therein may be invested pending each succeeding Payment Date in
Eligible Investments. If so specified in the related Prospectus Supplement, the
Servicer or its designee will be entitled to receive any such interest or other
income earned on funds in the Certificate Account as additional compensation.
The Servicer will deposit in the Certificate Account from amounts previously
deposited by it into the Servicer's Custodial Account on the related Remittance
Date the following payments and collections received or made by it on and after
the Cut-Off Date (including scheduled payments of principal and interest due on
and after the Cut-Off Date but received before the Cut-Off Date):
(i) all Mortgagor payments on account of principal, including Principal
Prepayments and, if specified in the related Prospectus Supplement,
prepayment penalties;
(ii) all Mortgagor payments on account of interest, adjusted to the
Remittance Rate;
(iii) all Liquidation Proceeds net of certain amounts reimbursed to the
Servicer or other person entitled thereto, as described above;
(iv) all Insurance Proceeds, other than proceeds to be applied to the
restoration or repair of the related property or released to the Mortgagor
and net of certain amounts reimbursed to the Servicer or other person
entitled thereto, as described above;
(v) all condemnation awards or settlements which are not released to the
Mortgagor in accordance with normal servicing procedures;
(vi) any Advances made as described under "Servicing of Mortgage Loans
and Contracts - Advances" herein and certain other amounts required under
the Agreement to be deposited in the Certificate Account;
(vii) all proceeds of any Mortgage Loan or Contract or property acquired
in respect thereof repurchased by the Depositor, the Seller or otherwise as
described above or under "Termination" below;
(viii) all amounts, if any, required to be deposited in the Certificate
Account from any Credit Enhancement for the related series; and
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(ix) all other amounts required to be deposited in the Certificate
Account pursuant to the related Agreement.
REPORTS
Concurrently with each distribution on the Certificates, there will be
mailed to Owners a statement generally setting forth, to the extent applicable
to any series, among other things:
(i) the aggregate amount of such distribution allocable to principal,
separately identifying the amount allocable to each class;
(ii) the amount of such distribution allocable to interest, separately
identifying the amount allocable to each class;
(iii) the aggregate Certificate Principal Balance of each class of the
Certificates after giving effect to distributions on such Distribution
Date;
(iv) the aggregate Certificate Principal Balance of any class of Compound
Interest Certificates after giving effect to any increase in such Principal
Balance that results from the accrual of interest that is not yet
distributable thereon;
(v) if applicable, the amount otherwise distributable to any class of
Certificates that was distributed to other classes of Certificates;
(vi) if any class of Certificates has priority in the right to receive
Principal Prepayments, the amount of Principal Prepayments in respect of
the related Mortgage Assets;
(vii) the aggregate Principal Balance and number of Mortgage Loans and
Contracts which were delinquent as to a total of two installments of
principal and interest; and
(viii) the aggregate Principal Balances of Mortgage Loans and Contracts
which (a) were delinquent 30-59 days, 60-89 days, and 90 days or more, and
(b) were in foreclosure.
Customary information deemed necessary for Owners to prepare their tax
returns will be furnished annually.
FORWARD COMMITMENTS; PRE-FUNDING
The Trustee of a Trust may enter into a Pre-Funding Agreement for the
transfer of additional Mortgage Loans to such Trust following the date on which
such Trust is established and the related Certificates are issued. The Trustee
of a Trust may enter into Pre-Funding Agreements to permit the acquisition of
additional Mortgage Loans that could not be delivered by the Depositor or have
not formally completed the origination process, in each case prior to the
Delivery Date. Any Pre-Funding Agreement will require that any Mortgage Loans
so transferred to a Trust conform to the requirements specified in such
Pre-Funding Agreement. If a Pre-Funding Agreement is to be utilized, the
related Trustee will be required to deposit in the Purchase Account all or a
portion of the proceeds received by the Trustee in connection with the sale of
one or more classes of Certificates of the related series; the additional
Mortgage Loans will be transferred to the related Trust in exchange for money
released from the related Pre-Funding Account. Each Pre-Funding Agreement will
set a specified period during which any such transfers must occur. The
Pre-Funding Agreement or the related Agreement will require that, if all moneys
originally deposited to such Pre-Funding Account are not so used by the end of
such specified period, then any remaining moneys will be applied as a mandatory
prepayment of the related class or classes of Certificates as specified in the
related Prospectus Supplement. The specified period for the acquisition by a
Trust of additional Mortgage Loans is not expected to exceed three months from
the date such Trust is established.
SERVICER EVENTS OF DEFAULT
"Events of Default" under the Agreement will consist of (i) any failure by
the Servicer to duly observe or perform in any material respect any other of
its covenants or agreements in the Agreement
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materially affecting the rights of Owners which continues unremedied for a
specified number of days after the giving of written notice of such failure to
the Depositor by the Trustee or to the Servicer and the Trustee by the Owners
of Certificates evidencing interests aggregating not less than 25% of the
affected class of Certificates; and (ii) certain events of insolvency,
readjustment of debt, marshaling of assets and liabilities or similar
proceedings and certain actions by the Servicer indicating its insolvency,
reorganization or inability to pay its obligations.
RIGHTS UPON SERVICER EVENT OF DEFAULT
As long as an Event of Default under the Agreement remains unremedied by
the Servicer, the Trustee, or Owners of Certificates may terminate all the
rights and obligations of the Servicer under the Agreement, whereupon the
Trustee or Master Servicer, if any, or a new Servicer appointed pursuant to the
Agreement, will succeed to all the responsibilities, duties and liabilities of
the Servicer under the Agreement and will be entitled to similar compensation
arrangements. Following such termination, the Depositor shall appoint any
established mortgage loan servicer satisfying the qualification standards
established in the Agreement to act as successor to the Servicer under the
Agreement. If no such successor shall have been appointed within a specified
number of days following such termination, then either the Depositor or the
Trustee may petition a court of competent jurisdiction for the appointment of a
successor Servicer. Pending the appointment of a successor Servicer, the
Trustee or the Master Servicer, if any, shall act as Servicer.
The Owners of Certificates will not have any right under the Agreement to
institute any proceeding with respect to the Agreement, unless they previously
have given to the Trustee written notice of default and unless the Owners of
the percentage of the Certificates specified in the Prospectus Supplement have
made written request to the Trustee to institute such proceeding in its own
name as Trustee thereunder and have offered to the Trustee reasonable indemnity
and the Trustee for a specified number of days has neglected or refused to
institute any such proceedings. However, the Trustee is under no obligation to
exercise any of the trusts or powers vested in it by the Agreement or to make
any investigation of matters arising thereunder or to institute, conduct or
defend any litigation thereunder or in relation thereto at the request, order
or direction of any of the Owners, unless such Owners have offered to the
Trustee reasonable security or indemnity against the costs, expenses and
liabilities which may be incurred therein or thereby.
AMENDMENT
An Agreement generally may be amended by the Depositor, the Servicer and
the Trustee, without the consent of the Owners of the Certificates, to cure any
ambiguity, to correct or supplement any provision therein which may be
defective or inconsistent with any other provision therein, to take any action
necessary to maintain REMIC status of any Trust as to which a REMIC election
has been made, to add any other provisions with respect to matters or questions
arising under the Agreement which are not materially inconsistent with the
provisions of the Agreement or for any other purpose, provided that with
respect to amendments for any other purpose (a) the Depositor shall deliver an
opinion of counsel satisfactory to the Trustee, that such amendment will not
adversely affect in any material respect the interests of any Owners of
Certificates of that series and (B) such amendment will not result in a
withdrawal or reduction of the rating of any rated Certificate. Notwithstanding
the foregoing, no such amendment may (i) reduce in any manner the amount of, or
delay the timing of, collections of payments received on the related Mortgage
Assets or distributions which are required to be made on any Certificate
without the consent of the Owner of such Certificate, (ii) adversely affect in
any material respect the interests of the Owners of any class of Certificates
in any manner other than as described in (i), without the consent of the Owners
of Certificates of such class evidencing not less than a majority of the
interests of such class or (iii) reduce the aforesaid percentage of
Certificates of any class required to consent to any such amendment, without
the consent of the Owners of all Certificates of such class then outstanding.
Any other amendment provisions inconsistent with the foregoing shall be
specified in the related Prospectus Supplement.
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TERMINATION
The obligations of the Depositor, the Servicer, and the Trustee created by
the Agreement will terminate upon the payment as required by the Agreement of
all amounts held by the Servicer or in the Certificate Account and required to
be paid to them pursuant to the Agreement after the later of (i) the maturity
or other liquidation of the last Mortgage Asset subject thereto or the
disposition of all property acquired upon foreclosure of any such Mortgage Loan
or Contract or (ii) the repurchase by the Depositor from the Trust of all the
outstanding Certificates or all remaining assets in the Trust. The Agreement
will establish the repurchase price for the assets in the Trust and the
allocation of such purchase price among the classes of Certificates. The
exercise of such right will effect early retirement of the Certificates of that
series, but the Depositor's right so to repurchase will be subject to the
conditions described in the related Prospectus Supplement. If a REMIC election
is to be made with respect to all or a portion of a Trust, there may be
additional conditions to the termination of such Trust which will be described
in the related Prospectus Supplement. In no event, however, will the trust
created by the Agreement continue beyond the expiration of 21 years from the
death of the survivor of certain persons named in the Agreement. The Trustee
will give written notice of termination of the Agreement to each Owner, and the
final distribution will be made only upon surrender and cancellation of the
Certificates at an office or agency of the Trustee specified in such notice of
termination.
USE OF PROCEEDS
Substantially all the net proceeds to be received from the sale of each
series of Certificates will be applied to the simultaneous purchase of the
Mortgage Assets related to such series (or to reimburse the amounts previously
used to effect such a purchase), the costs of carrying such Mortgage Assets
until sale of the Certificates and to pay other expenses.
THE DEPOSITOR
The Depositor will have no ongoing servicing obligations or
responsibilities with respect to any Mortgage Pool or Contract Pool. The
Depositor does not have, nor is it expected in the future to have, any
significant net worth.
The Depositor anticipates that it will acquire Mortgage Assets in the open
market or in privately negotiated transactions, which may be through or from an
affiliate.
Neither the Depositor nor any of its affiliates will insure or guarantee
the Certificates of any series.
CERTAIN LEGAL ASPECTS OF THE MORTGAGE ASSETS
The following discussion contains summaries of certain legal aspects of
mortgage loans and manufactured housing contracts which are general in nature.
Because such legal aspects are governed primarily by applicable state law
(which laws may differ substantially), the summaries do not purport to be
complete nor to reflect the laws of any particular state, nor to encompass the
laws of all states in which the security for the Mortgage Loans and Contracts
is situated. The summaries are qualified by reference to the applicable federal
and state laws governing the Mortgage Loans and Contracts.
GENERAL
Mortgages. The Mortgage Loans will be secured either by deeds of trust or
mortgages. A mortgage creates a lien upon the real property encumbered by the
mortgage. It is not prior to liens for real estate taxes and assessments.
Priority between mortgages depends on their terms and generally on the order of
filing with a state or county office. There are two parties to a mortgage: the
mortgagor, who is the borrower and homeowner or the land trustee (as described
below), and the mortgagee, who is the lender. Under the mortgage instrument,
the mortgagor delivers to the mortgagee a note or bond and the mortgage.
Although a deed of trust is similar to a mortgage, a deed of trust formally has
three parties, the borrower-homeowner called the trustor (similar to a
mortgager), a lender (similar to a mortgagee) called the beneficiary, and a
third-party grantee called the trustee. Under a deed of trust, the borrower
grants
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the property, irrevocably until the debt is paid, in trust and generally with a
power of sale, to the trustee to secure payment of the obligation. The
trustee's authority under a deed of trust and the mortgagee's authority under a
mortgage are governed by law, the express provisions of the deed of trust or
mortgage and, in some cases, the directions of the beneficiary.
Cooperatives. Certain of the Mortgage Loans may be Cooperative Loans. The
private, non-profit, cooperative apartment corporation owns all the real
property that comprises the project, including the land, separate dwelling
units and all common areas. The cooperative is directly responsible for project
management and, in most cases, payment of real estate taxes and hazard and
liability insurance. If there is a blanket mortgage on the cooperative
apartment building and or underlying land, as is generally the case, the
cooperative, as project mortgagor, is also responsible for meeting these
mortgage obligations. A blanket mortgage is ordinarily incurred by the
cooperative in connection with the construction or purchase of the
cooperative's apartment building. The interest of the occupant under
proprietary leases or occupancy agreements to which that cooperative is a party
are generally subordinate to the interest of the holder of the blanket mortgage
in that building. If the cooperative is unable to meet the payment obligations
arising under its blanket mortgage, the mortgagee holding the blanket mortgage
could foreclose on that mortgage and terminate all subordinate proprietary
leases and occupancy agreements. In addition, the blanket mortgage on a
cooperative may provide financing in the form of a mortgage that does not fully
amortize with a significant portion of principal being due in one lump sum at
final maturity. The inability of the cooperative to refinance this mortgage and
its consequent inability to make such final payment could lead to foreclosure
by the mortgagee providing the financing. A foreclosure in either event by the
holder of the blanket mortgage could eliminate or significantly diminish the
value of any collateral held by the lender who financed the purchase by an
individual tenant-stockholder of cooperative shares or in the case of a Trust
including Cooperative Loans, the collateral securing the Cooperative Loans.
The cooperative is owned by tenant-stockholders who, through ownership of
stock shares or membership certificates in the corporation, receive proprietary
leases or occupancy agreements which confer exclusive rights to occupy specific
units. Generally, a tenant-stockholder of a cooperative must make a monthly
payment to the cooperative representing such tenant-stockholder's pro rata
share of the cooperative's payments for its blanket mortgage, real property
taxes, maintenance expenses and other capital or ordinary expenses. An
ownership interest in a cooperative and accompanying occupancy rights is
financed through a cooperative share loan evidenced by a promissory note and
secured by a security interest in the occupancy agreement or proprietary lease
and in the related cooperative shares. The lender takes possession of the share
certificate and a counterpart of the proprietary lease or occupancy agreement
and a financing statement covering the proprietary lease or occupancy agreement
and the cooperative shares is filed in the appropriate state and local offices
to perfect the lenders interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant-stockholder, the lender may sue for
judgment on the promissory note, dispose of the collateral at a public or
private sale or otherwise proceed against the collateral or tenant-stockholder
as an individual as provided in the security agreement covering the assignment
of the proprietary lease or occupancy agreement and the pledge of cooperative
shares.
FORECLOSURE
Mortgages. Foreclosure of a deed of trust is generally accomplished by a
non-judicial trustee's sale under a specific provision in the deed of trust
that authorizes the trustee to sell the property to a third party upon any
default by the borrower under the terms of the note or deed of trust. In some
states, the trustee must record a notice of default and send a copy to the
borrower-trustor or and any person who has recorded a request for a copy of a
notice of default and notice of sale. In addition, the trustee must provide
notice in some states to any other individual having an interest in the real
property, including any junior lienholders. The borrower, or any other person
having a junior encumbrance on the real estate, may, during a reinstatement
period, cure the default by paying the entire amount in arrears plus the costs
and expenses incurred in enforcing the obligation. Generally, state law
controls the amount of foreclosure expenses and costs, including attorney's
fees' which may be recovered by a lender. If the deed of trust is
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not reinstated, a notice of sale must be posted in a public place and, in most
states, published for a specific period of time in one or more newspapers. In
addition, some state laws require that a copy of the notice of sale be posted
on the property and sent to all parties having an interest in the real
property.
Foreclosure of a mortgage is generally accomplished by judicial action.
The action is initiated by the service of legal pleadings upon all parties
having an interest in the real property. Delays in completion of the
foreclosure may occasionally result from difficulties in locating necessary
parties defendant. Judicial foreclosure proceedings are often not protested by
any of the parties defendant. However, when the mortgagee's right to foreclose
is contested, the legal proceedings necessary to resolve the issue can be time
consuming. After the completion of judicial foreclosure, the court generally
issues a judgment of foreclosure and appoints a referee or other court officer
to conduct the sale of the property.
In case of foreclosure under either a mortgage or a deed of trust, the
sale by the referee or other designated officer or by the trustee is a public
sale. However, because of the difficulty a potential buyer at the sale would
have in determining the exact status of title and because the physical
condition of the property may have deteriorated during foreclosure proceedings,
it is uncommon for a third party to purchase the property at the foreclosure
sale. Rather it is common for the lender to purchase the property from the
trustee or referee for an amount equal to the principal amount of the mortgage
or deed of trust, accrued and unpaid interest and expenses of foreclosure.
Thereafter, the lender will assume the burdens of ownership, including paying
real estate taxes, obtaining casualty insurance and making such repairs at its
own expense as are necessary to render the property suitable for sale. The
lender will commonly obtain the services of a real estate broker and pay the
broker's commission in connection with the sale of the property. Depending upon
market conditions, the ultimate proceeds of the sale of the property may not
equal the lender's investment in the property. Any loss may be reduced by the
receipt of any mortgage insurance proceeds.
When the junior mortgagee or beneficiary under a junior deed of trust
cures the default and state law allows it to reinstate or redeem by paying the
full amount of the senior mortgage or deed of trust, then in those states the
amount paid so to cure or redeem generally becomes a part of the indebtedness
secured by the junior mortgage or deed of trust. See "Junior Liens; Rights of
Senior Mortgagors or Beneficiaries" below.
A sale conducted in accordance with the terms of the power of sale
contained in a mortgage or deed of trust is generally presumed to be conducted
regularly and fairly, and a conveyance of the real property by the trustee
confers, in most states, legal title to the real property to the purchaser,
free of all junior mortgages or deeds of trust and free of all other liens and
claims subordinate to the mortgage or deed of trust under which the sale is
made (with the exception of certain governmental liens). The purchaser's title
is, however, subject to all senior liens, encumbrances and mortgages and may be
subject to mechanic's and materialman's liens in some states. Thus, if the
mortgage or deed of trust being foreclosed is a junior mortgage or deed of
trust, the sheriff or trustee will convey title to the purchaser of the real
property, subject to any existing first mortgage or deed of trust and any other
prior liens and claims. The foreclosure of a junior mortgage or deed of trust,
generally, will have an effect on the first mortgage or deed of trust, if the
senior mortgage or deed of trust grants to the senior mortgagee or beneficiary
the right to accelerate its indebtedness under a "due-on-sale" clause or "due
on further encumbrance" clause contained in the senior mortgage or deed of
trust. See "Anti-Deficiency Legislation and Other Limitations on Lenders"
below.
The proceeds received by the sheriff or trustee from the sale are applied
pursuant to the terms of the deed of trust, which may require application first
to the costs, fees and expenses of sale and then in satisfaction of the
indebtedness secured by the mortgage or deed of trust under which the sale was
conducted. In some states, any surplus money remaining may be available to
satisfy claims of the holders of junior mortgages or deeds of trust and other
junior liens and claims in order of their priority, whether or not the
mortgagor or trustee is in default, while in some states, any surplus money
remaining may be payable directly to the mortgagor or trustor. Any balance
remaining is generally payable to the mortgagor or trustor. Following the sale,
in some states the mortgagee or beneficiary following a foreclosure of a
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mortgage or deed of trust may not obtain a deficiency judgment against the
mortgagor or trustor. A junior lienholder whose rights in the property are
terminated by the foreclosure by a senior lienholder will not share in the
proceeds from the subsequent disposition of the property.
Cooperative Loans. The cooperative shares owned by the tenant-stockholder
and pledged to the lender are, in almost all cases, subject to restrictions on
transfer as set forth in the cooperative's Certificate of Incorporation and
Bylaws, as well as the proprietary lease or occupancy agreement, and may be
canceled by the cooperative for failure by the tenant-stockholder to pay rent
or other obligations or charges owned by such tenant-stockholder, including
mechanics' liens against the cooperative apartment building incurred by such
tenant-stockholder. The proprietary lease or occupancy agreement generally
permits the cooperative to terminate such lease or agreement in the event an
obligor fails to make payments or defaults in the performance of covenants
required thereunder. Typically, the lender and the cooperative enter into a
recognition agreement which establishes the rights and obligations of both
parties in the event of a default by the tenant-stockholder on its obligations
under the proprietary lease or occupancy agreement. A default by the
tenant-stockholder under the proprietary lease or occupancy agreement will
usually constitute a default under the security agreement between the lender
and the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the cooperative will recognize the
lender's lien against proceeds from a sale of the cooperative apartment,
subject, however, to the cooperative's right to sums due under such proprietary
lease or occupancy agreement. The total amount owed to the cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the cooperative loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that in the event of a foreclosure on
a cooperative loan, the lender must obtain the approval or consent of the
cooperative as required by the proprietary lease before transferring the
cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited in any rights it may have to dispossess the tenant-stockholders.
In some states, foreclosure on the cooperative shares is accomplished by a
sale in accordance with the provisions of Article 9 of the Uniform Commercial
Code (the "UCC") and the security agreement relating to those shares. Article 9
of the UCC requires that a sale be conducted in a "commercially reasonable"
manner. Whether a foreclosure sale has been conducted in a "commercially
reasonable" manner will depend on the facts in each case. In determining
commercial reasonableness, a court will look to the notice given the debtor and
the method, manner, time, place and terms of the foreclosure. Generally, a sale
conducted according to the usual practice of banks selling similar collateral
will be considered reasonably conducted. Article 9 of the UCC provides that the
proceeds of the sale will be applied first to pay the costs and expenses of the
sale and then to satisfy the indebtedness secured by the lender's security
interest. The recognition agreement, however, generally provides that the
lender's right to reimbursement is subject to the right of the cooperative
corporation to receive sums due under the proprietary lease or occupancy
agreement. If there are proceeds remaining, the lender must account to the
tenant-stockholder for the surplus. Conversely, if a portion of the
indebtedness remains unpaid, the tenant-stockholder is generally responsible
for the deficiency. See "Anti-Deficiency Legislation and Other Limitations on
Lenders" below.
Junior Liens; Rights of Senior Mortgagees or Beneficiaries. Certain of the
Mortgage Loans, including Title I Loans, may be secured by mortgages or deeds
of trust providing for junior (i.e., second, third, etc.) liens on the related
Mortgaged Properties which are junior to the other mortgages or deeds of trust
held by other lenders or institutional investors. The rights of the beneficiary
under a junior deed of trust or as mortgagee under a junior mortgage are
subordinate to those of the mortgagee or beneficiary under the senior mortgage
or deed of trust, including the prior rights of the senior mortgagee or
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beneficiary to receive hazard insurance and condemnation proceeds and to cause
the property securing the Mortgage Loans to be sold upon default of the
mortgagor or trustor. As discussed more fully below, a junior mortgagee or
beneficiary in some states may satisfy a defaulted senior loan in full and in
some states may cure such default and bring the senior loan current, in either
event adding the amounts expended to the balance due on the junior loan. In
most states, absent a provision in the senior mortgage or deed of trust, no
notice of default is required to be given to a junior mortgagee or beneficiary.
The forms of the mortgage or deed of trust used by most institutional
lenders generally confer on the mortgagee or beneficiary the right both to
receive all proceeds collected under any hazard insurance policy and all awards
made in connection with any condemnation proceedings, and to apply such
proceeds and awards to any indebtedness secured by the mortgage or deed of
trust, in such order as the mortgagee or beneficiary may determine. Thus, in
the event improvements on the property are damaged or destroyed by fire or
other casualty, or in the event the bankruptcy is taken by condemnation, the
mortgagee or beneficiary under the underlying first mortgage or deed of trust
may have the prior right to collect any insurance proceeds payable under a
hazard insurance policy and any award of damages in connection with the
condemnation and to apply the same to the indebtedness secured by the first
mortgage or deed of trust. In those situations, proceeds in excess of the
amount of first mortgage indebtedness generally may be applied to the
indebtedness of a junior mortgage or trust deed.
Other provisions typically found in the form of the mortgagee or deed of
trust generally used by most institutional lenders obligate the mortgagor or
trustor to pay before delinquency all taxes and assessments on the property
and, when due, all encumbrances, charges and liens on the property which appear
prior to the mortgage or deed of trust, to provide and maintain fire insurance
on the property, to maintain and repair the property and not to commit or
permit any waste thereof, and to appear in and defend any action or proceeding
purporting to affect the property or the rights of the mortgagee or beneficiary
under the mortgage or deed of trust. Upon a failure of the mortgagor or trustor
to perform any of these obligations, the mortgagee or beneficiary typically is
given the right under the mortgage or deed of trust to perform the obligation
itself at its election, with the mortgagor or trustor agreeing to reimburse the
mortgagee or beneficiary for any sums expended by the mortgagee or beneficiary
on behalf of the trustor. All sums so expended by the mortgagee or beneficiary
generally become part of the indebtedness secured by the mortgage or deed of
trust
Right of Redemption. In some states, after sale pursuant to a deed of
trust or foreclosure of a mortgage, the borrower and foreclosed junior lienors
are given a statutory period in which to redeem the property following
foreclosure. In some states, redemption may occur only upon payment of the
entire principal balance of the loan, accrued interest and expenses of
foreclosure. In other states, redemption may be authorized if the former
borrower pays only a portion of the sums due. The effect of a statutory right
of redemption is to diminish the ability of the lender to sell the foreclosed
property. The rights of redemption would defeat the title of any purchaser from
the lender subsequent to foreclosure or sale under a deed of trust.
Consequently, the practical effect of the redemption right is to force the
lender to retain the property and pay the expenses of ownership until the
redemption period has run.
Anti-Deficiency Legislation and Other Limitations on Lenders. Certain
states have imposed statutory prohibitions that limit the remedies of a
beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment would be a personal judgment against the
former borrower equal in most cases to the difference between the net amount
realized upon the public sale of the real property and the amount due to the
lender. Other statutes require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an
attempt to satisfy the full debt before bringing a personal action against the
borrower. Finally, other statutory provisions limit any deficiency judgment
against the former borrower following a judicial sale to the excess of the
outstanding debt over the fair market value of the property at the time of the
public sale. The purpose of these statutes is generally to prevent a
beneficiary or a mortgagee from obtaining a large deficiency judgment against
the former borrower as a result of low or no bids at the judicial sale.
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In addition to laws limiting or prohibiting deficiency judgments, numerous
other statutory provisions, including the federal bankruptcy laws and state
laws affording relief to debtors, may interfere with or affect the ability of
the secured mortgage lender to realize upon collateral and/or enforce a
deficiency judgment. For example, with respect to federal bankruptcy law, a
court with federal bankruptcy jurisdiction may permit a debtor through his or
her Chapter 11 or Chapter 13 rehabilitative plan to cure a monetary default in
respect of a mortgage loan on a debtor's residence by paying arrearages within
a reasonable time period and reinstating the original mortgage loan payment
schedule even though the lender accelerated the mortgage loan and final
judgment of foreclosure had been entered in state court (provided no sale of
the residence had yet occurred) prior to the filing of the debtor's petition.
Some courts with federal bankruptcy jurisdiction have approved plans, based on
the particular fact of the reorganization case, that effected the curing of a
mortgage loan default by paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan secured by property of the debtor may be modified.
These courts have suggested that such modifications may include reducing the
amount of each monthly payment, changing the rate of interest, altering the
repayment schedule and reducing the lender's security interest to the value of
the residence, thus leaving the lender a general unsecured creditor for the
difference between the value of the residence and the outstanding balance of
the loan. Federal bankruptcy law and limited case law indicate that the
foregoing modifications could not be applied to the terms of a loan secured by
property that is the principal residence of the debtor.
The Code provides priority to certain tax liens over the lien of the
mortgage. In addition, substantive requirements are imposed upon mortgage
lenders in connection with the origination and the servicing of mortgage loans
by numerous federal and some state consumer protection laws. These laws include
the federal Truth-in-Lending Act, Real Estate Settlement Procedures Act, Equal
Credit Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act and
related statutes. These federal laws impose specific statutory liabilities upon
lenders who originate mortgage loans and who fail to comply with the provisions
of the law. In some cases, this liability may affect assignees of the mortgage
loans.
Generally, Article 9 of the UCC governs foreclosure on cooperative shares
and the related proprietary lease or occupancy agreement. Some courts have
interpreted section 9-504 of the UCC to prohibit a deficiency award unless the
creditor establishes that the sale of the collateral (which, in the case of a
Cooperative Loan, would be the shares of the cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner.
Enforceability of Certain Provisions. Certain of the Mortgage Loans will
contain due-on-sale clauses. These clauses permit the lender to accelerate the
maturity of a loan if the borrower sells, transfers, or conveys the property.
The enforceability of these clauses was the subject of legislation or
litigation in many states, and in some cases the enforceability of these
clauses was limited or denied. However, the Garn-St. Germain Depository
Institutions Act of 1982 (the "Garn-St. Germain Act") preempts state
constitutional, statutory and case law prohibiting the enforcement of
due-on-sale clauses and permits lenders to enforce these clauses in accordance
with their terms, subject to certain limited exceptions. The Garn-St. Germain
Act does "encourage" lenders to permit assumption of loans at the original rate
of interest or at some other rate less than the average of the original rate
and the market rate.
The Garn-St. Germain Act also sets forth nine specific instances in which
a mortgage lender covered by the Garn-St. Germain Act (including federal
savings and loan associations and federal savings banks) may not exercise a
due-on-sale clause, notwithstanding the fact that a transfer of the property
may have occurred. These include intra-family transfers, certain transfers by
operation of law, leases of fewer than three years and the creation of a junior
encumbrance. Regulations promulgated under the Garn-St. Germain Act by the
Federal Home Loan Bank Board as succeeded by the Office of Thrift Supervision
(the "OTS"), also prohibit the imposition of a prepayment penalty upon the
acceleration of a loan pursuant to a due-on-sale clause. Any inability of the
Depositor to enforce due-on-sale clauses may affect the average life of the
Mortgage Loans and the number of Mortgage Loans that may be outstanding until
maturity.
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Upon foreclosure, courts have imposed general equitable principles. These
equitable principles are generally designed to relieve the borrower from the
legal effect of his defaults under the loan documents. Examples of judicial
remedies that have been fashioned include requirements that the lender
undertake affirmative and expensive actions to determine the causes for the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's judgment and have required that lenders reinstate loans or recast
payment schedules in order to accommodate borrowers who are suffering from
temporary financial disability. In other cases, courts have limited the right
of the lender to foreclose if the default under the mortgage instrument is not
monetary, such as the borrower falling to adequately maintain the property or
the borrower executing a second mortgage or deed of trust affecting the
property. Finally, some courts have been faced with the issue of whether or not
federal or state constitutional provisions reflecting due process concerns for
adequate notice require that borrowers under deeds of trust or mortgages
receive notices in addition to the statutory-prescribed minimum. For the most
part, these cases have upheld the notice provisions as being reasonable or have
found that the sale by a trustee under a deed of trust, or under a mortgage
having a power of sale, does not involve sufficient state action to afford
constitutional protections to the borrower.
The standard forms of note, mortgage and deed of trust generally contain
provisions obligating the borrower to pay a late charge if payments are not
timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations upon late charges which a lender may collect
from a borrower for delinquent payments. Certain states also limit the amounts
that a lender may collect from a borrower as an additional charge if the loan
is prepaid. Under the Agreement, late charges (to the extent permitted by law
and not waived by the Servicer) will be retained by the Servicer as additional
servicing compensation.
Adjustable Rate Loans. The laws of certain states may provide that
mortgage notes relating to adjustable rate loans are not negotiable instruments
under the UCC. In such event, the Trustee will not be deemed to be a "holder in
due course," within the meaning of the UCC and may take such a mortgage note
subject to certain restrictions on its ability to foreclose and to certain
contractual defenses available to a mortgagor.
Environmental Legislation. Certain states impose a statutory lien for
associated costs on property that is the subject of a cleanup action by the
state on account of hazardous wastes or hazardous substances released or
disposed of on the property. Such a lien will generally have priority over all
subsequent liens on the property and, in certain of these states, will have
priority over prior recorded liens including the lien of a mortgage. In
addition, under federal environmental legislation and under state law in a
number of states, a secured party which takes a deed in lieu of foreclosure or
acquires a mortgaged property at a foreclosure sale or assumes active control
over the operation or management of a property so as to be deemed an "owner" or
"operator" of the property may be liable for the costs of cleaning up a
contaminated site. Although such costs could be substantial, it is unclear
whether they would be imposed on a secured lender (such as a Trust) to
homeowners. In the event that title to a Mortgaged Property securing a Mortgage
Loan in a Trust was acquired by the Trust and cleanup costs were incurred in
respect of the Mortgaged Property, the Trust might realize a loss if such costs
were required to be paid by the Trust.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
Generally, under the terms of the Relief Act, a borrower who enters
military service after the origination of a Mortgage Loan or Contract by such
borrower (including a borrower who is a member of the National Guard or is in
reserve status at the time of the origination of the Mortgage Loan and is later
called to active duty) may not be charged interest above an annual rate of 6%
during the period of such borrower's active duty status, unless a court orders
otherwise upon application of the lender. It is possible that such interest
rate limitation or similar limitations under state law could have an effect,
for an indeterminate period of time, on the ability of the Servicer to collect
full amounts of interest on certain of the Mortgage Loans. In addition, the
Relief Act imposes limitations which would impair the ability of the Servicer
to foreclose on an affected Mortgage Loan during the borrower's period of
active duty status.
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Thus, in the event that such a Mortgage Loan goes into default there may be
delays and losses occasioned by the inability to realize upon the Mortgaged
Property in a timely fashion.
Any shortfalls in interest collections resulting from application of the
Relief Act could adversely affect Certificates.
THE CONTRACTS
General. As a result of the Depositor's assignment of the Contracts to the
Trustee, the Owners of Certificates will succeed collectively to all the rights
(including the right to receive payment on the Contracts) and will assume
certain obligations of the Depositor. Each Contract evidences both (a) the
obligation of the obligor to repay the loan evidenced thereby, and (b) the
grant of a security interest in the Manufactured Home to secure repayment of
such loans. Certain aspects of both features of the Contracts are described
more fully below.
The Contracts generally are "chattel paper" as defined in the UCC in
effect in the states which the Manufactured Homes initially were registered.
Pursuant to the UCC, the sale of chattel paper is treated in a manner similar
to perfection of a security interest in chattel paper. Under the Agreement, the
Depositor will transfer physical possession of the Contracts to the Trustee or
its custodians. In addition, the Depositor will make an appropriate filing of a
UCC-1 financing statement in the appropriate states to give notice of the
Trustee's ownership of the Contracts. The Contracts will not be stamped or
marked otherwise to reflect their assignment from the Depositor to the Trustee.
Therefore, if a subsequent purchaser were able to take physical possession of
the Contracts without notice of such assignment the Trustee's interest in
Contracts could be defeated.
Security Interests in the Manufactured Homes. The Manufactured Homes
securing the Contracts may be located in all 50 states. Security interests in
manufactured homes may be perfected either by notation of the secured party's
lien on the certificate of title or by delivery of the required documents and
payment of a fee to the state motor vehicle authority, depending on state law.
In some nontitle states, perfection pursuant to the provisions of the UCC is
required. The Depositor may effect such notation or delivery of the required
documents and fees, and obtain possession of the certificate of title, as
appropriate under the laws of the state in which any manufactured home securing
a manufactured housing conditional sales contract is registered. In the event
the Depositor fails, due to clerical errors, to effect such notation or
delivery, or files the security interest under the wrong law (for example,
under a motor vehicle title statute rather than under the UCC, in a few
states), the Trustee may not have a first priority security interest in the
Manufactured Home securing a Contract. As manufactured homes have become larger
and often have been attached to their sites without any apparent intention to
move them, courts in many states have held that manufactured homes, under
certain circumstances, may become subject to real estate title and recording
laws. As a result, a security interest in a manufactured home could be rendered
subordinate to the interests of other parties claiming an interest in the home
under applicable state real estate law. In order to perfect a security interest
in a manufactured home under real estate law, the holder of the security
interest must file either a "fixture filing" under the provisions of the UCC or
a real estate mortgage under the real estate laws of the state where the home
is located. These filings must be made in the real state records office of the
county where the home is located. So long as the borrower does not violate this
agreement, a security interest in the Manufactured Home will be governed by the
certificate of title laws or the UCC, and the notation of the security interest
on the certificate of title or the filing of a UCC financing statement will be
effective to maintain the priority of the security interest in the Manufactured
Home. If, however, a Manufactured Home is permanently attached to this site,
other parties could obtain an interest in the Manufactured Home which is prior
to the security interest transferred to the Trustee. With respect to a series
of Certificates and as described in the related Prospectus Supplement, the
Depositor may be required to perfect a security interest in the Manufactured
Home under applicable real estate laws. If such real estate filings are not
required and if any of the foregoing events were to occur, the only recourse
would be to pursue the Trust's rights to require repurchase for breach of
warranties.
The Depositor will assign its security interest in the Manufactured Homes
to the Trustee. Neither the Depositor nor the Trustee will amend the
certificates of title to identify the Trust as the new secured party.
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Accordingly, the Depositor will continue to be named as the secured party on
the certificates of title relating to the Manufactured Homes. In most states,
such assignment is an effective conveyance of such security interest without
amendment of any lien noted on the related certificate of title and the new
secured party succeeds to the Depositor's rights as the secured party. However,
in some states there exists a risk that, in the absence of an amendment to the
certificate of title, such assignment of the security interest might not be
held effective against creditors of the Depositor.
In the absence of fraud, forgery or permanent affixation of the
Manufactured Home to its site by the Manufactured Home owner, or administrative
error by state recording officials, the notation of the lien of the Depositor
on the certificate of title or delivery of the required documents and fees will
be sufficient to protect the Trust against the rights of subsequent purchasers
of a Manufactured Home or subsequent lenders who take a security interest in
the Manufactured Home. If there are any Manufactured Homes as to which the
security interest is not perfected, such security interest would be subordinate
to, among others, subsequent purchasers for value of Manufactured Homes and
holders of perfected security interests. There also exists a risk in not
identifying the Trust as the new secured party on the certificate of title
that, through fraud or negligence, the security interest of the Trust could be
released.
Enforcement of Security Interests in Manufactured Homes. The Servicer on
behalf of the Trustee, to the extent required by the related Agreement, may
take action to enforce the Trustee's security interest with respect to
Contracts in default by repossession and resale of the Manufactured Homes
securing such Contracts in default. So long as the Manufactured Home has not
become subject to the real estate law, a creditor can repossess a Manufactured
Home securing a Contract by voluntary surrender, by "self-help" repossession
that is "peaceful" (i.e., without breach of the peace) or in the absence of
voluntary surrender and the ability to repossess without breach of the peace,
by judicial process. The holder of a Contract must give the debtor a number of
days' notice, which varies from 10 to 30 days depending on the state, prior to
commencement of any repossession. The UCC and consumer protection laws in most
states place restrictions on repossession sales, including requiring prior
notice to the debtor and commercial reasonableness in effecting such a sale.
The law in most states also requires that the debtor be given notice of any
sale prior to resale of the unit so that the debtor may redeem at or before
such resale. In the event of such repossession and resale of a Manufactured
Home, the Trustee would be entitled to be paid out of the sale proceeds before
such proceeds could be applied to the payment of the claims of unsecured
creditors or the holders of subsequently perfected security interests or,
thereafter, to the debtor.
If the owner of a Manufactured Home moves it to a state other than the
state in which such Manufactured Home initially is registered, under the laws
of most states the perfected security interest in the Manufactured Home would
continue for four months after such relocation and thereafter only if and after
the owner registers the Manufactured Home in such state. If the owner were to
relocate a Manufactured Home to another state and not re-register the
Manufactured Home in such state, and if steps are not taken to re-perfect the
Trustee's security interest in such state, the security interest in the
Manufactured Home would cease to be perfected. A majority of states generally
requires surrender of a certificate of title to re-register a Manufactured
Home; accordingly, the Trustee must surrender possession if it holds the
certificate of title to such Manufactured Home or, in the case of Manufactured
Homes registered in states which provide for notation of lien, the Trustee
would receive notice of surrender if the security interest in the Manufactured
Home is noted on the certificate of title. Accordingly, the Trustee would have
the opportunity to re-perfect its security interest in the Manufactured Home in
the state of relocation. In states which do not require a certificate of title
for registration of a manufactured home, re-registration could defeat
perfection. In the ordinary course of servicing the manufactured housing
conditional sales contracts, the Servicer will be required to take steps to
effect such re-perfection upon receipt of notice of re-registration or
information from the obligor as to relocation. Similarly, when an obligor under
a manufactured housing conditional sales contract sells a manufactured home,
the Trustee must surrender possession of the certificate of title or will
receive notice as a result of its lien noted thereon and accordingly will have
an opportunity to require satisfaction of the related manufactured housing
conditional sales contract before release of the lien. Under each Agreement the
Servicer is obligated to take such steps, at the Servicer's expense, as are
necessary to maintain perfection of security interests in the Manufactured
Homes.
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Under the laws of most states, liens for repairs performed on a
Manufactured Home take priority even over a perfected security interest. The
Depositor will represent in the Agreement that it has no knowledge of any such
liens with respect to any Manufactured Home securing payment on any Contract.
However, such liens could arise at any time during the term of a Contract. No
notice will be given to the Trustee in the event such a lien arises.
Under the laws applicable in most states, a creditor is entitled to obtain
a deficiency judgment from a debtor for any deficiency on repossession and
resale of the manufactured home securing such debtor's loan. However, some
states impose prohibitions or limitations on deficiency judgments.
Certain other statutory provisions, including federal and state bankruptcy
and insolvency laws and general equitable principles, may limit or delay the
ability of a lender to repossess and resell collateral or enforce a deficiency
judgment.
Consumer Protection Laws. The so-called "Holder-in-Due-Course" rule of the
Federal Trade Commission is intended to defeat the ability of the transferor of
a consumer credit contract which is the seller of goods which gave rise to the
transaction (and certain related lenders and assignees) to transfer such
contract free of notice of claims by the debtor thereunder. The effect of this
rule is to subject the assignee of such a contract to all claims and defenses
which the debtor could assert against the seller of goods. Liability under this
rule is limited to amounts paid under a Contract; however, the obligor also may
be able to assert the rule to set off remaining amounts due as a defense
against a claim brought by the Trust against such obligor. Numerous other
federal and state consumer protection laws impose requirements applicable to
the origination of and lending pursuant to the Contracts, including the
Truth-in-Lending Act, the Federal Trade Commission Act, the Fair Credit Billing
Act, the Fair Credit Reporting Act, the Equal Credit Opportunity Act, the Fair
Debt Collection Practices Act and the Uniform Consumer Credit Code. In the case
of some of these laws, the failure to comply with their provisions may affect
the enforceability of the related Contract
Transfers of Manufactured Homes; Enforceability of "Due-on-Sale"
Clauses. The Contracts, in general, prohibit the sale or transfer of the
related Manufactured Homes without the consent of the Depositor and permit the
acceleration of the maturity of the Contracts by the Depositor upon any such
sale or transfer for which consent has not been granted. In certain cases, the
transfer may be made by a delinquent obligor in order to avoid a repossession
proceeding with respect to a Manufactured Home.
In the case of a transfer of a Manufactured Home after which the Servicer
desires to accelerate the maturity of the related Contract, the Servicer's
ability to do so will depend on the enforceability under state law of the
"due-on-sale" clause. The Garn-St. Germain Act preempts, subject to certain
exceptions and conditions, state laws prohibiting enforcement of "due-on-sale"
clauses applicable to the Manufactured Homes. Consequently, in some states the
Servicer may be prohibited from enforcing a "due-on-sale" clause in respect of
certain Manufactured Homes.
THE TITLE I PROGRAM
Certain of the Mortgage Loans or Contracts contained in a Trust may be
loans insured under the FHA Title I credit insurance program created pursuant
to Sections 1 and 2(a) of the National Housing Act of 1934 (the "Title I
Program"). Under the Title I Program, the FHA is authorized and empowered to
insure qualified lending institutions against losses on eligible loans. The
Title I Program operates as a coinsurance program in which the FHA insures up
to 90% of certain losses incurred on an individual insured loan, including the
unpaid principal balance of the loan, but only to the extent of the insurance
coverage available in the lender's FHA insurance coverage reserve account. The
owner of the loan bears the uninsured loss on each loan.
The types of loans, which are eligible for insurance by the FHA under the
Title I Program, include property improvement loans ("Property Improvement
Loans" or "Title I Loans") and manufactured home loans ("Manufactured Home
Loans" or "Title I Contracts"). A Property Improvement Loan or Title I Loan
means a loan made to finance actions or items that substantially protect or
improve the basic livability or utility of a property and includes: (1) single
family, multifamily and nonresidential property improvement loans; (2)
manufactured home improvement loans, where the home is classified as
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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
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term of a manufactured home improvement loan is limited to 12 years and 32
days. A borrower may obtain multiple Title I Loans with respect to multiple
properties, and a borrower may obtain more than one Title I Loan with respect
to a single property, in each case as long as the total outstanding balance of
all Title I Loans on the same property does not exceed the maximum loan amount
for the type of Title I Loan thereon having the highest permissible loan amount
Borrower eligibility for a Title I Loan requires that the borrower have at
least a one-half interest in either fee simple title to the real property, a
lease thereof for a term expiring at least six months after the final maturity
of the Title I Loan or a recorded land installment contract for the purchase of
the real property, and that the borrower have equity in the property being
improved at least equal to the amount of the Title I Loan if such loan amount
exceeds $15,000. Any Title I Loan in excess of $5,000 must be secured by a
recorded lien on the improved property which is evidenced by a mortgage or deed
of trust executed by the borrower and all other owners in fee simple.
The proceeds from a Title I Loan may be used only to finance property
improvements which substantially protect or improve the basic livability or
utility of the property as disclosed in the loan application. The Secretary of
HUD has published a list of items and activities which cannot be financed with
proceeds from any Title I Loan and from time to time the Secretary of HUD may
amend such list of items and activities. With respect to any dealer Title I
Loan, before the lender may disburse funds, the lender must have in its
possession a completion certificate on a HUD-approved form, signed by the
borrower and the dealer. With respect to any direct Title I Loan the lender is
required to obtain, promptly upon completion of the improvements but not later
than 6 months after disbursement of the loan proceeds with one 6 month
extension if necessary, a completion certificate, signed by the borrower. The
lender is required to conduct an on-site inspection on any Title I Loan where
the principal obligation is $7,500 or more, and or any direct Title I Loan
where the borrower fails to submit a completion certificate.
Requirements for Title I Contracts. The maximum principal amount for any
Title I Contract must not exceed the sum of certain itemized amounts, which
include a specified percentage of the purchase price of the manufactured home
depending on whether it is a new or existing home; provided that such maximum
amount does not exceed the following loan amounts: (i) $40,500 for a new or
existing manufactured home purchase loan; (ii) $13,500 for a manufactured home
lot purchase; and (iii) $54,000 for a combination loan (i.e., a loan to
purchase a new or existing manufactured home and the lot for such home).
Generally, the term of a Title I Contract may not be less than six months nor
greater than 20 years and 32 days, except that the maximum term of a
manufactured home lot loan is limited to 15 years and 32 days and the maximum
term of a multimodule manufactured home and lot in combination is limited to 25
years and 32 days.
Borrower eligibility for a Title I Contract requires that the borrower
become the owner of the property to be financed with such loan and occupy the
manufactured home as the borrower's principal residence, except for a
manufactured home lot loan which allows six months to occupy the home as the
borrower's principal residence. If a manufactured home is classified as realty,
then ownership of the home must be in fee simple, and also, the ownership of
the manufactured home lot must be in fee simple, except for a lot which
consists of a share in a cooperative association that owns the manufactured
home park. The borrower's minimum cash down payment requirement to obtain
financing through a Title I Contract is as follows: (i) at least 5% of the
first $5,000 and 10% of the balance of the purchase price of a new manufactured
home and at least 10% of the purchase price of an existing manufactured home
for a manufactured home purchase loan, or in lieu of a full or partial cash
down payment, the trade-in of the borrower's equity in an existing manufactured
home; (ii) at least 10% of the purchase price and development costs of a lot
for a manufactured home lot loan; and (iii) at least 5% of the first $5,000 and
10% of the balance of the purchase price of the manufactured home and lot for a
combination loan.
Any manufactured home financed by a Title I Contract must be certified by
the manufacturer to have been constructed in compliance with the National
Manufactured Housing Construction and Safety Standards Act of 1974 (42 U.S.C.
5401-5426), so as to conform to all applicable Federal construction and safety
standards, and with respect to the purchase of a new manufactured home, the
manufacture must furnish the borrower with a one year written warranty on a HUD
approved form which obligates the
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manufacturer to correct any nonconformity with all applicable Federal
construction and safety standards or any defects in materials or workmanship
for the one year period after the date of delivery. The proceeds from a Title I
Contract may be used as follows: the purchase or refinancing of a manufactured
home, a suitably developed lot for a manufactured home already owned by the
borrower, or a manufactured home and suitably developed lot for the home in
combination; or the refinancing of an existing manufactured home already owned
by the borrower in connection with the purchase of a manufactured home lot or
an existing lot already owned by the borrower in connection with the purchase
of a manufactured home. In addition, the proceeds for a Title I Contract which
is a manufactured home purchase loan or a combination loan may be used for the
purchase, construction or installation of a garage, carport, patio or other
comparable appurtenance to the home. The proceeds from a Title I Contract
cannot be used for the purchase of furniture or the financing of any items and
activities which are set forth on the list published by the Secretary of HUD as
amended from time to time.
Any Title I Contract must be secured by a recorded lien on the
manufactured home, its furnishings, equipment, accessories and appurtenance,
which lien must be a first lien, superior to any other lien on the property.
With respect to any Title I Contract involving a manufactured home purchase
loan or combination loan and the sale of the manufactured home by a dealer, the
lender or its agent (other than the dealer) must conduct a site-of-placement
inspection within 60 days after the date of the loan to verify that the terms
and conditions of the purchase contract have been met, the manufactured home
and any options and appurtenances included in the purchase price or financed
with the loan have been delivered and installed, and the placement certificate
executed by the borrower and the dealer is in order.
FHA Insurance Coverage. Under the Title I Program the FHA establishes an
insurance coverage reserve account for each lender which has been granted a
Title I insurance contract. The amount of insurance coverage in this account is
10% of the amount disbursed, advanced or expended by the lender in originating
or purchasing eligible loans registered with the FHA for Title I insurance,
with certain adjustments. The balance in the insurance coverage reserve account
is the maximum amount of insurance claims the FHA is required to pay. Loans to
be insured under the Title I Program will be registered for insurance by the
FHA and the insurance coverage attributable to such loans will be included in
the insurance coverage reserve account for the originating or purchasing lender
following the receipt and acknowledgment by the FHA of a loan report on the
prescribed form pursuant to the Title I regulations. The FHA charges a fee of
0.50% per annum of the net proceeds (the original balance) of any eligible loan
so reported and acknowledged for insurance by the originating lender. The FHA
bills the lender for the insurance premium on each insured loan annually, on
approximately the anniversary date of the loan's origination. If an insured
loan is prepaid during the year, the FHA will not refund or abate the insurance
premium.
Under the Title I Program the FHA will reduce the insurance coverage
available in the lender's FHA insurance coverage reserve account with respect
to loans insured under the lender's contract of insurance by (i) the amount of
the FHA insurance claims approved for payment relating to such insured loans,
(ii) the amount of the Annual Reductions attributable to such insured loans and
(iii) the amount of insurance coverage attributable to insured loans sold by
the lender, and such insurance coverage may be reduced for any FHA insurance
claims rejected by the FHA. After a lender has held its Title I contract of
insurance for five years, the lender's FHA insurance coverage reserve account
is subject to an annual reduction (the "Annual Reduction") on each October in
an amount equal to 10% of the insurance coverage reserves available on such
date with respect to such contract of insurance; provided that such Annual
Reduction shall not reduce the insurance coverage to an amount less than
$50,000. The balance of the lender's FHA insurance coverage reserve account
will be further adjusted as required under Title I or by the FHA, and the
insurance coverage therein may be earmarked with respect to each or any
eligible loans insured thereunder, if a determination is made by the Secretary
of HUD that it is in its interest to do so. Originations and acquisitions of
new eligible loans will continue to increase a lender's insurance coverage
reserve account balance by 10% of the amount disbursed, advanced or expended in
originating or acquiring such eligible loans registered with the FHA for
insurance under the Title I Program. The Secretary of HUD may transfer
insurance coverage between insurance coverage reserve accounts with earmarking
with respect to a particular insured loan or group of insured loans when a
determination is made that it is in the Secretary's interest to do so.
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The lender may transfer (except as collateral in a bona fide loan
transaction) insured loans and loans reported for insurance only to another
qualified lender under a valid Title I contract of insurance. Unless an insured
loan is transferred with recourse or with a guarantee or repurchase agreement,
the FHA, upon receipt of written notification of the transfer of such loan in
accordance with the Title I regulations, will transfer from the transferor's
insurance coverage reserve account to the transferee's insurance coverage
reserve account an amount, if available, equal to 10% of the actual purchase
price or the net unpaid principal balance of such loan (whichever is less).
However, under the Title I Program not more than $5,000 in insurance coverage
shall be transferred to or from a lender's insurance coverage reserve account
during any October 1 to September 30 period without the prior approval of the
Secretary of HUD.
Claims Procedures Under Title I. Under the Title I Program the lender may
accelerate an insured loan following a default on such loan only after the
lender or its agent has contacted the borrower in a face-to-face meeting or by
telephone to discuss the reasons for the default and to seek its cure. If the
borrower does not cure the default or agree to a modification agreement or
repayment plan, the lender will notify the borrower in writing that, unless
within 30 days the default is cured or the borrower enters into a modification
agreement or repayment plan, the loan will be accelerated and that, if the
default persists, the lender will report the default to an appropriate credit
agency. The lender may rescind the acceleration of maturity after full payment
is due and reinstate the loan only if the borrower brings the loan current,
executes a modification agreement or agrees to an acceptable repayment plan.
Following acceleration of maturity upon a secured Title I Loan, the lender
may either (a) proceed against the Mortgaged Property under any security
instrument or (b) make a claim under the lender's contract of insurance. If the
lender chooses to proceed against the Mortgaged Property under a security
instrument (or if it accepts a voluntary conveyance or surrender of the
Mortgaged Property), the lender may file an insurance claim only with the prior
approval of the Secretary of HUD. After acceleration of maturity on a defaulted
Title I Contract, the lender must proceed against the loan security by
foreclosure or repossession, as appropriate, and acquire good, marketable title
to the property securing the loan. The lender must take all actions necessary
under applicable law to preserve its rights, if any, to obtain a deficiency
judgment against the borrower. Before filing a claim for insurance with the
FHA, the lender must sell for the best price obtainable any property which the
lender acquired by the foreclosure or repossession of such property securing a
defaulted Title I Contract.
When a lender files an insurance claim with the FHA under the Title I
Program, the FHA reviews the claim, the complete loan file and documentation of
the lender's efforts to obtain recourse against any dealer who has agreed
thereto, certification of compliance with applicable state and local laws in
carrying out any foreclosure or repossession, and evidence that the lender has
properly filed proofs of claims, where the borrower is bankrupt or deceased.
Generally, a claim for reimbursement for loss on any eligible loan must be
filed with the FHA no later than (i) for any Title I Loan, 9 months after the
date of default of such loan, or (ii) for any Title I Contract, 3 months after
the date of sale of the property securing such loan, but not to exceed 18
months after the date of default. Concurrently with filing the insurance claim,
the lender shall assign to the United States of America the lender's entire
interest in the loan note (or a judgment in lieu of the note), in any security
held and in any claim filed in any legal proceedings. If, at the time the note
is assigned the Secretary has reason to believe that the note is not valid or
enforceable against the borrower, the FHA may deny the claim and reassign the
note to the lender. If either such defect is discovered after the FHA has paid
a claim, the FHA may require the lender to repurchase the paid claim and to
accept a reassignment of the loan note. If the lender subsequently obtains a
valid and enforceable judgment against the borrower, the lender may resubmit a
new insurance claim with an assignment of the judgment. The FHA may contest any
insurance claim and make a demand for repurchase of the loan at any time up to
two years from the date the claim was certified for payment and may do so
thereafter in the event of fraud or misrepresentation on the part of the
lender.
Under the Title I Program the amount of an FHA insurance claim payment,
when made, is equal to the Claimable Amount, up to the amount of insurance
coverage in the lender's insurance coverage reserve account. The "Claimable
Amount" is equal to 90% of the sum of: (a) the unpaid loan obligation (net
unpaid principal and the uncollected interest earned to the date of default)
with adjustments thereto if the lender has proceeded against property securing
such loan; (b) the interest on the unpaid amount of the
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loan obligation from the date of default to the date of the claim's initial
submission for payment plus 15 calendar days (but not to exceed 9 months from
the date of default), calculated at the rate of 7% per annum; (c) the
uncollected court costs; (d) the attorneys fees not to exceed $500; (e) the
expenses for recording the assignment of the security to the United States; and
(f) if the loan is a Title I Contract, certain costs incurred in connection
with the foreclosure or repossession of the manufactured home and/or lot.
LEGAL INVESTMENT MATTERS
The Certificates may constitute "mortgage related securities" for purposes
of SMMEA, so long as they are rated in one of the two highest rating categories
by the Rating Agency or Agencies identified in the related Prospectus
Supplement and, as such, would be legal investments for persons, trusts,
corporations, partnerships, associations, business trusts and business entities
(including, but not limited to, state-chartered savings banks, commercial
banks, saving and loan associations and insurance companies, as well as
trustees and state government employee retirement systems) created pursuant to
or existing under the laws of the United States or any State (including the
District of Columbia and Puerto Rico) whose authorized investments are subject
to State regulation to the same extent that, under applicable law, obligations
issued by or guaranteed as to principal and interest by the United States or
any agency or instrumentality thereof constitute legal investments for such
entities. Under SMMEA, in all States which enacted legislation prior to October
4, 1991 specifically limiting the legal investment authority of any of such
entities with respect to "mortgage related securities," the Certificates will
constitute legal investments for entities subject to such legislation only to
the extent provided in such legislation SMMEA provides, however, that in no
event will the enactment of any such legislation affect the validity of any
contractual commitment to purchase, bold or invest in any securities or require
the sale or over disposition of any securities, so long as such contractual
commitment was made or such securities were acquired prior to the enactment of
such legislation. Alaska, Arkansas, Colorado, Connecticut, Delaware, Florida,
Georgia, Illinois, Kansas, Louisiana, Maryland, Michigan, Missouri, Nebraska,
New Hampshire, New York, North Carolina, Ohio, South Dakota, Utah, Virginia and
West Virginia each enacted legislation overriding the exemption afforded by
SMMEA prior to the October 4, 1991 deadline.
Institutions whose investment activities are subject to legal investment
laws or regulations or review by certain regulatory authorities may be subject
to restrictions on investment in certain classes of the Certificates. Any
financial institution which is subject to the jurisdiction of the Comptroller
of the Currency, the Board of Governors of the Federal Reserve System, the
FDIC, the OTS, the NCUA or other federal or state agencies with similar
authority should review any applicable rules, guidelines and regulations prior
to purchasing the certificates. The Federal Financial Institutions Examination
Council, for example, has issued a Supervisory Policy Statement on Securities
Activities effective February 10, 1992 (the "Policy Statement"). The Policy
Statement has been adopted by the Comptroller of the Currency, the Federal
Reserve Board, the FDIC and the OTS with respect to the depository institutions
that they regulate. The Policy Statement prohibits depository institutions from
investing in certain "high-risk mortgage securities" except under limited
circumstances, and sets forth certain investment practices deemed to be
unsuitable for regulated institutions. The NCUA issued final regulations
effective December 2, 1991 that restrict and in some instances prohibit the
investment by federal credit unions in certain types of mortgage related
securities.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, "prudent investor" provisions, percentage-of-assets limits and provisions
which may restrict or prohibit investment in securities which are not "interest
bearing" or "income paying," or in securities which are issued in book-entry
form.
Investors should consult their own legal advisors in determining whether
and to what extent the Certificates constitute legal investments for such
investors.
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ERISA CONSIDERATIONS
ERISA imposes requirements on employee benefit plans (and on certain other
retirement plans and arrangements, including individual retirement accounts and
annuities, Keogh plans and collective investment funds and separate accounts in
which such plans, accounts or arrangements are invested) (collectively,
"Plans") subject to ERISA and on persons who are fiduciaries with respect to
such Plans. Among other things, ERISA requires that the assets of Plans be held
in trust and that the trustee, or other duly authorized fiduciary, have
exclusive authority and discretion to manage and control the assets of such
Plans. ERISA also imposes certain duties on persons who are fiduciaries of
Plans. Under ERISA, any person who exercises any authority or control
respecting the management or disposition of the assets of a Plan is considered
to be a fiduciary of such Plan (subject to certain exceptions not here
relevant). In addition to the imposition of general fiduciary standards of
investment prudence and diversification, ERISA prohibits a broad range of
transactions involving Plan assets and persons ("Parties in Interest") having
certain specified relationships to a Plan and imposes additional prohibitions
where Parties in Interest are fiduciaries with respect to such Plan.
The United States Department of Labor (the "DOL") has issued regulations
concerning the definition of what constitutes the assets of a Plan. (DOL Reg
Section 2510.3-101). Under this regulation, the underlying assets and
properties of corporations, partnerships and certain other entities in which a
Plan makes an "equity" investment could be deemed for purposes of ERISA to be
assets of the investing Plan in certain circumstances. In such case, the
fiduciary making such an investment for the Plan could be deemed to have
delegated his or her asset management responsibility, and the underlying assets
and properties could be subject to ERISA reporting and disclosure. Certain
exceptions to the regulation may apply in the case of a Plan's investment in
the Certificates, but the Depositor cannot predict in advance whether such
exceptions apply due to the factual nature of the conditions to be met.
Accordingly, because the Mortgage Loans may be deemed Plan assets of each Plan
that purchases Certificates, an investment in the Certificates by a Plan might
give rise to a prohibited transaction under ERISA Sections 406 and 407 and be
subject to an excise tax under Code Section 4975 unless a statutory or
administrative exemption applies.
DOL Prohibited Transaction Exemption 83-1 ("PTE 83-1") exempts from
ERISA's prohibited transaction rules certain transactions relating to the
operation of residential mortgage investment trusts and the purchase, sale and
holding of "mortgage pool pass-through certificates" in the initial issuance of
such certificates. PTE 83-1 permits, subject to certain conditions,
transactions which might otherwise be prohibited between Plans and Parties in
Interest with respect to those Plans involving the origination, maintenance and
termination of mortgage pools consisting of mortgage loans secured by first or
second mortgages or deeds of trust on single-family residential property, and
the acquisition and holding of certain mortgage pool pass-through certificates
representing an interest in such mortgage pools by PTE.
PTE 83-1 sets forth three general conditions which must be satisfied for
any transaction to be eligible for exemption: (i) the maintenance of a system
of insurance or other protection for the pooled mortgage loans and property
securing such loans, and for indemnifying Owners against reductions in
pass-through payments due to property damage or defaults in loan payments in an
amount not less than the greater of one percent of the aggregate principal
balance of all covered pooled mortgage loans or the principal balance of the
largest covered pooled mortgage loan, (ii) the existence of a pool trustee who
is not an affiliate of the sponsor, and (iii) a limitation on the amount of the
payments retained by the pool sponsor, together with other funds inuring to its
benefit, to not more than adequate consideration for selling the mortgage loans
plus reasonable compensation for services provided by the pool sponsor.
Although the Trustee for any series of Certificates will be unaffiliated
with the Depositor, there can be no assurance that the system of insurance or
subordination will meet the general or specific conditions referred to above.
In addition, the nature of a Trust's assets or the characteristics of one or
more classes of the related series of Certificates may not be included within
the scope of PTE 83-1 or any other class exemption under ERISA. The Prospectus
Supplement will provide additional information with respect to the application
of ERISA and the Code to the related Certificates.
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Several underwriters of mortgage-backed securities have applied for and
obtained ERISA prohibited transactions exemptions which are in some respects
broader than PTE 83-1. Such exemptions can only apply to mortgage-backed
securities which, among other conditions, are sold in an offering with respect
to which such underwriter serves as the sole or a managing underwriter, or as a
selling or placement agent. Several other underwriters have applied for similar
exemptions. If such an exemption might be applicable to a series of
Certificates, the related Prospectus Supplement will refer to such possibility.
Each Plan fiduciary who is responsible for making the investment decisions
whether to purchase or commit to purchase and to hold Certificates must make
its own determination as to whether the general and the specific conditions of
PTE 83-1 have been satisfied or as to the availability of any other prohibited
transaction exemptions Each Plan fiduciary should also determine whether, under
the general fiduciary standards of investment prudence and diversification, an
investment in the Certificates is appropriate for the Plan, taking into account
the overall investment policy of the Plan and the composition of the Plan's
investment portfolio.
Any Plan proposing to invest in Certificates should consult with its
counsel to confirm that such investment will not result in a prohibited
transaction and will satisfy the other requirements of ERISA and the Code.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is based upon the opinion of Dewey Ballantine LLP, special
counsel to the Depositor with respect to the material federal income tax
consequences of the purchase, ownership and disposition of Certificates. The
discussion below does not purport to address all federal income tax
consequences that may be applicable to particular categories of investors, some
of which may be subject to special rules. The authorities on which this
discussion is based are subject to change or differing interpretations, and any
such change or interpretation could apply retroactively. This discussion
reflects the applicable provisions of the Code, as well as final regulations
concerning REMICs (the "REMIC Regulations") and final regulations under
Sections 1271 through 1273 and 1275 of the Code concerning debt instruments
(the "OID Regulations"). The Depositor intends to rely on the OID Regulations
for all Certificates offered pursuant to this Prospectus; however, investors
should be aware that the OID Regulations do not adequately address certain
issues relevant to prepayable securities, such as the Certificates. Investors
should consult their own tax advisors in determining the federal, state, local
and any other tax consequences to them of the purchase, ownership and
disposition of Certificates. The Prospectus Supplement for each series of
Certificates will discuss any special tax 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
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qualify as a REMIC and that if a Trust qualifies as a REMIC, the tax
consequences to the Owners will be as described below. In such case, the
Regular Certificates will be considered to be "regular interests" in the REMIC
Pool and generally will be treated for federal income tax purposes as if they
were newly originated debt instruments, and the Residual Certificates will be
considered to be "residual interests" in the REMIC Pool. The Prospectus
Supplement for each series of Certificates will indicate whether one or more
REMIC elections with respect to the related Trust will be made, in which event
references to "REMIC" or "REMIC Pool" herein shall be deemed to refer to each
such REMIC Pool.
Status of REMIC Certificates. REMIC Certificates held by a domestic
building and loan association will constitute "a regular or residual interest
in a REMIC" within the meaning of Code Section 7701(a)(19)(C) (xi) in the same
proportion that the assets of the REMIC Pool would be treated as "loans secured
by an interest in real property" within the meaning of Code Section
7701(a)(19)(C)(v) or as other assets described in Code Section 7701(a)(19)(C).
REMIC Certificates held by a real estate investment trust (a "REIT") will
constitute "real estate assets" within the meaning of Code Section
856(c)(5)(a), and interest on the REMIC Certificates will be considered
"interest on obligations secured by mortgages on real property or on interests
in real property" within the meaning of Code Section 856(c) in the same
proportion that, for both purposes, the assets of the REMIC Pool would be so
treated. If at all times 95% or more of the assets of the REMIC Pool constitute
qualifying assets for domestic building and loan associations and REITs, the
REMIC Certificates will be treated entirely as qualifying assets for such
entities. Moreover, the REMIC Regulations provide that, for purposes of Code
Sections 856(c), payments of principal and interest on the Mortgage Assets that
are reinvested pending distribution to holders of REMIC Certificates,
constitute qualifying assets for REIT. Where two REMIC Pools are part of a
tiered structure they will be treated as one REMIC for purposes of the tests
described above respecting asset ownership of more or less than 95%.
Notwithstanding the foregoing, however, REMIC income received by a REIT owning
a residual interest in a REMIC Pool could be treated in part as non-qualifying
REIT income if the REMIC Pool holds Mortgage Assets with respect to which
income is contingent on mortgagor profits or property appreciation. In
addition, if the assets of the REMIC include buy-down Mortgage Assets, it is
possible that the percentage of such assets constituting "qualifying real
property loans" or "loans secured by an interest in real property" for purposes
of Code Sections 593(d)(1) and 7701(a)(19)(C)(v), respectively, may be required
to be reduced by the amount of the related buy-down funds. REMIC Certificates
held by a regulated investment company will not constitute "government
securities" within the meaning of Code Section 851(b)(4)(a)(i). REMIC
Certificates held by certain financial institutions will constitute an
"evidence of indebtedness" within the meaning of Code Section 582(c)(i). REMIC
Certificates representing interests in obligations secured by manufactured
housing treated as single family residences under Code Section 25(e)(10) will
be considered interests in "qualified mortgages" as defined in Code Section
860E(a)(3).
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
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regulations that address situations where failure to meet one or more of the
requirements for REMIC status occurs inadvertently and in good faith, and
disqualification of the REMIC Pool would occur absent regulatory relief.
Investors should be aware, however, that the Conference Committee Report to the
Tax Reform Act of 1986 (the "1986 Act") indicates that the relief may be
accompanied by sanctions, such as the imposition of a corporate tax on all or a
portion of the REMIC Pool's income for the period of time in which the
requirements for REMIC status are not satisfied.
TAXATION OF REGULAR CERTIFICATES
General. Payments received by holders of Regular Certificates generally
should be accorded the same tax treatment under the Code as payments received
on ordinary taxable corporate debt instruments. In general, interest and
original issue discount on a Regular Certificate will be treated as ordinary
income to a holder of the Regular Certificate (the "Regular Certificateholder")
as they accrue, and principal payments on a Regular Certificate will be treated
as a return of capital to the extent of the Regular Certificateholder's basis
in the Regular Certificate allocable thereto. Regular Certificateholders must
use the accrual method of accounting with regard to Regular Certificates,
regardless of the method of accounting otherwise used by such Regular
Certificateholders.
Original Issue Discount. Regular Certificates may be issued with "original
issue discount" within the meaning of Code Section 1273(a). Holders of any
class of Regular Certificates having original issue discount generally must
include original issue discount in ordinary income for federal income tax
purposes as it accrues, in accordance with a constant interest method that
takes into account the compounding of interest, in advance of receipt of the
cash attributable to such income. The Depositor anticipates that the amount of
original issue discount required to be included in a Regular
Certificateholder's income in any taxable year will be computed as described
below.
Each Regular Certificate (except to the extent described below with
respect to a Regular Certificate on which distributions of principal are made
in a single installment or upon an earlier distribution by lot of a specified
principal amount upon the request of a Regular Certificateholder or by random
lot (a "Retail Class Certificate")) will be treated as a single installment
obligation for purposes of determining the original issue discount includible
in a Regular Certificateholder's income. The total amount of original issue
discount on a Regular Certificate is the excess of the "stated redemption price
at maturity" of the Regular Certificate over its "issue price." The issue price
of a Regular Certificate is the first price at which a substantial amount of
Regular Certificates of that class are first sold to the public. The Depositor
will determine original issue discount by including the amount paid by an
initial Regular Certificateholder for accrued interest that relates to a period
prior to the issue date of the Regular Certificate in the issue price of a
Regular Certificate and will include in the stated redemption price at maturity
any interest paid on the first Distribution Date to the extent such interest is
attributable to a period in excess of the number of days between the issue date
and such first Distribution Date. The stated redemption price at maturity of a
Regular Certificate always includes the original principal amount of the
Regular Certificate, but generally will not include distributions of stated
interest if such interest distributions constitute "qualified stated interest."
Qualified stated interest generally means stated interest that is
unconditionally payable in cash or in property (other than debt instruments of
the issuer) at least annually at (i) a single fixed rate, (ii) one or more
qualified floating rates (as described below), (iii) a fixed rate followed by
one or more qualified floating rates, (iv) a single objective rate (as
described below) or (v) a fixed rate and an objective rate that is a qualified
inverse floating rate. The OID Regulations state that interest payments are
unconditionally payable only if reasonable remedies exist to compel payment or
late payment and nonpayment are remote. Because the debt securities will
generally not provide the holders 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
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is longer than the interval between subsequent Distribution Dates (and interest
paid on the first Distribution Date is less than would have been earned if the
stated interest rate were applied to outstanding principal during each day in
such interval), the stated interest distributions on such Regular Certificate
technically do not constitute qualified stated interest. In such case a special
rule, applying solely for the purpose of determining whether original issue
discount is de minimis, provides that the interest shortfall for the long first
period (i.e., the interest that would have been earned if interest had been
paid on the first Distribution Date for each day the Regular Certificate was
outstanding) is treated as made at a fixed rate if the value of the rate on
which the payment is based is adjusted in a reasonable manner to take into
account the length of the interval. There is also a special "teaser" rule which
may be available to treat OID arising from a long first accrual period as de
minimis OID. Regular Certificateholders should consult their own tax advisors
to determine the issue price and stated redemption price at maturity of a
Regular Certificate.
Under a de minimis rule, original issue discount on a Regular Certificate
will be considered to be zero if such original issue discount is less than
0.25% of the stated redemption price at maturity of the Regular Certificate
multiplied by the weighted average maturity of the Regular Certificate. For
this purpose, the weighted maturity of the Regular Certificate is computed as
the sum of the amounts determined by multiplying the number of full years
(i.e., rounding down partial years) from the issue date until each distribution
in reduction of stated redemption price at maturity is scheduled to be made by
a fraction, the numerator of which is the amount of each distribution included
in the stated redemption price at maturity of the Regular Certificate and the
denominator of which is the stated redemption price at maturity of the Regular
Certificate. Although currently unclear, it appears that the schedule of such
distributions should be determined in accordance with the assumed rate of
prepayment of the Mortgage Assets and the anticipated reinvestment rate, if
any, relating to the Regular Certificates (the "Prepayment Assumption"). The
Prepayment Assumption with respect to a series of Regular Certificates will be
set forth in the related Prospectus Supplement. The holder of a debt instrument
includes any de minimis original issue discount in income pro rata as stated
principal payments are received.
Of the total amount of original issue discount on a Regular Certificate,
the Regular Certificateholder generally must include in gross income for any
taxable year the sum of the "daily portions," as defined below, of the original
issue discount on the Regular Certificate accrued during an accrual period for
each day on which he holds the Regular Certificate, including the date of
purchase but excluding the date of disposition. Although not free from doubt,
the Depositor intends to treat the monthly period ending on the day before each
Distribution Date as the accrual period, rather than the monthly period
corresponding to the prior calendar month. With respect to each Regular
Certificate, a calculation will be made of the original issue discount that
accrues during each successive full accrual period (or shorter period from the
date of original issue) that ends on the day before the related Distribution
Date on the Regular Certificate. For a Regular Certificate, original issue
discount is to be calculated initially based on a schedule of maturity dates
that takes into account the level of prepayments and an anticipated
reinvestment rate that are most likely to occur, which is expected to be based
on the Prepayment Assumption. The original issue discount accruing in a full
accrual period would be the excess, if any, of (i) the sum of (a) the present
value of all of the remaining distributions to be made on the Regular
Certificate as of the end of that accrual period that are included in the
Regular Certificate's stated redemption price at maturity and (b) the
distributions made on the Regular Certificate during the accrual period that
are included in the Regular Certificate's stated redemption price at 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.
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Under the method described above, the daily portions of original issue
discount required to be included in income by a Regular Certificateholder
generally will increase to take into account prepayments on the Regular
Certificates as a result of prepayments on the Mortgage Assets or that exceed
the Prepayment Assumption, and generally will decrease (but not below zero for
any period) if the prepayments are slower than the Prepayment Assumption. To
the extent specified in the applicable Prospectus Supplement, an increase in
prepayments on the Mortgage Assets with respect to a series of Regular
Certificates can result in both a change in the priority of principal payments
with respect to certain classes of Regular Certificates and either an increase
or decrease in the daily portions of original issue discount with respect to
such Regular Certificates.
A purchaser of a Regular Certificate at a price greater than the issue
price also will be required to include in gross income the daily portions of
the original issue discount on the Regular Certificate. With respect to such a
purchaser, the daily portion for any day is reduced by the amount that would be
the daily portion for such day (computed in accordance with the rules set forth
above) multiplied by a fraction, the numerator of which is the amount, if any,
by which the price paid by such purchaser for the Regular Certificate exceeds
the sum of the issue price and the aggregate amount of original issue discount
that would have been includible in the gross income of an original holder of
the Regular Certificate who purchased the Regular Certificate at its issue
price, less any prior distributions included in the stated redemption price at
maturity, and the denominator of which is the sum of the daily portions for
such Regular Certificate (computed in accordance with the rules set forth
above) for all days after the date of purchase and ending on the date on which
the remaining principal amount of such Regular Certificate is expected to be
reduced to zero under the Prepayment Assumption.
A Certificateholder may elect to include in gross income all stated
interest, original issue discount, de minimis original issue discount, market
discount (as described below under "Market Discount"), de minimis market
discount and unstated interest (as adjusted for any amortizable bond premium or
acquisition premium) currently as it accrues using the constant yield to
maturity method. If this election is made, the holder is treated as satisfying
the requirements for making the elections with respect to amortization of
premium and current inclusion of market discount, each as described under
"Premium" and "Market Discount" below.
Variable Rate Regular Certificates. Regular Certificates may provide for
interest based on a variable rate. The OID Regulations provide special rules
for variable rate instruments that meet three requirements. First, the
noncontingent principal payments may not exceed the instrument's issue price by
more than a specified amount equal to the lesser of (i) .015 multiplied by the
product of the total noncontingent payments and the weighted average maturity
or (ii) 15% of the total noncontingent principal payments. Second, the
instrument must provide for stated interest (compounded or paid at least
annually) at (i) one or more qualified floating rates, (ii) a single fixed rate
followed by one or more qualified floating rates, (iii) a single objective rate
or (iv) a single fixed rate and a single objective rate that is a qualified
inverse floating rate. Third, the instrument must provide that each qualified
floating rate or objective rate in effect during an accrual period is set at a
current value of that rate (one occurring in the interval beginning three
months before and ending one year after the rate is first in effect on the
Regular Certificate). A rate is a qualified floating rate if variations in the
rate can reasonably be expected to measure contemporaneous variations in the
cost of newly borrowed funds. Generally, neither (i) a multiple of a qualified
floating rate in excess of a fixed multiple that is greater than 0.65 but not
more than 1.35 (and increased or decreased by a fixed rate) nor (ii) a cap or
floor that is likely to cause the interest rate on a Regular Certificate to be
significantly less or more than the overall expected return on the Regular
Certificate is considered a qualified floating rate. An objective 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
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information; however, an objective rate does not include a rate based on
information that is in the control of the issuer or that is unique to the
circumstances of a related party. Stated interest on a variable rate debt
instrument is qualified stated interest if the interest is unconditionally
payable in cash or property at least annually.
In general, the determination of original issue discount and qualified
stated interest on a variable rate debt instrument is made by converting the
debt instrument into a fixed rate debt instrument and then applying the general
original issue discount rules described above to the instrument. If a variable
rate debt instrument provides for stated interest at a single qualified
floating rate or objective rate, all stated interest is qualified stated
interest and the amount of original issue discount, if any, is determined by
assuming the variable rate is a fixed rate equal to (a) in the case of a
qualified floating or inverse floating rate, the value, as of the issue date,
of the qualified floating inverse floating rate or (b) in the case of an
objective rate (other than a qualified inverse floating rate), a fixed rate
that reflects the yield that is reasonably expected for the debt instrument.
For all other variable rate debt instruments, the amount of interest and
original issue discount accruals are determined using the following steps.
First, a fixed rate substitute for each variable rate under the debt instrument
is determined. In general, the fixed rate substitute is a fixed rate equal to
the rate of the applicable type of variable rate as of the issue date. Second,
an equivalent fixed rate debt instrument is constructed using the fixed rate
substitute(s) in lieu of the variable rates and keeping all other terms
identical. Third, the amount of qualified stated interest and original issue
discount with respect to the equivalent fixed rate debt instrument are
determined under the rules for fixed rate debt instruments. Finally,
appropriate adjustments for actual variable rates are made during the term by
increasing or decreasing the qualified stated interest to reflect the amount
actually paid during the applicable accrual period as compared to the interest
assumed to be accrued or paid under the equivalent fixed rate debt instrument.
If there is no qualified stated interest under the equivalent fixed rate debt
instrument, the adjustment is made to the original issue discount for the
period.
The application of the OID Regulations to variable rate debt instruments
is limited and may not apply to some Regular Certificates having variable
rates. Furthermore, by their terms, the provisions of regulations issued on
June 11, 1996, applicable to instruments having contingent payments, may apply
to those Regular Certificates. Prospective purchasers of variable rate Regular
Certificates are advised to consult their tax advisers concerning the tax
treatment of such Regular Certificates.
Market Discount. A purchaser of a Regular Certificate also may be subject
to the market discount rules of Code Sections 1276 through 1278. Under these
sections and the principles applied by the OID Regulations in the context of
original issue discount, "market discount" is the amount by which a subsequent
purchaser's initial basis in the Regular Certificate (i) is exceeded by the
stated redemption price at maturity of the Regular Certificate or (ii) in the
case of a Regular Certificate having original issue discount, is exceed by the
sum of the issue price of such Regular Certificate plus any original issue
discount that would have previously accrued thereon if held by an original
Regular Certificateholder (who purchased the Regular Certificate at its issue
price), in either case less any prior distributions included in the stated
redemption price at maturity of such Regular Certificate. Such purchaser
generally will be required to recognize accrued market discount as ordinary
income as distributions includible in the stated redemption price at maturity
of such Regular Certificate are received in an amount not exceeding any such
distribution. That recognition rule would apply regardless of whether the
purchaser is a cash-basis or accrual-basis taxpayer. Such market discount would
accrue in a manner to be provided in Treasury regulations and should take into
account the Prepayment Assumption. The Conference Committee Report to the 1986
Act provides that until such regulations are issued, such market discount would
accrue either (i) on the basis of a constant interest rate or (ii) in the ratio
of stated interest allocable to the relevant period to the sum of the interest
for such period plus the remaining interest as of the end of such period, or in
the case of a Regular Certificate issued with original issue discount, in the
ratio of original issue discount accrued for the relevant period to the sum of
the original issue discount accrued for such period plus the remaining original
issue discount as of the end of such period. Such purchaser also generally will
be required to treat a portion of any gain on a sale or exchange of the Regular
Certificate as ordinary income to the extent of the market discount accrued to
the date of disposition under one of the foregoing methods, less any accrued
market discount previously reported as ordinary income as
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partial distributions in reduction of the stated redemption price at maturity
were received. Such purchaser will be required to defer deduction of a portion
of the excess of the interest paid or accrued on indebtedness incurred to
purchase or carry a Regular Certificate over the interest distributable
thereon. The deferred portion of such interest expense in any taxable year
generally will not exceed the accrued market discount on the Regular
Certificate for such year. Any such deferred interest expense is, in general,
allowed as a deduction not later than the year in which the related market
discount income is recognized or the Regular Certificate is disposed of. As an
alternative to the inclusion of market discount in income on the foregoing
basis, the Regular Certificateholder may elect to include market discount in
income currently as it accrues in all market discount instruments acquired by
such Regular Certificateholder in that taxable year or thereafter, in which
case the interest deferral rule will not apply. In Revenue Procedure 92-67, the
Internal Revenue Service set forth procedures for taxpayers (1) electing under
Code Section 1278(b) to include market discount in income currently, (2)
electing under rules of Code Section 1276(b) to use a constant interest rate to
determine accrued market discount on a bond where the holder of the bond is
required to determine the amount of accrued market discount at a time prior to
the holder's disposition of the bond, and (3) requesting consent to revoke an
election under Code Section 1278(b).
By analogy to the OID Regulations, market discount with respect to a
Regular Certificate will be considered to be zero if such market discount is
less than 0.25% of the remaining stated redemption price at maturity of such
Regular Certificate multiplied by the weighted average maturity of the Regular
Certificate (determined as described above under "Original Issue Discount")
remaining after the date of purchase. Treasury regulations implementing the
market discount rules have not yet been issued, and therefore investors should
consult their own tax advisors regarding the application of these rules as well
as the advisability of making any of the elections with respect thereto.
Premium. A Regular Certificate purchased at a cost greater than its
remaining stated redemption price at maturity generally is considered to be
purchased at a premium. If the Regular Certificateholder holds such Regular
Certificate as a "capital asset" within the meaning of Code Section 1221, the
Regular Certificateholder may elect under Code Section 171 to amortize such
premium as an offset to interest income under a constant yield method that
reflects compounding based on the interval between payments on the Regular
Certificates. This election, once made, applies to all obligations held by the
taxpayer at the beginning of the first taxable year to which such section
applies and to all taxable debt obligations thereafter acquired and is binding
on such taxpayer in all subsequent years. The Conference Committee Report to
the 1986 Act indicates a Congressional intent that the same rules that apply to
the accrual of market discount on installment obligations will also apply to
amortizing bond premium under Code Section 171 on installment obligations such
as the Regular Certificates.
Sale or Exchange of Regular Certificates. If a Regular Certificateholder
sells or exchanges a Regular Certificate, the Regular Certificateholder will
recognize gain or loss equal to the difference, if any, between the amount
received and his adjusted basis in the Regular Certificate. The adjusted basis
of a Regular Certificate generally will equal the cost of the Regular
Certificate to the seller, increased by any original issue discount or market
discount previously included in the seller's gross income with respect to the
Regular Certificate and reduced by amounts included in the stated redemption
price at maturity of the Regular Certificate that were previously received by
the seller and by any amortized premium.
Except as described above with respect to market discount, and except as
provided in this paragraph, any gain or loss on the sale or exchange of a
Regular Certificate realized by an investor who holds the Regular Certificate
as a capital asset will be capital gain or loss and will be long-term or
short-term depending on whether the Regular Certificate has been held for the
long-term capital gain holding period (currently more than one year). Gain from
the disposition of a Regular Certificate that might otherwise be capital gain
will be treated as ordinary income to the extent that such gain does not exceed
the excess, if any, of (i) the amount that would have been includible in the
gross income of the holder if his yield on such Regular Certificate were 110%
of the applicable Federal rate under Code Section 1274(d) as of the date of
purchase over (ii) the amount of income actually includible in the gross income
of such holder with respect to the Regular Certificate. In addition, gain or
loss recognized from the sale of a Regular Certificate by certain banks or
thrift institutions will be treated as ordinary income or loss pursuant to Code
Section 582(c).
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TAXATION OF RESIDUAL CERTIFICATES
Taxation of REMIC Income. Generally, the "daily portions" of REMIC taxable
income or net loss will be includible as ordinary income or loss in determining
the federal taxable income of holders of Residual Certificates ("Residual
Certificateholders") and will not be taxed separately to the REMIC Pool. The
daily portions of REMIC taxable income or net loss of a Residual
Certificateholder are determined by allocating the REMIC Pool's taxable income
or net loss for each calendar quarter ratably to each day in such quarter and
by allocating such daily portion among the Residual Certificateholders in
proportion to their respective holdings of Residual Certificates in the REMIC
Pool on such day. REMIC taxable income is generally determined in the same
manner as the taxable income of an individual using a calendar year and the
accrual method of accounting, except that (i) the limitation on deductibility
of investment interest expense and expenses for the production of income do not
apply, (ii) all bad loans will be deductible as business bad debts and (iii)
the limitation on the deductibility of interest and expenses related to
tax-exempt income will apply. REMIC taxable income generally means the REMIC
Pool's gross income, including interest, original issue discount income and
market discount income, if any, on the Mortgage Assets, plus income on
reinvestment of cashflows and reserve assets, minus deductions, including
interest and original issue discount expense on the Regular Certificates,
servicing fees on the Mortgage Assets and other administrative expenses of the
REMIC Pool, amortization of premium, if any, with respect to the Mortgage
Assets, and any tax imposed on the REMIC's income from foreclosure property.
The requirement that Residual Certificateholders report their pro rata share of
taxable income or net loss of the REMIC Pool will continue until there are no
Certificates of any class of the related series outstanding.
The taxable income recognized by a Residual Certificateholder in any
taxable year will be affected by, among other factors, the relationship between
the timing of recognition of interest and original issue discount or market
discount income or amortization of premium with respect to the Mortgage Assets,
on the one hand, and the timing of deductions for interest (including original
issue discount) on the Regular Certificates, on the other hand. Because of the
way REMIC taxable income is calculated, a Residual Certificateholder may
recognize "phantom" income (i.e., income recognized for tax purposes in excess
of income as determined under financial accounting or economic principles)
which will be matched in later years by a corresponding tax loss or reduction
in taxable income, but which could lower the yield to Residual
Certificateholders due to the lower present value of such future loss or
reduction. For example, if an interest in the Mortgage Assets is acquired by
the REMIC Pool at a discount, and one or more of such Mortgage Assets is
prepaid, the Residual Certificateholder may recognize taxable income without
being entitled to receive a corresponding amount of cash because (i) the
prepayment may be used in whole or in part to make distributions in reduction
of principal on the Regular Certificates and (ii) the discount income on the
Mortgage Loan which is includible in the REMIC's taxable income may exceed the
discount deduction allowed to the REMIC upon such distributions on the Regular
Certificates. When there is more than one class of Regular Certificates that
distribute principal sequentially, this mismatching of income and deductions is
particularly likely to occur in the early years following issuance of the
Regular Certificates when distributions in reduction of principal are being
made in respect of earlier maturing classes of Certificates. If taxable income
attributable to such a mismatching is realized in general, losses would be
allowed in later years as distributions on the later classes of Regular
Certificates are made. Taxable income may also be greater in earlier years than
in later years as a result of the fact that interest expense deductions,
expressed as a percentage of the outstanding principal amount of such a series
of Regular Certificates, may increase over time as distributions in reduction
of principal are made on the lower yielding classes of Regular Certificates,
where interest income with respect to any given Mortgage Loan will remain
constant over time as a percentage of the outstanding principal amount of that
loan. Consequently, Residual Certificateholders must have sufficient other
sources of cash to pay any federal, state or local income taxes due as a result
of such mismatching or unrelated deductions against which to offset such
income. Prospective investors should be aware, however, that a portion of such
income may be ineligible for offset by such investor's unrelated deductions.
See the discussion of "excess inclusions" below under "Limitations on Offset or
Exemption of REMIC Income; Excess Inclusions." The timing of such mismatching
of income and deductions described in this paragraph, if present with respect
to a series
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of Certificates, may have a significant adverse effect upon the Residual
Certificateholder's after-tax rate of return. In addition, a Residual
Certificateholder's taxable income during certain periods may exceed the income
reflected by such Certificateholder for such periods in accordance with
generally accepted accounting principles.
Basis and Losses. The amount of any net loss of the REMIC Pool that may be
taken into account by the Residual Certificateholder is limited to the adjusted
basis of the Residual Certificate as of the close of the quarter (or time of
disposition of the Residual Certificate if earlier), determined without taking
into account the net loss for the quarter. The initial adjusted basis of a
purchaser of a Residual Certificate is the amount paid for such Residual
Certificate. Such adjusted basis will be increased by the amount of taxable
income of the REMIC Pool reportable by the Residual Certificateholder and
decreased by the amount of loss of the REMIC Pool reportable by the Residual
Certificateholder. A cash distribution from the REMIC Pool also will reduce
such adjusted basis (but not below zero). Any loss that is disallowed on
account of this limitation may be carried over indefinitely with respect to the
Residual Certificateholder as to whom such loss was disallowed and may be used
by such Residual Certificateholder only to offset any income generated by the
residual from such REMIC Pool. Residual Certificateholders should consult their
tax advisors about other limitations on the deductibility of net losses that
may apply to them.
A Residual Certificateholder will not be permitted to amortize directly
the cost of its Residual Certificate as an offset to its share of the taxable
income of the related REMIC Pool. However, such taxable income will not include
cash received by the REMIC Pool that represents a recovery of the REMIC Pool's
basis in its assets. Such recovery of basis by the REMIC Pool will have the
effect of amortization of the issue price of the Residual Certificates over
their life. However, in view of the possible acceleration of the income of
Residual Certificateholders described above under "Taxation of REMIC Income,"
the period of time over which such issue price is effectively amortized may be
longer than the economic life of the Residual Certificates.
If a Residual Certificate has a negative value, it is not clear whether
its issue price would be considered to be zero or such negative amount for
purposes of determining the REMIC Pool's basis in its assets. The REMIC
Regulations do not address whether residual interests could have a negative
basis and a negative issue price. The Depositor does not intend to treat a
class of Residual Certificates as having a value of less than zero for purposes
of determining the bases of the related REMIC Pool in its assets.
Further, to the extent that the initial adjusted basis of a Residual
Certificateholder (other than an original holder) in the Residual Certificate
is greater than the corresponding portion of the REMIC Pool's basis in the
Mortgage Assets, the Residual Certificateholder will not recover a portion of
such basis until termination of the REMIC Pool unless Treasury regulations yet
to be issued provide for periodic adjustments to the REMIC income otherwise
reportable by such holder. The REMIC Regulations do not so provide. See
"Treatment of Certain Items of REMIC Income and Expense--Market Discount" below
regarding the basis of Mortgage Assets to the REMIC Pool and "Sale or Exchange
of Residual Certificates" below regarding possible treatment of a loss upon
termination of the REMIC Pool as a capital loss.
Mark to Market Rules
Prospective purchasers of a Residual Certificate should be aware that on
December 24, 1996, the Internal Revenue Service issued final regulations (the
"Mark to Market Regulations") relating to the requirement that a securities
dealer mark to market securities held for sale to customers. This
mark-to-market requirement applies to all securities of a dealer, except to the
extent that the dealer has specifically identified a security as held for
investment. The Mark to Market Regulations provide that for purposes of this
mark-to-market requirement, a Residual Certificate acquired after January 4,
1995, is not treated as a security and thus may not be marked to market.
TREATMENT OF CERTAIN ITEMS OF REMIC INCOME AND EXPENSE
Original Issue Discount. Generally, the REMIC Pool's deductions for
original issue discount will be determined in the same manner as original issue
discount income on Regular Certificates as described above under "Taxation of
Regular Certificates--Original Issue Discount" and "Variable Rate Regular
Certificates," without regard to the de minimis rule described therein.
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Market Discount. The REMIC Pool will have market discount income in
respect of Mortgage Assets if, in general, the basis of the REMIC Pool in such
Mortgage Assets is exceeded by their unpaid principal balances. The REMIC
Pool's basis in such Mortgage Assets is generally the fair market value of the
Mortgage Assets immediately after the transfer thereof to the REMIC Pool. The
REMIC Regulations provide that such basis is equal in the aggregate to the
issue prices of all regular and residual interests in the REMIC Pool. In
respect of Mortgage Assets that have market discount to which Code Section 1276
applies, the accrued portion of such market discount would be recognized
currently by the REMIC as an item of ordinary income. Market discount income
generally should accrue in the manner described above under "Taxation of
Regular Certificates--Market Discount."
Premium. Generally, if the basis of the REMIC Pool in the Mortgage Assets
exceeds the unpaid principal balances thereof, the REMIC Pool will be
considered to have acquired such Mortgage Assets at a premium equal to the
amount of such excess. As stated above, the REMIC Pool's basis in the Mortgage
Assets is the fair market value of the Mortgage Assets, based on the aggregate
of the issue prices of the regular and residual interests in the REMIC Pool
immediately after the transfer thereof to the REMIC Pool. In a manner analogous
to the discussion above under "Taxation of Regular Certificates--Premium," a
person that holds a Mortgage Loan as a capital asset under Code Section 1221
may elect under Code Section 171 to amortize premium on Mortgage Assets
originated after September 27, 1985 under a constant yield method. Amortizable
bond premium will be treated as an offset to interest income on the Mortgage
Assets, rather than as a separate deduction item. Premium on Mortgage Assets
may be deductible in accordance with a reasonable method regularly employed by
the holder thereof. The allocation of such premium pro rata among principal
payments should be considered a reasonable method; however, the Internal
Revenue Service may argue that such premium should be allocated in a different
manner, such as allocating such premium entirely to the final payment of
principal.
Limitations on Offset or Exemption of REMIC Income; Excess Inclusions. A
portion of the income allocable to a Residual Certificate (referred to in the
Code as an "excess inclusion") for any calendar quarter, with will be subject
to federal income tax in all events. Thus, for example, an excess inclusion (i)
cannot, except as described below, be offset by any unrelated losses or loss
carryovers of a Residual Certificateholder, (ii) will be treated as "unrelated
business taxable income" within the meaning of Code Section 512 if the Residual
Certificateholder is a pension fund or any other organization that is subject
to tax only on its unrelated business taxable income and (iii) is not eligible
for any reduction in the rate of withholding tax in the case of a Residual
Certificateholder that is a foreign investor, as further discussed in "Taxation
of Certain Foreign Investors--Residual Certificates" below. Members of an
affiliated group are treated as one corporation for purposes of applying the
limitation on offset of excess inclusion income. The Small Business Protection
Act of 1996 (the "1996 Act") eliminated a special rule that permitted thrift
institutions to use net operating losses and other allowable deductions to
offset their excess inclusion income from Residual Certificates with
significant value for taxable years beginning after December 31, 1995 (subject
to exceptions for certain certificates held continuously since November 1,
1995). The 1996 Act also provides new rules affecting the determination of
alternative maximum taxable income ("AMTI") of a Residual Certificateholder.
First, AMTI is calculated without regard to the special rule that taxable
income cannot be less than excess inclusion income for the year. Second, AMTI
cannot be less than excess inclusion income for the year. Finally, any AMTI net
operating loss deduction is computed without regard to excess inclusion income.
These new rules are effective for tax years beginning after December 31, 1986,
unless a Residual Certificateholder elects to have the rules apply only to tax
years ending after August 20, 1996.
Except as discussed in the following paragraph, with respect to excess
inclusions from Residual Certificates without "significant value," for any
Residual Certificateholder, the excess inclusion for any calendar quarter is
the excess, if any, of (i) the income of such Residual Certificateholder for
that calendar quarter from its Residual Certificate over (ii) the sum of the
"daily accruals" (as defined below) for all days during the calendar quarter on
which the Residual Certificateholder holds such Residual Certificate. For this
purpose, the daily accruals with respect to a Residual Certificate are
determined by allocating to each day in the calendar quarter its ratable
portion of the product of the "adjusted issue price" (as defined below) of the
Residual Certificate at the beginning of the calendar quarter and 120 percent
of the
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"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 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.
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For these purposes, (i) "Disqualified Organization" means the United
States, any state or political subdivision thereof, any foreign government, any
international organization, any agency or instrumentality of any of the
foregoing (provided, that such term does not include an instrumentality if all
its activities are subject to tax and a majority of its board of directors is
not selected by any such governmental entity), any cooperative organization
furnishing electric energy or providing telephone service to persons in rural
areas as described in Code Section 1381(a)(2)(C), and any organization (other
than a farmers' cooperative described in Code Section 521) that is exempt from
taxation under the Code unless such organization is subject to the tax on
unrelated business income imposed by Code Section 511 and (ii) "Pass-Through
Entity" means any regulated investment company, real estate investment trust,
common trust fund, partnership, trust or estate and certain corporations
operating on a cooperative basis. Except as may be provided in Treasury
regulations yet to be issued, any person holding an interest in a Pass-Through
Entity as a nominee for another will, with respect to such interest, be treated
as a Pass-Through Entity.
The Agreement with respect to a series of Certificates will provide that
neither legal title nor beneficial interest in a Residual Certificate may be
transferred or registered unless (i) the proposed transferee provides to the
Depositor and the Trustee an affidavit to the effect that such transferee is
not a Disqualified Organization, is not purchasing such Residual Certificates
on behalf of a Disqualified Organization (i.e., as a broker, nominee or
middleman thereof) and is not an entity that holds REMIC residual securities as
nominee to facilitate the clearance and settlement of such securities through
electronic book-entry changes in accounts of participating organizations and
(ii) the transferor provides a statement in writing to the Depositor and the
Trustee that it has no actual knowledge that such affidavit is false. Moreover,
the Agreement will provide that any attempted or purported transfer in
violation of these transfer restrictions will be null and void and will vest no
rights in any purported transferee. Each Residual Certificate with respect to a
series will have a legend referring to such restrictions on transfer, and each
Residual Certificateholder will be deemed to have agreed, as a condition of
ownership thereof, to any amendments to the related Agreement required under
the Code or applicable Treasury regulations to effectuate the foregoing
restrictions. Information necessary to compute an applicable excise tax must be
furnished to the Internal Revenue Service and to the requesting party within 60
days of the request, and the Depositor or the Trustee may charge a fee for
computing and providing such information.
Noneconomic Residual Interests. Under the REMIC Regulations certain
transfers of Residual Certificates are disregarded, in which case the
transferor continues to be treated as the owner of the Residual Certificates
and thus continues to be subject to tax on its allocable portion of the net
income of the REMIC Pool. Under the Final REMIC Regulations, a transfer of a
Noneconomic Residual Interest (defined below) to a Residual Certificateholder
(other than a Residual Certificateholder who is not a U.S. Person, as defined
below under "Foreign Investors") is disregarded for all federal income tax
purposes unless no significant purpose of the transfer is to impede the
assessment or collection of tax. A residual interest in a REMIC (including a
residual interest with a positive value at issuance) is a "Noneconomic Residual
Interest" unless, at the time of the transfer, (i) the present value of the
expected future distributions on the residual interest at least equals the
product of the present value of the anticipated excess inclusions and the
highest federal corporate income tax rate in effect for the year in which the
transfer occurs, and (ii) the transferor reasonably expects that the transferee
will receive distributions from the REMIC at or after the time at which taxes
accrue on the anticipated excess inclusions in an amount sufficient to satisfy
the accrued taxes. The anticipated excess inclusions and the present value rate
are determined in the same manner as set forth above under "Disqualified
Organizations." A significant purpose to impede the assessment or collection of
tax exists if the transferor, at the time of the transfer, either knew or
should have known (had "improper knowledge") that the transferor would be
unwilling or unable to pay taxes due on its share of the taxable income of the
REMIC. Under the REMIC Regulations, a transferor is presumed not to have
improper knowledge if (i) the transferor conducted, at the time of the
transfer, a reasonable investigation of the financial condition of the
transferee and, as a result of the investigation, the transferor found that the
transferee had historically paid its debts as they came due and found no
significant evidence to indicate that the transferor will not continue to pay
its debts as they come due in the future; and (ii) the transferee represents to
the transferor that it understands that, as the holder of the Noneconomic
Residual Interest, the transferee may incur tax liabilities in excess
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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
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a 100% rate. Prohibited transactions generally include (i) the disposition of a
qualified mortgage other than for (a) substitution within two years of the
Startup Day for a defective (including a defaulted) obligation (or repurchase
in lieu of substitution of a defective (including a defaulted) obligation at
any time) or for any qualified mortgage within three months of the Startup Day,
(b) foreclosure, default or imminent default of a qualified mortgage, (c)
bankruptcy or insolvency of the REMIC Pool or (d) a qualified (complete)
liquidation, (ii) the receipt of income from assets that are not the type of
mortgages or investments that the REMIC Pool is permitted to hold, (iii) the
receipt of compensation for services or (iv) the receipt of gain from
disposition of cash flow investments other than pursuant to a qualified
liquidation. Notwithstanding (i) and (iv), it is not a prohibited transaction
to sell REMIC Pool property to prevent a default on Regular Certificates as a
result of a default on qualified mortgages or to facilitate a clean-up call
(generally, an optional termination to save administrative costs when no more
than a small percentage of the Certificates is outstanding). The REMIC
Regulations indicate that the modification of a Mortgage Loan generally will
not be treated as a disposition if it is occasioned by a default or reasonably
foreseeable default, an assumption of the Mortgage Loan, the waiver of a
due-on-sale or encumbrance clause or the conversion of an interest rate by a
mortgagor pursuant to the terms of a convertible adjustable rate Mortgage Loan.
The REMIC Regulations also provide that the modification of mortgage loans
underlying Mortgage-Backed Securities will not be treated as a modification of
the Mortgage-Backed Securities, provided that the trust issuing the
Mortgage-Backed Securities was not created to avoid prohibited transaction
rules.
Contributions to the REMIC Pool After the Startup Day. In general, the
REMIC Pool will be subject to a tax at a 100% rate on the value of any property
contributed to the REMIC Pool after the Startup Day. Exceptions are provided
for cash contributions to the REMIC Pool (i) during the three months following
the Startup Day, (ii) made to a qualified reserve fund by a Residual
Certificateholder, (iii) in the nature of a guarantee, (iv) made to facilitate
a qualified liquidation or clean-up call and (v) as otherwise permitted in
Treasury regulations yet to be issued.
Net Income from Foreclosure Property. The REMIC Pool will be subject to
federal income tax at the highest corporate rate on "net income from
foreclosure property," determined by reference to the rules applicable to real
estate investment trusts. Generally, property acquired by the REMIC Pool
through foreclosure or deed in lieu of foreclosure would be treated as
"foreclosure property" for a period of three years, with 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
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regulations do not permit the Depositor to act as tax matters person in its
capacity as agent of the Residual Certificateholders, the Residual
Certificateholder chosen by the Residual Certificateholders or such other
person specified pursuant to Treasury regulations will be required to act as
tax matters person.
Treasury regulations provide that a holder of a Residual Certificate is
not required to treat items on its return consistently with their treatment on
the REMIC Pool's return if a holder owns 100% of the Residual Certificates for
the entire calendar year. Otherwise, each holder of a Residual Certificate is
required to treat items on its return consistently with their treatment on the
REMIC Pool's return, unless the holder of a Residual Certificate either files a
statement identifying the inconsistency or establishes that the inconsistency
resulted from incorrect information received from the REMIC Pool. The Service
may assess a deficiency resulting from a failure to comply with the consistency
requirement without instituting an administrative proceeding at the REMIC Pool
level.
LIMITATIONS ON DEDUCTION OF CERTAIN EXPENSES
An investor who is an individual, estate or trust will be subject to
limitation with respect to certain itemized deductions described in Code
Section 67, to the extent that such itemized deductions, in the aggregate, do
not exceed 2% of the investor's adjusted gross income. In addition, Code
Section 68 provides that itemized deductions otherwise allowable for a taxable
year of an individual taxpayer will be reduced by the lesser of (i) 3% of the
excess, if any, of adjusted gross income over $100,000, adjusted yearly for
inflation ($50,000, adjusted yearly for inflation, in the case of a married
individual filing a separate return), or (ii) 80% of the amount of itemized
deductions otherwise allowable for such year. In the case of a REMIC Pool, such
deductions may include deductions under Code Section 212 for servicing fees and
all administrative and other expenses relating to the REMIC Pool or any similar
expenses allocated to the REMIC Pool with respect to a regular interest it
holds in another REMIC. Such investors who hold REMIC Certificates either
directly or indirectly through certain pass-through entities may have their pro
rata share of such expenses allocated to them as additional gross income, but
may be subject to such limitation on deductions. In addition, such expenses are
not deductible at all for purposes of computing the alternative minimum tax,
and may cause such investors to be subject to significant additional tax
liability. Treasury regulations provide that the additional gross income and
corresponding amount of expenses generally are to be allocated entirely to the
holders of Residual Certificates in the case of a REMIC Pool that would not
qualify as a fixed investment trust in the absence of a REMIC election.
However, such additional gross income and limitation on deductions will apply
to the allocable portion of such expenses to holders of Regular Certificates,
as well as holders of Residual Certificates, where such Regular Certificates
are issued in a manner that is similar to pass-through certificates in a fixed
investment trust. In general, such allocable portion will be determined based
on the ratio that a REMIC Certificateholder's income, determined on a daily
basis, bears to the income of all holders of Regular Certificates and Residual
Certificates with respect to a REMIC Pool. As a result, individuals, estates or
trusts holding REMIC Certificates (either directly or indirectly through a
grantor trust, partnership, S corporation, REMIC, or certain other pass-through
entities described in the foregoing Treasury regulations) may have taxable
income in excess of the interest income at the pass-through rate on Regular
Certificates that are issued in a single class or otherwise consistently with
fixed investment trust status or in excess of cash distributions for the
related period on Residual Certificates.
TAXATION OF CERTAIN FOREIGN INVESTORS
Regular Certificates. Interest, including original issue discount,
distributable to Regular Certificateholders who are nonresident aliens, foreign
corporations, or other Non-U.S. Persons (as defined below), will be considered
"portfolio interest" and therefore, generally will not be subject to 30% United
States withholding tax, provided that such Non-U.S. Person (i) is not a
"10-percent shareholder" within the meaning of Code Section 871(h)(3)(B) or a
controlled foreign corporation described in Code Section 881(c)(3)(C) and (ii)
provides the Trustee, or the person who would otherwise be required to withhold
tax from such distributions under Code Sections 1441 or 1442, with an
appropriate statement, signed under penalties of perjury, identifying the
beneficial owner and stating, among other things, that the beneficial owner of
the Regular Certificate is a Non-U.S. Person. If such statement, or any other
required statement,
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is not provided, 30% withholding will apply unless reduced or eliminated
pursuant to an applicable tax treaty or unless the interest on the Regular
Certificate is effectively connected with the conduct of a trade or business
within the United States by such Non-U.S. Person. In the latter case, such
Non-U.S. Person will be subject to United States federal income tax at regular
rates. Investors who are Non-U.S. Persons should consult their own tax advisors
regarding the specific tax consequences to them of owning a Regular
Certificate. The term "Non-U.S. Person" means any person who is not a U.S.
Person.
Residual Certificates. The Conference Committee Report to the 1986 Act
indicates that amounts paid to Residual Certificateholders who are Non-U.S.
Persons are treated as interest for purposes of the 30% (or lower treaty rate)
United States withholding tax. Treasury regulations provide that amounts
distributed to Residual Certificateholders qualify as "portfolio interest,"
subject to the conditions described in "Regular Certificates" above, but only
to the extent that (i) the Mortgage Assets were issued after July 18, 1984 and
(ii) the Trust fund or segregated pool of assets therein (as to which a
separate REMIC election will be made), to which the Residual Certificate
relates, consists of obligations issued in "registered form" within the meaning
of Code Section 163(f)(1). Generally, Mortgage Assets will not be, but regular
interests in another REMIC Pool will be, considered obligations issued in
registered form. Furthermore, a Residual Certificateholder will not be entitled
to any exemption (or lower treaty rate) from the 30% withholding tax to the
extent of that portion of REMIC taxable income that constitutes an "excess
inclusion." See "Taxation of Residual Certificates--Limitations on Offset or
Exemption of REMIC Income; Excess Inclusions." If the amounts paid to Residual
Certificateholders who are Non-U.S. Persons are effectively connected with the
conduct of a trade or business within the United States by such Non-U.S.
Persons, 30% (or lower treaty rate) withholding will not apply. Instead, the
amounts paid to such Non-U.S. Persons will be subject to United States federal
income tax at regular rates. If 30% (or lower treaty rate) withholding is
applicable, such amounts generally will be taken into account for purposes of
withholding only when paid or otherwise distributed (or when the Residual
Certificate is disposed of) under rules similar to withholding upon disposition
of debt 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
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dealers, real estate investment trusts, investment companies, common trust
funds, thrift institutions and charitable trusts) may request such information
for any calendar quarter by telephone or in writing by contacting the person
designated in Internal Revenue Service Publication 938 with respect to a
particular series of Regular Certificates. Holders through nominees must
request such information from the nominee. Treasury regulations provide that
information necessary to compute the accrual of any market discount on the
Regular Certificates must be furnished.
The Internal Revenue Service's Form 1066 has an accompanying Schedule Q,
Quarterly Notice to Residual Interest Holders of REMIC Taxable Income or Net
Loss Allocation. Treasury regulations require that Schedule Q be furnished by
the REMIC Pool to each Residual Certificateholder with respect to each calendar
quarter.
Treasury regulations require that, in addition to the foregoing
requirements, information must be furnished quarterly to Residual
Certificateholders, furnished annually, if applicable, to holders of Regular
Certificates, and filed annually with the Internal Revenue Service concerning
Code Section 67 expenses (see "Limitations on Deduction of Certain Expenses"
above) allocable to such holders. Furthermore, under such regulations,
information must be furnished quarterly to Residual Certificateholders,
furnished annually to holders of Regular Certificates, and filed annually with
the Internal Revenue Service concerning the percentage of the REMIC Pool's
assets meeting the qualified asset tests described above under "Federal Income
Tax Consequences for REMIC Certificates" above.
FEDERAL INCOME TAX CONSEQUENCES FOR CERTIFICATES AS TO WHICH NO REMIC ELECTION
IS MADE
Dewey Ballantine LLP, special counsel to the Depositor, is of the opinion
that if a Trust does not elect REMIC status and is not treated as a
partnership, the tax consequences to the Owners will be as described below.
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
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amount of cash received on such Certificates with respect to interest at the
pass-through rate on such Certificates or discount thereon. In addition, such
expenses are not deductible at all for purposes of computing the alternative
minimum tax and may cause such investors to be subject to significant
additional tax liability. Moreover, where there is fixed retained yield with
respect to the Mortgage Assets underlying a series of Certificates or where the
servicing fees are in excess of reasonable servicing compensation, the
transaction will be subject to the application of the "stripped bond" and
"stripped coupon" rules of the Code, as described below under "Stripped
Certificates" and "Premium and Discount--Recharacterization of Servicing Fees,"
respectively.
Tax Status. Subject to the discussion below, Dewey Ballantine, special
counsel to the Depositor, is of the opinion that:
1. A Standard Certificate owned by a "domestic building and loan
association" within the meaning of Code Section 7701(a)(19) will be
considered to represent "loans . . . secured by an interest in real
property" within the meaning of Code Section 7701(a)(19)(C)(v), provided
that the real property securing the Mortgage Assets represented by that
Certificate is of the type described in such section.
2. A Standard Certificate owned by a real estate investment trust will be
considered to represent "real estate assets" within the meaning of Code
Section 856(C) (5) (A) to the extent that the assets of the related Trust
consist of qualified assets, and interest income on such assets will he
considered "interest on obligations secured by mortgages on real property"
within the meaning of Code Section 856(c).
3. A Standard Certificate owned by a REMIC will be considered to
represent an "obligation (including any participation or certificate of
beneficial ownership therein) which is principally secured by an interest
in real property" within the meaning of Code Section 860G(a)(3)(A) to the
extent that the assets of the related Trust consist of "qualified
mortgages" within the meaning of Code Section 860G(a)(3).
An issue arises as to whether buy-down Mortgage Assets may be
characterized in their entirety under the Code provisions cited in the
immediately preceding paragraph. There is indirect authority supporting
treatment of an investment in a buy-down Mortgage Loan as entirely secured by
real property if the fair market value of the real 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
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not anticipated that adjustable rate Mortgage Assets will be treated as issued
with original issue discount. However, the application of the OID Regulations
to adjustable rate mortgage loans with incentive interest rates or annual or
lifetime interest rate caps may result in original issue discount.
Original issue discount must generally be reported as ordinary gross
income as it accrues under a constant yield method that takes into account the
compounding of interest, in advance of the cash attributable to such income.
However, Code Section 1272 provide for a reduction in the amount of original
issue discount includible in the income of a holder of an obligation that
acquires the obligation at a price greater than the sum of the original issue
price and the previously accrued original issue discount, less prior payments
of principal. Accordingly, if such Mortgage Assets acquired by a
Certificateholder are purchased at a price equal to the then unpaid principal
amount of such Mortgage Assets, no original issue discount attributable to the
difference between the issue price and the original principal amount of such
Mortgage Assets (i.e., points) will be includible by such holder. Section
1272(a)(6) provides for the use of a prepayment assumption in determining
original issue discount for any pool of debt instruments the yield on which may
be affected by reason of prepayments.
Market Discount. Certificateholders also will be subject to the market
discount rules to the extent that the conditions for application of those
sections are met. Market discount on the Mortgage Assets will be determined and
will be reported as ordinary income generally in the manner described above
under "--Taxation of Regular Certificates--Market Discount."
Recharacterization of Servicing Fees. If the servicing fees paid to
Servicers were deemed to exceed reasonable servicing compensation, the amount
of such excess would be nondeductible under Code Section 162 or 212. In this
regard, there are no authoritative guidelines for federal income tax purposes
as to either the maximum amount of servicing compensation that may be
considered reasonable in the context of this or similar transactions or
whether, in the case of the Certificates, the reasonableness of servicing
compensation should be determined on a weighted average or loan-by-loan basis.
If a loan-by-loan basis is appropriate, the likelihood that such amount would
exceed reasonable servicing compensation as to some of the Mortgage Assets
would be increased. Recently issued Internal Revenue Service guidance indicates
that a servicing fee in excess of reasonable compensation ("excess servicing")
will cause the Mortgage Assets to be treated under the "stripped bond" rules.
Such guidance provides safe harbors for servicing deemed to be reasonable and
requires taxpayers to demonstrate that the value of servicing fees in excess of
such amounts is not greater than the value of the services provided.
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
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interest with respect to each deferred payment. The Internal Revenue Service
may take the position that the specific statutory provisions of Code Section
1286 described above override the alternative described in this paragraph.
Certificateholders are advised to consult their tax advisors as to the proper
treatment of the amounts paid to the servicers as set forth herein as servicing
compensation or under either of the alternatives set forth above.
Sale or Exchange of Certificates. Upon sale or exchange of a Certificate,
a Certificateholder will recognize gain or loss equal to the difference between
the amount realized on the sale and its aggregate adjusted basis in the
Mortgage Assets and other assets represented by the Certificate. In general,
the aggregate adjusted basis will equal the Certificateholder's cost for the
Certificate, increased by the amount of any income previously reported with
respect to the Certificate and decreased by the amount of any losses previously
reported with respect to the Certificate and the amount of any distributions
received thereon. Except as provided above with respect to market discount on
any Mortgage Assets, and except for certain financial institutions subject to
the provisions of Code Section 582(c), any such gain or loss would be capital
gain or loss if the Certificate was held as a capital asset.
STRIPPED CERTIFICATES
General. Pursuant to Code Section 1286, the separation of ownership of the
right to receive some or all of the principal payments on an obligation from
ownership of the right to receive some or all of the interest payments results
in the creation of "stripped bonds" with respect to principal payments and
"stripped coupons" with respect to interest payments. For purposes of this
discussion, Certificates that are subject to those rules will be referred to as
"Stripped Certificates." The Certificates will be subject to those rules if (i)
the Depositor or any of its affiliates retains (for its own account or for
purposes of resale), in the form of fixed retained yield or otherwise, an
ownership interest in a portion of the payments on the Mortgage Assets, (ii)
the Depositor, any of its affiliates or a servicer is treated as having an
ownership interest in the Mortgage Assets to the extent it is paid (or retains)
servicing compensation in an amount greater than reasonable consideration for
servicing the Mortgage Assets (see "Standard Certificates-- Recharacterization
of the Servicing Fees" above) and (iii) Certificates are issued in two or more
classes or subclasses representing the right to non pro rata percentages of the
interest and principal payments on the Mortgage Assets.
In general, a holder of a Stripped Certificate (a "Stripped
Certificateholder") will be considered to own "stripped bonds" with respect to
its pro rata share of all or a portion of the principal payments on each
Mortgage Loan and/or "stripped coupons" with respect to its pro rata share of
all or a portion of the interest payments on each Mortgage Loan, including the
Stripped Certificate's allocable share of the servicing fees paid, to the
extent that such fees represent reasonable compensation for services rendered.
See discussion above under "Standard Certificates--Recharacterization of
Servicing Fees." For this purpose the Trust intends to allocate the servicing
fees to the Stripped Certificates in proportion to the respective offering
price of each class (or subclass) of Stripped Certificates. The holder of a
Stripped Certificate generally will be entitled to a deduction each year in
respect of the servicing fees, as described above under "--Federal Income Tax
Consequences for Certificates as to Which No REMIC Election is Made--Standard
Certificates--General," subject to the limitations described therein.
Code Section 1286 treats a stripped bond or a stripped coupon generally as
a new obligation issued (i) on the date that the stripped interest is purchased
and (ii) at a price equal to its purchase price or, if more than one stripped
interest is purchased, the share of the purchase price allocable to such
stripped interest. Each stripped interest generally will have original issue
discount equal to the excess of its stated redemption price at maturity (or, in
the case of a stripped coupon, the amount payable on the due date of such
coupon) over its issue price. Although the treatment of Stripped Certificates
for federal income tax purposes is not clear in certain respects at this time,
particularly where such Stripped Certificates are issued with respect to a
Trust containing variable-rate Mortgage Assets, the Depositor has been advised
by counsel that (i) the Trust will be treated as a grantor trust under subpart
E, Part 1 of subchapter J of the Code and not as an association taxable as a
corporation, and (ii) each Stripped Certificate should be treated as a single
installment obligation for purposes of calculating original issue discount and
gain or loss on disposition. This treatment is based on the interrelationship
of Code Section 1286 and the regulations
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thereunder, Code Sections 1272 through 1275, and the OID Regulations. While
under Code Section 1286 computations with respect to Stripped Certificates
arguably should be made in one of the ways described below, the OID Regulations
state, in general, that all debt instruments issued in connection with the same
transaction must be treated as a single debt instrument. The Trustee will make
and report all computations described below using this aggregate approach,
unless substantial legal authority requires otherwise.
Furthermore, the regulations under Code Section 1286 support the treatment
of a Stripped Certificate as a single debt instrument issued on the date it is
originated for purposes of calculating any original issue discount. The
preamble to such regulations state that such regulations are premised on the
assumption that an aggregation approach is appropriate in determining whether
original issue discount on a stripped bond or stripped coupon is de minimis. In
addition, under these regulations, a Stripped Certificate that represents a
right to payments of both interest and principal may be viewed either as issued
with original issue discount or market discount (as described below), at a de
minimis original issue discount, or presumably, at a premium. The preamble to
such regulations also provide that such regulations are premised on the
assumption that generally the interest component of such a Stripped Certificate
would be treated as stated interest under the original issue discount rules.
Further, the regulations provide that the purchaser of such a Stripped
Certificate may be required to account for any discount as market discount
rather than original issue discount if either (i) the initial discount with
respect to the Strip Certificate was treated as zero under the de minimis rule
or (ii) no more than 100 basis points in excess of reasonable servicing is
stripped off the related Mortgage Assets. Any such market discount would be
reportable as described above under "Federal Income Tax Consequences for REMIC
Certificates--Taxation of Regular Certificates--Market Discount," without
regard to the de minimis rule therein.
Status of Stripped Certificates. No specific legal authority exists as to
whether the character of the Stripped Certificates, for federal income tax
purposes, will be the same as that of the Mortgage Assets. Although the issue
is not free from doubt, counsel has advised the Depositor that Stripped
Certificates owned by applicable holders should be considered, "real estate
assets" within the meaning of Code Section 856(c)(A), "obligations(s) . . .
principally secured by an interest in real property" within the meaning of Code
Section 860G(a)(3)(A), and "loans . . . secured by an interest in real
property" within the meaning of Code Section 7701(a)(19)(C)(v), and interest
(including original issue discount) income attributable to Stripped
Certificates should be considered to represent "interest on obligations secured
by mortgages on real property" within the meaning or Code Section 856(c),
provided that in each case the Mortgage Assets and interest on such Mortgage
Assets qualify for such treatment. The application of such Code provisions to
buy-down Mortgage Assets is uncertain. See "--Federal Income Tax Consequences
for Certificates as to Which No REMIC Election is Made" and "--Standard
Certificates--Tax Status" above.
Original Issue Discount. Except as described above under "- General," each
Stripped Certificate will be considered to have been issued (i) on the date
that the stripped interest is purchased and (ii) at a price equal to its
purchase price or, if more than one stripped interest is purchased, the share
of the purchase price allocable to such stripped interest. Each stripped
interest generally will have original issue discount equal to the excess of its
stated redemption price at maturity (or, in the case of a stripped coupon, the
amount payable on the due date of such coupon) over its issue price. Original
issue discount with respect to a Stripped Certificate must be included in
ordinary income as it accrues, in accordance with a constant yield method that
takes into account the compounding 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.
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If the Mortgage Assets prepay at a rate either faster or slower than that
under the Prepayment Assumption, a Stripped Certificateholder's recognition of
original issue discount will be either accelerated or decelerated and the
amount of such original issue discount will be either increased or decreased
depending on the relative interests in principal and interest on each Mortgage
Loan represented by such Stripped Certificateholder's Stripped Certificate.
While the matter is not free from doubt, the holder of a Stripped Certificate
should be entitled in the year that it becomes certain (assuming no further
prepayments) that the holder will not recover a portion of its adjusted basis
in such Stripped Certificate to recognize an ordinary loss equal to such
portion of unrecoverable basis.
Sale or Exchange of Stripped Certificates. Sale or exchange of a Stripped
Certificate prior to its maturity will result in gain or loss equal to the
difference, if any, between the amount received and the Stripped
Certificateholder's adjusted basis in such Stripped Certificate, as described
above under "Federal Income Tax Consequences for REMIC Certificates--Taxation
of Regular Certificates--Sale or Exchange of Regular Certificates." To the
extent that a subsequent purchaser's purchase price is exceeded by the
remaining payments on the Stripped Certificates, such subsequent purchaser will
be required for federal income tax purposes to accrue and report such excess as
if it were original issue discount (or market discount) in the manner described
above. It is not clear for this purpose whether the assumed prepayment rate
that is to be used in the case of a Stripped Certificateholder other than by
original Stripped Certificateholder should be based on the Prepayment
Assumption or a new rate based on the circumstances at the date of subsequent
purchase.
Purchase of More Than One Class of Stripped Certificates. Where an
investor purchases more than one class of Stripped Certificates, it is
currently unclear whether for federal income tax purposes such classes of
Stripped Certificates should be treated separately or aggregated for purposes
of the rules described above.
Because of these possible varying characterizations of Stripped
Certificates and the resultant differing treatment of income recognition,
Stripped Certificateholders are urged to consult their own tax advisors
regarding the proper treatment of Stripped Certificates for federal income tax
purposes.
REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
The Trustee will furnish, within a reasonable time after the end of each
calendar year, to each Certificateholder or Stripped Certificateholder at any
time during such year, such information (prepared on the basis described above)
as the Trustee deems to be necessary or desirable to enable such
Certificateholders to prepare their federal income tax returns. Such
information will include the amount of original issue discount accrued on
Certificates held by persons other than Certificateholders exempted from the
reporting requirements. The amounts required to be reported by the Trustee may
not be equal to the proper amount of original issue discount required to be
reported as taxable income by a Certificateholder, other than an original
Certificateholder. The Trustee will also file such original issue discount
information with the Internal Revenue Service. If a Certificateholder fails to
supply an accurate taxpayer identification number or properly certify the
number or if the Secretary of the Treasury determines that a Certificateholder
has not reported all interest and dividend income required to be shown on his
federal income tax return, 31% backup withholding may be required in respect of
any reportable payments, as described above under "--Backup Withholding."
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
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July 18, 1984 will be "portfolio interest" and will be treated in the manner,
and such persons will be subject to the same certification requirements
described above under "--Taxation of Certain Foreign Investors-- Regular
Certificates."
Recently issued Treasury regulations (the "Final Withholding
Regulations"), which are generally effective with respect to payments made
after December 31, 1998, consolidate and modify the current certification
requirements and means by which a holder may claim exemption from United States
federal income tax withholding and provide certain presumptions regarding the
status of holders when payments to the holders cannot be reliably associated
with appropriate documentation provided to the payor. All holders of Offered
Certificates should consult their tax advisers regarding the application of the
Final Withholding Regulations.
TAXATION OF SECURITIES CLASSIFIED AS PARTNERSHIP INTERESTS
Certain Trusts may be treated as partnerships for Federal income tax
purposes. In such event, the Trusts may issue Certificates characterized as
"Partnership Interests" as discussed in the related Prospectus Supplement. With
respect to such series of Partnership Interests, Dewey Ballantine LLP, special
counsel to the Depositor, is of the opinion that (unless otherwise limited in
the related Prospectus Supplement, which will also cover any material federal
income tax consequences applicable to the Owners), the Trust will be
characterized as a partnership and not an association taxable as a corporation
for federal income tax purposes.
PLAN OF DISTRIBUTION
Certificates are being offered hereby in series through one or more
underwriters or groups of underwriters (the "Underwriters"). The Prospectus
Supplement will set forth the terms of offering of the series of Certificates,
including the public offering or purchase price of each class of Certificates
of such series being offered thereby or the method by which such price will be
determined and the net proceeds to the Depositor from the sale of each such
class. Such Certificates will be acquired by the Underwriters for their own
account or may be offered by the Underwriters on a best efforts basis. The
Underwriters may resell such Certificates from time to time in one or more
transactions including negotiated transactions, at fixed public offering prices
or at varying prices to be determined at the time of sale or at the time of
commitment therefor. The managing Underwriter or Underwriters with respect to
the offer and sale of a particular series of Certificates will be set forth on
the cover of the Prospectus Supplement relating to such series and the members
of the underwriting syndicate, if any, will be named in such Prospectus
Supplement
In connection with the sale of the Certificates, Underwriters may receive
compensation from the Depositor or from purchasers of the Certificates in the
form of discounts, concessions or commissions. Underwriters and dealers
participating in the distribution of the Certificates may be deemed to be
underwriters in connection with such Certificates, and any discounts or
commissions received by them from the Depositor and any profit on the resale of
Certificates by them may be deemed to be underwriting discounts and commissions
under the Securities Act of 1933, as amended. The Prospectus Supplement will
describe any such compensation paid by the Depositor.
It is anticipated that the underwriting agreement pertaining to the sale
of any series of Certificates will provide that the obligations of the
Underwriters 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.
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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 DEFINITIONS
<TABLE>
<S> <C>
1986 Act .................................... 56
1996 Act .................................... 63
Agreement ................................... 1
AMTI ........................................ 63
Annual Reduction ............................ 50
Applicable Accounting Standards ............. 34
Balloon Loans ............................... 7
Beneficial Owners ........................... 5
BIF ......................................... 35
Book Entry Certificates ..................... 5
Certificate Account ......................... 13
Certificate Interest Rate ................... 12
Certificate Principal Balance ............... 11
Certificate Register ........................ 11
Certificate Registrar ....................... 11
Certificateholder ........................... 70
Certificates ................................ 1
Clearing Agency ............................. 5
Clearing Agency Participants ................ 5
Code ........................................ 5
Companion Certificates ...................... 12
Compound Interest Certificates .............. 12
Contract Loan Schedule ...................... 33
Contract Pool ............................... 18
Contracts ................................... 18
Conventional Multifamily Loans .............. 1
Cooperative Loans ........................... 15
Cooperatives ................................ 1
Credit Enhancement .......................... 4, 9, 19
Credit Enhancer ............................. 10
Custodial Account ........................... 25
Cut-Off Date ................................ 12
Debt Service Coverage Ratio ................. 18
Defective Mortgage Loan ..................... 34
Delivery Date ............................... 10
Deposit Date ................................ 34
Depositor ................................... 1
Disqualified Organization ................... 65
Distribution Date ........................... 13
DOL ......................................... 53
Due Dates ................................... 17
Eligible Investments ........................ 35
Equity Participation ........................ 17
ERISA ....................................... 5
FDIC ........................................ 25
FHA ......................................... 1
FHA-Insured Multifamily Loans ............... 1
FHLMC ....................................... 2
Financial Guaranty Insurance Policy ......... 20
Financial Guaranty Insurer .................. 20
FNMA ........................................ 2
Garn-St. Germain Act ........................ 43
GNMA ........................................ 2
HUD ......................................... 48
Insurance Paying Agent ...................... 20
Insurance Proceeds .......................... 25
Insured Payment ............................. 20
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Interest Accrual Period ..................... 13
Liquidation Proceeds ........................ 25
Loan-to-Value Ratio ......................... 17
Lock-out Expiration Date .................... 17
Lock-out Period ............................. 17
Manufactured Home ........................... 18
Manufactured Home Loans ..................... 47
Mark to Market Regulations .................. 62
Master Servicer ............................. 1
MBS ......................................... 2, 19
MBS Agreement ............................... 19
MBS Issuer .................................. 19
MBS Servicer ................................ 19
MBS Trustee ................................. 19
Monthly Advance ............................. 26
Mortgage Assets ............................. 1
Mortgage Loan Rate .......................... 17
Mortgage Notes .............................. 15
Mortgage Pool Insurance Policy .............. 22
Mortgage Rates .............................. 16
Mortgage-Backed Securities .................. 19
Mortgaged Properties ........................ 15
Mortgages ................................... 15
Mortgagors .................................. 25
Multifamily Loans ........................... 1
Multifamily Properties ...................... 15
NCUA ........................................ 25
Net Leases .................................. 18
Net Operating Income ........................ 18
Noneconomic Residual Interest ............... 65
Non-Priority Certificates ................... 12
Nonrecoverable Advance ...................... 26
Non-U.S. Person ............................. 69
Notional Principal Balance .................. 11, 13
OID Regulations ............................. 54
Original Value .............................. 17
OTS ......................................... 43
Owners ...................................... 13
Partnership Interests ....................... 76
Pass-Through Entity ......................... 64, 65
Pass-Through Rate ........................... 3
Plans ....................................... 53
Policy Statement ............................ 52
Pool Insurer ................................ 22
Pre-Funding Account ......................... 4
Pre-Funding Agreement ....................... 3
Prepayment Assumption ....................... 57
</TABLE>
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<TABLE>
<S> <C>
Prepayment Premium .......................... 17
Principal Balance ........................... 16
Principal Prepayments ....................... 14
Priority Certificates ....................... 12
Property Improvement Loans .................. 47
PTE 83-1 .................................... 53
Record Date ................................. 13
Regular Certificateholder ................... 56
Regular Certificates ........................ 54, 69
REIT ........................................ 55
Relief Act .................................. 10
REMIC ....................................... 1, 5, 55
REMIC Certificates .......................... 54
REMIC Pool .................................. 54, 55
REMIC Regulations ........................... 54
Remittance Date ............................. 25
Remittance Rate ............................. 25
Reserve Fund ................................ 24
Residual Certificateholders ................. 61
Residual Certificates ....................... 54
Retail Class Certificate .................... 56
SAIF ........................................ 35
Scheduled Amortization Certificates ......... 12
Seller ...................................... 1
Senior Certificates ......................... 20
Servicer .................................... 1
SMMEA ....................................... 6
Special Allocation Certificates ............. 12
Special Hazard Insurance Policy ............. 23
Special Hazard Insurer ...................... 23
Standard Certificate ........................ 70
Stripped Certificateholder .................. 73
70, 71, 72,
Stripped Certificates ....................... 73
Subordinated Certificates ................... 20
Title I Contracts ........................... 47
Title I Loans ............................... 47
Title I Program ............................. 47
TMP ......................................... 55
Trust ....................................... 1
Trustee ..................................... 1
UCC ......................................... 41
Underwriters ................................ 76
U.S. Person ................................. 66
VA .......................................... 2
</TABLE>
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